Getting back to the gold standard

Jim Grant, one of Wall Street's best known gold bugs, believes that the future of the United States relies on returning back to gold and that gold, not paper currency, will be the future. He continues to say that paper currencies and the current monetary system is out of date.

Feb. 2, 2012, 12:00 a.m. EST
By Brett Arends
MarketWatch

NEW YORK (MarketWatch) — 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.

He is best known these days — to Gingrich and Paul, among others — for his long-standing support for the gold standard. The world has moved in his direction. In 12 years, gold has risen from a derided relic trading at $250 an ounce to a hot investment at $1,750. Everywhere paper currency systems are under challenge. In 2008, the world discovered that you can’t just manufacture endless wealth out of thin air, as the gold bugs had long argued, and it is still struggling with the realization.

Many people will think of the gold standard as a relic of a bygone era, something as old-fashioned as bow-ties and stuffed animals. (My caveat: To me, that’s not an insult.) Grant, when we met, argued the reverse. He says paper currencies and our current monetary system are the ones that are out of date.

“The anachronism is today’s system,” he says. We have a “command and control, top down” system whereby the Federal Reserve imposes an interest rate on society. The Fed, in other words, tells us what the price of money should be. It is, Grant says, oddly at odds with the modern age. “We live in a world of collaborative social networks” of the Internet and Facebook, of Wikipedia instead of the old World Book, and so on. And yet when it comes to the price of money, we wait for a committee that sits in private to tell us what it should be.

This, he argues, is the cause of so many of our ills. The Fed has moved from “central banking” to “central planning,” fueling bubbles, encouraging risks, and generally upsetting the equilibrium of the economy.

It’s a good critique. I’m less certain that the gold standard would cure all our ills than I am of how flawed our current system is. Grant calls it “like tennis without a net” and says that the Fed has now inflated a bubble in Treasury bonds comparable to the housing bubble a few years ago, though he notes he’s been warning about Treasurys for several years, and so far they’ve kept going up.

Grant calls the gold standard “the least imperfect monetary system.” He notes that our present regime of purely paper currency is new: It only dates back to Richard Nixon.

I asked him, whimsically, what he’d do if he actually were to be named chairman of the Fed. He said he’d begin by communicating to the public why the present system was so wrong, and needed to be changed. He’d make the case for the gold standard.

“I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers. “ A dollar, he says, is supposed to be a fixed measure, “like a foot, or a pound,” not something that can be redefined every few weeks by the Fed.

In his ideal world, says Grant, he would lay out a three-year program to convert back to the gold standard, probably at around $2,500 per ounce of gold. He adds that he would take great care to avoid the notorious blunder made by Winston Churchill and the British back in 1925, when they went back on the gold standard at too high a price, and imposed brutal deflation on the economy. Alas, he admits, this would need an act of Congress.

He added that he would also wind down the Fed’s bloated balance sheet, selling assets for gold, and he would shut down the Fed’s open market activities completely, relying instead on the discount window alone. The Fed, he said, shouldn’t be going out into the market to provide liquidity. It should simply be there to provide temporary liquidity to solvent banks when they ask, and on the basis of good collateral.

For good measure, he’d also push for a repeal of a 1935 New Deal law that protected bank investors from runs on their financial institutions. Before the law, he notes, if a bank got into trouble, the investors were on the hook to bail it out: After all, it was their bank. The same was true of the partners in a Wall Street brokerage. The system of taxpayer bailouts, like that of paper money, is a modern innovation.

“We want to reconnect the taking of risk with the bearing of risk,” says Grant. “Our financial titans, especially at the upper echelons, all too often take risks but they do not bear risks.” As people, they are probably no worse than their predecessors, he adds, but today “the consequences of failure are much less severe.”

A decade ago, Jim Grant looked old-fashioned to many on Wall Street. Today, his views look much more in step with the times. His fortnightly Interest Rate Observer, famously, warned about the looming catastrophe in housing debt and mortgage-backed securities as early as 2005 and 2006. Sales are now booming.

Unlike most modern journalists, Jim Grant does not give away his work for free: Instead he charges $965 a year to subscribe. Conventional wisdom keeps telling me this is a doomed business model, but we all know about CW. Grant says paid subscriptions are up an astounding 82% since early 2005, to near-record levels. Apparently quality still sells. I hope that, in this too, he may prove an “old-fashioned” holdover who is ahead of his time.

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