Episode 252: The Gold Standard : Planet Money We visit the respected finance writer (and charming curmudgeon) James Grant. He makes the case for going back on the gold standard.
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Episode 252: The Gold Standard

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Episode 252: The Gold Standard

Episode 252: The Gold Standard

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DAVID KESTENBAUM, HOST:

Back in 2010, each of us here contributed $200 of our own money into what I like to call the PLANET MONEY investment fund. It was $1,000 in all, like the world's tiniest hedge fund. The idea was that we were going to use the money to explore the financial world. So longtime listeners may remember we bought a toxic asset, one of those complicated mortgage things that nearly brought down the global economy. We did a bunch of stories about that, and we lost half our money.

Next week, we are going to break out what is left of the fund to try out something I've wanted to do for a long time, something, frankly, that lots of smart people advised us not to do. You'll find out what that is next week. For now, to kind of set things up, we are going to replay two podcasts from when we used our money to buy something that for hundreds of years had been used as money - gold. Here's the show.

(SOUNDBITE OF ARCHIVED BROADCAST)

KESTENBAUM: Hello and welcome to PLANET MONEY. I'm David Kestenbaum.

JACOB GOLDSTEIN, BYLINE: And I'm Jacob Goldstein.

KESTENBAUM: Today, we take you back to 1971, the year that Led Zeppelin put out its incredible, unbelievable fourth album.

GOLDSTEIN: And maybe less importantly, it was the year the U.S. finally gave up on the gold standard. Yes, David, we were still on some form of the gold standard in 1971. It was your lifetime, if not quite my lifetime. And, in fact, it's gold standard week on PLANET MONEY.

KESTENBAUM: Today, we're going to talk to a man who is well-respected in the financial world and who pines for a return to the gold standard - that era when every dollar was backed by gold, when you could always take your dollar bill and exchange it for a fixed amount of gold. On our next podcast on Friday, we are going to tell you why the world decided that was a terrible, awful idea, but we want to take today's show to explore the arguments for the gold standard.

GOLDSTEIN: As regular listeners know, we wanted to understand better, you know, really what money is and how it works. So we went to the diamond district a few blocks from our office, and we bought a tiny gold coin for $385 plus tax. I'm actually holding it in my hand right now. It's very shiny. The guy who sold it to us was this guy named Hank Mendelsohn.

KESTENBAUM: Previously on PLANET MONEY.

HANK MENDELSOHN: It's a little bigger than a nickel.

GOLDSTEIN: I wouldn't call it heavy. Heavy is not the right word to describe this coin.

MENDELSOHN: Pretty.

GOLDSTEIN: It's very shiny, like, if I were a bird and I liked to put shiny things in my nest, I would take this coin.

MENDELSOHN: That's your coin if you want it.

GOLDSTEIN: Twenty, 40, 60, 80, 100. Twenty, 40, 60...

KESTENBAUM: There is something weird about this coin that we haven't mentioned yet. Here, can I hold it? All right so even though we spent, like, $400 on this, it says on it - I almost need my reading glasses - it says $10 right underneath the U.S. eagle. So this is a special coin made by the U.S. Mint for collectors or investors. But it used to be that money was like this; money was gold or gold at least backed our dollars. We were on a gold standard.

GOLDSTEIN: Back then, even if you were holding paper dollars, those were basically an IOU for gold.

KESTENBAUM: And if you really want to talk about the gold standard, there's actually a better place to do that than sitting around in these studios. There is a $300-billion relic right here in Manhattan.

GOLDSTEIN: And we're going to go stand on top of it.

KESTENBAUM: All right, let's go.

All right so we're standing on Liberty Street in downtown Manhattan outside the New York Fed which is a branch of the Federal Reserve or central bank. And I think we're standing in the right place. So underneath our feet, 80 feet down and I think it's over that way under the building, is the gold vault - is a [bleep]-load of gold.

GOLDSTEIN: It's something like $300 billion worth of gold is right here...

KESTENBAUM: I love that if you're walking down the street here, you're walking above, like, a relic of the gold standard, right? This is left over from a day where you could take your dollar bills and they were worth some specific amount of gold.

GOLDSTEIN: Right, and it was indeed a specific amount. It was the case for a very long time in the history of the U.S. that for $20.67, you could get an ounce of gold. You could go into a bank, and they would go back in the vault. And they would give you an ounce of gold. And that was true year after year.

KESTENBAUM: Not true anymore.

GOLDSTEIN: (Laughter) No, I mean, we spent $400-some, we got one quarter of one ounce of gold. Of course the U.S. went off the gold standard partly in the 1930s, finally in 1971.

KESTENBAUM: The Fed did not want to talk about the gold standard. For them, it's some weird thing tourists come and look at. It's some ugly period in the nation's economic history.

GOLDSTEIN: Right, but fortunately for us, there's a guy just a few blocks from here who, unlike the Fed, was delighted to talk to us about the gold standard. His name's Jim Grant.

