The True Gold Standard (Second Edition)
Key Writings: Grant on the Gold Standard
In the past 12 months alone, the world's top five central banks have conjured up $1.4 trillion. They called it into existence as a sorcerer might summon the spirits. No wand, no printing press was required; taps on a keyboard did the heavy lifting.
"War and Gold" is a chronicle of fiscal ruination and redemption, with the emphasis on the former. In ages past, observes the historian and politician Kwasi Kwarteng, governments printed currency and levied taxes to fight wars. Now they materialize the money on computer screens to jolt their underachieving and overindebted economies back to life (so far without notable success). Customarily, sound finance resumed with the peace. What's new is that, starting about 1919, the taxing and inflating has kept right on going even after the shooting stopped.
Money is as old a story as the historian cares to make it. Mr. Kwarteng begins his chronicle with the 16th-century Spaniards, who ripped gold and silver from the hands of the Incas and Aztecs and hauled it back to Seville, making that inland port "one of the great financial centers of the world." "It is no accident," the author relates, "that four of the most widely performed operas of the modern era— Mozart's The Marriage of Figaro and Don Giovanni, Rossini's Barber of Seville and Bizet's Carmen—are set in this city."
In 1801, Albert Gallatin, Thomas Jefferson's Treasury secretary, vowed to extinguish the public debt, then in the sum of $83 million. It would be gone in 16 years, he vowed. But 16 years later, it had grown to $127 million.
President Bill Clinton, too, produced a plan to pay down the debt in 16 years. This was in 1999, when the nation owed $3.6 trillion. Though the clock's still ticking, it looks as if 2015 will find the debt weighing in not at zero but at something like $12.9 trillion (not counting the IOUs held by the government itself), a margin of miss about 100,000 times greater than Gallatin's.
"The U.S. economy" is the name we confer on the collective efforts of 143 million working Americans. Nobody invented it, but Gallatin and Hamilton—and the Philadelphia merchant Robert Morris, among others—gave it an early constructive push. Other pioneers followed, many laboring in obscurity, including Elizur Wright, a hotblooded Massachusetts actuary who developed the American science of life insurance. Confronted today by the fiscal cliff, mounting dependency on federal entitlements and the virtual nationalization of Citigroup C -4.77% following the panic of 2008, a voter might well pause to study the words and deeds of America's economic visionaries. Surely, they didn't envision this.
In "The Founders and Finance," Thomas K. McCraw, an emeritus professor of business history at the Harvard Business School, celebrates the contributions of men who chose to become Americans, as distinct from those whose parents gave them no choice in the matter. Gallatin made his way to America from Geneva, Switzerland, Hamilton from the Caribbean island of St. Croix and Robert Morris from the English city of Liverpool. Each brought with him an approach to financial organization somehow lacking in the native population.
More important than anything that Ben Bernanke might say in his long-awaited speech Friday in Jackson Hole, Wyo., is the thing he won’t say, but should.
Positively out of bounds for the chairman of the Federal Reserve is the admission that he is in the wrong line of work. The institution he leads was created to conduct a central banking business. But Congress and he have steered it into the central planning business. In so doing, the Fed has exchanged a job it could do for one it can’t.
When the Fed opened its doors in 1914, its job was to lend against sound collateral to solvent banks and to protect the value of the dollar. The Founders gave no thought to empowering their brainchild to steer the course of the economy. The future would take care of itself if the dollar were sound and the banks were solvent, they reasoned. As for the dollar, it was legally defined as a weight of gold. You couldn’t just materialize it.
Today’s monetary mandate comes in innumerable parts, written and unwritten: to keep the economy growing, the workforce fully employed, stock prices rising, the banking system under surveillance and the inflation rate modulated (neither too high nor — oddly enough — too low). To achieve these desired ends, the Fed manipulates interest rates, plays mind games with the stock market and creates hundreds of billions of dollar bills, with a few taps on a computer keyboard. The Bernanke dollar is lighter than air: a piece of paper or a swarm of pixels.
