Russ Roberts

Gene Epstein on Gold, the Fed, and Money

EconTalk Episode with Gene Epstein
Hosted by Russ Roberts
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Gene Epstein, Barron's economics editor, talks to EconTalk host Russ Roberts about the virtues of the gold standard relative to fiat money. Epstein argues that privately issued money, backed by gold, would lead to an economy with much greater price stability and fewer and milder recessions.

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Podcast Highlights
0:36Intro. Gold standard. What's wrong with the Fed's handling of the money supply? John Maynard Keynes condemned the gold standard. Alan Greenspan wrote "Gold and Economic Freedom," making the case for gold: under a gold standard we would no longer have business cycles; under a gold standard a free banking system stands as protector, balanced economic growth. Unlimited expansion of credit would come to an end, government cannot monetize its spending deficit. Reagan, Cheney: "deficits don't matter." Would make government more accountable to people. Galloping inflation of the sort that plagued us in the 1970s would not occur. Disinflation, Greenspan now acknowledges that some of those benefits can come to an end, cheap labor from China would already be achieved; tsunami of Medicaid and Medicare. Federal Reserve has been lucky.
5:35Deficits: Sometimes beneficial to spread payments over time, so sometimes government borrowing is rational. Concern is that we fund things that that are not beneficial. What matters is what we spend the money on. So isn't it a budgeting problem, not a central bank problem? Government is supposed to raise money through taxes and through limited borrowing against future taxes. Could hardly make the statement that deficits don't matter--Cheney could only say that as a Federal government politician. If he'd been in charge of a business or buying a house or a municipal government official, he could not make the statement that deficits don't matter--only the Federal government can monetize the debt. Friedman made the point that government spending is like dealing with a teenager. Government doesn't spend according to needs--whenever it can get money it will spend it. When deficits don't matter government can fight wars and make promises knowing it can ultimately print the money. Textbook model: private sector doesn't do all things well; government has to step in to correct externalities. Reality of incentives faced by politicians differs from textbook model.
10:53Monetizing the debt, Meltzer podcast. What does the Fed do to monetize the debt? Johnson case: those were the days before one of the major reforms, 1985, indexing income tax brackets to inflation. Before that reform expanding the money supply boosted nominal incomes, pulling people into higher tax brackets (even 70%), which increased government revenue. We still have that mechanism to some extent, some potential for bracket creep, higher nominal income within a bracket still means more taxes paid. State tax level is not indexed. Federal Reserve can monetize the debt through its open market operations, buying the Federal government's debt and pumping money into the economy. This has become less important recently; about half the increase of the debts has been taken up by foreign official holdings, such as the Central Bank of China. General Accounting Office (GAO) makes some of these data available. Is that a bad thing that the Bank of China buys U.S. Treasury Bonds? They're financing the teenager. Interest rates have stayed low because of foreign willingness to hold Federal debt. Also bad if we don't like what the Federal Government is spending its money on. Can wage war, have guns and butter, Medicare Part D, endless giveaways. Cheney may not have understood the mechanism, but he could only say what he said as a federal official. Deficits allow the government to pay for activities today with taxes tomorrow. Monetization part has been relatively unimportant because of China's willingness to hold our bonds--it's a benefit. Inflation in recent years has remained relatively low as a consequence. If we couldn't count on foreign officials lending us the money perhaps the cost of government spending would have caused us to spend less. If they stop we may find ourselves in a situation where we may have to inflate.
21:38Alternative view: gold advocate George Reisman: When the government need not obtain its funds from the people, but instead can supply the people with funds, it can no longer easily be viewed as deriving its powers and rights from the people. We vote with our taxes; we know we have to make sacrifices when the government buys things, resources are being taken from us. With the ability to print money either by our own Federal Reserve or by foreign central banks, we don't feel it. But don't we feel it? Some policies make it easier for us to respond than others. Future tax payments are less noticeable than current tax payments, writing a check is less noticeable than paying cash. As inflation gets high people yell. In the current situation much of the deficit financing of the last 20 years has not been through monetization of the debt but by individuals and foreigners who buy those bonds. Prefer to live in a society where we feel the cost when we vote for something. Money printing as an escape valve. Not everybody even understands that inflation comes from the increase in the money supply.
26:00Empirical question of how costly the ability of the Fed to monetize has been. Last 50 years, Fed has surprisingly decent track record. Relatively stable output, dampened business cycles, unemployment stays in narrow bounds. Not all attributable to the Fed, but we've had no hyperinflation, relatively low and stable inflation despite bad period in the 1970s. Barron's readers tend to be dour about the economy than Epstein. Main problem with regime is that it makes it much easier for the government to finance wars. WWI. Setting that aside, from 1947-2007, National Bureau of Economic Research (NBER) shows that nearly 9 were years of contraction, 51 were years of growth. We'd be 40% richer but for those 9 lost years. Several years of double-digit unemployment in the 1980s, though relatively low 5% unemployment rate now; but a lot of human anguish with foreclosures. "Growth recessions"--period in which the economy grows but not fast enough to prevent the unemployment rate from rising. What does that have to do with the Fed versus a gold standard? Ironic: we're talking about the Austrian theory of the business cycle. Hayek, Nobel Prize 1974. If you actually read mainstream economists we are all Austrians. The housing bubble, the Internet bubble were essentially due to the expansion of credit. Kindleberger, Manias, Panics, and Crashes, "speculative manias gather speed because of an expansion of money and credit." Not an Austrian but he sounds like one. What can we do to prevent the expansion of credit. If all the governments of the world agree to go back to gold, not the way they did historically, which allowed banks to be protected in their expansions of credit. War of 1812 financed by banks, spent in New England to purchase armaments, which went to Government and asked for redemption in gold. Should have a simple rule: we're on a gold standard and banks should be required to keep 100% reserves, warehouses for gold. Pound sterling, dollar originally thaler. We don't allow the warehouse to lend part of the wheat out to someone else. The wheat is fungible, but it can't be given away on loan. Bank could sell us on the idea of saving some of it, giving out certificates of deposit, looking for people to lend it to. It would become impossible to lend money based upon demand balances. Money couldn't expand beyond the savings decisions people make. Speculative bubbles would be possible but less likely.
39:15We had many speculative bubbles historically. Federal Reserve didn't invent the idea of lending beyond savings decisions. Greenspan. Economists became powerful people as chairmen of the Fed. Fed starting in 1913. Part of the reason there were speculative bubbles was because there were flows of gold in and out of countries; discoveries of gold and silver in the New World inflated the price level in Europe. Gold standard doesn't insulate us from that. Institutional issue: in the past under a gold standard the nations of the world agreed to move to a gold standard, classical period 1880-1913, in that period prices were more stable but we did have business cycles. So, in those times the institutional standards are not the ones being advocated here. Occam's Razor, simple arguments are best: plausible argument that if you keep the government out of the printing of money then other banks will force a bank that expands too much to contract, bank runs. 100% backing has almost never been the case in the history of the gold standard. Historically there were Balance of Payments deficits and surpluses that were settled with gold flows. Hume, countries call each other to account. Bank run will happen if a bank doesn't back 100% because other banks will insist that it honor its certificates. Just simplify it by saying let's treat banks as warehouses. Reader letter: with alchemy and modern technology they can maybe find a way to create new gold. Can't rule out the possibility that there would be some disruption but nothing like the disruptions that plague other countries, or even this one. No Great Depression in the last 60 years, 4.6 trillion in lost GDP, wrenching foreclosures and bankruptcies but not 25% unemployment. Then the U.S. can do even better on the kind of gold standard being spoken of.
50:23Mainstream economist's argument: We don't have a very good understanding of what causes the business cycle. Sympathetic to the idea that credit distorts price signals as in the Austrian economy and that Fed's attempt to fine-tune the economy can be very disruptive. There are probably other causes of business cycles and we don't have a very good understanding of the causes. Empowering of economists through role of the Fed changes economists' incentives to be political and we should be skeptical of the mainstream view on that ground. 100% reserve requirement: Government's role would be to enforce contracts. Resource costs of providing the gold to back up that money: you have to accumulate a lot of gold. $200 billion estimate, Friedman. Illegal to hold (monetary) gold privately in the 1930s till 1975. Alternative costs would be jewelry, industrial uses; we have all those costs right now. Allowing just that some business cycles would be eliminated, that's worth something.
55:49How would we get there from here? Austrian insight--historically gold as money came from commodity, Mises, it's impossible otherwise. Cigarettes in POW camps. How do we get back to that world? People would use paper certificates backed by gold and store their gold. We would no longer have investment that would originate from the printing of money. Reinvested earnings by corporations. Personal savings is higher than reported. Plenty of savings would go on in that world but it would all be done prudently. Innovation would still occur. Commonly thought that the housing crisis can be blamed on the expansion of money and credit, not taught in classrooms. Internet bubble would have been impossible without the expansion of credit. Cannot claim that speculative bubbles could not occur without inflation--people can think assets are worth more than they are actually worth without inflation. Irrationally exuberant folks can still start bidding something up. Simply wouldn't be enough money and credit to create bubbles as large as the housing bubble or internet bubble. Less likely to lead to downturns.
1:00:58Confession: Macroeconomics is complicated, trying to understand it. Government has kept its monetary activities constrained in part because of better understanding today. 100% gold reserve backing is politically unlikely. Is a world where more people advocated a gold standard possible? What would it take? Greater awareness can lead to change. Key rule about being an economics journalist is to ask dumb questions. Iraqi War objectors may object to the financing of it through the Fed. What can be done to make a more stable economy? Economists are now arguing that instability is due to the Fed. Paul Volker, high priesthood of Federal Reserve chairmen aiming at only low inflation. Greenspan, Bernanke. Galloping inflation could return by 2030.

