A look at this week’s show:
- Steve Forbes calls for a gold solution to paper currency
- Paper currency inflation slowly steals our standard of living
- Gold standards of the past: an important history
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin: David, over the last few weeks, we have looked at gold, and we have looked at it for the last two weeks with Ian McAvity. But in the mainline media we are also starting to see people outspoken about the need for gold. A good example is Steve Forbes, who came out and said that gold can actually save us right now from the situation that we are in.
David: One of the things that Steve Forbes is focusing on is at the core of our economy. If you can’t trust the currency, then really, what is your reference point, in terms of international trade, domestic trade, price stability? We talk about having concerns about inflation or deflation, and we think of those as economic issues, when in fact, they are really monetary in nature. It has everything to do with what is happening to your money.
This is a must read article. It highlights some of the things that are critical. Today’s topic is the gold standard – why we need it, what we should be doing to get it implemented, and the costs that we have endured for many decades without it.
Kevin: And David, there are some unlikely voices right now in this campaign. Over in Europe, Weidmann, who is the head of Bundesbank, was talking about the need to have some sort of monetary discipline, like the gold standard.
David: But it was early this year, in the Financial Times, when Robert Zoellick, who at the time was President of the World Bank, was suggesting that we need gold as a part of our international monetary system.
Kevin: That is an unlikely voice – the World Bank.
David: I think what we are seeing is more and more practitioners of finance saying that something is wrong with the system and it needs to be addressed at the most foundational and fundamental levels, at the unit of account, when you are dealing with a denomination, the currency itself. That is where you begin to rebuild the financial system, on the basis of stability.
Kevin: Do you think we may be resting on our laurels, just because the dollar is the reserve currency of the world and we are forgetting just how rotten that currency really is?
David: We forget that. We forget how exceptionally rotten our currency system is, because as we engage in commerce every day, consumed by the here and now, we really don’t reflect on the core issue of price stability. The changes affecting our dollars are spread over a long enough period of time that it goes unnoticed, particularly by a U.S. audience.
Kevin: Let’s say we are sitting overseas right now, and we are making business decisions. We have to buy soybeans from so-and-so, and we have to sell oil to so-and-so. What are we going to do? Are we going to continue to hold dollars that are devaluing, or are we going to find other ways around that?
David: This is where you see a greater sensitivity to dollar degradation or dollar decline. There is a little bit more distance from the issue. And the changes, which are imperceptible here in the United States because they are spread out over such a long period of time, are more obvious.
Kevin: That reminds me of when you visit family members, maybe once a year at Christmas, you watch their kids growing up, and you see changes that they may not have seen. It is hard to point it out to them because they have watched it the whole time.
David: Right. It is always surprising to the outsider. Inflation, over a long period of time, is frankly, not just an inconvenience for the consumer, in which they are paying higher and higher prices as time goes on, but it is also a source of frustration for the would-be saver or investor. When people look out on a time horizon, they say that someday they’d like to retire, at 50, 60, or 75, and in tomorrow’s generation, perhaps they will have dreams of retirement in their 80s (laughter).
But I think what the would-be saver or investor is frustrated by is that the ability to save and invest is diminished by ever-increasing prices. This is where we see a disconnect, in fact, with many economists, who say that inflation in prices is driven by inflation in wages, where people are making more, therefore there is more money that is spent on goods, and goods go up in price because there is scarcity of goods. The issue for a long time has been that prices are rising, but wage growth has been stagnant.
Kevin: This is why most people are starting to run out of money before they run out of month. They say that our cost of living is not really going up, and we are told that actually our standard of living is much better today than it was before, but statistics don’t show that.
David: Right. We have an issue here. If you want to put it in terms of labor arbitrage, companies, in order to keep their margins healthy, will lower wages. We aren’t talking about outright pay cuts, but by outsourcing their employees to a lower wage environment, which is called labor arbitrage, they are basically counter-balancing the inputs that they are not really in control of – commodity prices, health care costs, transport and distribution costs. They are trying to keep margins in balance, and labor arbitrage has allowed them to maintain margins and continue to deliver shareholder value. But what we have seen is, in the context of globalization, and I don’t have a problem with this, per se, but we do have lower wages in other countries which puts a cap on wages here, even though costs continue to rise.
