MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The price of gold hit a record high earlier this month. Today, it's still hovering near $1,500 an ounce. Deep within underground vaults, the U.S. is sitting on at least $370 billion of gold. As debate over the federal debt continues, a small group of economists had suggested selling the nation's gold. Joining me to talk about the price of gold and its impact on budget debates, Ted Truman of the Peterson Institute for International Economics, Neil Irwin, an economics correspondent for The Washington Post, and David Smick, he's a global macroeconomic advisor. I'll be interested in your thoughts, your questions. Join us on 800-433-8850. Send us your email to drshow@wamu.org. Good morning, all.

MR. NEIL IRWINGood morning.

MR. DAVID SMICKGood morning.

MR. EDWIN "TED" TRUMANGood morning.

REHMNeil Irwin, could the U.S. sell its gold assets?

IRWINIt could. We have a lot of gold in Fort Knox and in the basement of the New York Fed up in lower Manhattan.

REHMHave you seen it?

IRWINI've seen the gold vault at the Federal Reserve Bank of New York. You can take a tour if you call them up. It's an impressive sight to behold. The thing is it wouldn't deal much with our long-term deficit problems. It would be the equivalent of if you're a family that's spending beyond its means to sell some of your furniture. And you can certainly do that. And that'll tide you over for a little while. But it doesn't fix the longer-term problem of living beyond your means. It's kind of a one-time thing. And the other big problem is that if you try and dump a lot of this gold, suddenly the price will decline. And so the revenue won't be what it might seem like if you just do the math of what it's worth.

REHMSo is anybody realistically talking about this idea of selling off gold?

IRWINNobody at the -- nobody in the Obama administration, nobody in the Treasury Department, and it's not even really something that comes up on Capitol Hill, though it's been tossed around a little bit. It's not in the range of what you would call kind of serious viable proposals, but it is being talked about by some analysts and economists.

REHMBut, Ted Truman, you wrote an op-ed for the Financial Times titled "America Should Open Its Vaults and Sell Gold." Was tongue in cheek when you wrote that? What was behind your thinking?

TRUMANWell, it was certainly a bit of tongue-in-cheek. And now, I realize I'm not a serious analyst.

TRUMANBut it was more -- and it was not designed to say this is the way we're going to solve our debt problem, though it may make some modest contributions to that direction. It was saying, you know, we're sitting in on all this gold, and is it good for us to keep it there -- all there in Fort Knox? Or should we have a better financial strategy for what we do with it? We could use it to pay down debt. We could use it to convert it into foreign exchange. We could do, at least, a lot of other things to do it. But what -- the question is what good is it doing as a public policy question, a public policy issue sitting there in Fort Knox and waiting for whatever? And that was the question I was raising.

REHMWell, what about Neil Irwin's point, that if you began selling it, the price would go down. It would be a short-term fix. It would affect global markets. What about that?

TRUMANWell, it depends on how you do it. The central bank has sold quite a lot of gold over the last decade. And IMF sold 400 billion ounces, if I remember correctly, over the last three or four years. And the price of gold has gone up. So you could sell quite a lot of gold slowly over time and probably without any significant impact on the gold price if you side everything else being equal, which may not be going on. But obviously, if you said we're going to sell all the gold on August 1, right, in order to deal with the debt problem, that -- and we're going to try to sell all 261.5 million troy ounces at one day, it would have an impact.

REHMDavid Smith -- Smick, you called the idea of selling gold a sideshow.

SMICKIt really is a sideshow. I kind of feel like Washington is in the midst -- particularly, Capitol Hill is in the midst of what I call a Tel Aviv effect. You know, in Tel Aviv, you can be -- you can sit with someone in a café and he tells you, yeah, this morning, across the street, 12 people were killed, blown up. And yet the guy's sitting there calmly -- whatever. I mean, we have a phenomenal debt problem. And the -- I mean, we have $14 billion or trillion of debt. But the unfunded entitlement liabilities are nine times that. So we're talking, you know, a massive debt problem overhanging this -- future of our country -- plaguing the future of country.

SMICKAnd, you know, and the idea of selling gold for a couple hundred billion dollars is -- really is a sideshow. And it's a diversion. It's kind of what you talked about at that cafe in Tel Aviv when you don't want to talk about the horrendous events that are happening at the time.

REHMNeil Irwin, why does the U.S. keep all this gold?

IRWINThere's a kind of historical, traditional rationale for it. You know, we were on the gold standard for a very long time. And that was what was backing our currency. That hasn't been the case since the early 1970s. But, you know, it's kind of a -- it's kind of what we keep in the attic in the same way that people may keep some things around that are valuable, that they don't have much use for.

IRWINI think it's kind of a more historical legacy than something that's an active part. You know, to Ted's point, you -- you know, it really is the question, why do we have this huge asset sitting in vaults, and, you know, what's it actually doing for us? It's not yielding anything. It's not creating any value for American citizens, except in the sense of some kind of stability and symbolism that it conveys.

REHMIs that what it's there for, Ted Truman?

TRUMANWell, I don't really know. That's why I asked the question. I think it is a question that should be addressed. I mean, it's like -- certainly, it's like any other management of your portfolio. It's part of the U.S. portfolio, right, that we have a portfolio -- if you want to think about it in terms of foreign exchange reserves, which is 75 percent gold and 25 percent everything else, foreign currencies. So one thing is, well, maybe what you could do, keep the same amount of foreign exchange reserve than the actual reserves, right, but convert some of the gold into euros and yen and whatever it might be.

TRUMANJust to cite an example of how you might manage your portfolio better. Very few people in the world, though there probably are some, have 75 percent of all their financial assets in gold. And that's sort of one of the issues, as well as whether you want to go on and use the proceeds, the capital gains on the gold. If we bought it $35 an ounce or less, for other things, modest paying down with the debt -- it would actually generate some savings because you convert -- you eliminated the debt. At interest rates, it would save about $17 billion a year in interest costs because the gold itself is not earning us anything.

TRUMANAnd if you used it to replace debt, you would -- anything that we can use -- let me put it that way -- currently use, we used it to replace debt, then you would actually save an interest cost -- a modest amount. But it's nickels and dimes relative to the big problems, but it doesn't mean that nickels and dimes shouldn't be thought of, not as a substitute for thinking about the big issues, but as a (word?).

REHMDavid Smick.

SMICKWell, I think an interesting question here is why the price of gold is $1,500 an ounce. I mean, we -- it's pretty remarkable. I mean, you can ask the same question why is the, you know, the value of the Swiss franc going through the roof? And the reason is it's considered a safe haven because, you know, during financial panics, central banks have to step forward, and they have to do things. They have to -- there's a demand for liquidity, so the central bank just floods the system with liquidity. And those who are critics of that, you know, are never critics during the panic. They're always critics after the fact.

SMICKBut the fact is that's what central banks have to do. But it also -- the fact is that financial panics also threaten central banks' independence. And I think when -- particularly, if you suddenly are buying the bond market and you're suddenly, as the central bank in there buying bonds and you're -- and not to mention the, you know, that you've put yourself in a position with TARP as kind of the savior, you know, how do you then back out of that politically?

SMICKHow does the Fed keep its independence and say, well, actually, we are not -- as one Fed governor wrote recent, we're not the repair shop for everything that goes wrong in the economy. And so I think global investors say, we're not sure if the Fed has jeopardized its independence. We hope not. So they move in to things like gold and the Swiss franc and everything because they -- and that's why the value of those entities has soared.

REHMNeil Irwin, from my own listening to the radio, seems to me an awful lot of people are pushing the sale of gold and, thereby, pushing the price way up.

IRWINYeah, there's a real vein of fear that goes into this rally of the price of gold over the last few years, and it's, you know -- it's driven by some very real things going on. There's a huge -- you know, we have a large national debt. We have a very difficult recession and a prolonged unemployment period. You have the Federal Reserve, as David mentions, you know, pumping money into the economy and firing up the presses and printing a lot of money. And that makes people nervous.

IRWINAnd you have a lot of commentators going back and some of the especially conservative-leaning commentators have really been pushing this idea. You see advertisements during their shows. And so it's kind of seizing on the fear that people have that we might be heading toward high inflation, toward a...

REHMOn the next...

IRWIN...a debt crisis, towards some of the risky things that people worry about. It's viewed as kind of a place to park your money and a protection against those scary things.

REHMA protection against those scary things only in people's minds or in reality?