JIM GRANT: The Fed and I are like ships in the night. We hardly go to lunch. We - they don't call me. I call them. They don't return the calls. I have spoken to distinguished Fed alumni who try to keep a straight face when I put this to them.

GOLDSTEIN: So Jim Grant is the go-to guy on Wall Street if you want to hear the pro-gold standard argument. And we spent a very interesting hour or so in his office, listening to him make the case that we'd be better off with the gold standard.

GRANT: That's my line, and I'm sticking to it.

KESTENBAUM: So before we get to his reasons, a little bit about the man. Jim Grant is a well-respected, well-known guy. He publishes an investment newsletter called Grant's Interest Rate Observer. It is indeed a serious publication. Investors pay a lot of money to get it. He appears on television on all the big money shows. He writes op-eds for The New York Times and The Wall Street Journal.

GOLDSTEIN: That's all true, David, but it doesn't quite capture what a charming, curmudgeonly guy he is. He really seems to cultivate this image of being from another era. His prose in his newsletter is very literary with these long, winding sentences. And he's the kind of guy who uses the word risible instead of laughable. And when we show up, he's wearing his trademark bow tie.

KESTENBAUM: So Grant's office - it looks like an old university library. There are wooden bookshelves going up to the ceilings. It's in this old part of Wall Street. You can see Trinity Church out the window where Alexander Hamilton is buried. And if you got rid of the computer on his desk, you wouldn't know what decade you were in or maybe even what century.

GOLDSTEIN: And in keeping with this persona, Jim Grant is really very skeptical about the modern financial world. There's a statue of a ship that looks like it's sinking right into the surface of his desk. And over in the corner of the room, standing on its hind legs, is this big taxidermied bear.

KESTENBAUM: You want to start by explaining the bear?

GRANT: The bear is furniture. It's not meant to be a symbol of any sort of fixed point of view around here.

GOLDSTEIN: And then I was going to ask, I noticed there's also a sinking ship. Is that also non-metaphorical furniture?

GRANT: It doesn't mean anything (laughter).

KESTENBAUM: Is it any ship in particular?

GRANT: The Titanic.

GOLDSTEIN: He is as he says, not a glass is half-full type of fellow. So Grant starts to make the case for going back to the gold standard. And he uses our little coin that we brought.

GRANT: This is it? This is all you guys have? (Laughter). Let the witness explain that this beautiful gold coin is packed in the cheesiest of plastic wrappings you can imagine. I am now unwrapping it and holding it. And the reason that money was called sound is that if you dropped it on a hard surface, it would make a pleasing ring. It would ring unto bullion. Want to hear the same ring? OK.

(SOUNDBITE OF COIN DROPPING)

GRANT: Now that - that's money.

GOLDSTEIN: The point Grant is making is basically this -when you're on the gold standard, money holds its value. Every dollar is backed by gold.

KESTENBAUM: If you're not anchored to the gold standard, the government can print as much money as it wants. And the more dollars that are out there, the less each dollar is worth.

GOLDSTEIN: Of course we're all familiar with this. It's called inflation.

KESTENBAUM: We haven't had a big problem with inflation recently in the United States, but it can really wreck an economy. We had it bad in the 1970s. We had that podcast about how it destroyed the Brazilian economy for decades.

GOLDSTEIN: On the gold standard, on the other hand, it's much, much harder to create money. If you want to print more money, you need more gold. That is the law. Every dollar is worth a certain amount of gold, so money isn't just something you can create out of nowhere. It's something physical, something constant.

GRANT: And that idea is deeply rooted, I think, in all of us. mean, these few universal things - sex, mathematics, music, gold - all these things are universal.

KESTENBAUM: Jacob, I've always wondered, I mean, it seems like when I think about the gold standard, it seems like there could be some problems, right? This is the one I think about. Like, say a giant meteor, that happens to have a lot of gold in it, hits the Earth. You'd have massive inflation. And let's say it hits, like, Barbados, right? Then, in an instant, everyone who lives in Barbados, in this little island, become billionaires. And Barbados is suddenly the new world superpower. It just seems weird.

GOLDSTEIN: David, it's striking to me how preoccupied you are with the gold meteor. You really have been talking about it a lot. And we did ask Grant about the gold meteor. And, you know, he pointed out well, yeah, that would be a problem, but, in fact, we never had a gold meteor. I mean, you do have gold rushes, but basically the total amount of gold that has been dug up out of the earth, it doesn't change that fast. It's pretty constant. And Grant said he'll take that risk of a gold meteor over the alternative, which is basically what we have now - a bunch of guys in a room at the Federal Reserve led by Ben Bernanke deciding how much money we should have. That's the Fed's job. And recently, they've been creating a lot more money.

GRANT: To the gold standard, the value is fixed, and we adjusted our fares to this North Star of value. Today, the North Star is like a comet. Then Bernanke testifies one day, he wants to impart a little zest into our shopping by injecting more green paper dollars into the world. He thinks that more of them will be more better. Why? Because it will cause prices to go up just enough - not too much, but just enough. He then, Bernanke - comma, Ph.D. by the way - Ph.D. - will see to it that he creates just enough inflation to make us feel better, but not too much as to impoverish us. Do you believe that? Do either one of you believe that? It's risible - laughable.

GOLDSTEIN: Regardless of whether you think Ben Bernanke knows what he's doing, the Fed is thinking about money very differently than Jim Grant. The Fed wants money to lose value. The Fed likes to have a little bit of inflation. That means they want your money to lose value - not too fast they hope, but a little bit.

KESTENBAUM: And the idea behind that is that if your money is losing value just sitting in your wallet or on your bureau, you are more likely to invest it, and that helps keep the economy going. But if the Fed gets things wrong, you can get serious inflation. And Grant says on the gold standard at least you didn't have to worry about that.

GOLDSTEIN: Grant says there are other advantages to the gold standard as well. He says the global economy actually works better if everyone is on the gold standard because it fixes this huge problem of trade imbalances. We, for example, in the U.S., we have been importing far more than we export for a long time. Economists say this was a major cause of the financial crisis. And Grant says the crisis might have been avoided if we were on the gold standard.

KESTENBAUM: All right, so here is how trade would've worked on the gold standard. And to make things simple, let's imagine that all the money in the world is actually gold - gold coins. And there's a finite amount, right? So everyone's got their coins. There's some coins in the pockets of people in United States; there's some coins in Europe; there's some in China or wherever. And now whenever one of us buys something from someone else, we got to fork over some coins, right? So, Jacob, I'll be the United States. You be China, OK? I would like to buy some T-shirts.

GOLDSTEIN: OK, I'll give you the shirt off my back if you give me that gold coin in your hand.

KESTENBAUM: OK, here you go. So now imagine where you end up if this keeps happening, right? If we, in the U.S., keep buying more T-shirts, keep importing more stuff than we export, what happens? My country, the United States, we start to run out of gold coins.

GOLDSTEIN: That means, David U.S. Kestenbaum, there is less money, there are fewer gold coins to go around your economy. Less money means that wages would have to drop. So if the wages of, say, steelworkers drop, well, then the price of steel made in the U.S. would drop also. And this is the key point, that the price of stuff made in the U.S. drops, so it gets cheaper for people around the world. So people around the world start buying more stuff made in the U.S.

GRANT: So, lo and behold, the gold that had been going offshore now returns.

KESTENBAUM: That's sort of self-balancing.

GRANT: The system was self-adjusting in a way that this present system is absolutely not. And that was one of the selling points of it.

GOLDSTEIN: It sounds beautiful the way you lay it out.

GRANT: Doesn't it? (Laughter).

GOLDSTEIN: It sounds especially beautiful considering the financial crisis we just went through with the system we have in place.

KESTENBAUM: The system has allowed us for decades to keep importing more than we export. So, as a result, dollars piled up in China. The Chinese had to do something with those dollars, so they lent them back to us. And that arguably led to real problems. We bought all kinds of stuff we probably shouldn't have, like big, fancy houses - voila, housing bubble.

GOLDSTEIN: So in all of these arguments Grant is making for the gold standard, he is envisioning this kind of idealized version of the gold standard. For Grant, the gold standard is a kind of dream, and he knows that he's basically alone in having that dream.

GRANT: The argument I'm making is, in fact, the wing-nut arguments. There's no getting around that. These are not ideas to be uttered in polite company. Every self-respecting tenured faculty member in economics in this country, almost without exception, would laugh it out of court. It's not they just disagree with it; they regard it as laughable.

KESTENBAUM: Risible.

GOLDSTEIN: So there you have it. There is the case for the gold standard. On the next podcast on Friday, we'll hear from basically the rest of the economic establishment, the people who agree on that last point that calling for a return to the gold standard - that is the wing-nut argument.

KESTENBAUM: Coming up on PLANET MONEY.

PARKER: I think that it is a pernicious anachronism that should be kept in the history books. And to think that modern people today want to speak about its resurrection should absolutely horrify and terrify anyone who understands economics even a little bit.

(SOUNDBITE OF SONG, "GOLD")

PRINCE: (Singing) What's the use of money if you ain't going to break the mold? Even at the center of the fire, there is cold. All that glitters ain't gold.

KESTENBAUM: If you have comments or questions, you can send us email. We're planetmoney@npr.org. Also we really recommend you check out the new show from NPR called Invisibilia. The upcoming episode is going to be about a woman who has no fear. This is by two of the people who started This American Life and Radiolab. It's really great. You can find it on iTunes or wherever you get your podcasts. I'm David Kestenbaum. Thanks for listening.

(SOUNDBITE OF SONG, "GOLD")

PRINCE: (Singing) There's an ocean of despair, there are people living there. They're unhappy each and every day. But hell is not fashion, so what you trying to say? Everybody wants to sell what's already been sold. Everybody wants to tell what's already been told.

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