Kevin: David, we have talked about this many times before. This isn’t just a monetary issue, it’s not an economic issue, and it’s not some form of academia. This is a justice issue. There is morality and immorality involved in this. Let’s talk a little bit about the justice of money.
David: One of the things, when I just casually mention that costs continue to rise, this is not just an accidental issue. There is a causal connection between the way money is managed – I’m not talking about by individuals but by a central bank – and the consequence to real goods and services as they are priced in real time in the marketplace.
Kevin: David, on that issue of justice. Let’s talk about morality and justice.
David: Where you have put forth an effort – I’m talking about your work effort in a day – a man or woman is worth their wage. That’s a principle that we have seen illustrated through history. It has made for successful businesses, and it is certainly illustrated in some of the great works on ethics. Where you have an effort put forth, there should be an effort rewarded, a just and appropriate compensation.
This is one of the reasons why we look at the old child labor laws, and all the issues of slavery. Certainly, there is a dehumanizing when someone is not compensated fairly for the effort that they have put in. To varying degrees, we have seen that through history, and it brings us back to the issue of stable prices being critical, because what was a living wage is quickly unlivable as stuff gets more expensive.
Kevin: David, I have a question for you. Should a man work a day’s labor for a day’s wage that is paid by something that somebody can print for free?
David: That’s an issue, isn’t it? Because it doesn’t have any intrinsic value. It has an assumed value, it has an associated value, and by maintaining loose monetary policy, over a long period of time, there is a gradual repricing of goods and services, and an increased need to work more for the old stuff, or even work more for less. This is what rubs me the wrong way, and has me looking at this as an issue of justice, because I still show up and work hard, you show up and work hard, the average worker across America shows up and works hard…
Kevin: And their wives, and their family members.
David: And they are having to work more and more, for less and less, and this is not, I think, to be laid at the feet of major corporations, because it is not just a question of outsourcing, it’s a question of repricing. And that repricing is a function of what is being done to the money earned, and it is buying less and less through time.
Kevin: David, talking about time, we both grew up with the Jetsons, a TV cartoon show that showed what technological advances would do for our lives – more leisure time. Sure you would go to the office, but you wouldn’t go to the office for long. We have all these things that are delivered right to our homes, and we actually have these kinds of technological advances now, yet we are working as many hours as we ever have been.
David: In spite of them. To say that a different way, in spite of those changes, with cheaper electronic goods, with cheaper cell phones, we still need to work more for the same lifestyle. Again, that is not a problem that you can lay at the feet of greedy company executives or corporate fat cats, it is the more subtle moving of the goalposts by the Federal Reserve System, continually degrading our currency. And the beauty is, it is something that is imperceptible, because the timeframe involved is such that you can’t observe the change.
Kevin: David, I watched the football game last night, and the Broncos had a huge comeback, but it was a good metaphor you used, because if they continued to move the goalposts, imperceptibly, and they continued to do that, and do that, and do that, ultimately, you would never make a touchdown. You would run, and you would run, and you would run, but you couldn’t get to the goalpost. That seems to be what is happening. We have seen the dollar, since they closed the gold window back in 1971, lose 90% of its value.
David: I think this is where conservatives tend to focus on the issue of justice. Is this an issue of just weights and measures? Is the Fed managing our money, or mismanaging our money and creating all kinds of issues? Whether it is malinvestment, rampant profligacy of financial products on Wall Street, government spending which is off the charts and uncontrollable, I think for conservatives, there is an issue of justice here, and just weights and measures.
Kevin: But even a liberal, who is more concerned with social justice…
David: Exactly. If you look at it from the standpoint of social justice issues, I would suggest that the wrong place to start is with a political critique. Political parties argue, essentially, about whose responsibility it is to care for others. Amongst conservatives, it is, I care for myself. Amongst liberals, it is, I care for everyone, but not necessarily with my money – your money involved, but I still like the idea of caring for them.
Kevin: Wait, you just got political there.
David: (laughter) I understand, I understand, I apologize.
Kevin: Right, but go back to the idea.
