Jim Grant Explains The Gold Standard

Authored by Ryan McMaken via The Mises Institute,

Earlier this month in the Wall Street JournalJames Grant explored the latest academic attack on the gold standard — this time in the form of One Nation Under Gold by financial journalist James Ledbetter.

Not that the establishment economics profession needs another book trashing gold. Among the university- and government-employed PhDs who hand down their wisdom about economics from on high, few have anything but disdain for the yellow metal. 

Grant knows this all to well and notes: 

As if to clinch the case against gold - and, necessarily, the case for the modern-day status quo - Mr. Ledbetter writes: “Of forty economists teaching at America’s most prestigious universities — including many who’ve advised or worked in Republican administrations — exactly zero responded favorably to a gold-standard question asked in 2012.”


Perhaps so, but “zero” or thereabouts likewise describes the number of established economists who in 2005, ’06 and ’07 anticipated the coming of the biggest financial event of their professional lives. The economists mean no harm. But if, in unison, they arrive at the conclusion that tomorrow is Monday, a prudent person would check the calendar.

Nevertheless, the gold standard has a reputation for being dark and nefarious. It’s backward and limiting, and the sort of thing one ought to associate with crucifixion, as implied in William Jennings Bryan’s famous Cross of Gold speech

But, as Grant sums things up, it’s not as complicated as all that: 

What was the gold standard, exactly — this thing that the professors dismiss so airily today? A self-respecting member of the community of gold-standard nations defined its money as a weight of bullion. It allowed gold to enter and leave the country freely. It exchanged bank notes to gold, and vice versa, at a fixed and inviolable rate. The people, not the authorities, decided which form of money was best.


The gold standard was a hard task master, all right.


You couldn’t devalue your way out of trouble.


You couldn’t run up a big domestic budget deficit.


The central bank of a gold-standard country (if there was a central bank) was charged with preserving the convertibility of the currency and, in a pinch, serving as lender of last resort to needy commercial banks. Growth, employment and price stability took their own course. And if, in a financial panic or a business-cycle downturn, gold fled the country, it was the duty of the central bank to establish a rate of interest that called the metal home. In the throes of a crisis, interest rates would likely go up, not down.

The reason gold is so unpleasant then, Grant writes, is that “the modern sensibility quakes at the rigor of such a system.” But, in an age when science and technology can solve all our problems, surely if we try really hard, we can devise an economic system that can create wealth out of thin air! 

Thus was the gold standard replaced by another standard: 

That system features monetary oversight by former university economics faculty — the Ph.D. standard, let’s call it. The ex-professors buy bonds with money they whistle into existence (“quantitative easing”), tinker with interest rates, and give speeches about their intentions to buy bonds and tinker with interest rates (“forward guidance”).

But why was this new standard adopted? Many economists would have us believe it was due to some rational embrace of more “correct” thinking. 

But, as with Keynesian economics in general - which was largely embraced because it tells powerful people what they want to hear = the new monetary system was embraced because governments couldn't pay their debts:

Addressing a national television audience on Sunday evening, Aug. 15, 1971, President Richard Nixon announced the temporary suspension of the dollar’s convertibility into gold. No more would foreign governments enjoy the right to trade in their greenbacks for bullion at the then standard rate of $35 to the ounce. 

It’s not a coincidence that this came at the end of a long period of guns-and-butter policy in which the US government spent freely on new wars and a growing welfare state. But there was a problem. Government’s ability to give itself a raise by inflating the currency was restrained somewhat by the Bretton Woods system, which guaranteed the international value of gold at a fixed number of dollars. 

Nixon yearned to be free of this restraint so he could spend dollars more freely, and not have to worry about their value in gold. 

Nixon’s move was, in short, the final and total politicization on money itself, and, as Grant notes, “The Ph.D. standard is ... a political institution. It is the financial counterpart to the philosophy of statism."



MrSteve Tue, 06/27/2017 - 22:55 Permalink

James Grant is one of the very few people making any sense today about our so-called economy. Ignore him at your own deepest danger to self-preservation.

J S Bach BaBaBouy Tue, 06/27/2017 - 23:51 Permalink

Gold and silver are the eternal anchors of wealth preservation.  Let no one convince you otherwise.  Manipulations of every sort will come and go, but in the end, the facts of scarcity and preciousness forever cement these rare metallic elements as things to be coveted and desired by men to preserve their hard-earned labor in a fungible form.

