People simply couldnt come into force knocks metaphorically and say heres a hundred dollars i want to get the gold value and that was as a consequence of the big bad problems the american federal government got into with its debt in the vietnam war and also pay for the Great Society and it just didnt work out. There was a deficit from a trade deficit and people were coming to change the dollars into gold associate decided to stop that is interesting enough, the training and the Federal Reserve was very skeptical about that and was an oldschool balancedbudget kind of guy stopping the decoupling in that way. Host another moment later george in the house of commons. Guest the great thing about the British Public finance for the hundred years before the First World War essentially they ran a balancedbudget. Its difficult to imagine that amount but the whole of the Victorian Era host stable Interest Rates. Guest stable Interest Rates and fiscal policy and what happened in the First World War all of that went to pieces. To defeat germany the parliament had to go through massive spending and he stands up and says this is an extraordinary thing weve done. Weve given up billions where it had been hundreds of millions in the budget up to that point but so they borrowed huge amounts and the debt went up ten times if you can imagine more than ten times so 700 million to over 11 billion the house of commons went through because they would do whatever it took to defeat germany. Host and the title is the sort of push and pull a fact and yukon template order and chaos. Guest order i think is represented by the Gold Standard or the commodity standard where you can see this is how much my dollar or pound is worth and it is linked to an external value. Chaos and one of the arguments i put forward is when you dont have anything for the commodities or paper money and essentially you are at the mercy of the press to keep printing money and those are the opinions in the country more than any other that says that was a mistake we should get back to the Gold Standard and its associated with people like ron paul but this is a problematic. Im not trying to write a good narrative to explain how we got to where we are but there is a force in the argument that we need something more structured than just the ability of the government to print money. Host from one pole and 81 the experiment that is an argument that is very resonant here in 2008 and 2012 and his son is probably going to run in 2016. Do you think we should return guest its different in terms of how we can talk about that initially. The only way we can get back and i mention in the book is for the chinese essentially to decide how badly. They could institute the Gold Standard tomorrow and say it is going to equal x. Amount of gold and they have enough reserves to back that. The only problem for them is they run the export model. It would become a strong currency which would be the reverse of the export and the policy where they want to keep the value low said the exports are cheap and when we come by and essentially. That would be a complete reversal but in terms of introducing the Gold Standard they can do it because they have the reserves and one of the points i make about the Gold Standard is if you look at britain they largely guaranteed it and britain was running great exports and was the manufacturer of the world in the British Goods were flooding is enjoy the Global Markets in america and the reserves that britain acquired meant that they could keep the Gold Standard. The british themselves never had that much gold but everyone sort of relied on the stability and the strength and for much of the 20th century the United States ran surpluses. Its unbelievable to think that that until 1970 the u. S. Was exporting more than it was importing. It was building up reserves and gold and other reserves and they guarantee that the Gold Standard after the war and the whole settlement was based on this value of the dollar. And that lasted from 44 to 1971 as we were talking about earlier. Host so you dont anticipate the chinese doing this because it wouldnt be in their interest. Guest given where theyve come from the last 25 years they deliberately forced the currency to be lower and if you look at the 1980 i think that it was one and a half to the dollar and ten over 20 years it went down as well as eight and a half and now it is six and a half but they had little value currency so they could drive exports so you are right to suggest that would be a complete reversal of how theyve been building their economy through this export. Host so the return would be impractical. Guest i think its impractical but what im saying is the Current System is very vulnerable and explains what happened in 2008 and i talked about that. I mention the fact that many economists predicted this would happen when you have a system where you just have the currency backed essentially just pushing enter and renting money you will get a vulnerable system and thats something we have to consider. Host what about an 2008 because years earlier your argument is that it wasnt just about 9 11 and more spending. Guest it wasnt that complicated that i was on the Trading Floor in 2001 jpmorgan. I was a banker and the first thing that happened was the index was down 10 and dow jones the same amount. The response was to lower Interest Rates. If they had been coming down all that year. They went down to 1 and this is really cheap money. My argument was that if you followed what happened as a consequence to such a low degree but happened is that people wanted t the search for a yield. You are getting the treasury had 2 and a banker in the midwest you are thinking i need to get more than 2 . Guest that is absolutely right. It pushes 2 . Ive got to get some Interest Rates. Thats the phrase that was used commonly at the time and that drove a lot of the subprime lending to poor credit decisions in terms of expanding credit and giving people loans they could never afford to pay and that was what caused this instead of the and thats where the view is interesting because i found at the same thinthesame thing happd in the 1820s. There was south american so what happened is after the napoleonic wars 1815 and the defeat after that he went bac we went d and as a consequence of that Government Spending down what it was a lowInterest Rate environment and then again there was this search for the yield if we buy the uk Government Debt we are only going to get small Interest Rate so lets look for something that is going to give us more Interest Rates there was a search for the yield which ended up buying the government bonds paying 10 speculative stocks, all that kind of thing. Host how do we stabilize it and stop another . Guest the main thing that is missing from this and this is what people in the markets feel and generally feel there should be more leadership and international coordination. If you look at printing modes that lasted for three weeks. There was preparation before that but essentially you have delegates from about 50 countries that came as a result in New Hampshire and they decided wha with the internatiol architecture would be and that was a very responsible and effective that lasted from 44 to 71. In the Current Crisis we have sent enabled to reach that level of International Cooperation that has been a lack of leadership or hacks. People are feeling less confident and there is less of an idea of what can be done and i think that that has come about in the last four or five years and one of the things about that is in a way that crisis can at the time Global Leadership in the u. S. The u. S. Itself is running huge deficits which we can talk about later and the u. S. Has been burned by the overextension of the affairs for commitments. So the capacity of the u. S. To provide that kind of Global Leadership is much lower now than in the past case in 44 in the postwar. Guest im always a robust defender of the system. If you look at my hometown of london it was the center of International Finance for 300 years arguably today. Its still in terms of the International Banks and the time zone and the idea that the british politicians should bankers and close down the city of london. Thats been a great strength of the british economy and thats what i would argue and i think it is borne out by the historical record. Host in terms of the debt you have a fascinating chapter understanding the trail that what went after the window as the balanced budgets and it became almost maybe a fetish and in and of themselves and the getting to a lesser extent they talk up the talk of the fiscal responsibility but in the end of guest he was a great figure. He had unparalleled communication so they could boil things down very simply so people could relate to them and of course his idea, he was very much a great metaphor about the Government Spending was that he related it to alcoholism and his father had been an alcoholic. If you look at the speech he keeps talking about how we have been on this massive binge and we have a terrible hangover me to sort ourselves out was the metaphor that he used. When you look at the record throughout the 80s then yes, you are right because of the defense spending in the cold war there was this deficit and that was the time that people on the conservative side of the argument it here in america and focus on the tax cuts regardless of expenditure and my argument is that right through to the 60s the u. S. Conservatives were balancedbudget people so what they did if you look at the korean war they were not reluctant to raise expenditure to cover or raise taxes to cover expenditure. So i think in the korean war the president went to congress and they paid for that because they wanted to balance the budget. And that was very much the oldschool conservative approach in both eisenhower and truman stuck with that and it was only in the 60s he started getting those deficits and in a way my argument is that the conservative movement in america wanted endless tax cuts because they would increase revenue but they didnt really focus on the expeditious side and i think if youre going to reduce taxes you have to try to reduce expenditures. Its a good reducing taxes hoping you get more money from that while keeping the expenditure rising. And this argument, this sort of supplyside argument and people like jack kemp in the late 70s and obviously very famously they focused on tax cuts. But in order to balance the budget coming you have to address the expenditure. You cant just balance the budget on the tax cuts alone. And even though im in an ideal world i would reduce the taxes and expenditure, the two have got to get together. Host george w. Bush you describe him guest he was present in a way because he was attacked from the left and the right because of his fiscal. If you look at the period from 2001 the u. S. Started running deficits quite aggressively. And those deficits were compounded by the Foreign AffairsCommittee Bush government went into and i think people on the left and the right, certainly on the right were saying what happened to this. You know, we are supposed to be the balanced budget and on the Public Expenditure. We want to reduce the federal government and its impact in the spending. But the spending is out of control. And it wasnt me. It was a lot of those from the think tanks, the Heritage