David: To simplify, there is a divide between who is responsible for whom. This is the idea behind empowering government to implement more and more social programs. The problem lies in the often-neglected issue of money. Most basically, if your money cannot maintain price stability, the ranks of the government-dependent will always grow, because you are dealing with being unable to take care of yourself, and unable to take care of others. This is not a rehash of Romney’s comment on the 47%. What I am saying is that government, via the Federal Reserve System, will continue to grow, out of necessity, as people look at what once was a living wage, and is no longer so.
Kevin: This is the fascinating thing, because we are just weeks away from possibly a change in administration, or not, but whatever the case is, we have a debt problem right now that is created by this monetary system, the way it stands, and unless that monetary system is thrown out, the difference between an Obama presidency and a Romney presidency is marginal when it comes to money.
David: Often the criticism is that there is no difference between the Republicans and the Democrats, the red shirts and the blue shirts, the same team, it’s just who is on the field. Individual empowerment and opportunity, and it doesn’t matter if it’s the Republicans or Democrats, is gradually being replaced with dependency on the state, as the system creates a context in which care of others and care of self is constrained by rising costs. We, more and more, have to focus on just meeting our own individual needs. The average family across this country can’t be as generous and as concerned about the needs of their neighbors, when they are very likely not going to be able to pay their own bills.
But this is the issue. We are creating dependency. And the system is being driven, not by Republicans or Democrats, but by the Federal Reserve System. This is our central bank, which is responsible today for printing money. This is not how money was always managed. But, uniquely, the issue with the Tea Party and Occupy participants, what they should agree on is the travesty of what government has done to our money, and out of that flow many, many other issues.
Kevin: What is amazing is that this thing is self-continuing. It’s just like a snowball rolling downhill. The more dependency that you create by this wage problem, or this inflation problem, the more you have to create more, and more, and more of it, until finally, it can’t feed itself.
I have mentioned this before, but when I was a little kid, maybe 6 or 7 years old, I had a little Fisher-Price record player, and I had three records, and one or two of them had a story on them. One was the story of the big oven, and it makes me cold even just thinking about it, but it was about this man who had a large oven, and everybody was jealous because he had the warmest house on the block, and it was the largest house, as well. But over time, he continued to feed the oven, and it took more and more wood, and more and more wood, until he finally cut the house up, timber by timber, furniture piece by furniture piece, until he had nothing but a cold oven. The way the story ends, you can hear the wind blowing and see the snow flying, and that is where we are going with the paper dollar.
David: So whether it’s a question of justice in the abstract, or even if it is cast as a social justice issue, the Fed centers in the discussion because of the delegation of responsibility to the Fed for the creation of our money, which was not always the case. You understand, this is a unique phenomenon in U.S. history. It was never to be, according to our founding fathers. It has been fought over multiple times. This is the third iteration of a central bank, because the first two were allowed to go away, because they determined at different points in U.S. history that we needed something that was better than a managed money system.
Kevin: The fascinating thing is, a big part of the American Revolution was fought over this same issue. Look at the Bank of England. They had everyone in debt to them by the time the American Revolution was being fought, so the patriots knew that this was something they didn’t want to repeat.
David: Something we should look at, in brief, is how did we get here? This is a synopsis, a brief history. In 1717, Isaac Newton was brought in by the royals to figure out why their money system was failing. He figured out that the money guild was, in fact, treating the crown unfairly. What he did in 1717 was to put the British on the gold standard, where the money was defined by a specific weight of silver, and as a result we have the pound sterling. But this is essentially where the definition of the pound and of the sterling came from, silver and gold as a part of the monetary system.
There were a number of things that were happening at the time, which made, not only the gold standard, but the British, become one of the most successful enterprises, if you will, or country experiments, if you will, in world history.
Kevin: Didn’t they dominate trade, partially because of the gold standard?
David: A couple of factors: One, there was the British naval expansion which was central to their move into world trade. The currency was easy to like, and even easier to trust, than other alternatives around the world, so the pound sterling, backed by gold, and that history, that legacy, made it an easy go-to currency.
Kevin: But like the United States, they also had vast military superiority. They ruled the ocean at that time.