Bailouts, bear markets and joblessness will surely put capitalism on the November ballot. How do you like your enterprise, Mr. and Ms. American Voter—free or stifled or a little something in between?
The 2012 election promises a clear ideological divide. Mitt Romney may be no Ron Paul, but neither is there any mistaking him for Barack Obama. The former private-equity titan will likely take his stand with a kind of almost-free-enterprise—the welfare state as we knew it before ObamaCare, so-called quantitative easing and the enterprise-thwarting dread that someone in Washington is dreaming up even costlier experiments than the ones that have already failed.
"Capitalism" is the epithet that 19th-century collectivists foisted on the economic system of private property and the invisible hand. It's a name that wins no friends for the cause of enterprise. A socialist, supposedly, cares for society. A capitalist ostensibly loves only his stocks and steel mills and strikebreakers. The PR battle was almost lost at the naming.
Books upholding capitalism or denouncing it are as old as the printing press—as to the denunciation, indeed, it is much older. Aristotle and the church fathers condemned the acquisitive spirit. Voltaire and Adam Smith praised it. America's original WASPs were of two minds. Hard work and enterprise were godly virtues, but the virtuous man, by practicing them, could hardly help getting rich. Which is when the trouble started. "Religion begot prosperity," lamented Cotton Mather, "and the daughter devoured the mother."
As time went by, statism devoured prosperity. Today the American economy sleepwalks. Ultralow interest rates starve the savers and finance the speculators. Unanchored exchange rates fire up talk of "currency wars." Where have we gone wrong, and what must we do to turn right?
The Federal Reserve Bank of New York has invited some of its public critics to visit the bank to unburden themselves of their criticisms. On March 12, it was Jim Grant's turn. The text of his remarks follows. (highlights added)
Piece Of My Mind
My friends and neighbors, I thank you for this opportunity. You know, we are friends and neighbors. Grant’s makes its offices on Wall Street, overlooking Broadway, a 10-minute stroll from your imposing headquarters. For a spectacular vantage point on the next ticker-tape parade up Broadway, please drop by. We’ll have the windows washed.
You say you would like to hear my complaints, and, on the one hand, I do have a few, while on the other, I can’t help but feel slightly hypocritical in dressing you down. What passes for sound doctrine in 21st-century central banking—so-called financial repression, interest-rate manipulation, stock-price levitation and money printing under the frosted-glass term “quantitative easing”—presents us at Grant’s with a nearly endless supply of good copy. Our symbiotic relationship with the Fed resembles that of Fox News with the Obama administration, or—in an earlier era—that of the Chicago Tribune with the Purple Gang. Grant’s needs the Fed even if the Fed doesn’t need Grant’s.
In the not quite 100 years since the founding of your institution, America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, I suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever read the Federal Reserve Act? The authorizing legislation projected a body “to provide for the establishment of the Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes.” By now can we identify the operative phrase? Of course: “for other purposes.”
You are lucky, if I may say so, that I’m the one who’s standing here and not the ghost of Sen. Carter Glass. One hesitates to speak for the dead, but I am reasonably sure that the Virginia Democrat, who regarded himself as the father of the Fed, would skewer you. He had an abhorrence of paper money and government debt. He didn’t like Wall Street, either, and I’m going to guess that he wouldn’t much care for the Fed raising up stock prices under the theory of the “portfolio balance channel.”
It enflamed him that during congressional debate over the Federal Reserve Act, Elihu Root, Republican senator from New York, impugned the anticipated Federal Reserve notes as “fiat” currency. Fiat, indeed! Glass snorted. The nation was on the gold standard. It would remain on the gold standard, Glass had no reason to doubt. The projected notes of the Federal Reserve would—of course—be convertible into gold on demand at the fixed statutory rate of $20.67 per ounce. But more stood behind the notes than gold. They would be collateralized, as well, by sound commercial assets, by the issuing member bank and—a point to which I will return— by the so-called double liability of the issuing bank’s stockholders.
BY JAMES GRANT: