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Colbert Report: Paul vs. Leonhardt

An annotated transcript of the debate on the gold standard between Ron Paul and David Leonhardt on the Colbert Report.

On January 4, 2011’s episode of the Colbert Report, host Stephen Colbert touched on the controversial issue of the gold standard. He began with an interview via satellite of the staunch advocate of Austrian economics Republican Congressman Ron Paul, followed by a debate between Paul and New York Times Economics Writer David Leonhardt. But as a result of his satirical comedic style, the interview and subsequent debate became more entertaining than informative. Here is the transcript, along with some of our annotations in italics. Some stuttering and comedic interruptions have been edited out. The full interview can be seen here for a limited time.

Colbert: “Congressman Paul, thanking you so much. Now sir, explain to the good people here what I already understand. Why do we need gold for our currency?”

Paul: “Well, the main reason we want gold is over 6,000 years gold has always been picked over paper. Paper’s always destroyed. There’s been no example of paper money lasting for long, long periods of time. Money has always evolved out of the market place of something of real value. Gold has not always been, silver has not always been, but it’s always been the best and longest lasting.”

Colbert: “I think it’s time we return to an economy that’s based upon trading cattle or the value of our daughter for dowry.”

Paul: “Well the whole thing is if you have a certificate, like if you have a certificate for gold, you don’t have to carry your gold, but …”

Colbert: “Wait a second, but sir, if I have a certificate for gold how would I know it’s actually gold? Do I get to go visit my gold at the bank? Because I want to touch it and lick it and stuff like that.”

Paul: “You’ve touched on a most important point. You have a gold coin standard and anytime you quiz or question the integrity of the government you should be able to take that certificate to the bank and make sure they do have the gold.”

Here, Colbert deliberately created confusion by equating the gold-backed currency with gold-made currency. But a more important issue is the practicality of money freely convertible for gold as advocated by Paul. The system was used as recently as from 1944 to 1971, as per the Bretton Woods Accord in which the United States, the dominant economic power following the Second World War, made the dollar convertible at $35 per ounce of gold while other economies pegged their currencies to the dollar. But as US trade deficit increased due to wars, international aid, and domestic spending, foreign governments built up excessive reserves of US dollars. Unwilling to lose its gold reserves, US President Richard Nixon announced that the government would no longer exchange gold for dollars and thus the system fell. What the system advocated by Paul requires is a binding promise to exchange money for gold, a promise that cannot be realistically enforced.

Colbert: “Sir, if we don’t have a gold standard for our money, could this lead to hyperinflation?”

Paul: “No, not could, it is, it will.”

Colbert: “On the other side of this debate, we now have economics writer from the New York Times, Mr. David Leonhardt. Dave, thank you so much for joining me.”

Colbert: “Dr. Paul and I agree that without a gold standard, we’re talking Weimar Republic, wheelbarrows full of money to pay for one loaf of bread. Why do you want my children to starve?”

Leonhardt: ”The gold proponents have been saying we need to worry about inflation. They have been saying that the big worries is that our economy is going to overheat, we are spending so much money, prices are going to go out of control.”

Colbert: “It will.”                                                                                                       

Leonhardt: “Does it feel to you the economy is too strong right now, that it’s overheating?”

Colbert: “No, but it’s waiting for us to let our guard down.”

It is here that the debate begins to diverge, though Colbert, most likely unintentionally, framed the debate in the scenario experienced by Germany following the First World War. What Leonhardt claims is true, but is more likely for China than for the United States. Overheating occurs following rapid economic expansion when productive capacity is insufficient for the rapidly growing demand and hence causes inflation. However, inflation does not need to follow economic growth. What Paul previously talked about was a currency crisis, in this case if the US government creates too much money to fund deficit spending, pay off debt, or increase aggregate demand, hyperinflation will occur, similar to what happened in the Weimar Republic to pay for war reparations.

Leonhardt:  “Well, so what we have now going on is we have for years for people saying inflation is just about to take off. A year ago, people are saying inflation is just about to take off, we need to think about a way to go to something like gold to do something like this. At the time inflation was 2.7%, today it is 1.1%.”

Colbert: “Okay but Dave listen up, if our economy is so great on this present standard, why aren’t things getting better? Listen if my teeth are falling out, I’d change my toothpaste, okay? Or I stop smoking meth, one of those two. What do you make what this man is saying, Congressman? He says we don’t have to worry about inflation.”

Again Colbert deliberately confuses the issue for comedic effect. Even Paul does not argue that switching to the gold standard will improve the economy. The most pressing issue to the American public right now is the slow economic recovery and low job growth, which cannot be solved quickly through monetary tightening. Paul argues that the gold standard will usher in long-term stability. The current recession can essentially be used as an opportunity for the economy to adjust for the loose monetary policy under Greenspan that arguably caused the housing bubble, since cheap money made people feel they were wealthier than they actually were. However, since US politicians are gauged on short-term results, such measures are unlikely to be ever adopted unless following an actual currency crisis as predicted by Paul.

Paul: “Well, he better. Why doesn’t he look at the inflation of the NASDAQ bubble, why doesn’t he look at the inflation of the bubble in housing? That was plenty of inflation. Why doesn’t he look at the inflated prices of the bonds right now?”

Colbert: “Yeah Dave, why don’t you do any of that? Why don’t you do what the man is saying?”

Leonhardt: “So there is a problem in which an economy can get too heated and prices can get too high. But look at what’s been happening lately. Prices have been falling. Price of stocks fell sharply during the financial crisis. The problem we’ve been having is not inflation, not too strong of an economy. It is too weak of an economy.”

Colbert: “But do you not believe that gold is more valuable than paper? Simple question, Mr. Economics Man.”

Leonhardt: “It depends.”

Colbert: “It depends?”

Leonhardt: “Sometimes paper is more valuable than gold.”

This is a bold assertion that is followed by a chuckle from Paul. But by adopting fiat currency, governments allow themselves the flexibility to create money in order to fund short-term endeavours, such as wars and stimulus packages, a benefit that most believe is well worth the constant erosion of value.

Colbert: “Gold is always, always valuable. Think about how many jobs gold will create. We’ll have to hire tailors to reinforce our pockets.”

Leonhardt: “If I gave you a choice between the amount of gold in my wedding ring and a million dollar worth of paper bills, which would you take?”

Colbert: “How about that Congressman Paul? He said would you rather have my wedding ring or a million dollars in paper?”

Paul: “Okay, the question is would he take $10,000 and put it in a box and keep it for 20 years or would he take a couple of gold coins and put them in a box for 20 years. Believe me 99% of the American people, they’ll take the gold. They will not bet on the value of the dollar. The Federal Reserve has destroyed 98% of the value of the purchasing power of the dollar since 1913. And in the meantime they finance every war that they couldn’t have financed if they were on the gold standard.”

Colbert: “Dave you want some ice for that burn? The Fed has destroyed our currency.”

Leonhardt’s ring is probably worth less than a million dollars anyways, but the real question is the investment horizon and the need for liquidity. Taking $1,384 in cash (Jan 4, 2011), rather than an ounce gold may be good for immediate purchases, but 20 years from now investing in gold has a significant potential for capital appreciation while holding cash will face substantial inflation erosion.

As for the 98% of the value of the dollar was destroyed since the inception of the Federal Reserve, the statement actually came from the Richmond Tea Party, which used the price of gold of $20.64 per ounce and $1,370 at the time of their calculation to arrive at their claim. But based on the US Bureau of Labor Statistics’s Consumer Price Index, the value of the dollar eroded about 95% ($1 in 1913 is worth $22.10 in 2010). Still, the fact remains that the value of the dollar fell significantly over this period. But this is only half the picture. Living standards greatly improved since the inception of the Fed, but just like inflation, it was not solely the result of the Fed’s creation. In fact, one of the key drivers of inflation in overheating economies is the increase in wages. The dollar is worth less, but people own much more of it.

Leonhardt: “The fed hasn’t destroyed our currency. If you look around the world people remain very willing to lend the United States money. Our currency is good around the world. Ultimately what has value is what people will give you value for. You can’t eat gold, you can’t live in gold, so…”

Neither can you eat or live in paper. The argument that the USD is strong is true, as the US still carries an AAA rating while its status as a safe-haven currency was demonstrated again during the Eurozone crisis recently. Even booming China only has a recently upgraded AA- from S&P.  Yet at the same time, the USD is slowly losing its infallible image as foreign reserves try to diversify away from US debt, most notably China’s purchase of European debt.

Colbert: “Have you ever tried to eat gold?”

Leonhardt: “I have never tried to eat gold.”

Colbert: “You can eat gold leaf on a chocolate cake.”

Leonhardt: “That is true.”

Colbert: “That is true? I accept your apology. Gentlemen, I’ll leave the question to both of you. Would you rather worship a calf made of paper or a calf made of gold? It’s a simple choice.”

Paul: “I would rather have gold in my money, not paper. It has always failed and always will.”

Colbert: “Representative Paul, thanks so much. From the New York Times Dave Leonhardt, thank you. We’ll be right back.”

This debate is akin to the Goldbug vs Silverite Debate in the 1896 election that resulted in William Jennings Bryan’s Cross of Gold Speech. Back then, Goldbugs wanted a gold standard to ensure low inflation and sound money. The Silverites wanted silver instead to increase inflation, arguing that increased money supply would spread to everyone and increase general prosperity. Today, Paul is unlikely to get even silver.

Many debates on this controversial topic become muddled and too extreme, with both sides predicting unimaginable horrors should the other side prevail. Staying true to his signature style, Stephen Colbert manages to satirize the nature of the monetary debate for its cynical views of the future. At the end, neither side was able to recommend the best type of calf to worship.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.