In reply to by BaBaBouy

J S Bach SafelyGraze Wed, 06/28/2017 - 00:50 Permalink

I've seen Bill Still's videos and understand his arguments.  He makes valid points.  But, the fact remains that even if gold and silver are not the "backing" of currency, they will still always be bedrocks for preserving wealth.  Whatever underlies a currency does not matter in this case.  The gold and silver will carry their own weight in gold and silver... period.  Historically, it has yet to be proven otherwise.

In reply to by SafelyGraze

MEFOBILLS J S Bach Wed, 06/28/2017 - 02:01 Permalink

If I were designing a money system from scratch, I would have precious metals be a store of value.  They would have an exchange rate against money.  That way you could save the metal, and in times of distress, exchange it for money.  There would need to be enough, so much of the population could hold it.  Maybe electrum, which is an amalgamation of gold and silver, and it would be in standard bars marked for purity and weight.Also, people need a currency they can use if and when the government gets taken over by Oligarchy.  The metal could serve this function outside of government purview.The dual nature of money, being good as a store of value, and being good for transactions creates an automatic tension, as they are at odds.  So, a unique unit for a long term store of value is something I would recommend.Metal has issues being the money, as demonstrated by history.

In reply to by J S Bach

WallHoo MEFOBILLS Wed, 06/28/2017 - 04:17 Permalink

A good idea mefo,i wouldnt do that,if i was the PM of my country i would put in place sharp regulations and restrictions on gold and silver,not because i hate them,if people want them they should be able to buy the, BUT if all that gold and silver comes from imports that puts severe presure on your currency... And lets call gold and silver for what it is,it is wealth not money,like land or cars or clothes or smoke,the difference is that gold is more "comfy" and valuable than the rest.

In reply to by MEFOBILLS

silvermail WallHoo Wed, 06/28/2017 - 06:11 Permalink

Aristotle (384 BC - 322 BC) was a Greek philosopher, a student of Plato and teacher of Alexander the Great. Aristotle discovered, formulated, and analyzed the problem of commensurability. He wondered how ratios for a fair exchange of heterogeneous things could be set. He searched for a principle that makes it possible to equate what is apparently unequal and non-comparable.

Aristotle says that money, as a common measure of everything, makes things commensurable and makes it possible to equalize them. He states that it is in the form of money, a substance that has a telos (purpose), that individuals have devised a unit that supplies a measure on the basis of which just exchange can take place. Aristotle thus maintains that everything can be expressed in the universal equivalent of money. He explains that money was introduced to satisfy the requirement that all items exchanged must be comparable in some way.

Within such frame work, Aristotle defined the characteristics of a good form of money:

Durable: A good money shouldn’t fall apart in your pocket nor evaporate when you aren’t looking. It should be indestructible. This is why we don’t use fruit for money. It can rot, be eaten by insects, and so on. It doesn’t last.

Divisible: A good money needs to be convertible into larger and smaller pieces without losing its value, to fit a transaction of any size. This is why we don’t use things like porcelain for money—half a Ming vase isn’t worth much.

Consistent: A good money is something that always looks the same, so that it’s easy to recognize, each piece identical to the next. This is why we don’t use things like oil paintings for money; each painting, even by the same artist, of the same size, and composed of the same materials is unique. It’s also why we don’t use real estate as money. One piece is always different from another piece.

Convenient: A good money packs a lot of value into a small package and is highly portable. This is why we don’t use water for money, as essential as it is—just imagine how much you’d have to deliver to pay for a new house, not to mention all the problems you’d have with the escrow. It’s also why we don’t use other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.

Intrinsically valuable: A good money is something many people want or can use. This is critical to money functioning as a means of exchange; even if I’m not a jeweler, I know that someone, somewhere, wants gold and will take it in exchange for something else of value to me. This is why we don’t—or shouldn’t—use things like scraps of paper for money, no matter how impressive the inscriptions upon them might be.

Actually, there’s a sixth reason Aristotle should have mentioned, but it wasn’t relevant in his age, because nobody would have thought of it… It can’t be created out of thin air.

In reply to by WallHoo

WallHoo silvermail Wed, 06/28/2017 - 08:52 Permalink

I like how you explained to me the word "telos"(end),purpose=skopos. Anyway aristotel(is) believed that world was geocentric and that some people deserve to be slaves...So yeah he was a great philosopher but i dont think that we should take what he says without question,after all he was one man,studying a lot of thinks 2.400 years ago. Now when it comes to gold and aristotel(is) mefobills will answear to you about the bullshit you just wrote about money...(lets not discredit the ancient man) For me money is a mean of exchange,something that facilitates industry and commerce. You can hoard whatever you want...cars,houses,horses,gold,iron,i-phones i dont care...Money is law and gold as money doesnt solve anything on its own...Im not against it,sure you can make gold coins legal tender for debts and taxes,but that gold is gonna be fiat the momment the state makes it a legal tender.And guess whos is an (((expert))) at hoarding gold.No more will gold be a safe heaven against the powers of the state,but your tyrant. If gold as money existed in our own time thinks would look like Greece,take a good hard look at Greece and see what happens.When those nice peachy  dollars stop coming from the feds you will see how important is a "service economy".

