The True Gold Standard (Second Edition)
Key Writings: Grant on the Gold Standard
From George Washington to Dwight D. Eisenhower, the national debt tended to grow in wartime and shrink in peacetime. Because the dollar was generally convertible into gold or silver at a fixed and statutory rate, the central bank, when there was a central bank, couldn't just materialize money as the Federal Reserve does today. You had to dig the metal out of the Earth, or entice it into American vaults with money-friendly financial policies. The Treasury could borrow, all right, but not without limit. Wars aside, the government paid its way like a man with a debit card.
Washington, D.C., got its credit card on Sunday, Aug. 15, 1971. Pre-empting the horse opera "Bonanza," President Richard Nixon told a national television audience that the gold standard, or what little of it remained, was kaput. No more would the dollar be defined in law as 1/35th of an ounce of gold. It would rather be anchored by the good intentions of the people who printed it.
There has never been a credit card quite like the nonmetallic dollar. We Americans, consuming much more than we produce, finance our deficits with the dollars that we alone may lawfully print. Our Asian creditors not only accept this money in payment for goods and services but also turn right around and invest it in U.S. Treasury bonds and federally insured mortgages. It's as if the greenbacks never left the 50 states.
The Nixon gambit marks a great divide. In the 10 years before 1971, the "gross" public debt (counting even those obligations held by the government itself) had climbed to $408 billion from $293 billion. This increase amounted to a compound annual rate of only 3.4%, the Great Society and the Vietnam War notwithstanding. In the next 10 years, till 1981, the gross debt jumped to $995 billion from $408 billion—a compound annual rate of 9.3%, the close of the Great Society and the end of the Vietnam War notwithstanding. Not until fiscal 2001 did the debt reach $5.8 trillion. Yet it expanded by an identical $5.8 trillion in the four short years between 2007 and 2011. Now the grand total stands at $15.6 trillion.
Jim Grant’s rise to power may be delayed.
The legendary Wall Street writer, publisher of Grant’s Interest Rate Observer, has been mentioned by two of the rivals for the Republican presidential nomination. Newt Gingrich said if elected president, he’d name Grant to help run a commission looking at a possible return to the gold standard. And Ron Paul said, if elected president, he’d go all-in and name Grant — one of Wall Street’s best-known gold bugs — as the new chairman of the Federal Reserve.
As Paul wants to abolish the Fed, it would doubtless be a temporary post. But Grant says he found the offer — which came out of the blue — very flattering.
Alas, both men are trailing in the race to front-runner Mitt Romney. “Unfortunately, I haven’t heard from Mr. Romney yet,” joked Grant when I called on him in his offices down on Wall Street. “I’m sitting by the phone, I’m ready.”
He may have to wait some time. Romney, a conventional Wall Street figure, is unlikely to tap him anytime soon.
Jim Grant is a paradox: A legendary, well-established figure on Wall Street who is not part of the Wall Street “establishment.” He is a raging contrarian. A writer from a more elegant age, Grant is also a scathing critic of “too big to fail” banks and the whole Wall Street racket — with its privatized profits and socialized losses.
The latest edition of his Interest Rate Observer carries a cartoon on the front cover, in which a banker is bemoaning his fate to a bartender: “Just one more unconscionable bonus,” he is saying over his beer, “and I would’ve been golden.”
Grant is an old-school conservative, but the cartoon could have appeared without any change in The Nation: It’s a sign of how the principled right and the principled left have often found some common cause in their critique of the amoral, expedient financial “elite.”
Entering Grant’s offices is like a step back in time. There are books and actual papers piled high on his desk. I could spy neither an iPad nor an iPhone. Grant, now in his 60s, wears bow ties and horn-rimmed glasses. He was known for many years as a “perma-bear” on the Street, and there is a giant stuffed bear by the door.
Our Great Recession ended 2½ years ago, according to the official cyclical timekeepers, but you wouldn’t know it by a glance at the news. Zero percent interest rates and $1 trillion in “stimulus” notwithstanding, the U.S. economy can hardly seem to heave itself out of bed in the morning. Now compare this with the first full year of recovery from the ugly depression of 1920-21. In 1922, under the unsung stewardship of the president best remembered for his underlings’ scandals and his own early death in office, the unemployment rate fell from 15.6 percent to 9 percent (on its way to 3.2 percent in 1923), while constant-dollar output leapt by 16 percent. After which the 1920s proverbially roared.
