financial collapse in 1920, '21, almost unprecedented in its severity and its speed. jim grant has written a good deal on the subject. we had the worst depression in american history, which milton freedman himself laid at the doorstep of the central bank. we had 11% unemployment in 1982 after paul volcker ascended to the chairmanship of the central bank. in 1974 we also -- '73, '74, '75, followed by the worst decade in american economic history after of the second world war also inaugurated by central bank management of the monetary system. so perhaps -- all i mean to say is, it's always compared to what?

on this -- which i think the gold standard, the classical gold standard, for example, stands up very well to the age of central banking, establish in especially in the united states of the last 100 years. on the cost of the gold standard, the cost of the gold standard is but a fraction, a small fraction, of the cost of the management paper currency system. just give you one equation to think about. it appears that the total cost of the monetary system under the classical gold standard was about one-fifth of 1%. that is to say, the cost of mining gold as the source by which the monetary standard was -- >> one-fifth of 1% of what? >> one-fifth of 1% of output. forgive me. whereas today, all you have to do is walk down park avenue and look in the window for bank

exchange rates and for a customer or a tourist who purchases foreign currency, the spread can be as much as 15%. there's now a great investigation which is long overdue -- and i won't mention the banks here. >> just give us the tickers. >> well, i think we've been reading about them in the newspaper, but all the banks -- the cartelized banking systems collude in the making of a market in foreign exchange. the spreads are enormous. and, having been at one of these banks, they hold the book on both the bid and the ask. and the purchase of foreign exchange in vast amounts -- i'm talking about tens, hundreds of millions of dollars -- a cost makes one-fifth of 1% of output looks like a minuscule fraction so that the kennard, which of course was spread by milton freedman about the cost of the gold standard, that is to say

the provision of the monetary standard in gold mining, was too much for society to bear. and, of course, he promoted floating exchange rates which we now have today, floating exchange rates have produced a system where the cost of output is substantially higher than it was under the gold standard, not to mention that almost every three or four years the variation in the value of foreign exchange can be as much as 20%. so the entire national economy, its workforce, its labor wages, its costs of production, can vary by as much as 15% to 20% in a very short period, which causes enormous misallocations of resources, which by itself is a cost substantially greater than the steady price level and economic growth produced under the classical gold standard. there's one other comment that edward made, and in a word the process of exploring and

discovering and mining gold and its effect upon the price level, curious thing is, if you really do the statistical homework, which if you'll permit me to say mr. bernanke surely didn't do in his speech that he gave to the university in washington, d.c., if you do the homework, you find out that over the last 150 years, the output of gold annually on average has been approximately 1.5% to 2% per year. i'm talking about over the full century and a half. now, the growth rate of population has been approximately 1.5% to 2%, and the growth rate of output in the developed world has been 1.5% to 2% of output per capita. this is the hidden equation, which established a proportionality and the stable price level between the gold monetary standard, the

population growth, and the general output in the developed world. so it seems to be -- rather, it's a hidden equation because it's never made explicit by the apostles of central banking. but the monetary standard established in gold created a stable price level and conditions for economic growth that were no accident. they were, in fact, a proportionality of a product of proportionality between the production of gold output and population. >> i'm going to ask one more question and then open it up a tiny bit for people to come and ask their own questions at the microphones in the aisles. this is for you, jim. i think we all agree that we have a dysfunctional international currency system. we have a central bank that sets

interest rates, experiences bubbles, infuses moral hazard into the system and we have a plethora of redundant and a number of other things. go back to this ideal world that has been described in which everything was more or less hunky-dory. but do we really believe in this current world that we could actually the keynesian report on leveraging says the japanese total debt outstanding is 500% of gdp. spanish private sector debt is 225% of gdp. the british financial debt is 200% of gdp. with these enormous debt structures, if you were to impose a gold standard that sort of deflation, the sort of collapse, what the gold standard

is capable of doing was actually collapsing fragile credit structures, but we've now built credit skyscrapers that would come falling down upon us, and i think when -- when the british went back in the 1920s, one of the reasons they failed on going back to the gold standard is in an age of welfare and unions, wages are sticky and therefore they didn't clear -- the wages didn't come down and operate. so my concern is both the stickiness of labor and these extraordinary debt structures that frankly if i were given a choice between deflation to get rid of them or inflation, i'm afraid i'd hold my nose and take the inflationary route. >> so the question is, can we go back? >> the question is, is this just pie in the sky? could one really do it? >> yes.