COMMENTS (47 to date)
Greg Ransom writes:

What's missing from this discussion of money and debt are the returns from capital goods and the structure of production. When you turn goods into production goods, you are saving, and you are increasing productivity and later output.

Private savings via private lending which goes into capital goods creates additional wealth down the road.

Government spending via private lending does not go into capital goods, and does not create additional wealth down the road.

Milton Friedman's economics lacks any grappling with capital goods and the structure of production -- to the poverty of his economics of money, interest, and public finance.

Which side of the "magic" of compound interest to you want to be on? The capital goods growing side or the capital consuming side?

When the government borrows, it puts American's on the very dark side of the "magic" of compound interest.

But there is much more to it than that, stuff discussed in the economics of Friedrich Hayek (Hayek's best work is his _The Pure Theory of Capital_, which includes his account of the explanatory role of the pure logic of the equilibrium construct.)

Jeff Henderson writes:

I just listened, and this is probably my favorite podcast of the last year. I might have more comments once I digest it further.

Scott Anderson writes:

I to was thinking about capital formation when listening to this podcast but I came to a different conclusion about the money supply but a similar conclusion (I think??) regarding your implied dislike of government spending (in general). I am not a trained economist so have had to trace out the flows of money in the economy including the monetary base and the creation of bank money.

It seems to me that we currently have the ability for private currencies in a sense. I can buy gold and with a property exchange or conversion to cash, trade the gold for some other asset. In most situations using dollars seems more convenient to me. I rarely hold cash balances that are very large and inflation seems to be fairly benign. When it is a little higher, my investments increase in dollar value (inflation yield, if managed correctly).

What it goes back to in a representative money regime or a fiat system like our’s , is the trust that our dollars can be redeemed for a dollar worth (whatever that is) of certain goods. We want a stable store of value. In a gold system, gold can only represent a portion of all money obligations. After all, there is only about $4 trillion of gold in existence. Certainly not all money is going to be redeemed at once. About half of the dollars in circulation are in foreign countries. That means in a gold system, gold probably would only represent the monetary base, while the bank money would still be represented in interlocking balances backed by fractional reserves of gold at the Fed or some other institution(am I right about that?).