And how did the administration of Warren G. Harding, in conjunction with the Federal Reserve, produce these astonishing results? Why, by raising interest rates, reducing the public debt and balancing the federal budget. Let 21st-century economists rub their eyes in disbelief. Eighteen months after the depression started, it ended.
When he wasn’t presiding over a macroeconomic miracle cure, Harding convened a world disarmament conference and overhauled the creaky machinery of federal budget-making. For his trouble, historians customarily place him last, or next to last, in their rankings of U.S. presidents. Incredibly, they consign him near the bottom even in the subcategory of economic management, about 40 places behind Franklin D. Roosevelt, who inherited a depression that he didn’t actually fix. This year’s GOP aspirants are tussling over the mantle of “Reagan Republican.” A forward-thinking politician might lay claim to the Harding legacy instead.
You couldn’t dislike the handsome and amiable alumnus of Ohio Central College. He was one of three members of the Class of 1882 who, with some partners, bought control of the decrepit Marion, Ohio, Star newspaper in 1884 and turned it into a moneymaker. Gentle and accommodating to a fault, editor Harding would gladly withhold a fact or a name from a delicate story lest his newspaper cause unnecessary hurt to a neighbor. He was elected a state senator in 1899, lieutenant governor in 1903 and a U.S. senator in 1914.
Harding’s style of politicking was as easygoing as his personality. What his constituents were for, he liked, too. Peace, harmony and party loyalty were his watchwords. You’d never hear him sniping at a fellow Republican (except once, at Teddy Roosevelt) or even at a Democrat. In Washington, his cigar box, liquor cabinet and poker table were open to good fellows of any political stripe. Present for only slightly more than half of the recorded floor votes during his single Senate term, Harding made time for the little pleasures in life.
Possibly no political figure in Washington bore less resemblance to the austere occupant of the White House than the convivial senator from Ohio. President Woodrow Wilson — moralist, reformer and intellectual — read books and wrote them. Harding made no pretense to living the life of the mind. He liked people better than books, anyway.
And when, at the 1920 National Republican Convention, the hot and exhausted delegates looked for someone who could win the presidency and unite a deadlocked party, they picked Harding. “Everyone’s second choice,” the pundits sneered.
“I guess you have nominated the wrong candidate, if this is the plan,” Harding told the handlers who urged him to attack the, by then, hugely unpopular incumbent, “for I will never go to the White House over the broken body of Woodrow Wilson.” Campaigning from his front porch in Marion, Harding had hardly a cross word for anyone. Rather, he called for lower taxes, economy in government, restricted immigration, an anti-lynching law and responsible enforcement of the Volstead Act, by which America had voted to enforce Prohibition. “Most of all,” wrote Harding’s best biographer, Robert K. Murray, “he advocated allowing the nation to experience a period of tranquility in which it could restore itself and return to ‘normalcy.’?” Against fellow Ohioan James M. Cox, Harding won in a landslide.
It was an untranquil country he was elected to govern. In the 1918-19 flu pandemic, 675,000 Americans died, more than 10 times the number of U.S. battle deaths in the Great War. In the months before Election Day, consumer prices were rising at year-over-year rates of more than 20 percent, a legacy of wartime spending and borrowing. Partisans picked sides in the Bolshevik Revolution, and capital and labor were at each other’s throats. On Sept. 16, 1920, a bomb exploded on Wall Street, killing or wounding more than 200 people. Normalcy was, indeed, just what the doctor ordered.
Candidate Harding had promised “less government in business and more business in government,” and he was as good as his word. In June 1921, he signed the bill that created the Bureau of the Budget, forerunner to today’s Office of Management and Budget. “There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures,” the new president said. “We want to reverse things.”
Harding uttered these words as prices were collapsing and the nation’s output was shrinking. From top to bottom, 1920-21, consumer prices fell by 8.3 percent, wholesale prices by 40.8 percent and the Dow Jones Industrial Average by 36 percent. The Federal Reserve, founded in 1913 and still new to the job, regarded these dislocations clinically. As prices had skyrocketed in the war, so they should come back down to earth, the central bank reasoned. Besides, the nation was on the gold standard; they couldn’t just print the money.