>> to the debt. >> just a couple of points before we open this up for the ventilation of better questions, the british have this way, edward, of returning to the gold standard bloody mindedly at rates prevailing before the wars they won. they did it in napoleonic wars and again in 1925, so doing despite the advice from france, they crushed labor, crushed the price level, but it was their choice. there's nothing inherently deflationary about the gold standard. it's the rate you make your currency exchangeable is dependent upon the statutory rate you choose. >> you could say the euro works in some way of the gold standard. the currencies that -- the

periphery of europe became overvalued and now spain in a way -- the situation facing spain would be much the same under gold standard as it is under the euro with 25% of the population unemployed, no prospect of devaluation, and -- >> oh, there's a prospect. >> no willing prospect. a financial prospect. >> well, it's a heck of a fix, and i'm not sure that the gold standard is the answer to all these problems. but it seems to me that the record of the gold standard, in sum, is a record by and large of growth and in the macro sense and in personal accountability in the banking or the micro sense and perhaps the audience has some questions about whether it might be a preferable system. >> good. with that, can we -- would anyone like to come forward?

>> how would you set the value of gold today in the gold standard? and what value would you put on it in today's world? >> that's your book. >> there is an optimum price. there is a methodology for getting there. and i think that that was the issue that edward was getting at when speaking of the problems of deflation in certain cases and jim also mentioned this simply as an historical example before the technique in 1925, the british price level had risen

during the first world war by two to three times the price level before the war, whereas britain tried to go back on the gold standard at a parity which preceded the war, and of course they chose a parity obtusely and it resulted in a terrible effect on the labor market in england. so the question is, when you have a price level which has risen so substantially, five times, for example, in the united states since 1971, price level has risen five times, does one try to go back on the gold standard or go forward, if you will, to the gold standard to the $35 that existed in 1971? which is analogous to the situation that the british faced, although slightly less intense in 1914-1918. no. what you want to do in establishing convertibility is

you want the convertibility price of gold or the value of the gold standard established by statute to be adjusted within the hierarchy of all prices, the hierarchy of all prices, the general price level, having risen about five times at the very minimum, one wants to adjust the price level accordingly. so how does one get there? well, the best method is, in fact, the method of analyzing mining securities. what is the average cost per ounce of gold globally? as its overall cost of production, what is the average cost? the average cost today taking all production in all mines, mining, volume, weighted, is approximately $1,300. the cost of mining gold has been

rising in the last four years at about 20% to 23% compounded annually. were that to continue, you can see that, in a mere four years, the average cost of mining an ounce of gold or the 100 million ounces of gold which will have been mined in that year will have risen somewhere north of $2,000. so everything will depend upon the instant in which convertibility is established, and i think jim and i, for one, we're part of that remnant which believe there's going to be nothing left for monetary reform but a restoration of the gold standard. so that it is plausible that the convertibility price, if properly done, that is to say, convertibility price established in its proper proportion within the hierarchy of all prices, could be anywhere between $2,000 and $3,000 per ounce. now, that is not the sole reform that's going to be necessary in

such a true monetary form and a reestablishment of the constitutional monetary standard which inaugurated the republic, but it is the indispensable first cause. >> let's take a question from the other side of the room. >> sure. for mr. grant, i take it -- i don't want to put words in your mouth -- but one of the principle benefits of the gold standard is that it takes the ability to create money out of the hands of people, particularly people in government, particularly politicians. would you be happy with something like a synthetic gold standard where they just, rather than actually waiting for gold to be mined, just said, the currency plus reserves, like the total sum of high-powered money, is equal to "x" dollars and that we will then just, by reference to something objective, like

something that's totally out of the hands of the government, maybe just the number of people in the country or something like that, it will just grow at a constant rate? i mean, would that be a feasible sort of substitute for a gold standard? >> i think not. milton freedman got to be at wit's end with respect to the fed. i guess he got to be at wit's end very quickly in his career with respect to the fed. but he proposed that they put the monetary base on autopilot and grow it at 3% or 4% a year and be done with it. the gold standard is not just about more or less steady over the long term rise in the volume of purchasing media of money, it's rather more elegant than that. and if you just did that, you'd miss some of the features that synchronize different participating gold standard economies.

an important element of the gold standard is the interplay between price levels in different countries. imagine -- don't have to imagine. just put yourself in the position of a talented individual in a high tax regime country and you see opportunities across the seas in a lower tax environment and you pack your bags and you move to the more desirable place economically. gold is a little bit like that. it seeks out the best returns and most advantageous economies in which to circulate. so the gold standard is synchronous in a way the present system certainly is not, in a way in which milton freedman's idea for the steady gross of the monetary base would not be. lew, you thought about this as well. what's wrong with the milton freedman idea? >> well, the very thing which you just said.

>> so you were listening. >> yes. >> next question, then. >> do you think that a return to the gold standard would restrict the government's ability to overborrow and to finance current expenses with borrowed money? >> yes, sir, i do. there is no shortage of good intentions in washington about the shocking rate of growth in our debts and in our federal outlays. and, if you look at the statute books, you find a succession of legislative attempts since the mid-1970s with the congressional budget office and there are literally dozens of reforms voted into law to throttle the rate of growth in spending and borrowing. none has succeeded, and i think none has succeeded for the

simple fact that, under a paper currency regime in which we are the owner of the franchise to use our money as the world's money, in such a regime there's no reason not to spend and borrow because we can do it painlessly. lew's mentor and teacher talked about the exorbitant privilege of the reserve currency country, and the reserve currency country is our country. we consume more than we produce. we pay the difference in dollars we alone created. >> keep in mind britain under the gold standard had much high rates of public debt to gdp than even today, 260% at the end of the wars. it wasn't as if it didn't actually -- >> in what year did it reach 260%? >> 1822. >> yes, sir, i think a gold standard would constitute a very constructive check on this. >> may i, edward say a word or two about the mechanism that

this gentleman just raised. now, the reason why the gold standard or a currency convertible to gold, a dollar convertible to gold, checks the ability of the federal government to spend money, is that you'll remember that by law the banks are required, including the federal reserve system, to redeem in gold all that currency, which individuals in the market hold which they no longer desire to hold. so, under conditions where the treasury is in deficit and is spending money and the federal reserve system is financing it, creating an upward move of in a price level of inflation, people are not fools, they know that inflation is going on today and they would of course see that. they would take their paper dollars or their bank checking accounts and they would turn them in for gold. but, you see, the banking system and the federal reserve system

are now pledged by law to redeem in gold all the undesired cash balances held by individuals and firms which they no longer desire to hold given the tendency toward inflation. as a result, the federal reserve is then required to reduce the quantity of credit money in the market such that the tendency toward inflation and the redemption in gold must cease. >> that puts a first-fact check on the congress and the treasure for financing. as a result, the federal reserve is then required to reduce the quantity of credit money in the market such that the tendency toward inflation and the redemption in gold must cease. that's puts a first fact check on the congress and the treasury for financing, and as a result, it ties right to the first gentleman's question about, in a democratic republic like the united states, governed by a supreme law of the constitution, the money supply should be in the hands of the people. it should not be in the hands of the elite. that is to say it should be in the people. the governing board at the fmoc decides in camera what it sees at the end of the day.

of course convertible currency put it is control of the money back in the hands of the people. that's precisely why the first coinage act of america defined the dollar as a weight unit of gold. if people simply do not desire to hold the dollars which are being issued by the banks in general or by the central bank, if there be one, or by the treasury if it is issuing paper dollars, and it also did before the federal reserve, they had the privilege of returning those dollars to the banks or the treasury and demanding the gold which is, in fact, the dollar itself. that ends -- that ends the discretion of money printing and it ends the systemic tendency toward inflation. so it's not only an economic issue that we're facing here. it's the who governs in the united states? is it the sovereign people or is it a political elite in washington that is completely

independent of the voters ability to control the quantity of money in circulation? >> over here. >> why were we taken off the gold standard in 1971? >> well, i suppose someone would say it wasn't a true gold standard. anyone? >> you just said it. sir, the move off the gold standard had been in the works for a while. the united states had begun to run deficits in its international payments late in the 1950s and into the '60s. then the dollar was defined as a weight of gold of 1/35 of an ounce of gold, the definition of a dollar. and year by year, foreign central banks, which alone could exercise that right to redeem began to redeem. and for a full ten years before

the united states suspended the gold convertibility of the dollar, before it went on the pure paper system for that full ten years, the government was -- was continuously -- it was an exercise in continuous improvisation to try to fend off that evil day when they would have to face the fact that we were simply consuming more than we were producing. so it didn't happen precipitously. it happened because the united states refused to yield to the ever so constructive discipline that the world was trying to impose on it. >> wasn't it the pesky french demanding the american gold? >> among others. there were many nations that came to the window and demanded gold. >> and over here. >> this may be seen as somewhat of a follow-up to the prior question. but as a practical matter, if the united states were to return to a gold standard, the way you discuss it, my question would

be, how much -- how much of a gold reserve would that require? the united states has eight tons i believe at the moment. is that 270 million ounces? i think that's what it is. >> 253 million. >> there you go. is that enough to return to the gold standard considering this speculative pressure that would be based on the currency? that was why we went off in 1971, partly. >> well, the first thing to be said is one would not go on the gold standard tomorrow morning, even if one had full powers to implement it. there would have to be an announcement by the president of the united states that the united states intended to go forward to a modernized gold standard, and he would also announce the period in which the market would have its opportunity. the open free market would have its opportunity worldwide to adjust to conditions in the market. and the process of discovery generally known as price discovery for any product, whether it be toothpaste or gold, would go on in the market as everybody attempted to adjust

themselves to the fact two or three years hence on a date certain the dollar would be defined at law as the weight unit of gold. and during that period, the price of gold would clearly tend to vary in proportion to its all-in cost of production. so as you approach that date, you would be guided very substantially how to have this reasonably long period of adjustment by the market price of gold. the second aspect of the problem, which has always been the case in successful restorations of the gold standard. france had one in 1926. france had another in 1959. 100 to the gold and 100 present point carry. in each case where it was successful, you -- the market price, of course, is a first guiding point. but remember, how much gold is available is not only a function of the quantity. 250 million ounce.

it's a function of price. as in every case, the value of a total quaint tie quantity is always price times quantity. so the -- so how much gold would be prudent to have in a national reserve in order to sustain redeemability would be a function not only of the total quantity of gold in any particular nation or in the world at large. worldwide there's about -- there's about a billion ounces of gold in central banks of -- the 200 countries that participate in the united nations. so that the price at the time times the quantity, as a percentage of the demand deposits outstanding, would ensure whether or not there was sufficient redemption. now, if the price of gold was substantially above the cost of production, which is, of course, the sustainability price for the gold standard, upon conversion, no one is going to bring their money to the treasury to redeem it. because why would you -- why

would you redeem for gold when you can buy it for less in the process of mining it? that is why, for example, in the convertibility of -- the resumption of convertibility in the united states in 1879 after the civil war, after all of the -- jimmy grant has written about this, after all of the fear and trembling in the congress about what would happen, you know, everybody would be rushing to the gold windows to redeem, no one showed up. because, "a," they were confident in the relative price of gold, given the price level at that time. and they were also confident about the future value of the currency. so why not hold more convenient paper and convenient coin rather than holding gold bullion under the mattress? >> and the $50 minimum i believe at the time for greenback. okay. thank you. >> one more question and then we'll wrap up. this side.

>> it seems to me that the real losers of the current system are going to be the people that are holding cash and that are holding debt. in my family experience that fleeing the soviet union in the 1980s, we were not able to take our things with us. so instead we had debt owed to us. and everything we owned was about a million rubles, which at the time was close parity with the dollar. five years later we collected the debt in a million rubles. after they were worth about 1/10,000 of their original value. and today, i'm a lot more lucky because at the click of a button i can convert nearly my entire net worth into gold bullion at a price of about half of the spread that jpmorgan might charge me in a fx transaction at the wholesale level. so what is the value of a gold standard to me when, thanks to

technological innovation, i can so freely move between dollars and gold and back again? >> you are on your own personal gold standard now. we all can be. the desirable feature of a gold standard for the entire society is, just as lew suggested before, it is an objective measure. we don't all have our own individual idea of what a meter might be or a yard or a bolt of cloth or any of the standard units of weights and measures and to standardize weights and measures introduces all manner of efficiencies into an economy, and we say -- i think we both say that to render objective, the purchasing power of money as a weight of something rare and tangible is to do a great good turn for not just individuals who choose to own it but for the society as a whole. >> ava, last word.