The True Gold Standard (Second Edition)
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."
James Grant, publisher of Grant's Interest Rate Observer, talks about the impact of the fiscal impasse in Washington on global markets, U.S. debt and the dollar, and the outlook for Federal Reserve policy. Grant speaks with Deirdre Bolton on Bloomberg Television's "Money Moves."
James Grant, founder & editor of Grant's Interest Rate Observer, predicts that the result of recent Federal Reserve action will prompt a return to the gold standard for the United States. He speaks on Bloomberg Television's "Bloomberg Surveillance."
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.
BY JAMES GRANT: