From The Coolidge Review, July 15:
Gold: A Constructively Inhibiting Institution
By James Grant
This article appears in the Summer 2024 issue of the Coolidge Review. Request a free copy of the print issue.I stand with anachronism. I like the low hum of cultured voices, great books, and the dead authors who wrote them. I believe in the fedora hat, which should be tipped in the open air and doffed in an elevator. I support the gold standard.
Nothing against progress. The sextant sailed us around the world and the slide rule got us up to the moon, but neither beats your pocket-sized GPS-cum-high-speed-computer-cum-Encyclopedia-Britannica.
I understand the imperative of creative destruction, but where has prudence gone?
It was nowhere to be seen in 2008, when a half dozen great American banks became wards of the state, triple-A-rated General Electric required a government bailout, and the edifice of subprime mortgages collapsed. “The greatest failure of ratings and risk management ever”—that’s what Doug Lucas, an executive director at the Swiss bank UBS, called this shameful episode when it was happening. And it was true.
Financial upheaval is as old as finance. Fractional reserve banking is inherently risky. But the so-called Great Recession stands alone for the pedigree of the victims it claimed—or would have claimed except for the saving, smothering, costly federal intercession.
On Wall Street, the fear of loss is the best regulator. It inhibits the human tendency, especially marked in boom times, to overdo it. Zero percent interest rates and reams of paper money work in the opposite direction. They are the great disinhibitors.
DRUNK ON CHEAP CREDIT“The creation of debt should always be accompanied with the means of extinguishment,” Alexander Hamilton said.
Recall, if you can, the dot-com bubble of the late 1990s, its bursting in 2000–2001, and the Federal Reserve’s attempts to contain the damage. From 6.5 percent in 2000, the central bank slashed its policy interest rate to 1 percent in 2004.The dot-com bubble was indeed contained, but a new bubble, this one centered on fixed-income securities, especially mortgages, rose up in its place. It was titanic. And to contain the fallout of its bursting, in 2007–2009, the Fed slashed interest rates to zero. Its counterparts in Europe and Japan explored the new frontier of less-than-zero.
Ten years of ultra-low rates, beginning in 2008, proved that money grew on trees. From Silicon Valley to Washington, D.C., from venture capital to private equity to cryptocurrency to private credit and the public debt, there was money for very nearly anything and everything.
Interest rates, arguably the most important prices in a market economy, inform. That is, market-determined interest rates inform. Manipulated interest rates misinform.
Observe, today, the immensity of the public debt. Note, especially, its accelerating growth. On Donald Trump’s inauguration day, it summed to slightly less than $20 trillion. Four years later, in 2021, it reached almost $28 trillion. In 2024, under President Joe Biden, it topped $34 trillion. The successive Republican and Democratic administrations boosted the debt by more than $14 trillion, as much as the totality of what the country owed as recently as 2011. Cheap dollars and artificial borrowing costs may not have made this dubious achievement inevitable. They certainly made it possible.
In the monetary vein, I think of the chaotic scenes at Cleveland’s Municipal Stadium, home of the old American League Indians, on the night of June 4, 1974. To draw fans into the cavernous ballpark, Indians’ management staged a ten-cent beer promotion. Before many innings had passed, spectators were wandering out on the field to introduce themselves to the players. The full moon didn’t help, but the underlying problem—the remote cause of the seven emergency-room visits and nine arrests—was the mispricing of a substance nearly as intoxicating as artificially cheap credit....
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