“[A]fter a year or two of discomfort, embarrassment, some losses, some disorders caused by unemployment,” Ben Strong, the Ben Bernanke of his time, predicted in 1919, “we will emerge with an almost invincible banking position, prices more nearly at competitive levels with other nations, and be able to exercise a wide and important influence in restoring the world to a normal and livable condition.” You can call it monetary malpractice — farmers called it worse — but tight money hastened the liquidation of misconceived wartime investments. And just as Strong predicted, the banking system weathered the storm. In 1920-23, the biggest institution to fail was little First National Bank of Cleburne, Tex.
Well, how did the nation ever climb out of the deflationary abyss? By the age-old magnetic power of high interest rates and low investment values. Foreigners sent their gold to America to seize the bargains before they vanished — and up went the prices that had fallen so frighteningly. As for Harding, he fostered recovery as much by what he didn’t do as by what he did. The Bureau of the Budget brought public spending to heel, but the president encouraged private spending by speaking up for business. The Harding administration’s “avowed purpose,” historian George Soule writes in “Prosperity Decade,” “was to withdraw as far as possible from exerting any influence on the economic life of the country except the encouragement that might be derived from a balanced budget and nonintervention with private enterprise.” The nation was duly encouraged.
Harding, the 882-day president, died on Aug 2. 1923. He lived to see the first fruits of his policies, though not their full flowering under his boom-time successor, Calvin Coolidge (nor, happily, the disgrace of some of his crooked friends and deputies in the Teapot Dome affair). Remarking on the depression that came and went, Murray observes that “the art of economic prognostication and statistical evaluation was still in its infancy.” A good thing, too, if one judges by the results.
The best economists are formidable intellects, but do they really know what they are talking about?
Mankind missed a bet 2,000 years ago when no one thought to invest $100 or its equivalent in Roman coin in a certificate of deposit compounding at 2% a year forever. The principal balance today of this ungifted benefaction would come to the astounding sum of $15,861,473,276,036,900,000. That would be $2.3 billion, before tax, for every man, woman and child on earth. But the ancients bungled, perpetuating the problem of scarcity and leaving the way open for Sylvia Nasar to write her "Grand Pursuit: The Story of Economic Genius," a survey of economic thought from Charles Dickens to Paul Samuelson and beyond.
Economic genius would seem to be in short supply these days. On the say-so of economists, Congress has spent upwards of $1 trillion to "stimulate" an economy that remains unstimulated. The best economists are formidable intellects, as it goes without saying—Ben Bernanke was the spelling champion of South Carolina—but you begin to wonder if they know what they're talking about.
Ms. Nasar divides her book into three "acts," like a play. They are "hope," "fear" and "confidence." "Hope" is what the Victorian thinkers, including Dickens, in his role of social reformer, and Karl Marx (of all people), gave the world concerning the possibility of solving the economic problem through conscious effort. "Fear" is what the interwar economists—confronting first hyperinflation and then the Great Depression—had to wrestle with and surmount. "Confidence" is what returned after World War II, as governments implemented the allegedly constructive notions of the Keynesians and monetarists.
Her collected geniuses, Ms. Nasar claims, were "instrumental in turning economics into an instrument of mastery." I find nothing in these pages remotely to substantiate that contention. Economics may be an "engine of analysis," as Alfred Marshall said, or an "apparatus of the mind," as Keynes put it. But economists no more set the world to producing and consuming than baseball statisticians hit home runs. Then, too, you'll never see Bill James, the dean of the baseball sabermetricians, trip up a base runner the way the government thwarts an entrepreneur. The intervention-minded economists are the ones who give the government its big ideas.
Ms. Nasar, the author of "A Beautiful Mind" (1998), the story of the mathematician John Nash, is a superb writer, fully meeting the standard set by Robert Heilbroner, in his "The Worldly Philosophers" (1953), for graceful writing on a difficult subject. You may or may not agree that the word "genius" fairly describes the mental apparatus of each of her heroes, but you can't help becoming engrossed in their lives. In her telling, Karl Marx has never seemed more repugnant or Joseph Schumpeter more persevering.