IRWINWell, it is true that when the world becomes chaotic, gold does tend to rally, so it does tend to be something that preserves value in times of, you know, war or economic chaos. At the same time, I don't think people -- you know, a lot of people who put money in gold don't always understand the risks. And, you know, if you bought gold in the late '70s, early '80s, you lost a lot of money over the ensuing decades.

REHMNeil Irwin, he's economics correspondent for The Washington Post. Short break. I do want to hear your views. Do join us, 800-433-8850.

REHMWelcome back. We are talking about gold, the price of gold, why it's going up, its international, as well as national, importance. Here in the studio, Neil Irwin. He's economics correspondent for The Washington Post. Ted Truman is senior fellow at the Peterson Institute for International Economics. He's worked both for the Treasury Department and the Federal Reserve. David Smick is global macroeconomic advisor, founder and editor of The International Economy Magazine and author of "The World Is Curved: Hidden Dangers to the Global Economy." We'll open the phones very shortly for your thoughts. First, Ted Truman, the international importance of gold in Fort Knox.

TRUMANWell, our gold, collective gold, is about 25 percent of all official holdings, so we don't hold all of it. And the demand for gold on the private market is largely driven by a jewelry demand, personal demand. More than half of it -- at least the numbers that I've seen -- more than half of it comes from jewelry demand. And that demand is -- comes from countries who are getting -- lower incomes are going rapidly. So the emerging market countries -- China, India, traditionally, other emerging market countries are driving the -- just on a supply and demand center, driving the demand for gold, even as they're driving up other commodities.

TRUMANThat doesn't mean that there aren't other issues involved in terms of confidence and currencies and debts and so forth and so on, coming from a sort of pure investment side. But a lot of it, I think, has been coming just from the fact that the demand is expanding more rapidly, and the supply is not shaking that off.

REHMDavid Smick.

SMICKI think that's exactly right, but there's an added element to that. The -- it's the dollar. And to go back to the Fed that's put in this position after a financial panic of doing what they have to do -- but one of the unintended consequences is a weakening of the dollar. When the dollar weakens and global investors, including global central banks, they suddenly look for hard assets. And in -- I mean, if you look at, you know, copper, even in China, it's being used as collateral to make loans.

SMICKIt's become essentially like gold, particularly for the Chinese. If you -- all assets that are hard suddenly become valuable. The problem for gold is it's such a tiny market. So you have this, like, ocean of buyers, you know, pouring into this one market of gold. And I would argue that -- you know, we've had a series of bubbles -- housing bubble, equity bubble. The next bubble may be gold. It may be short-term...

REHMInteresting. Interesting.

SMICK...but it's -- whenever I see commercials on cable TV saying, you can, you know, get rich quick, buy gold, I assume that's the time to short gold.

REHMNow, here's a comment posted online. "Does anyone know just how much gold there is in the world at any one time? And what percentage of the world's gold does the U.S. hold, China, Saudi Arabia?" Can you answer that?

TRUMANWell, I can answer part of it. In official holdings, the United States holds about a quarter of the total official holdings. And the advanced countries -- European countries and like that -- hold most of -- hold about 90 percent of the gold in official holdings in the world. That's partly because the emerging market countries, who now have more in way of total reserves, have only recently come to the party. And, for the moment, though they've been -- David made an important exception. In general, they've been accumulating dollars, though in the last couple of years several of the major central banks in the world have made some purchases of gold.

REHMAll right. So if I had purchased gold three years ago and went to sell it now, I'd make a fairly good profit, wouldn't I, Neil?

IRWINAbsolutely. Price is up quite a lot. You know, the thing about any kind of commodity -- and it's certainly true of gold -- it doesn't create a yield. It's not like where you buy a bond and you get a payment every -- you know, every quarter as a payment or a stock where you get a dividend payment. In fact, it costs you money because you have to store it and you have to pay for wherever you store it. So, you know, you're purely betting on what the price is going to be down the road.

IRWINAnd if the price continues to rise for these forces that we've been talking about, then people who own it are in good shape. But if those forces aren't lined in some way, then the price could decline just as quickly as it's risen.

REHMTed Turner, what do you think about David Smick's idea that what's being created is something of a gold bubble?

TRUMANWell, I think there is some considerable truth to that. I mean, I would say that I agree with him, that if you see a lot of advertising in this area, and you -- and, indeed, if you see anything that rises in price 15 to 20 percent a year, right, that is a sign that there may well be a bubble going on. And it's associated, again, in part because the market is so small. So it is a -- it may be a bubble that is more like a champagne bubble than a housing bubble, but it may be a bubble.

REHMNeil Irwin, you mentioned earlier that the U.S. had gone off the gold standard when President Nixon was in office. Why was that decision made?

IRWINWell, it's -- essentially, the system was breaking down. And, you know, when you're on the gold standard, you're pegging your currency to the price of a metal. And it depends on -- you know, the price of that metal, the value of that metal depends on a whole lot of forces that are beyond your control -- you know, how much is mined, how much demand there is for jewelry, things like that. And so you lose a lot of flexibility that you, you know, gain when the independent central bank can kind of turn the dials of the money supplied based on other factors and not based on what the price of gold is on the international market. And so that system was just breaking down. And the truth is they didn't have a whole lot of choice by the early '70s.

REHMIs gold still being mined in this country?

IRWINYes.

REHMIt is?

TRUMANQuite extensively, and that's one of the reasons why there is -- in my view, there is resistance to selling gold because, to the extent that you sold it and pressed the price, I think something like two-thirds of the states in the union have gold mines in them, often small mining operations, right. But they're all scattered widely through the states. And like any other commodity, they're -- they want to restrict the supply.

REHMAnd joining us now is Lewis Lehrman. He's chairman of the Lehrman Institute, and he runs the Internet project TheGoldStandardNow.org. Good morning to you, sir.

MR. LEWIS LEHRMANGood morning, Diane. Nice to be on with you.

REHMThank you. Tell me why you believe the U.S. ought to return to the gold standard.

LEHRMANWell, I would prefer to say the U.S. should go forward to a modernized gold standard. The essential reasons are twofold. On the one hand, the Federal Reserve managed a credit and paper money system, had given rise to catastrophic booms and panics and busts with all of the talent of 10,000 PhDs organized to help whoever happened to be the chairman at the time, whether it be Greenspan or Bernanke.

LEHRMANSo, on the whole, the paper money standard, which has been in existence, as your -- as one of your guests mentioned, since 1971 when Richard Nixon suspended convertibility, has been, on the whole, a failure. So we look at the history and when we do monetary history carefully, we discover that, under the classical gold standard in the United States, America rose to be the largest economy in the world.

LEHRMANThe gyroscope of that very rapid economic growth was, in fact, a stable dollar. The purpose of a gold standard is, essentially, to make for a stable dollar. To do so now would tend to stabilize the dollar, which has lost approximately 80 percent of its purchasing power since 1971 when Nixon suspended the convertibility of the dollar to gold. There are many arguments, and some of your guests have implied and made explicit other ones. But that's the essential argument.

REHMAnd, I gather that, in the early '80s, you authored a book with Rand Paul, advocating for the gold standard. You served on President Reagan's Gold Commission. All these years later, why are you still championing this position?

LEHRMANThe position that advocates convertibility of the dollar to gold at a fixed price or -- even better said, the definition of the value of the dollar as a specified weight unit of gold is -- first, it's the historic monetary standard of American monetary history and navigated the U.S. economy from 13 impoverished colonies by the sea to the largest economy in world history and largest economy at the period of the class of gold standard.

LEHRMANToday, we have lived through booms, panics and busts since 1971, always hoping -- and I did myself -- that the Federal Reserve System and a monetary system without anchor, without any grounding in the historic American monetary standard, could be managed as effectively. That is to say, human intellect, the pride of human intelligence, being substituted for a standard measurement by which the dollar should be defined.

LEHRMANIt would be similar, for example, to a situation where for 1,000 years you have the yardstick defined as 36 inches, and then, suddenly in 1971, a proud group of men would decide that they could manage the length of the yardstick more effectively than anybody else, and they had the authority to change this great measuring rod of value to 29 inches next year and 49 inches the next year. And the dollar is a standard measure of value. And while it cannot be completely unvarying, it must be stable.

LEHRMANAnd when the standard of measurement of the entire economy of the world, namely the dollar, loses 80 percent -- quite literally, 80 percent of its value since 1971, when the gold value of the dollar was eliminated, you have, I think, an implicit argument that restoration of the gold standard is the least imperfect. It's not perfect. It's the least imperfect of the available monetary institutions America has utilized.

REHMSo, from your point of view, you believe that the U.S. ought to lead the way and that every country in the world ought to put gold as its standard?

LEHRMANPrecisely. What we need in the United States is the competence in recognizing our past history of economic growth under the gold standard and the failure of the paper credit money system, which has been under way for the last generation, to realize that the world needs a leader. The world needs an equilibrium leader. And the dollar is the world standard now. Almost the substratum of all banking systems throughout the world is essentially based in the dollar, monetized by central banks all over the world, the euro being really only an incidental characteristic of the world monetary systems.

LEHRMANSo we have all the grounding and the basis for the United States taking lead in establishing convertibility of the dollar today. Now, you'd have to do it the way resumptions have been done in the past, and we would want to do it better than some. That is to say, it would be done gradually over a period perhaps of three years, where the United States would announce that within a three- to a four-year period, resumption of convertibility of the dollar could go for the purpose of restoring a stable value of the dollar...

REHMAll right.

LEHRMAN...would be completed by statute, sent to the Congress and signed by the president. That's the way every resumption in history has been done, after the Napoleonic Wars, after the Civil War -- I might add, unsuccessfully, in Britain after the First World War.

REHMAll right. Lewis Lehrman, he is chairman of the Lehrman Institute. He runs the Internet project, thegoldstandardnow.org. And you're listening to "The Diane Rehm Show." Ted Truman, how do you react to what you've just heard.

TRUMANWell, I'm somewhat more skeptical, if I may put it that way. I think it's important to make two points. One is a historical point in that there was not a great deal of stability in terms of prices during the gold standard period of the late -- which existed, really, only from in the late -- latter half of the 19th century and the first decade of the 20th century. Prices fluctuated quite widely during that period, and that was -- that's one definition of instability, even if on average they didn't move that much.

TRUMANThe second is that when we're talking about what happened in 1971, that was just the last chapter of the gold story -- or the latest chapter because we convert -- we stopped converting gold with foreign holders of dollars. We had long since stopped supporting the gold price or we had stopped doing that in 1968. So we were not on a gold standard in a normal sense of that word in the sense that you were controlling the money supplies by the inflow and outflow of gold. And, in addition, during the gold standard, most countries cheated.

TRUMANThey didn't say I get an ounce of gold in. I create a certain amount of money. I lose an ounce of gold. I stop creating money on the (unintelligible) of the central bank. They were running a discretionary monetary standard throughout the period. That's one of the reasons why the wheels would come off the standard periodically.

REHMAll right. I want to ask Lewis Lehrman about your point that most countries cheated. Therefore, in part, for other reasons as well, it's not a good idea.

LEHRMANWell, Ted makes several points, which are made by other opponents of the effectiveness of the gold standard, cheating only being, I think, one of the four which Ted just mentioned.

REHMSure.

LEHRMANLet's just take the -- just take price stability. Under the gold standard, the variation and the price level -- the general price level in the United States generally average -- in the period to which Ted was referring, approximately 1880 to 1913, the average variation in the price or the average change in price level was about 1.5 to 2 percent. That is a very, very modest change. The price level -- that is to say, the value of the dollar in 1913 by the very same statistics that is measured in -- let's say, in 1879, 1880, was -- the general price level was almost exactly the same.

LEHRMANIn other words, over an entire 35-year period, the value of the dollar had remained stable. Now, if we think about the dollar as a standard of measure of all other goods and services, and we recognize the world is an imperfect place, my point to Ted would be not to argue -- and no one should argue that there is any kind of perfect institution in human affairs. It's just that it's the least imperfect. And the rate of inflation or the rate of deflation under the gold standard was so modest and so gentle, that all the businessmen, which is my trade, were able easily to adjust to it, unlike the characteristics of the panic-born paper and credit (unintelligible).

REHMAll right. I'm afraid we're out of time. Thank you so much for joining us. Lewis Lehrman, he is chairman of thegoldstandardnow.org.

REHMAnd here is our first email, which begins in bold caps, "BAD IDEA NUMBER TWO," says Bob. "Many think the gold price will double from current levels, especially in this unsettled time with huge unknowns about the debt limit, budget cuts, EU finances, inflation, et cetera. Then, number two," says Bob, "there exists an urban legend that the gold reserve at Fort Knox may have already been sold. Now would be a good time to let some independent, credible experts actually view the actual gold and confirm it's real and really all there." Ted, you say you have heard this urban legend.

TRUMANOh, yes. I actually signed a lot of letters when I was at the Federal Reserve in the Treasury Department on that urban legend. I think that was many years ago, so more than a decade ago. There is...

REHMSo it's been around for a long time.

TRUMANWell, it's a problem that's -- it's -- and it's...

REHMOf trust.

TRUMANAnd it's a problem of trust and, I think, it actually -- in fairness, it is the current circumstances where trust, in general, in individuals and entities, corporations and business banks and government is on decline. There is less trust than there was before. There is a technical point to be made here, however. A, it's not cheap to run 100 percent audit. And, B, you would actually use up a lot of gold.

TRUMANI mean, you have to pay someone to do -- audit this thing, right? You don't -- they don't do it for nothing. All right? And if you -- every time you handle a gold bar, you actually lose some gold. I am told you could actually -- could examine it for its finest electronically, but you have to move that bar to somewhere else...

REHMAnd if...

TRUMANAnd some of the gold wears off, just as my wedding ring after 46 years is thinner than it was 46 years ago. I've worn off some of the gold, and it's been scattered around Washington, D.C.

REHMGee, I've had mine for 52. It's still pretty much intact.

TRUMANLess gold than there was 52 years ago.

REHMAll right. I'm going to open the phones here. To Peter in McKinney, Texas. Good morning.

PETERGood morning, Diane, and good morning to your guests. I'd like to say that the gold price is a function of our debt. And as our debt rises, so does the price of gold. The government can print all the money it wants, but it can't print gold, it can't print silver, corn, wheat, soy beans. The reason why these commodities are rising is because we have too much debt. And as for people saying that we are in a bubble, we are nowhere near previous levels.

PETERGosh, in 1921, 1932, 1948, 1981, gold and gold-related assets reached between 25 and 30 percent of total world assets. Right now, we're less than 2 percent, so gold would have to rise tenfold from today's prices to reach the bubble levels that some people say that we're at right now. In summary, I'd like to point out that we will keep printing money in this country until we cannot. And we will not voluntarily stop printing money. The markets will force our hand.

PETERAnd when that occurs, when our trading partners no longer accept our dollar because we've depreciated it so much, when we can't buy oil, for example, with our dollars, and we have -- are forced to pay in gold, we will then create a new dollar, like your previous guest suggested, that will be backed by gold. I don't think we will ever have a gold standard. That's not practical, but we'll have some sort of ratio...

REHMHmm.

PETER...of gold to our dollar monetary base. And then that might help make people understand why holding our gold is so important. China only has 1,000 tons of gold. We have 8,000 tons of gold, and we are currently babysitting over 7,000 tons of gold for some of our friends and allies...

REHMHmm.

PETER...up in New York, Federal Reserve Bank.

REHMDavid Smick, do you want to comment?

SMICKWell, I think the point to look at here is the global nature of the debt. I mean, if you total up all public and private debt, we're talking about debt 300 percent of global GDP. I mean, it's an enormous amount of that and a less than -- part of that is public debt, less than 100 percent. But, nevertheless, it's a huge amount. Now, we're not talking about U.S. investors. We're talking about global investors. We have a global system.

SMICKAnd you -- if you're looking at a system with debt gone wild and you'll look at the central banks of Europe and or the European Central Bank and you'll look at the Fed, and you have to ask yourself, how are we going to come to terms with this debt, and are the central banks going to be, you know, the backstop for this global debt situation? And I think you could probably make a case, yes. You can see it in Europe. The German public is already saying no more bailouts. So you got to scratch your head and say, okay, there is a debt element here that's kind of overriding.

REHMBut is that debt element directly connected to the question regarding gold, Ted Truman?

TRUMANWell, directly, probably not. And I think actually the comment about the rise of debt and the price of gold, I think, that would probably not fit. That equation would not fit. But I agree with the point there, the uncertainty that has been created in particular by the recent crisis and how it will all shake out is certainly driving some people to think that we need to have a new system on the one hand or substantial modification to the system on the other hand. Or, on the other hand, to sort of say where I can I go for a safe asset.

TRUMANI mean, I wouldn't deny that is an element in this process. And the central banks have a challenge. I -- as former central banker, I'm more -- I'm personally more confident in the central banks, but the fact that a bunch of people around the world, as well as in our country, have doubts is reality that the central banks can't deny.

SMICKWell, the central -- you know, the central banks are in a horrible position because, you know, they have these huge expectations that -- they have the power. There -- they have the magic wand that they can solve these problems. But I looked at the way, you know -- the way, you know, Ben Bernanke has tried to guide the Fed. It's been very difficult. The Fed has a dual mandate, employment and inflation. And, you know, they've been running a very, very excessive monetary policy.

SMICKIt hasn't had the kind of effect on inflation that you would think. You think, at the end of the day, the Fed is probably going to have to decide, does it target real variables like unemployment and GDP growth, or does it just concentrate on price stability, including inflation and deflation?

REHMAll right. Here is an email from Kenneth in Sarasota who says, "In 1960, one could buy a really nice house for $20,000 or 400 ounces of gold. Now, one can still buy a really nice house for 400 ounces of gold, but $20,000 won't even pay for a new roof. Gold has not gotten more valuable. Rather, the dollar has become virtually worthless." Neil Irwin.

IRWINThat's true. A lot of that's because of the high inflation of the '70s and the early 1980s. But, you know, the point is valid. You know, we do have a system where prices rise over time, where there's a, you know -- even the Fed aims for a little bit of inflation. They aim for about 2 percent inflation over time each year. And so if you do the math over time, that will mean a less valuable dollar. That said, I'm not sure if that's something to worry about too much.

IRWINI mean, the fact that, you know, we do have a world where, you know, in any reasonable time horizon, inflation is pretty well-contained and you kind of know, yeah, in 10 years, the dollar will be less valuable than it is now, but not by a tremendous amount and in a fairly predictable amount as long as Ben Bernanke and the Federal Reserve do their job right, seems to work out pretty well.

REHMAll right. To North Richland Hills, Texas, good morning, Susan.

SUSANGood morning. In my readings, what I have come to understand is that -- I think it was after World War I -- we were -- the European countries were demanding payment in gold, and we were depleting our supplies. So that was one of the reasons for going off the gold standard. And, you know, these conspiracy theorists and all that that, you know, want to be stuck -- I don't know what year they want to be stuck in. But, you know, the country has moved on. I mean, where does this silliness end?

REHMSilliness, Ted Truman?

TRUMANWell, I -- enough about -- I don't want to call anybody silly, if I put it that way. I think I agree with this caller, that if you look at history, there are more tragedies associated with gold. Lewis Lehrman himself referred to the tragedy in Britain when they tried to go back to the gold standard at a wrong par value. But there have been more tragedies associated with gold than otherwise.

TRUMANAnd, moreover, the problem, I think, in thinking about the gold standard itself is that when push came to shove, people went off -- like we did it in the 1930s, changed the ground rules. So it even has an anchor. It is an anchor that doesn't always work very effectively. And given the option, people -- you know, they cut the anchor cord, I guess, is the right image. And, now, that may be what Mr. Lehrman meant when he said the least bad, but the truth of the matter is it was pretty bad.

REHMHere is an email from Neil in Lowell, Mass., who says, "Isn't this talk of selling gold an attempt to drive down the price? The same thing happened in the late '90s when gold was rising. The central banks would announce gold sales but would never sell it to private parties, only to other central banks." Neil Irwin?

IRWINI don't know about that. I think some of this talk is coming about because we have a large debt, and people are look at -- you know, trying to think creatively about ways to deal with it.

REHMYeah. Yeah.

IRWINBut I'm not sure there's a deliberate effort by the U.S. government to manipulate the price.

REHMTed Truman.

TRUMANThe irony -- I think that the irony, in terms of the premise, is that most of the gold sales were after the trough of the gold price, about -- which was about $250 an ounce in the late '90s. And so there was this financial amount of gold sold in a controlled manner over that period (word?). So in some sense, they weren't selling it fast enough if their objective was to keep the price down.

REHMAll right. So, from everybody's perspective, the price of gold is going up as it is because of the insecurity, because of insecurity about the dollar, because of insecurity about the debt, because of insecurity about world markets and what that's going to mean to the U.S. Does that mean that the price of gold, as long as we are in this fix, is going to keep rising?

SMICKI don't think it'll go in a straight line, but I do think -- 'cause you're going to have these kind of these many bubbles. And if we...

REHMYeah.

SMICKBut I would say if it corrects 20 percent, unless there's some dramatic turnaround in the world economy with regard to debt and everything else, it's probably a buying opportunity for a lot of people. But -- 'cause the world doesn't look like it's going to get sacked together very soon.

REHMWhat do you think, Neil?

IRWINYou never know. These are volatile -- these are really volatile markets, and we've seen that the last few years. And I think to -- you know, to put your nest egg -- to think of gold as a absolutely safe asset that you can rely on, I think that's a very risky decision.

REHMNeil Irwin, he's economics correspondent from The Washington Post. You're listening to "The Diane Rehm Show." Ted Truman, what do you think? Is it going to continue to climb?

TRUMANI don't make these forecasts either. I agree that there may be -- we may well be in the bubble. If I had to bet, since I'm more of an optimist in terms of getting our act together, my guess is the real price of gold 10 years from now might be lower than it is today.

REHMLower. So if people...

TRUMANThe price of gold will go up less than the rate of inflation over the next 10 years.

REHMAll right. Let's go to Bowling Green, Ohio. Good morning, Bob.

BOBYes. I'd like to make two quick comments, one going back to the very beginning of the show, when the question was asked, since we can't live with -- or, since we aren't living within our means, we sell the gold. And I would like to posit a meta-question. Are we really not living within our means or we just decided we're going to forego revenue and transfer a lot of wealth to the richest? So it's a meta-question that I think people should consider. Also, just from factual history, the gold standard guy kept talking about economic instability.

BOBUp until the 1930s, our economy had -- roughly, every 15 to 20 years had a recession and had bank runs. There's nothing about gold standard that means our economy will be stable. It was the advent of regulations that gave us stability in our system.

REHMAll right.

BOBAnd thank you.

REHMOkay.

LEHRMANWell, I would say the Congressional Budget Office argues that if you tax the wealthy at 100 percent, you're still going to have a horrendous entitlement problem. So then the question is, will President Obama go back on his pledge not to tax the middle class? I doubt it, and because he would be jeopardizing his political future. So it is a debt problem. It's probably not going to be solved by -- alone by the fiscal side. And so, you know, does anyone believe this thing is going to solve itself anytime soon? It doesn't seem like it.

REHMBut it's interesting that you've got some states individually, like South Carolina, becoming the newest state to propose a bill to make gold and silver coins a form of legal tender in those states. What about that, Neil?

IRWINYou know, we have a national currency for a reason, which is that it really simplifies transactions, and it's a lot easier to do business if you can have the same dollar that you use in North Carolina as the one that you use in South Carolina, you know.

REHMBut here you've got Utah, which became the first state on May 9 to recognize gold and silver coins minted in the U.S.

TRUMANWell, there are legal issues here, as Neil was pointing to us, about whether it can be declared -- states can declare legal tender. My understanding of the Constitution is they can't. But I think what you're seeing, in part, is a reflection of this sort of uncertainty and a lot of the back and forth of U.S. politics and their perception in some parts of the country, which is more dominant in some parts of the country and others 'cause I'm thinking the elements in every part of the country, of doubts about whether we can get our act together -- no matter how you frame that question about getting your act together, there's doubts.

SMICKYou know, Diane, there's an -- the average person sitting back home, they're incredibly confused.

REHMOf course.

SMICKOne, they're hearing, on the one hand, core inflation is low, but then they say, but the price of commodities is high. There's a Fed official was recently giving a speech, and he's talking about the price of an iPad had come down. And someone in the audience said, well, sir, you can't eat iPads.

REHMDavid Smick, he's author of "The World is Curved," Neil Erwin of the Washington Post, Ted Truman of the Peterson Institute for International Economics, everybody talking about gold. Thank you all so much. Thanks for listening. I'm Diane Rehm.