Alan Meltzer is probably the greatest living disciple of Milton Friedman in relation to Friedman’s views of monetary policy. Meltzer is the monetarist par excellence, author of the definitive series of volumes on the history of the Fed which probably makes him our greatest authority on Federal Reserve history, bar none, not just our greatest monetarist historian of Fed history. He has been a friend and mentor of mine since the mid-90s. His three volume A History of the Federal Reserve System is dense and magisterial, while the men about which he writes tend just towards being dense, though not generally very magisterial. His most recent book, Why Capitalism? is a short and easy ready. We had a wide-ranging discussion, which included a friendly debate about the gold standard. Audio of the complete interview is here, and you can read an excerpt from the discussion below:
Jerry: “I would say on balance Clinton was a spending cutter and a tax cutter and, let’s switch over to your main area of expertise, a functional monetarist in many ways. I mean, I know it’s not just the president, you had a Fed chair there—“
Allan: “And a Secretary of the Treasury.”
Jerry: “And the Secretary of the Treasury, Robert Rubin, who also was a strong dollar advocate. So you didn’t have the traditional liberal devaluation philosophy, you actually had a president who was probably more committed to a strong dollar than the president who followed him, who was a Republican.”
Allan: “That’s right. He was in the camp of John F. Kennedy. John F. Kennedy wanted a strong dollar — he worried a lot about the loss of gold, the possible weakness of the dollar. In fact, what is not well-known is that in 1962, just before the Cuban missile crisis when he was worrying about the dollar and the loss of gold, he threatened to take the troops out of Europe to prevent the French and Germans at that point from buying our gold.”
Jerry: “That’s interesting. Well, the French resented the strength of the dollar, didn’t they?”
Allan: “Yes. The Frenchmen didn’t like the dollar.”
Jerry: “Exorbitant privilege, right? Isn’t that what they called it?”
Allan: “Yes, and they were right about that. It did give us a privilege. It gives us a privilege now, but we’re losing it.”
Jerry: “Alright, you brought up gold. We might end up debating a little in this next section.”
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Allan: “Probably.”
Jerry: “I’ve softened in my view towards the gold standard. It used to be that most of the writing that I did about the gold standard was negative. I’m beginning to wonder if one could ever really have the moral force in the political arena around an equation like the Taylor Rule, which is an admirable equation, that one could have over something that’s got basically over 4000 years of recorded history behind it, which is a reliance on gold. I’ve come to see the gold standard as maybe the only real hope we’d have of getting some kind of price stability, given the fact that it’s so easy to manipulate theories and to manipulate equations, but it’s not easy to manipulate the supply of gold. I know you don’t agree, or I don’t know, maybe you’ve softened too. We won’t find out until you answer, so tell me your response, please.”
Allan: “Well, all the way back to the 1970s I used to debate Ron Paul on radio about the gold standard. And of course, as you know, he’s an advocate of the gold standard – was then and is now. My final remark to him on almost every occasion was, “Look, we don’t have the gold standard. It’s not because we don’t know about the gold standard, it’s because we do.” The gold standard says we’re going to commit ourselves to maintain the exchange rate for gold. That’s not what people in democratically-elected governments want; they want something done about employment and inflation. Now, you can tell them, of course, that the gold standard would be a way of maintaining and controlling inflation, but they just don’t buy that argument. You’re never going to see the gold standard. The only way the gold standard would work would be as a multinational standard –“
Jerry: “Right, like Bretton Woods.”
Allan: “There isn’t the slightest chance in the world that you’ll get the Europeans, the Japanese, and the Chinese to agree to a gold standard.”
Jerry: “Well, it depends on what their paper currencies do and how sick their own populations eventually get of the decline of paper currencies. But I’ve heard you make this argument before, and it seems to me that there’s something different about the notion that you’ll never get it and the notion that it’s wrong.”
Allan: “I don’t say it’s wrong. I say it’s possible. I mean, it’s a plausible system.”
Jerry: “Is it better than our current fiat system?”
Allan: “There are a lot of things that are better than our fiat system. I’m hardly the person to defend what we’re doing, certainly not what we’re doing at the present time.”
Jerry: “So it is better?”
Allan: “The fiat system worked very well from 1985 to 2003, because that’s the longest period in Federal Reserve history and it’s the only period of length like that in which we had steady growth, stable growth, low inflation, short and brief recessions. That was a very good policy arrangement. Unfortunately, we overthrew it, abandoned it. What we need to do is go back to something that follows that rule. I testified in Congress a couple of weeks ago and I had support from some Democrats on the Financial Services Committee, not all but some, for the idea that what happens to money — Congress has the responsibility because Article One Section Eight of the Constitution gives it to them—“
Jerry: “The authority to coin money, which might imply a metallic standard. I mean, you read the minutes and the background discussion, I think the most reasonable interpretation of that clause is that it’s a metal standard—“
Allan: “Well, that’s because that’s all they knew at the time.”
Jerry: ‘Well, no, they knew about paper money. I mean, they had lengthy debates about paper money. Under the Articles of Confederation they had a paper money crisis –“
Allan: “But that was much later.”
Jerry: “The Articles of Confederation later than the Constitution?”
Allan: “Oh, no. That was before.”
Jerry: “Right. You can read, actually, Witherspoon – I just read a book of his, a series of speeches against paper money. So the founders had a debate about paper money and gold standard and they seem to come down to—“
Allan: “They knew paper money was inflationary. They surely knew that because they were living with it.”
Jerry: “Right. And they seem to have written a metallic standard into the text of the Constitution.”
Allan: “Well, we can debate that but let’s not.”…
My interview with Dr. Meltzer continues with a discussion about his book Why Capitalism?, and about North and South Korea, which you can read here next week.
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Mr. Bowyer is the author of "The Free Market Capitalists Survival Guide," published by HarperCollins, and a Forbes contributor. The above article was originally published in Forbes.com.
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