David: Right, dominant trade position, vast military superiority, and gold backing their currency. On that basis, London became the world financial center – what they called the Old Lady of Threadneedle Street, which is the euphemism for the central bank in Great Britain, became the most important institution in the 19th century. These are, in fact, traits that the U.S. has come to share in a post World War II era, common to the British-run, sterling-dominated system with trade preeminence, trusted currency status, and the like. This is now what the U.S. system reflects. New York is the new London. The central bank of America, which is the Federal Reserve, is the Old Lady of Threadneedle Street, just in new garb.
Kevin: David, you are talking about the United States being that same thing right now. That was mainly because we were on a gold standard when Bretton Woods was put together, which did make us trustworthy, as London was a couple of hundred years ago, when they were on a gold standard.
David: Just to clarify, though, as for being on the gold standard before Bretton Woods, we really weren’t.
Kevin: The exchange…
David: We were on the gold exchange standard.
Kevin: Yes.
David: We will clarify that in a minute, but 1717, remember that date. That British adopted it, Isaac Newton made it happen. From 1860 to 1880, there was really a global revolution in the world of currencies, where three-quarters of the globe, on a voluntary basis, went onto the gold standard, and essentially we had what became a one-world currency. Gold was acknowledged by everyone around the world as the currency of choice. World trade, during that period of 1860 to actually about 1914, and an expansion of globalization, and international cooperation, and world peace, expanded at a pace and at a rate that had never been seen in history.
Kevin: And there was price stability back then. We didn’t have hyperinflations in any of the countries that were on this gold standard.
David: It is interesting, when you look at the U.S. in particular, that period of 100 years, the 19th century, was defined by a variance of about 10% in terms of prices, up or down, minor inflations, minor deflations, but about a 10% variance for the century. Now fast forward to the 20th century, and we have subsequently been in the context of rising prices about 22 times – 22 times versus 10%.
We are looking at a basic list of daily necessities that over the course of the 20th century is up 22-fold, compared to a 10% variance in the previous century. Why? Going back to our earlier comments, this is like the frog being boiled, or the lobster being boiled. Inflation, over a long period of time, is not something that consumers associate with the management of money, but it is, in fact, because of the management, or as we would put it, the mismanagement of money. A 22-fold increase in a basic list of staple goods?
Kevin: In the 20th century.
David: It’s insane.
Kevin: David, almost a dream world for trade partners from 1860 to 1914, because we were on a disciplined, stable system, and that system meant that everyone got paid, their balance of payments equaled out, and balanced out, because they had gold. They couldn’t just print something. There was a compromise, David. Look at 1914. What happened in 1914?
David: We came off the world gold standard because we went into a world war, and no one could finance what they needed, in terms of tanks, bombs, guns, airplanes and the like, without an easy-money policy. And even the British did this. During the Napoleonic Wars they came off the gold standard, they were off of it for about 20-25 years, and then came back on because they realized, “Wait a minute. Politicians are gaming the system. We are doomed unless we go back to something that disciplines their spending habits.” And it starts with a limited quantity, and a clear definition as to what the unit of money is.
Kevin: But let’s say you go off the gold standard for a war, or a financial crisis. Yes, that’s a compromise, and as you had mentioned, it can be reinstituted, but it wasn’t. There was a conference in 1922 that changed the whole game.
David: And this is really where there is some confusion, the Conference of Genoa, the change in the gold standard. What bankers argued for at the Conference of Genoa was a compromise, sort of a half loaf. We will have gold as a part of our money system, but we want dollars and pound sterling, the paper version, also in the list of acceptable reserve assets.
Kevin: And once you start counting it as reserve, you can start loaning out on that paper reserve instead of gold reserve.
David: Yes, in theory, there was a move toward stability, but that compromise of allowing paper currencies to also serve as a reserve asset, allowed for some gaming on the part of the Americans and the British. It served to their advantage, and the rest of the world, in terms of trade partnership, was really being taken advantage of.
Kevin: In the next decade, we had the Roaring ’20s, and especially 1927, 1928, and 1929, before the Crash. But by 1932, 1933, the whole thing was falling apart.