Recent Economic Changes
By David A. Wells (1889)
The dull title of "Recent Economic Changes" does no justice to David A. Wells's fascinating contemporary account of a deflationary miasma that settled over the world's advanced economies in the 1880s. His cheery conclusion: Prices were falling because technology was progressing. What had pushed the price of a bushel of wheat down to 67 cents in 1887 from $1.10 in 1882 was nothing more sinister than the opening up of new regions to cultivation (Australia, the Dakotas) and astounding improvements in agricultural machinery. In the U.S. between 1849 and 1884, population had risen by 141%, wheat production by 410%. Farmers howled about the price drops, but humanity gained. Luckily, there was no Federal Reserve (it came about in 1913) to find in these trends a deflationary crisis that required amelioration by the vast production of new dollar bills.
I Would Live It Again
By Julia B. Foraker (1932)
Julia Foraker, a political wife of the Gilded Age, was born in rural Ohio in 1847, when, as she puts it, the only careers available to a woman were "the home or invalidism." She has a wonderful way of putting things. In Foraker's telling, someone is "laconically murdered," a preacher works up a "pulpit sweat" and—slyly—"husbands know best; that is understood." Of course, much has changed in American politics since the time of Grover Cleveland, Thomas B. Reed, William Jennings Bryan and Foraker's husband, Joseph, a U.S. senator from Ohio. But much has remained the same. Of Mark Hanna (see below), the Republican kingmaker of the 1890s, the memoirist observes: "When his favorite failed to win . . . he could switch to the man who did get in, with a rapidity that made whole wards blink."
By Thomas Beer (1929)
This biography of the Ohio money man and political entrepreneur Mark Hanna is a shining example of what a biographer can accomplish without using footnotes. Thomas Beer, the son of a Hanna aide, makes no pretense to scholarly objectivity but rather tells the story as familiarly as he might a Beer family anecdote. Hanna was the prototype of the American industrialist who applies business methods to electoral politics. The bland and museless William McKinley, America's 25th president, was Hanna's political masterwork. It seemed not to matter to the voters that McKinley so often wavered, not least on the merits of a war of choice with Spain in 1898. They decided (with Hanna's help) that he was lovable. "Their bodies thickened," Beer relates of the movers and shakers of Wall Street in Hanna's time. "They died at ages of 52 and 53. They swooned on bright tables at meetings of directors and were lugged down to slick private cabs waiting on the slope beside Trinity Church." It might interest Beer to learn that the lobby of the old Bankers Trust building on 14 Wall Street today houses an Equinox health club.
From Steerage to Congress
By Richard Bartholdt (1930)
A 12-term congressman from Missouri, Richard Bartholdt (1855-1932) had arrived in this country from Germany at age 21. He became a newspaperman and a Republican: "The Republicans were the party of emancipation. I did not care for any other reason." Bartholdt loved liberty, and he didn't mind saying so. "America," the then-freshman congressman declaimed at a Fourth of July celebration in 1893, "where the only aristocracy is the royalty of heart, the only imperialism the natural cast of brain. This is why it is that, when others boast of national achievement, the American just points to the flag and bluntly says to all the world, 'Match this if you can, the peerless story of human freedom, of intellectual progress, of great-hearted, broad-minded development told in the mystic wedlock of the Stars and Stripes.' " And, mind you, 1893 was a depression year.
An Adventure in Constructive Finance
By Carter Glass (1927)
Carter Glass, a prickly Democratic congressman (later senator) from Virginia, thought that, in shepherding the Federal Reserve Act through the House of Representatives, he and his allies had finally resolved the great monetary debates of the late 19th century. Out was the "wretched" and "unscientific" banking system that had fostered the panics of 1893 and 1907; in was a modern gold standard "responsive at all times and to the fullest extent to every reasonable demand of legitimate business." The Fed was, to its legislative father, a very nearly perfect institution. To any who predicted that his grand experiment would end with paper, or "fiat," money, Glass scoffed: "There is not an element of 'fiatism' about a federal reserve note." If the Virginian could be brought back to life to view the paper-spinning 21st-century Fed, the shock might kill him all over again.
BY JAMES GRANT: