In a troubled world, it is something of a joke that grown-ups who could be occupied otherwise are seriously discussing going back to a gold standard to regulate the creation and value of money. Perhaps, as economist Herbert Stein has suggested, we should consider going back even further, "to wampum."
The idea is denounced as ridiculous not only by conservatives like Stein, who thinks there are better ways of controlling the money supply, but also by liberals, Keynesians and others who view the gold standard as a straightjacket that has never performed the anti-inflation miracles true believers claim for it.
There isn't a single central bank, including the one in Switzerland, that wants to return to the gold standard (although the banks do want to maintain a role for gold in the international system of reserves).
But gold is getting new and serious attention from a Gold Commission appointed by Congress, which by next spring is to make recommendations "concerning the role of gold in our domestic and international monetary systems."
Although an overwhelming majority of the commission appears to be against a gold standard, the idea is not being brushed aside. For example, Federal Reserve Board Governor Henry Wallich, one of the members opposing a gold standard, warned in a speech in Paris last week against "the simple arrogance of saying that the gold standard is ridiculous and not worth talking about."
Wallich's point is that modern-day methods of regulating the world's monetary affairs, adopted since the gold standard collapsed during the Great Depression, have not proved to be exactly brilliant or successful. A negative view of the gold standard, he holds, "must be based on the assumption that in the future, we can handle our affairs better than we have in the past."
That's fair enough. The gold standard would not be getting the attention it is getting, and there never would have been a Gold Commission, if the world's politicians and finance ministers had not exhibited such a thoroughgoing inability to regulate their countries' monetary or fiscal affairs or to promote economic growth.
In the United States, as David Stockman has certified for us, there is a disenchantment with Reaganomics. What Stockman, Wall Street and a lot of other people envision is not stable prices and full employment but inflation and huge deficits. And though a deficit is acceptable in the coming year to counter recession, it will be bad medicine when the economy may be expected to be humming along a few years down the road.
So along come the gold bugs, who say the only way to keep the value of paper dollars from eroding is to control the supply of money by tying its growth to the growth in the official gold stock. A correct price for gold would be established (itself quite a trick). The United States would then obligate itself to buy and sell gold freely at that official price.
Advocates of this system claim that so long as the gold price is steady, the dollar price of all commodities will remain steady. They claim that for more than 50 years prior to 1933, when Franklin Roosevelt took the nation off the gold standard, prices and exchange rates were steady.
There are lots of holes in this line of argument. As economist and gold expert Edward M. Bernstein points out, there was in fact a great deal of instability during this period, including the Great Depression itself and other financial panics. The "stability" gold bugs cite consists only of the fact that prices at the end of that 50-year stretch were about the same as they were at the beginning, a view which conveniently ignores the radical ups and downs that went on in between.
But suppose, for argument's sake, there had been price stability at a time when there was a gold-backed currency? That doesn't suggest that what may have worked in a horse-and-buggy era, when there was no commitment to full employment or other noble social goals, will work in today's much more complex and sophisticated world.
"In the global enviroment that prevailed for much of the 19th and early 20th centuries," says New York securities analyst James E. Sinclair, "when the causes of world economic and political order were well served by the gold standard and the British Navy, it might work again." He goes on to say that in a world dependent on instant communication, it would be easy to set off a run on the Treasury gold stock.
Imagine, he says, a successful revolution against the ruling House of Saud, or an announcement by either Yassir Arafat of the Palestine Liberation Organizaton or Col. Muammar Qaddafi of Libya that he had acquired nuclear weapons. Or imagine a Russian military incursion into South Africa. "In today's world," Sinclair concludes, "the risk is high that (gold) convertibility would move swiftly to conversion."
Bernstein points out that it wouldn't even take such cosmic developments to deplete the U.S. gold stock. "If members of OPEC could convert their current account surplus into gold at a fixed price, they would probably do so on a large scale," he says.
"Other countries could also decide to diversify their reserves by converting dollars into gold. Finally, private holders of dollars could present enormous amounts for redemption in gold if they thought the price was too low, and private holders of gold could sell enormous amounts to the Treasury for dollars if they thought the price was too high."
Many Americans, and the great majority of economists, Wallich concedes, still subscribe to Keynes' description of gold as "a barbarous relic." It is apparent that if the United States went back to a gold standard, we would be more dependent on the Soviet Union's and South Africa's decisions on how much gold to mine and market than on our own policy judgments and priorities.
Yet, as part of the monetarist revolution of the 1970s, and with the knowledge that President Reagan himself has a pro-gold bias, the danger is that the Gold Commission will be tempted to find a compromise, to throw a bone to the gold bugs, to do something that is not a total rejection.
One such proposal was made to the commission by monetarist Robert E. Weintraub of the Joint Economic Committee of Congress. Weintraub suggested a restoration of the regulation that until 1965 required the Federal Reserve to hold gold certificates--representing gold held in Fort Knox--as reserves against its paper notes and liabilities.
Weintraub argues that going back to the so-called "gold cover" will "put a lid on money growth and thereby stop inflation." He would start with a 9 percent cover, because that is the amount of gold certificates now held by the Federal Reserve, based on the legal value of gold at $42.22 an ounce. Weintraub would rigidly control future money-supply growth by gradually raising the legal value of gold until it exceeded $400 an ounce in 1988.
Weintraub's is a clever compromise: It would introduce a rigid rule into monetary policy, limiting money supply expansion by the annual amount of a pre-determined increase in the value of the "gold cover," thereby eroding the independence of the Federal Reserve. That takes care of what the monetarists want. And the gold bugs would get their foot in the door. Once they do, watch out! That's why the Gold Commission ought to block, firmly if politely, any effort to bring the barbarous relic back into the system.