This is not really different from our current system in that our monetary base is backed by treasury securities and the bank money is backed by interlocking balances backed by a fractional reserve system of US treasuries (and some gold certificates, etc.) . Ultimately those treasury securities have a value that is marked to market every day. Not all of the $10 trillion of money supply is going to need to be redeemed for treasury securities (dollars are essentially a tax credit), but could be, given that the US national debt is about that amount.

What really matters is the credit risk of those treasury securities. We know that the revenue side is certain because taxes are certain and the GDP has an extremely low volatility. The cost side can get a little out of control but certainly can be controlled. The cost of the Federal government as a % of GDP also has not changed a whole lot. Finally, some of the government expenditures are for land, buildings, assets, etc. I can’t find a good number but estimate it must be more than $13 trillion or about 20% of the ~63 trillion of private assets (oil reserves - $84 billion, gold reserves $261 billion, etc.). All in all the system is working. The US government seems like a good investment and maybe that is why treasury yields are so low. The government and private citizens have accumulated capital at a pretty good clip so the system in general is not broken. As long as the economy grows the debt does not have to be monetized given the right relationship between revenues, costs and asset values.

What I do argue with is management’s (elected officials) affect on the numbers. I am less worried about the deficit than what it is spent on. Certainly we need a very strong defense. Other areas of spending may need a closer look. The private market grows economic value faster than the government.

The argument for gold really seems misplaced. The real argument is perhaps about how well the government is a steward of the citizen’s assets.

Jeff Henderson writes:

To respond to something Scott Anderson said, and to something that Russ said in the Metzger Podcast, there are in fact things preventing a private currencies from competing.

First of all, the existence of capital gains taxes on gold puts it at an unnatural disadvantage as a store of value. When the dollar depreciates in terms of gold, people who held gold during that time are taxed.

Secondly, legal tender laws make the dollar legal tender for all debts public and private. So in a legal dispute, a judge has the right to denominate the settlement in terms of dollars, even if the original contract was in terms of gold.

Furthermore, vague prohibitions on the private minting of coins of gold or silver exist in the US Code (18USC486).

The Liberty Dollar is a competing currency backed by precious metals. It has enjoyed modest success, but its legality is ambiguous. Earlier this year, its headquarters were raided by federal agents and its gold and silver was seized, however no case has yet been brought to trial. Clearly, this uncertainty deters some people from using competitive currencies and others from getting into the alternative currency industry.

Ed Ryan writes:

Good podcast. I don't think a gold standard is a good solution to the problem of government spending. Forcing the government to give money back through tax cuts is the way to fix the problem.

Unit writes:

If I remember correctly, Hayek's proposal was to let all currencies compete. I'm pretty sure that that is illegal at the moment.

About 100% gold reserves banking, I have the suspicion that it's unenforceable and that the purity of the gold being stored in the warehouse would be declining quickly. Epstein was saying that quite the opposite is true and in fact it would be a stable equilibrium. But I didn't understand his argument.

Brad Hutchings writes:

It seems gimmicky. Yes, I'd like the government to spend a lot less. I'd like the government more constrained in its ability to take on grand causes and flub them up.

I don't buy the speculative bubble talk. If a gold standard actually did make such bubbles less likely, it would also make things that look like speculative bubbles but actually turn out to be sustainable valuation adjustments less likely as well. If it works as advertised, the gold standard will be an obstacle to the flow of capital. It will get in the way of experimentation and innovation in the market. Experiments fail and we learn a lot from that. A speculative bubble in one sector could just as easily be financed by a premature abandonment of another sector rather than printing money, no?

The other thing that bothered me is that Epstein repurposes lots of Democratic "issues" to his gold standard argument. For example, loose credit yields predatory lending which leads to bankruptcies and foreclosures, etc. What of the 90%+ who are still paying their bills on time? Surely, some of them benefited from loose credit and didn't burn themselves. I can compare the credit situation my parents were in the 80s, when they had perfect spotless credit and getting a loan for anything was days of work. Meanwhile, I have good but not perfect credit, and could refinance my life with a phone call and 30 minutes on the phone with a broker. For those of us not biting off too much more than we can chew, it's an outstanding deal that more than offsets medium term affordability concerns in the housing market. Babies and bath water, that's how I feel about any return to the gold standard.

Stephane writes:

Thanks for pointing out the fiscal issues. I had never realized that as long as one currency serves as a basis for taxes, holding gold or another currency is fiscally not neutral. How can private currencies compete under these conditions? (I think this invalidates a remark about gold in the T.Cowen podcast).

I am puzzled by Russ Robert's assertion that asset bubbles don't need monetary expansion to occur. Is there any example? Thanks

Ethan Ilzetzki writes:

I found the discussion very ill informed. There were numerous weakness in Mr. Epstein's arguments.

1) He seemed to imply that the gold standard would put more discipline on the fisc. There is no reason to believe that this is the case. First, the US has monetized very little of its deficits since WWII. The US has mainly resorted to formally borrowing money from its citizens and from abroad. Second, nations amassed enormous debts under the gold standard. See the example of Great Britain in the 18th century or Latin American countries in the 19th century. Third, foreign central banks and citizens have been willing to lend to the US federal government despite the fact that the US has, in theory, the ability to inflate away its debt and therefore fail to service it in real terms. The federal government is able to run deficits at very low cost not due to monetization, but rather because the public in the US and abroad views the US as credit-worthy. There is no reason to believe that the US would become less credit worthy if it returned to the gold standard, and therefore no reason to believe that it would have any effect on restraining government spending. Finally, monetization occurred frequently under the gold standard, in the form of the debasement of the currency. It seems to me that an independent central bank with a clear price-stability mandate has less of an incentive to monetize the deficit than does the federal government itself, which would likely have the legal authority to determine the gold-content of the currency.

2) Mr. Epstein appeared to imply that the business cycles of the past 60 years were caused by monetary policy. There is no empirical support for that notion. In fact, the evidence is that monetary policy explains very little of post WWII business cycle fluctuations. Monetary policy in the US has been countercyclical since WWII, so if Mr. Epstein believes that monetary policy is potent, he should believe that monetary policy has mitigated business cycle volatility. In terms of business cycle volatility, the past 25 years have been among the most stable in history. On the other hand, there were numerous recessions and banking crises under the gold standard. In the US, there were major downturns and banking crises in the 1840s, the 1870s, the 1890s and several in the early 20th century. It is also arguable that the gold standard mentality even contributed to the great depression. The Fed was conducting a contractionary monetary policy in the midst of a recession--a policy that was largely motivated by its desire to stabilize the price of gold.

3) Mr. Epstein mentioned in passing that he would support a bi-metalic standard. Even if one believed in a commodity standard, Gresham's law implies that a bi-metalic one is unsustainable.

4) Why is gold an appropriate numeraire? Modern central banking continues to target a price level, just like under the gold standard, only that now we target a price level that is relevant to the average consumer, by definition: the CPI (recent debates as to the relevant price level to be targeted not withstanding). It is unclear why our entire monetary system should be based on the price of a specific commodity, rather than targeting prices and interest rates that are relevant to most private decision makers. Having a strict inflation targeting regime, like that of New Zealand, for example, would give us all the benefits Mr. Epstein incorrectly attributes to going on gold, without the costs.

This is just a sample of the Mr. Epstein's most problematic assertions in this podcast--there were many more.

Ethnic Austrian writes:

I believe Gene Epsteins proposal has a flaw. It could lead to a zero fractional reserve system.

He said that in a full reserve banking system, banks would be able to loan out gold on behalf of their customers for a period of, say, five years. Since the customer's gold isn't physically stored in the bank, he wouldn't get gold dollars, but there would still have to be some kind of receipt given to him. This receipt would be very trustworthy, since it was after all issued by a bank that promised to give back a certain amount of gold plus interest in five years of time.
This receipts could easily be monetized by customers, by using it as a collateral for lending gold receipts or leasing or purchasing goods or services. It would essentially be another currency, roughly equivalent to its gold amount, but not backed by gold at all. And anytime the gold that was originally lent out is lent out again via a bank by someone, new money would be created.
Now this kind of unintentional money might not circulate as easily as dollar receipts, but the amount it would add to the money supply would be problematic to predict, whereas the money created in a traditional fractional reserve system can be estimated much more easily.

It seems to me that some kind of fractional reserve lending will always emerge at the grassroots level. So why not let well regulated banks handle it?

Another problem with the gold standard would be counterfeiting. Today, gold is traded via expert intermediaries (mints, coin shops, banks). If your gold coins are not in pristine condition, you have to pay a fee for a lab to prove its purity.

vimothy writes:

Finally -- a podcast on the gold standard!

Unfortunately, Mr Epstein is not a great advocate. He spends a lot of time, rather pointlessly IMHO, discussing deficits. Obviously, like any debt, government deficits can be good or bad.

Epstein proposes a 100% reserve system, which is contra most gold advocates and monetary history. (Friedman also mistakenly thought a gold standard would require 100% reserves). Convertability is all that is required to maintain the system's discipline.

Expansion of credit is not inflationary per se, but it can be if there is no increase in productivity. Banks should therefore be able to expand cerdit as needed under a gold standard, tempered by their commitment to convertability.

Since gold is not destroyed, the total world gold stock is added to very slowly, and even the examples Russ gives of unexpected discoveries, such as the California gold rush, caused *very* mild inflation (under 1.5% per year during the most inflationary period). Increases in the purchasing power of gold cause increases in gold output and are therefore self-correcting to some extent. In any case, it is only necessary to expand or contract the money supply to meet demand relative to the price of gold.

A bimetallic standard is confusing and unnecessary.

Money is a store of value and a unit of account. It is self-evident that a currency backed with gold is superior in both functions.

Russ -- please could you get someone better to talk about the gold standard? Alan Reynolds, Nathan Lewis or especially Lawrence H Wright would be fantastic.

vimothy writes:

...That means in a gold system, gold probably would only represent the monetary base, while the bank money would still be represented in interlocking balances backed by fractional reserves of gold at the Fed or some other institution(am I right about that?).

Yes -- the difference is that under a gold standard the value of money would be tied to gold.

It seems gimmicky. Yes, I'd like the government to spend a lot less. I'd like the government more constrained in its ability to take on grand causes and flub them up.

A gold standard would not necessarily help. Under the classical gold standard, interest rates were very low. In fact the gold standard could make it easier for governments to finance wars because credit would be so cheap.

vimothy writes:

Oh and,

All in all the system is working. The US government seems like a good investment

What about the $60 trillion + in unfunded liabities? Wait for the serious inflation to kick in -- I don't think we're that far from hard money.

John S. writes:

Epstein seemed inordinately obsessed with Dick Cheney's remark that "deficits don't matter" -- something Epstein repeated at least three times at various points in the interview. He also seemed obsessed with the war in Iraq. While I too am concerned with what this war has cost us, taking away the government's ability to use deficit spending because you don't like what the money's being spent on is a bit like cutting off your nose to spite your face.

When he revealed himself to be an admirer of Noam Chomsky, he lost all credibility quite frankly. I'll bet Lyndon Larouche has some strong views on monetary policy too. Why not interview one of his admirers next?

Scott Anderson writes:


Thankyou for addressing my comments and providing additonal information. I am aware of the $60 billion in unfunded liabilities. I have not looked in detail regarding the amount and timing of cashflows associated with those liabilities. The key with any liability is matching. Some 53% of our current budget expediture goes to payouts including medicare and social security. On a present value basis, discounted at treasury rates (dpending on duration) is about $50-$75 trillion. Of course, gdp will increase as will tax revenues. I am also hoping that some sort of long term discussion of social security and medicare can be had to improve their costs. Is this in line with what you are thinking. I am not an economist, so am using a back of the envelope calculation.

Thank you,

vimothy writes:


Check out the work of John Williams at Shadow Government Statistics. He analyses government debt according to GAAP standards. Very enlightening.

You can find a free -- and terrifying -- issue here:

$60 trillion is not total expected expenses, BTW, but Medicare and social security excess over expected government revenues, according to current US tax structure, incorporating a growth estimate. Factor in pensions, IRAs, and increasing numbers of retirees relative to younger employed workers... probably best to stick with a fixed rate morgage, if you know what I mean.

oo chucko writes:

Evry podcast on the fed seems to confuse me a bit, but one thing stood out for me this time. Why is gold special? why not gold and silver, or real estate or IBM stock or anything that a bank deems sufficiently "real" to use as an assaet for baking it's issued currency?

Brad Hutchings writes:

I agree with John S.'s point about the repeated invocation of Dick Cheney. He's certainly not my hero. But he was a reliable budget hawk when in Congress. As Secretary of Defense, he downsized the military and cut expensive programs. He was Chairman and CEO of Halliburton for 5 years. To suggest that he doesn't understand the meaning of what he purportedly said is a bit absurd. It's as if calling him a Keynsian doesn't make him sinister enough.

Russ writes:

Let me second (or third) the notion that Epstein was not advocating a gold standard but rather 100% reserve banking. It is a very Austrian argument and it would be a huge change from the system we have now.
A gold standard would not be a big change from our current system but would have huge positive effects. The common vision for a gold standard is one that achieves price stability. Gold is unique in its ability to maintain a stable value. If you define the dollar in terms of gold (instead of in terms of nothing, like now) you create a currency with a stable value.
To answer Ethan, targeting gold would be much more stable than targeting a price index, especially one as flawed as the CPI. Violent swings in the price of gold recently signal changes in the value of the dollar. The value of gold is unchanged.
To answer a point Russ makes in the podcast, this would be superior to the current sytem because a stable currency would be greatly superior to any currency whose value was set by a small panel of so-called experts meeting periodically in secrecy. Any supporter of free men or markets should be repulsed by a currency set by our current system.
In fact, the Fed knows its current mechanism does not work. Papers published by the St. Louis Fed admit that targeting interest rates is no way to manage the moneytary system. A recent book, Deception and Abuse at the Fed, by former KC Fed economist Robert Auerbach touches on this and other flaws.
Finally, kudos to Russ for going down this path. The topic is an important one, even if Mr. Epstein is not a good spokesman for a true gold standard.

Ethan Ilzetzki writes:

Russ, I'm not sure I agree with your inference above regarding the price of gold. An increase in the dollar price of gold could be caused due to a general depreciation in the value of the dollar, as we have witnessed recently, or due to an increase in the relative price of gold, due to demand and supply factors in the market for gold, including possible hoarding of gold for speculative purposes.

If the Fed does its job and ensures the stability of a relevant price index that reflects the price of an average basket of goods(and I agree that it is debatable whether the Fed has been doing so in recent months, as well as whether the CPI is relevant price index), then any change in the dollar price of gold would reflect changes in the relative price of gold.

I'm not sure why you feel that the "value" of gold doesn't change (nor what the term "value" means--value to whom or relative to what?). Gold is no less affected by the forces of demand and supply than any other good or commodity.

Russ Wood writes:

In the classical model, the value of gold does not change measurably. It is not affected by the forces of supply and demand the way other goods or commodities are affected. The amount of gold produced, or brought out of the earth each year is a small fraction of the total stock of gold. A small amount is consumed each year (there are very few industrial uses) and a small amount is mined. The net effect is a stable stock of gold. You can see this in the futures market. Gold is the one traded commodity which has NEVER backwardized, meaning the spot price is never higher than the forward price. Other commodities do experience backwardation as short term supply and demand disruptions are occasionally material. Not so with gold.

Paul Clark writes:

Really enjoyed this week's podcast. I found Mr Epstein to be both eloquent and humble. I would agree with him that the Austrian business cycle theory is the only theory that is currently able to explain the vagaries of our economic cycles. I am a little confused though as to why the Austrians are so committed to a Gold Standard. Shouldn't we let freely co-operating individuals (i.e.the market)compete for and decide the best option?

Jeremy writes:

@Paul - most Austrians are committed to a gold standard because it is the most likely result of a free market in money (mainly due to its rareness & beauty, fungibility, and relative stability in supply), and because it is the only way to transition to a free market in money without the dollar completely losing all value.

Let me elaborate: If a law was passed today that did away completely with legal tender laws, the dollar would quickly collapse (it is backed by nothing, remember, besides the faith and credit of the US government) and commodity monies of various kinds would take its place. It is likely, based on past experience, that the dominant such money would be based on gold.

The only workable solution to this is to choose a commodity to back up the dollar with, and gradually or suddenly phase it in.

Suddenly means taking all of the precious metals the government has and backing the dollar up with them upon demand - ie total outstanding money (including demand deposits) divided by total government held gold & silver. This would result in an immediate revaluation in the price of gold to much higher levels, but it would again be 100% backed by something, not nothing.

The gradual solution would be for the government to gradually buy precious metals from unsuspecting investors until the dollar price of these metals equaled was equal to the amount that could back a dollar based on 100% reserves for all money.

"What it goes back to in a representative money regime or a fiat system like our’s , is the trust that our dollars can be redeemed for a dollar worth (whatever that is) of certain goods. We want a stable store of value. In a gold system, gold can only represent a portion of all money obligations. After all, there is only about $4 trillion of gold in existence. Certainly not all money is going to be redeemed at once. About half of the dollars in circulation are in foreign countries. That means in a gold system, gold probably would only represent the monetary base, while the bank money would still be represented in interlocking balances backed by fractional reserves of gold at the Fed or some other institution(am I right about that?)."

@Scott - No, what is being argued for, and the only thing that could tame the business cycle, is 100% reserves. Yes, gold is worth $4 trillion at current market prices. But it would be worth a lot more, in dollar and real terms, if the dollar was backed 100% by it. If a free market in money was instituted (if all legal tender laws were repealed) without the government backing up the dollar in some way, the dollar would become worthless very quickly vis-a-vis competing commidity currencies.

You also asked how much medicare and medicaid would take up in taxes based on current projections.

Well, according to The Revolution: A Manifesto by Ron Paul, just these two entitlement programs will take up 50-60% of all income, individual and corporate, by the time all baby boomers are retired. This is based on current benefit and economic growth projections.

The only way to 'grow our way out of the problem' without reducing benefits would be for the US to have double digit real economic growth for the next 75 years.

For those who are unimpressed with Epstein's arguments, the best work to date (released in only 2006) in establishing the argument for 100% reserve backed currencies (and very capably shooting down any and all counter-arguments & theories) is Jesus de Soto's _Money, Bank Credit, and Economic Cycles_, which you can find a free downloadable copy of by searching for "desoto.pdf", or by going to and searching through their Literature section.

Scott Anderson writes:


Thank you for some more information, I am always trying to learn. You are obviously more knowledgeable about these topics than I am. I am often in situations like that so I have to rely on fact based judgments rather than third party credible witnesses or statements without factual reasoning. If I believe every third party credible witness on this topic, I would have a difficult time forming any opinion. There is your view, Tyler Cowen’s view, Epstien’s view, Metzler’s view, Alan Greenspan’s view, Ron Paul etc., etc.

To give you an example of my confusion, you make the statement – “No, what is being argued for, and the only thing that could tame the business cycle, is 100% reserves. Yes, gold is worth $4 trillion at current market prices. But it would be worth a lot more, in dollar and real terms, if the dollar was backed 100% by it. If a free market in money was instituted (if all legal tender laws were repealed) without the government backing up the dollar in some way, the dollar would become worthless very quickly vis-a-vis competing commidity currencies.”

I believe there are two issues here. One is whether there are fractional reserves or whether there is full reserve (100%) banking. I understand the concept of full reserve banking and believe one of its drawbacks is inflation. Just as there is some inflation in a fractional reserve system, there is a potential for deflation in a full reserve system. In periods of high demand for money, the price of goods drops relative to the value of money. The deflation can be as destabilizing as inflation and potentially be the cause of other problems with inflation adjusted contracts, sticky wages, etc. Also, the cost of warehousing money rather than providing a promise of repayment, for some people may be greater than the benefit. In other words, there would be a cost to hold demand deposit accounts rather than the opportunity to gain interest. Shouldn’t there be a choice?

Some countries have used this system but with a currency board (Hong Kong, Argentina, Lithuania, etc.) where the country’s currency was backed by 100% dollars. So 100% reserve system is possible (maybe backed with 100% dollars) but would require a lot of changes to the existing system which would be a cost. Many have abandoned it.

The other issue is whether the dollar should be backed by gold. It’s appealing in the sense that it is easily understood but $10 trillion of gold in the US and maybe more than 3x that much worldwide on top of a current $4 trillion price. Ultimately the argument is one of trust that governments will not debauch the currency, which they can do with gold as well. I believe that is where focus needs to be placed.

Lastly, I have seen several different values for the Social Security and Medicare liability. Ron Paul’s is $62 billion. The liability figure is a net present value estimation of future obligations and incorporates estimates for the growth of future payouts even to the baby boomers. I certainly agree that this number should be reined in or the programs modified so that all who have contributed, get the best benefit possible. (I think I stated so in my last entry.) But given an estimate of what the total liability is ($62 billion), the average payout required is between $1.5 trillion and $1.95 trillion a year based on a cap rate of 2-3%. The current amount of payouts already funded with taxes is $1.268 trillion according to Ron Paul’s numbers. A modification to the programs and continued moderate growth should fund it???
Don’t get me wrong, philosophically, I believe in less government intrusion, a strong defense and much more liberty but I think the issues really are about what elected officials do rather than our monetary system. I am surprised that there has been little discussion regarding the “shadow banking system” where there was little regulation, a large growth in money supply and a destabilization of our banking system. That system was backed by land.

Thank you for the discussion.

James Kibler writes:

--Is there any empirical evidence that a gold standard would eliminate the business cycle? Epstein seems to take this as a given based on something Greenspan said several decades ago. I would think it is at least as likely that a gold standard of this sort would exacerbate business cycles rather than eliminate them.

--Is there any empirical evidence that inflation is the cause of business cycles as Epstein suggests?

--The suggestion that asset bubbles are only possible because of expansion in the money supply is ludicrous. Equally ludicrous is the idea that we somehow "lost" GDP during recessions, and that we would somehow have it if only we could have better managed the growth rate of the economy as a whole.

karl writes:

Does this gold standard eliminate fractional reserve banking? If so, how do banks address when there is a greater demand for credit than available gold to lend out. Even under a gold standard, there has always been fractional lending. It would seem credit is driven by the unseen hand. Each of us decides for ourselves how much we want to borrow. Sometimes we make good borrowing decisions, sometimes we make crappy choices. Just as we make good choices where to spend our money and bad choices. However, the added advantage here is banks generally figure out if our choice is a good one or not before lending us the money (subprime, that system broke down, oh well). Without a fractional reserve, it would seem to me credit (mortgages, car loans, business loans) would be hard to get or at a very high interest rate. Is that a good thing, making it hard for the majority of us to get a mortgage or make us pay dearly for a mortgage?

The guest's analogy comparing fractional reserve lending of gold to fractional reserve lending of grain is a false analogy. Grain is consumed and made to vanish the moment we take it out of the warehouse. Gold generally is not eaten, merely moved around.

Finally, wouldn't a gold standard mean a return to mercantilism? Where trade becomes a means by which you can move gold into your country and limit the exodus of your gold. Is that a good way to run a global economy? Wouldn't this mean a return to huge tariffs as nations try to limit the outflow of their gold? We don't care if we are sending billions of US dollars to the Chinese because at the end of the day they can't spend US dollars in China and have to return them to the US in the form of investments. But that wouldn't be the case with US gold going to China. There's no guarantee the USA will get its gold back.

Ethnic Austrian writes:
most Austrians are committed to a gold standard because it is the most likely result of a free market in money (mainly due to its rareness & beauty, fungibility, and relative stability in supply)
I'm just an Austrian, not an austrian and I don't know much about Austrianism, but this rather grandiose prediction of what would happen seems to go against the spirit of austrian economics, as I understand it.

There is already a free market for currencies. The official, local currency is not accepted in many countries. But it is not gold that succeds in such countries, but rather fiat currencies of respectable countries like the dollar and increasingly the euro (formale deutsche mark).

There is no sales tax or capital gains tax on gold in Austria and Germany. And even though many people whine about the Euro and claim that the Austrian Schilling was a better currency, I don't see anybody using Gold as a currency. The Wiener Philharmoniker coin is actually euro denominated, so it would give you the best of both worlds, but it is only used for saving.

Even when the gold standard was still in place, people prefered more practical notes and physically harder coins of other metals to gold. I personally rarely use cash nowadays. It's all electronic now, so our daily monetary transactions are completely decoupled from what goes on behind the scene in terms of the inner workings of how money is issued and backed.

There is no practical commodity anymore that large sections of the population deal with on a daily basis. Gasoline might make sense in the US, where almost everybody needs a car.

Thankyou for both of these recent podcasts on the FED and the gold standard. I'm just a software engineer, but I'm trying to spin up on this stuff quickly because its pretty important.

I guess two things Russ doesn't think about when he says he's not concerned about the, for example, Chinese taking our debt and giving us goods for consumption are:
(1) There is interest we have to pay on that debt. So, we aren't getting something for nothing. Instead, the debt keeps growing.
(2) Its currently all short-term debt. When the Chinese, or whomever, decides they don't like the deal anymore, they not only stop buying more bonds, but insist on highly increased interest rates, or worse won't take a rollover at all denominated in US dollars, but rather some other currency (or gold).

It gets pretty ugly at this point. The US must either:
(a) create money to make the higher interest payments or pay off the debt creating inflation or
(b) sell assets to pay. In either case, the wealth (assets / citizen) of the US citizen goes down.

The current situation is only good for the US as long as the Chinese continue to buy increasing amounts of US debt. That is debt to cover both the interest payments on the old debt plus new goods they are "giving" us for free.

Seems pretty simple and just like what an individual or business faces except that the USA has the inflation card they can play (one time when the music stops). Its basically the same as an individual declaring bankrupcy. A hyperinflation later to pay off an overburden of debt seems like a high price to pay for enjoying some Chinese goods we can't afford now.

I've got another comment to make which I'll submit separately.

There is one more big thing that the "gold nuts" claim about the FED reserve that has not be addressed (well maybe two):
(a) The Federal Reserve is at some level a private institution that was created by big bankers for the purpose of protecting big bankers from runs on the banks. Its claimed to still be a tool of these "big bankers" which include JP Morgan and Goldman Sachs. One example of this is that the president must pick Federal Reserve chairman from a big banker supplied list. Its claimed that the Federal Reserve is not really looking out for "the good of the country" or "price stability" or "full employment" but really keeping the big bankers fat and happy and safe from a run as they get away with multiplying their wealth thru the fraud of fractional reserve banking.
(b) The huge influence the big bankers have on the government. One example of this is the regulators looking the other way and allowing the big bankers to get away with tons insider trading and other fraudulent activities (e.g. packaging worthless, fraudulent subprime mortgages and selling them to suckers).

Well, I don't know how far down the road the truth goes in this direction, but I bet its a good deal further than Russ thinks it does.

Thanks again for the great series and for covering these rather obstruse, but important finance topics.


vimothy writes:


The Fed, as a central bank, was created as a lender of last resort, a necessary institution that will step into the breach and provide commercial banks with liquidity when there is no one else. Because most banks' assets are illiquid, a *solvent* bank can be brought down when too many people try to withdraw their money. Providing short term loans to banks merely allows solvent banks to carry on making loans and prevents them from going under. We all have an interest in this, because we all have money in banks.

It's that simple. No grand conspiracy.

vimothy writes:

There is already a free market for currencies. The official, local currency is not accepted in many countries. But it is not gold that succeds in such countries, but rather fiat currencies of respectable countries like the dollar and increasingly the euro (formale deutsche mark).

In a sense, yes. But the issuance of curency is controlled by the government. It is not a market that private businesses can enter. (BTW, wasn't there a "freedom dollar" or some such that was backed by gold and recently shut down over the pond recently)? The "Austrian proposal" -- if I can call it that -- is to have private banks issue currency, much like the system here in the UK where private banks in Scotland and Northern Ireland issue their own money, which is nonetheless still "sterling".

A gold standard would result in a much free-er monetary system because, properly implemented, the supply of money would be tied to demand. Price of gold going up? Contract the money supply! Price of gold going down? Expand the money supply!

Our current system is basically one of command and control. The Fed (the Bank of England over here) decides how much money is needed. Everyone just has to like it or lump it.