In reply to by silvermail

silvermail WallHoo Wed, 06/28/2017 - 13:00 Permalink

I think that you too do not understand the difference between the concepts of "money" and "currency."

If money is only a "means of exchange" for you, then you do not know what "money" is.
Money has three functions:
1. Measure of value
3. Means of exchange
3. A means of accumulating value and preserving wealth over time.

In reply to by WallHoo

WallHoo silvermail Thu, 06/29/2017 - 04:01 Permalink

Says who?Youre hightschool textbook?Cause these 3 where there in my hightschool textbook witch by the way excluded 3 chapters that were related with banking(i wonder why...).Guess (((who))) wrote these.The only way to accumulate value is through assets.A home,a car,a painting,a farm,some gold,guns etc...For the most part production is consumed and dies,and the only thing of value is that production and the continuation of it.Money should follow that cycle of life and death in order to be in par with PRODUCTION that makes you have ACTUAL things to use and consume.Storing value is an illusion and gues who gives legitimacy to it,the STATE.In a post apocaliptic world gold wouldn't do shit,a confederation of armed farmers would decimate you and your gold budies. Gold holds as much value as the production in place.Your gold coins wouldn't buy you anything in a jugle.The magic is how to you create and maintain production,accumulating currency or "money" as you say is the byproduct of that.

In reply to by silvermail

silvermail GtownSLV Wed, 06/28/2017 - 06:35 Permalink

Bitcoin, like any so-called crypto currency, is the old world scheme of Ponzi. Only in the new high-tech pack.

Want an example? You are welcome:

1. Assume that all people in the world convert half of their savings from ordinary national currencies to crypto-currencies. What does it mean? This means that the producers of crypto-currency, received half of the world's volume of national currencies - half of the total world currency bascet.

2. After a while, the fictitious value of investments in crypto-currencies increased 4-fold (as we see in the case of Bitcoin and the mass of other crypto-currencies). What does it mean? This means that now, every person in the world, reasonably expects to receive in exchange for his crypto currency (as a return on his genius) in 4 times more volume of the national currency.

3. Let's assume that all these people, at the same time, decide to fixed their investment profit-to exchange their crypto-currencies that went up four times, (if they take profit in the form ordinary national currencies).
All of them expect to receive now 4 times more national currency than they used to, they spent on buying crypto-currencies.

QUESTION: Where does this whole currency come from? From producers or producers of crypto-currency? But they simply do not have such volumes of ordinary currency, and never were. Because, previously selling the Crypto currency, in exchange for the usual currency, the organizers and the receivers only received the initial value of the crypto currency in the usual currency. Which was at the time of the transaction only - 1/4 of the amount of currency, which is now payable to all owners of the crypto currency.

CONCLUSION: Bitcoin, like any so-called crypto currency, is the old world scheme of Ponzi. Where each participant can receive a gain of the investments only one way - due to those new participants who have entered this pyramid later.

In reply to by GtownSLV

MEFOBILLS Tue, 06/27/2017 - 23:00 Permalink

 Government’s ability to give itself a raise by inflating the currency was restrained somewhat by the Bretton Woods system, which guaranteed the international value of gold at a fixed number of dollars. Nixon yearned to be free of this restraint so he could spend dollars more freely, and not have to worry about their value in gol _________It is a Mises article, so you have to take it with a big grain of salt. Who funds Mises?It was an international trading gold system.  Imbalance in goods exchange between countries, if they came into imbalance would be remediated with gold flows.  When Nixon deficit spent on IndoChina those dollars would end up in a French Central Bank (or British).  The French would NOT BUY American goods, but instead Gold.   This then started depeleting American gold stock.Since the U.S. was already bailing out France (French Indo China), Nixon dared them to buy American goods.  Of course, buying American Chevrolets is one less Peugot, so the French instead bought TBills.  This then started the TBill economy.Hudson's book "Super Imperialism" was the first to describe the mechanism, and it was first published in 1972.http://michael-hudson.com/books/super-imperialism-the-economic-strategy… 

silvermail MEFOBILLS Wed, 06/28/2017 - 06:44 Permalink

The imbalance in the trade that you are talking about is called "the inability to live at someone else's expense." Or "the inability to live at the expense of labor and resources of other countries and peoples."
And it is right. This imbalance must be in the economy. If we talk about the economy, and not about the ways and mechanisms of parasitism.

In reply to by MEFOBILLS

Cordeezy (not verified) Tue, 06/27/2017 - 23:03 Permalink

The gold standard means the central banks can't print to oblivion. It forces responsible policies on the fed. This is why they hate it and economists in training are indoctrinated to gate it through school


Seasmoke Tue, 06/27/2017 - 23:07 Permalink

Grant Should be Treasury Secretary. Not that lowlife fraudclosing POS Mnuchin. Surprised ZH didn't post about the asshole and his new wife's wedding .

ebworthen Tue, 06/27/2017 - 23:25 Permalink

"The gold standard was a hard task master, all right. You couldn’t devalue your way out of trouble.You couldn’t run up a big domestic budget deficit."Exactly. This is why they unhinged from the Gold Standard in 1972.This is why they knocked off J.F.K. for trying to restore Silver Certificates.Financialize the economy, make it a Ponzi, crush the Middle-Class, enrich Elites and fuck the U.S.A.If you can't pay for a person's labor and want to leverage a fantasy for 50 years this is how you do it.http://www.usdebtclock.org/

ChanceIs Tue, 06/27/2017 - 23:37 Permalink

I have one of James Grant's books autographed somewhere in my office.  He used to come down to the American Enterprise Institute in Washington quite a bit.  You can find a lot of his talks on their website.He liked Bernard Baruch - wrote a biography of him.He would like to get rid of the Fed!!!!!He originated the phrase: "US Treasuries are return free risk."  Jim Rickards has started to use that w/o attribution.  Rickards is OK but nowehere near Grant's standing.

gold rubeberg Wed, 06/28/2017 - 00:14 Permalink

"And if, in a financial panic or a business-cycle downturn, gold fled the country, it was the duty of the central bank to establish a rate of interest that called the metal home. In the throes of a crisis, interest rates would likely go up, not down."

If it depends on a central kommittee to set interest rates, it is still deeply flawed, gold standard or not.

GoldHermit Wed, 06/28/2017 - 00:20 Permalink

In 1971, the modern politician was born. The do nothing scum bag that robs the population to justify his/her position. How in the world the U.S. duped everyone else to use the dollar is beyond me.

decentraliseds… (not verified) Wed, 06/28/2017 - 00:21 Permalink

 Why waste time on this alligator when the swamp’s most critical economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying. The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world. It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option. This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment: Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to: 1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy; 2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and 3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.    

lasvegaspersona Wed, 06/28/2017 - 00:28 Permalink

Because the gold standard was hard and people are easy we will NEVER go back to it...gold will be held as a wealth asset however...it is all  the central banks have....unless you count treasuries...

amusedobserver Wed, 06/28/2017 - 01:11 Permalink

We don't need a gold-backed currency, there are too many ways to game the peg.  Every peg is eventually broken. What we need are gold-backed transactions.  Suppose every transaction was required to have 1% of it be comprised of gold at the current spot price.  And to keep this requirement from being a burden on the myriad small transactions that occur everyday, it would only be imposed on large transactions of $4 million or larger (1% of which is $40,000 or about 1 kg AU at current prices.  That would also make it easier to track and audit.  Any nation that did this would soon begin to accumulate gold and any that didn't would have a net drain of gold.  So one country doing this would cause all countries to do it.  So if WalMart wanted to buy $10 million of Chinese widgets it would have to wire $9.9 million plus $100,000 worth of gold at spot price.  Even over time, as forex rates change, the same amount of goods traded would also show the same weight of gold in the transaction. This would no doubt also create a dual account system in banks, as every account would have a fiat part and a gold weight part.  Since banks would want to be able to supply gold to their rich clients for purchasing mansions, jets, yachts, etc., they would want to take in gold from their small fry customers.  So you would actually be able to deposit gold into a bank with a high level of confidence.  Your acct #123F might show $5,000 and acct #123G might show 3.5 oz. gold. While such a system doesn't prevent a nation from debasing thier curency, the gold component serves as automatic wealth protection.

rent slave Wed, 06/28/2017 - 01:43 Permalink

LBJ took us off the gold standard in 1968 when he removed the reserve requirement for backing the dollar.All Nixon did was to tell everyone not to stand in line anymore.Don't argue with me.That's from Harry Browne.