Foundation and that sort of thing. They were criticizing bush for spending too much money. Host and that is one of the things that led to the tea party movement. Guest it was a legitimate process in the cycle of the deficit expenditure and federal debt was going through the roof. The deficit was going through the roof. And you forget people forget in america the budget was balanced. Certainly in my country the budget was balanced in the late 1990s. I remember when i started work in the late 19 90s they were saying that it would be abolished because the government wasnt affirming any more money. So in 50 years weve gone through the complete reversal of the position. And i think in my book i argue that the Bush Administration had a part to play in that. Host during the clinton era guest 2016. Who knows about that. But if you just look at the numbers if you just look at where the budget was was quite a responsible time in the sense that Public Expenditure rose a little bit but not as fast as it would subsequently because of the booming economy were increasing and the budget was largely balanced. A lot of the opponents would say that a lot of the problems with deep seeded in terms of entitlement and Social Security and that sort of thing. But the budget was balanced, and when he came to congress in 2001 if you read what he was saying it was extraordinary. We are going to abolish the national debt. But that was the environment in 2001. It growing at three to 4 of the Public Expenditure. Host that was based on estimates that were not shared guest they were not shared by everyone at the time but they speak as you mentioned of the glide path to busy road in 2001 as extraordinary given where we are now it is extraordinary that 15 years ago people actually thought that they would have abolished the natural and national and federal debt by 2016. Host what is your view of Alan Greenspan . Guest i look at what people do in their possibiliti possibilities. And one of the interesting things is they would suggest he took this approach managing the economy. It was a very improvised, and i quote the people that worked with him. He responded very quickly to what the markets were doing. And the most important thing in the career very early on as the chairman of th the federal resee is essentially in his own mind saved the western world because of the crash of 87, the wall street crash guest thats right. That was tricky at the time. Very cheap money. Lower Interest Rates and huge amounts of the quiddity into the system and he diverted the 29th style disaster. So once you do that early on in your career, if you are successful doing one policy very early on, the temptation is to keep repeating it is essentially what he did and now i would argue by 2002 and 2003 and is stored in the problems as we talked about in the low Interest Rates and the search for the yield and the people sort of investing in the very high risk products to give ideals. And that is what created the instability. Host he comes across as a successive interventionist. Guest i think that he set up in 1987 and one thing you have to remember and the one lesson they learned from 1929 is an 29 the Federal Reserve of the authorities if you would like to didnt do enough and they contracted the money supply and all the rest of it. So within this liquidity, pumping liquidity into the system is very much that responds from what they learned. Host was at the right response . Guest i think to do it as well enough he as they did was perhaps slightly risky. I think that they perhaps what some of the lessons in 29 made it worse by shrinking the money supply. They didnt need it to do that. And also in middle america. That is what people reall reallt cost about and we are still seeing the ramifications of th that. Its kind of covert perhaps in the balanced budget, but now we have this sort of system where you have the currency of the approach managing it and these huge as you say you have to google to begin to comprehend. And i guess the average american. Guest . The argument is in doubt whether we balanced the budget but how quickly we get to balance. Theres more of a consensus about that than people might realize. How you balance the budget and over what time frame these are political discussions all of that is very important, but i think that certainly if we are going to get back to stability over ten or 20 years i think a balanced budget approach is something that people are beginning to focus on even though the rhetoric might suggest otherwise which i follow in the budget and the rest of it. I dont think anyone is suggesting that. Can you just imagine the book by paul ryan or anybody its going to bring back this idea of the balanced budget straight into the political mainstream. And im trying to show the balanced budget an and what made britain and america a very powerful country over the time of which they held the power in Global Affairs so i think it is very timely and important i tend attempt to be more hawkish on the public spending then perhaps some of my other colleagues but this is something that is definitely being talked about. Host and so broadly speaking in terms of simplistic terms of the public debate i mean is that a useful way of looking guest that is a crazy way of looking at it. For the argument about growth which was first a very new argument in the context of the 500 years. And then in the 60s poster saying it was lyndon johnson, jfk towards the end of his brief tragic tenure of the presidency they started saying we shouldnt worry about balancing the budget because if we run the deficit we will get more growth and therefore we will be able to balance the budget. So what do i do, i have a defi