And what is the result? Hayek once asked, "Can we avoid inflation?" Of course, the answer was that we certainly *can* avoid inflation, but that we almost certainly will not. Where incentives and the mechanism exist for the government to devalue the currency, they will do exactly that. That's why the purchasing power of money is better behaved under the gold standard -- it removes the decision of how much money to supply from the hands of Mr King or the FOMC (or whoever) and places it in the invisible hands of impersonal market forces. A much better idea, IMHO.

vimothy writes:

To answer a point Russ makes in the podcast, this would be superior to the current sytem because a stable currency would be greatly superior to any currency whose value was set by a small panel of so-called experts meeting periodically in secrecy. Any supporter of free men or markets should be repulsed by a currency set by our current system.

Hear hear!

karl writes:


The people behind the Liberty Dollar were, a few months back, arrested for trying to pass liberty dollars as "current money". Basically you can exchange anything for another good or service but if you don't make it clear it's purely barter and you cross the line into making it appear your liberty dollars are equivalent to legal tender (or "current money") then the gov is going to come down on you like a ton of bricks.

karl writes:

||(BTW, wasn't there a "freedom dollar" or some such that was backed by gold and recently shut down over the pond recently)||

The people behind the Liberty Dollar were, a few months back, arrested for trying to pass liberty dollars as "current money". Basically you can exchange anything for another good or service but if you don't make it clear it's purely barter and you cross the line into making it appear your liberty dollars are equivalent to legal tender (or "current money") then the gov is going to come down on you like a ton of bricks.

Think Twice writes:

Russ asked in the pod cast why it is so bad that we could buy goods with printed money and foreign central banks in return sterilizes the dollar by buying our bonds. Was Russ just trying to bait Gene, or did he really think it's a good setup for the world economy?

Russ Roberts writes:

Think Twice (and Douglas M Dillon),

I don't remember the exact sequence of points being made, but in general, I don't think it's bad America runs a trade deficit and a capital account surplus. Most of the assets foreigners buy from Americans are not debt in the sense of borrowing to live beyond our means.

You'll find a podcast in the archives with Don Boudreaux on this topic. Maybe we'll do another one, soon.

John S. writes:

The official, local currency is not accepted in many countries.

Sometime in the early nineties I traveled to Nicaragua for business. They charged a hefty exit tax at the airport, and it had to be paid in dollars. They wouldn't accept their own #$%##$ currency.

I had a lot of cordobas left over too. There wasn't much to buy in Nicaragua at the time, besides the services of prostitutes. I didn't indulge, but my guess is that they didn't accept cordobas either.

Think Twice writes:

Thanks Russ for the clarification.

"You'll find a podcast in the archives with Don Boudreaux on this topic. Maybe we'll do another one, soon."

Yes, please do. It's a very important topic, in my opinion. I don't think such a system is bad in the short term, but is it sustainable? The problems I see with such a system in the long run are 1) the Fed would export painful inflation overseas, 2) the potential for a dollar crisis grows the longer the system is run, 3) it is a destabilizing force to the world's monetary and political regime, 4) if the system were to reverse itself due to external shocks, it could drive our economy into a severe recession.

David Johnson writes:

Borrowing from China is no more harmful than borrowing from New York or California. If China raises its rates, we can simply stop borrowing from them. The danger is not China, it is the excessive debt.

Think Twice writes:


Is it possible for you to interview Bob Mundell in addition to Don Boudreaux on the topic? Or, how about a group discussin between you, Mundell, Meltzer, and Boudreaux?

Jan writes:

I disagree with Epstein's view that a gold standard would have better gdp growth than fiat money. A gold standard would have stable money supply. In a growing economy, this would put downward pressure on prices. In a deflationary world, entrepreneurs would be less likely to borrow, leading to less growth. I think Milton Friedman advocated having the money supply increase automatically at the same rate as the gdp growth rate. In a Krugman book, he gives an example of a babysitting coop which after a time had a shortage of their coupons. This lead to a babysitting recession.

russ Bankson writes:

Given the current and continuing mismanagement of the Fed, I suggested that Russ do a podcast on Hayek's proposal for competing currencies.

It is good to see several recent podcasts on money and monetary policy but it would really be interesting to contrast this idea with the gold standard approach to monetary management.

dsm writes:

FWIW, the sort of gold-backed bank that Gene is advocates already exists. is a competitor (of sorts) to the better known PayPal.

karl writes:

Krugman has something about the babysitting thing here:

Jim writes:

What I thought was missing in the discussion were the concerns of Milton Friedman about the actual practicability of implementing a gold standard. (Russ did mention the issues around the actual handling of the commodity, but there were other concerns for Friedman, namely that in actual practice the gold standard has never been a "true" gold standard, and therefore did not enjoy the theoretical benefits the Austrians expound.) Furthermore, what about concerns about greater variability in employment and output?

@Ethan - "There is no empirical support . . ." for the notion that business cycles over the last 60 years were caused by monetary policy? I, for one, will cast my lot with Friedman, who in a past podcast with Russ said he could not name a single exception to the business cycle being caused by monetary policy. I suspect von Mises would concur. A couple of heavyweights there. Secondly, in your first point you claim "the U.S. has monetized very little of its deficits since WWII." If that is true, why is the dollar worth so much less now than then?

I second the thought of John S. regarding Epstein's admiration of Chomsky causing a decline in the valuation of Epstein's thought.

Simon Hallett writes:

You may like to look on Google books for the Works of Thomas Lovejoy Peacock, and his set of poems called "Paper Money Lyrics" from the 1830s. It includes "The Chorus of Bubble Buyers" (where are the riches that bubbled liked fountains, in places I neither could utter nor spell?) and See Saw Margery Daw (who spent all her money and spun gold out of straw).

They deserve to be better known.

Ed writes:

So I see that sound fiscal policy includes cutting taxes and cutting spending. While we have had tax rate cuts from the current administration, we haven't had spending cuts to match. I take it this will be a problem we'll have to deal with in the future with either increased taxes or decreased spending. Hopefully, it will be less spending.

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