David: So 1933. If we start in 1717, fast forward to the 1860 to 1914 period, and 1922 was a key, significant date. 1933 is where, here in the United States, we had the convertibility of gold and paper money suspended. That was just on a domestic basis. We were still converting dollars for gold with our international trade partners, but because it was made illegal for gold to be owned here in the United States, convertibility was only external, and could not be done internally. It was illegal to hold and trade, for U.S. persons.
Kevin: Shouldn’t it be brought out why? When you have a standard system where one can get gold in their hand, or let’s say a 20-dollar bill, which was the standard here in America. You could have a 1-ounce gold coin or a 20-dollar bill. If they start printing too much money, it is a self-correcting system, because people will say, “Well, here’s your twenty, give me my gold.” They had to close that down domestically in 1933.
David: That period, 1933 to 1937, was probably the greatest shift in our country, of any period, before or since, from an economic standpoint, and even from a social standpoint, because what happened there was that government took control of the money printing, via the Fed. The Fed had been created in 1913, but was really only given the keys to the kingdom in a post gold era, which was after 1933.
Here is what is interesting. It was from this point forward that government spending began to replace private spending, in terms of charities and taking care of the common good. And our running assumption today is that government takes care of the needy – we don’t. Of course, there are generous people who will share a part of their wealth, and you see that with foundations, you see that with individuals, you see that in religious communities, where 10% is almost a given, but that’s an exception.
What took place was a cultural shift, where government said, “We have an alphabet soup list of organizations which will do this, and that, and the other. We don’t have the money to pay for it unless we have control of the money supply. Now we control the money supply…
Kevin: And we’ll print it.
David: And we have money to pay for it, so we can pay for any government program heretofore. That was a major shift, and granted, we needed the jobs in that period of time. But what we didn’t need is the government to fill what was a temporary vacuum in terms of, call it a social generosity, where we took care of our neighbor, and our neighbor took care of us. The stories during the 1930s are very common about people who didn’t have food, but families shared amongst themselves. In your community, if you had an extra chicken, you shared with your neighbor. If somebody was traveling through on their way to looking for a good job prospect on the other coast, you let them stay with you, you fed them overnight, you gave them work for a week. That would never happen today, in part, because we have it ingrained in us that government takes care of those issues – we don’t.
Kevin: That’s why some of the people that we talk to in their 80s and 90s still look back at that time as the best worst time.
David: Fast-forwarding from 1933 to 1944, we already said that the gold exchange standard included fiat currencies, and did not tie us directly to 100% gold backing. In 1944, that’s what we carried with us into the Bretton Woods agreement, where we tied every world currency to the U.S. dollar, and implicit in that was that the dollar had sufficient gold backing to cover all external liabilities.
Kevin: And all the foreign governments that had dollars could change them, at any time they wanted to, to gold.
David: Right. Post World War II, the money system focused on paper, but with dollar-orientation, and the given in the equation was our 8,000 tons of gold that served as a reserve, the largest reserve in the world. By proxy, there was some association to gold.
Kevin: We kept printing, though, and Jacques Rueff wrote a book called The Monetary Sin of the West, that warned ahead of time that this was not going to last.
David: Right. The gold pool was broken, the official pricing in the early 1970s. Jacques Rueff anticipated that in the early 1960s, and all of a sudden 1971 rolls around and international convertibility – remember we talked about domestic convertibility, where it was illegal for someone in the U.S. to own gold – international convertibility was suspended, we would not pay our debts in gold ounces anymore, only in paper dollars, which we could create with basically a 3-cent cost basis. One dollar cost us 3 cents to create, and for that we would get 97 cents of purchasing power for free. Frankly, our foreign creditors didn’t like that. They wanted the real stuff, not the stuff that we could create virtually out of nothing.
Kevin: Enter Richard Nixon, who had to do what he had to do, but he said just temporarily, and that was to close the gold window completely.
David: Since then, we have been living with a fiat system, fiat meaning a currency system that has nothing backing it except the integrity of bankers. That is not to impugn the integrity of bankers, it is just to say that the system, as it is constructed, will tend to be inflationary, and there is a huge advantage given to the U.S., as there was a huge advantage to the British before us.
The advantage today is ours. The world has become, to some degree, dollarized, just as the world before, up until about the 1920s or 1930s, was really defined by the pound sterling and the British trade system, with London being the financial hub of the world. That has now fallen to us. It is not something that we necessarily get to keep. We may keep it, we are likely to keep it, but on what basis? Are we giving the world a reason to have confidence in our system?
This is why we have gone through the history a little bit today. There was a reason why the British were given the benefit of the doubt. It wasn’t because everyone thought the Queen was pretty. It was because they had confidence in gold. It was something that they knew could not be messed around with. If you are trading through London, if you are trading with an international firm, trade settlement could occur in a currency that you had confidence in.
We have taken advantage of the trust of the world, which has put confidence in the dollar, and yet we have been degrading the dollar over the last 70 years. We have been in a steady decline, with fits and starts of more radical devaluation, and this is where our foreign creditors have reason to be concerned.
Kevin: While the dollar is still the reserve currency, while the world is still on a dollarized system, shouldn’t this be the time, before collapse, that we should be looking at some sort of salvation for the dollar, to try to stay in that position, but with a more rational backing?
David: This brings us full circle to Steve Forbes’ article, titled, Gold Can Save Us From Disaster. One of the disasters that we have as a country is losing reserve currency status, which we will do, because money is nothing more than a confidence game, and people can have confidence in it, or they can lose confidence in that unit of measure, and the question is, why would they have confidence in the dollar today?
It is an interesting large liquidity pool, but in terms of credit, in terms of reliability, we have shown our hand to be very unreliable, and to actually be a very bad credit risk. What we would suggest, along with Forbes, along with Lewis Lehrman, along with Robert Zoellick, along with a growing host of Wall Street luminaries and financiers, is that we need stability at the core of our financial system, and if we don’t move there very quickly, the financial system as we know it, and the monetary system of the world will be upended, violently.
Kevin: David, you mentioned Lewis Lehrman. We have mentioned on this program many times that our office goes through various books and gets together, discusses them, and we write papers on them. There are a number of things that we do to really absorb the books. Lewis Lehrman has written a book that I think you would like to recommend at this point.
David: It’s called The True Gold Standard: A Monetary Reform Plan without Official Reserve Currencies. This is, literally, 100 pages or less of a step-sequence. A summary of the monetary reform plan, why we need a true gold standard, why it needs to be 100% gold, not the gold exchange standard of the past, where games could continue to be played, and there was the appearance of the comfort of gold backing the currency, but in fact, the advantage was given to the banking community to play games, and ultimately, cater to political corruption.
Let’s put it in very honest and very simple terms. When you have an unlimited amount of money, you get to spend an unlimited amount of money on various constituency groups. We have a budget today which reflects a high degree of political corruption, which is only possible given an unlimited amount of money.
Kevin: It reminds me of keeping your credit card just for emergencies, and then everything is an emergency.
David: You have to define limits, and that is not done voluntarily, not by the banking community. They never met a dollar they didn’t want to lend out, and particularly, when they can create those dollars out of nothing, and lend them out and collect interest on them. That’s the system, I appreciate the system, it’s a system that has worked, but it is a system that works to the advantage of some, and actually hurts many others.
If you are looking at this from the standpoint of justice, if you are looking at it from the standpoint of social justice, frankly, if you want to see the world and globalization expand, the way we did during the 1860 to 1914 period, one of the fundamental things you need is a trustworthy currency. The dollar has been that trustworthy currency, and people are losing confidence, and losing trust in it.
Kevin: David, all that is nice. We talk about how, idealistically, we could be on a gold standard, but really, what should we do now?
David: If you want to quote John Maynard Keynes, or even look at someone on the opposite end of the spectrum, Henry Hazlitt, whether it was Bretton Woods, world inflation, or economics in one lesson, Henry Hazlitt said it decades ago, “The answer is simple. We must stop inflating.” And the most reliable, tested means of tying the hands of politicians and their back-pocket central bankers, is to return to a 100% gold-backed currency. John Maynard Keynes said this in 1922, interestingly, about the time of the Genoa Conference: “If the gold standard could be re-introduced, we all believe that the reform would promote trade and production like nothing else, but also stimulate international credit and transfer of capital to the places where they are most useful. One of the greatest elements of uncertainty would be suppressed.”
We would simply encourage you to invest half a day’s time in reading The True Gold Standard, understand what is involved in a monetary reform plan, and a step-by-step as to how to get it implemented, because an idea that just a few years ago would have been considered by most in the mainstream to be crackpot, utterly unrealistic, and frankly, undesirable, we are seeing a growing number of Wall Street practitioners who say, “We’re okay with discipline. We’re okay with the rule of law. We’re okay with predictability.”
This is John Taylor’s idea that Fed policy needs to be less discretionary and much more patterned and predictable. There is a need for discipline, which we have not had since 1971, since 1944, since 1933, since 1922. To varying degrees, we have been losing and washing away what was a necessary discipline in the equation. But this is not a crackpot idea. This is something that world central bankers, as recently as the 1960s, were discussing.
We talked about the Conference of Genoa. There was a conference in Bologna in 1967, and they were trying to figure out what gold should be priced at, as a part of the world monetary system. There was a running assumption, and this is Triffin, this is Mundle, this is all of the guys who are read by Ph.D. economists today, and they assume that it was still a part of the conversation. Something changed in 1971, but we need to go back in history and re-enact what was the most stable, what in fact set the precedent, for the greatest growth in world history. Unprecedented growth. The 19th and 20th centuries have redefined global growth, and it had everything to do with the gold standard.
Kevin: Could we be seeing a replay of this dialogue a little early maybe, but from Weidmann, and Zoellick, and Grant, and as you said, Steve Forbes? These guys, back in the 1960s, saw the train light coming back through the tunnel, and they knew the gold standard wasn’t going to last. They were already talking about making it sound again.
Here’s my question, though. There are always vested interests, Dave. There are a lot of people who will say, “Oh, well, there’s not enough gold in the world to do this, or one country has a better advantage than another country.” These vested interests don’t want to see a gold standard, because they’re having their cake, and they’re eating it, too. So are we in a period of time, right now, where we could see this, or should we just be preparing for the time when the vested interests lose face?
David: Kevin, the vested interests you are talking about, whether it is at the Fed, or politicians, today, who like to spend more than they bring in, these are vested interests that have to be addressed, and the system does not accommodate the gold standard today because the vested interests don’t want anything other than the status quo.
Kevin: But there are paradigm turning points. You had us read the book by Thomas Kuhn, The Structure of Scientific Revolutions. It’s all about a scientific paradigm that is held tightly for sometimes 100 years, and then all of a sudden – boom! It’s busted.
David: And what happens in that process is that problems begin to accumulate that are not addressed by the governing school of thought, and ultimately, the problems get to be a critical mass.
Kevin: Like the solar system. Things do not revolve around the earth in the solar system, they revolve around the sun. That paradigm finally had to be broken.
David: Exactly. And the old science became a radically new science. The old money management system that we have via the central bank and the Fed will become a new system. We believe it’s possible. It seems very unlikely today, but we don’t know who our leadership will be tomorrow. We don’t know what ideas they will prize.
And this is where we would remind them of justice issues. We would remind them of the value of the individual. A worker is worth his wage. And for a central bank to degrade the wage which a worker is worth is a way of dehumanizing the general population and creating a world full of dependents. There is a moral issue here. There is something that has to be addressed. And it is something that we think may be addressed over the next 10-20 years.
Kevin: David, one of the things that we see through history is that history is usually changed by a minority, not a majority, viewpoint, when those paradigms change. This book, The True Gold Standard, by Lehrman – everyone listening to the program should read this book, because actually, if not us, then who will bring this change about?
David: If we were to achieve going back to the true gold standard, then individuals wouldn’t need to be on their own personal gold standard, the system would have done that for them. As it is, they do need it, and as it is, we are needed as a company. There could be a future date, if we are successful, when we are not as necessary.
Kevin: I think about the time that your dad started this company, back in 1972. He was doing that to put people on a personal gold standard.
David: We came off of it in 1971, and we started the business in 1972, because the need was obvious. This may sound very strange, but we would relish the day when we are no longer needed.
Kevin: But until that time, Dave, wouldn’t you say it is safe to say you really want to stay on your own personal gold standard?
David: Oh, I think it’s absolutely necessary.
