The Tuesday Podcast: The Gold Standard : Planet Money We visit the charming curmudgeon and respected finance writer James Grant. He says we should go back on the gold standard.

(SOUNDBITE OF ARCHIVED RECORDING)

RON PAUL: We should have a gold standard. We could start off by obeying the Constitution. Only gold and silver can be legal tender - no emitting bills of credit, which is printing press money. The most important thing is have money of real value. Paper money never lasts. All paper currencies end badly.

(SOUNDBITE OF LED ZEPPELIN "WHEN THE LEVEE BREAKS")

DAVID KESTENBAUM, HOST:

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

JACOB GOLDSTEIN, HOST:

And I'm Jacob Goldstein. Today is Tuesday, February 15. And that was Ron Paul you heard at the top. He's, of course, a Republican congressman. And he was speaking last year on Fox Business.

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

(SOUNDBITE OF LED ZEPPELIN "WHEN THE LEVEE BREAKS")

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're 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. First, our PLANET MONEY Indicator.

GOLDSTEIN: Today's PLANET MONEY Indicator - 381.6 billion. We, the people of America, spent $381.6 billion on stuff in January. This number is called retail sales, and it basically includes all the stuff people buy - clothes, cars, gas, TVs, whatever. Retail sales were up 8 percent over the past year, and they rose 0.3 percent over the past month. That was a little bit less than economists were expecting, but it was still a decent rise.

KESTENBAUM: Can I ask a question? Does retail sales include wool socks?

GOLDSTEIN: Yes.

KESTENBAUM: Because I bought wool socks.

GOLDSTEIN: OK. Thank you, David, for your contribution. I feel like you talked about socks the last time I did retail sales through the Indicator.

KESTENBAUM: I know. But it was really cold, and I bought wool pairs.

GOLDSTEIN: It's also the only thing you buy.

KESTENBAUM: And the reason we care about this number - right? - is because consumer spending accounts for 70 percent of our economy. Is that still true?

GOLDSTEIN: Yeah, it's in that ballpark.

KESTENBAUM: Right. And retail sales are a large part of consumer spending. So if retail sales are growing, that helps the economy grow, which is generally a good thing.

GOLDSTEIN: And, of course, it is true that there is this other feeling you get from rising retail sales, which is basically, do we really need to be buying more stuff. And didn't we get into financial trouble a few years ago because people borrowed too much and spent too much? But actually, if you look a little bit more broadly at the numbers now, what we're seeing is that household debt is actually continuing to fall even as retail sales are rising. So it does look like this is a more healthy kind of bounce back from the crisis type of retail sales.

KESTENBAUM: What if I tell you about my wool socks on credit?

GOLDSTEIN: Is that true? I don't believe it. You're not that kind of guy.

KESTENBAUM: I paid cash. I paid cash. All right. Thank you very much for that. That was a sunny indicator.

GOLDSTEIN: Once in a while.

KESTENBAUM: OK, speaking of sunny, shiny things - on to gold.

GOLDSTEIN: So as regular listeners know, in our most recent PLANET MONEY adventure in investment journalism, we decided to buy some gold. 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.

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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.

KESTENBAUM: It's 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.

(SOUNDBITE OF BILLS RUSTLING)

MENDELSOHN: Twenty, 40, 60, 80, 100, 20, 40...

KESTENBAUM: There is something weird about this coin that we haven't mentioned yet. Here, can I hold it? So even though we spent like $400 on this, it says on it - and 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 the 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.

(SOUNDBITE OF CAR DOOR CLOSING)

GOLDSTEIN: (Humming).

KESTENBAUM: 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 - our 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 the [expletive] gold vault.

GOLDSTEIN: It's something like $300 billion worth of gold. Of all the gold that has ever been dug up, it's like one-fifth of all of the gold everywhere - is right here.

KESTENBAUM: I love it. 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: No, I mean, we spent 400-some dollars. 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 is Jim Grant.

JIM GRANT: The Fed and I are like ships in the night. We hardly go to lunch. 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 is 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: Do you want to start by explaining the bear?

GRANT: Oh, 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.

KESTENBAUM: Is it any ship in particular?

GRANT: Yes, that would be the Titanic.

KESTENBAUM: 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? 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 a hard surface, it would make a pleasing ring. It would ring unto bullion. Let's - do you want to hear this thing ring?

KESTENBAUM: OK.

GRANT: OK.

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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: And, 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 this. I mean, there's a 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 - on this little island becomes billionaires. And Barbados is suddenly the new world superpower. It's 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 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: So with the gold standard, the value was fixed. And we adjusted our fares to this North Star of value. Today, the North Star is like a comet. Ben 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, Ben 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: So 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 have 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 the 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've 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 - 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: So it'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.

KESTENBAUM: 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, the dollar is 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 argument. There's no getting around that. This is not - 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 just that they disagree with it. They regard it as laughable.

GOLDSTEIN: Risible. 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 - 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...

RANDALL 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 calm. All that glitters ain't gold.

GOLDSTEIN: To see a photo of Jim Grant in his bow tie, visit the PLANET MONEY blog at npr.org/money.

KESTENBAUM: Let us know what you think. You can send us an email - planetmoney@npr.org. And you can find us on Facebook. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. 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...

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