Gold is forcing itself back into our consciousness. Its price passed $250 an ounce the other day, up from only $140 in June 1977. As the price increases, the metal seems to gain in virtue, promoting the idea that the world might be a better place if gold had remained -- as it once was -- the basis for money.
The notion ought to be resisted. You cannot understand what is happening to gold today unless you remember that its chief attraction to speculators -- its scarcity -- also constitutes a crippling liability as a useful tool of economic policy.
The spectacular price increase reflects an inevitable consequence of prolonged and accelerating inflation: a flight from money. When people lose confidence in their money, they either spend it quickly or transform it into something they think has lasting value. Gold is one of those things.
Americans long have seemed immune to this inflationary psychology, in part because inflation has played a small part in our formative national experience. But strong consumer spending -- implying an eagerness to change money into goods -- and a thirst for alternatives to money, including gold, indicate a slow corrosion of old values.
The taste for gold is new because Americans couldn't own it legally from 1934 until 1975 except as jewelry or for legitimate commercial uses. Many investors -- though probably only a small fraction of Americans -- are making up for lost time. In 1978, gold purchased for private investment or speculation doubled from 1977 levels to 9 million ounces, according to one private estimate. At last year's average price, that would have cost about $1.7 billion.
But to equate this private enthusiasm with any useful public purpose is to forget history. A few diehard boosters of the gold standard believe that its restoration would mean a lot less inflation. There's little doubt about that. But this stability would be achieved only at a staggering economic and political cost.
In fact, most of the world lived on the gold standard -- or a modified gold standard -- for much of the 19th and early 20th centuries. That era taught the dangers of tying a nation's money to gold's arbitrary control. In the United States, gold animated nearly 30 years of political warfare, climaxing only in 1896 when the great silver champion, William Jennings Bryan, ran unsuccessfully for president.
Under a strict gold standard, every bit of paper or coin money could be exchanged for a given amount of gold. This is what its advocates adore: It imposes a natural discipline -- restricted by the limited amounts of new gold annually -- on the creation of money. Because inflation is too much money changing too few goods, this would stifle inflation.
But it also might stifle a lot of other things. Money is the grease of a modern economy, and as economic activity increases, more money is needed. Our problem has been that we've been so eager to supply the grease that we've sent the machine into an inflationary spiral.
A gold standard risks the opposite effect: Without enough grease, the machine chokes and jolts. This is what happened in the late 19th Century. World gold supplies increased only slowly, while population and production (from both farms and factories) rose sharply. Friction between rising production and constrained money was inevitable: Either production would drop or prices would need to decline so that a given amount of money could finance rising physical output.
In fact, both happened. Although widespread price declines may seem a good thing now, they aren't necessarily. Like inflation, deflation causes political and economic disruption. The price declines embittered debtors -- particularly farmers -- and fueled demands for additional sources of money: first "greenbacks," then silver.
Their anger was understandable. As popular historian Mark Sullivan put it, "The farmer, when he borrowed the money, had received [the equivalent of] 2,500 bushels of wheat; but when the mortgage came due, he had to pay back 5,000."
Nor was that all. Fear that the United States -- pressured by advocates of free silver -- might abandon the gold standard often prompted foreigners to cash in their dollars for gold and ship the metal home. This aggravated the money squeeze. Bank failures often followed, and businesses that depended on credit withered. The last half of the 19th Century, although generally a period of rapid advancement, experienced frequent "panics" -- today's recessions and depressions.
These hazards have grown with time. Compared with the world's need for new money, annual gold production (about 40 million ounces) is pitifully small. And nearly three-quarters of the supply comes from unstable sources: South Africa (about 20 million ounces) and the Soviet Union (about 10 milion ounces). Moreover, our institutions and psyches are much less adaptable today to failing prices than in the 19th Century. Remember that falling prices also usually mean falling wages.
But if gold's unpredictable supply makes it unsuited as the basis for economic policy, is it not then a good investment? Plenty of people obviously think so. As much as 30 percent of South Africa's annual production is now going for coins, and Americans are buying about half that output. Thomas Wolfe, an economic consultant who formerly headed the Treasury Department's office of gold and silver operations, said some wealthy individuals "simply have their friendly banker buy a bullion bar for them."
No one can say how rewarding such gambles will be. Anyone who bought -- and held -- gold in the last four or five years would have profited handsomely. In 1972, an ounce cost $58. Even huge stockpile sales by the U.S. Treasury and International Monetary Fund, equaling about half of normal world supply, have failed to depress the price. And commercial demand (for electronics, jewelry) may provide a price floor.
But uncertaintities abound. Except for the psychic satisfaction it imparts, gold serves no useful purpose and earns no interest. The higher speculators drive prices, the more they encourage commercial users to find substituties. And the trap of any speculation remains: So long as speculators buy and hold, value remains. But what if they sell? As one specialist asked, "Do they end up staring at each other?"