Capitol Ideas/ A Cross of Gold

...Money can be likened to the railway lines along which the locomotive of the economy runs, and as long as the lines remain parallel and sturdy the locomotive runs smoothly and the lines themselves singularly lack interest as objects of curiosity or study...

...William Rees-Mogg, the former editor of the (London) Times and a monetary expert who likes to buttress his arguments with quotations from Locke, Ricardo, and Jevons, has called paper money "inordinate...

...Jack Kemp of New York, who-spoke from .the ,audience, to point~lt themain defect of monetarism...

...Today the growing monetary disorder merely reflects the more general disorder of Western Tom Bet/sell, The American Specta_9 o~.S FP'ashi~gton correspondent...

...4 THE AMERICAN SPECTATOR MAY 1982 This is another way of saying that we hear too much about money supply and not enough about money demand...

...O.!iga the De Witt Wallace Chair i~ Communications at the Ame~,tcan Euterpriye lnstituie...

...We now have real interest rates (the nominal rate minus inflation) of about ten percent, which he thought might be sufficient to cause the "mushroom of debt to implode...

...and by raising the rates if gold is flowing out...

...It sounds like a nice idea but in practice it may not be workable...

...and paradoxically dwindles away to the vanishing point in societies that no longer officially recognize the exisfence of God...

...In other words, there could be a dramatic deflation triggered by bankruptcy...

...Monetary creation is thus subordinated to the flow of gold...

...In short, we must take into account not j u s t t h e supply of money but the demand for it...

...Rees-Mogg wrote a slim volume on inflation called The Reigning Error (Baxter, 1975), and he came to Washington the other day for a luncheon arranged by Elizabeth Currier, executive vice-president of the Committee for Monetary Research and Education...

...Balance the budget...

...You no !onger treat money as a hot potato, passing it on (by exchanging it for something more comfortable to hold, such as goods) as quickly as you can...

...We are now suffering from economic diseases that our grandparents wer e fr.ee from," he added...

...and when it abandons the discipline of gold, the willingness to hold money, and thus its quantity, must ultimately diminish...

...All was quiet from the senator until he could endure his unnatural s t a t e of quiescence no longer...

...The way to balance the budget is to make prudent cuts into a monster that has fattened by over $500 billion in the decade from fiscal year 1973 to fiscal year 1983...

...Rees-Mogg, who is also the proprietor of an antiquarian book shop in Pall Mall and chairman of the British Arts Council, is one of the few people in the world who both has undeniable "establishment" credentials and favors the return to a gold standard...

...Gentlemen insist that they have cut to the bone, but in fact federal spending as a share of GNP will increase to 23.5 percent this year as opposed to 23 percent last year...

...this subtle and crucial point I shall hope to clarify...

...Even a senator educated at Newsweek would have learned that much...

...Gold's rate of production, over the long haul, is equivalent to the growth rate of mature economies, over the long haul...

...Samuel Johnson when he wrote: "'The reigning error of mankind is that we are not content with the conditions on which the goods of life are granted...

...In the same way, liberty will increase in a Christian order which accepts the discipline of religion...

...There is only one way of bringing supply and demand into balance and that is by price...

...This organization, based in Greenwich, Connecticut, is devoted to " g r e a t e r public understanding of monetary processes...

...Nevertheless, if it tries to clamp down by shrinking member bank reserves (over which it does have a more diI'ect control), then it can introduce a quite unnecessary, and quite dangerous, contraction 'in the nation's monetary aggregate...

...Just because the public is now willing to hold more dollars, it does not necessarily follow that inflation is once again at our throats...

...But the final irony is that ~,hen a nation accepts the discipline of gold, the quantity of money in the economy must increase, because the w!llingness to hold it also rises...

...As Rees-Mogg indirectly pointed out in his speech, it is certainly not working at present...

...now in the midst of reduced economic activity they call for tax i n c r e a s e s . Or consider the Democrats who favor giving the citizen still more federal manna with one hand while they raise his taxes with a n o t h e r . Both groups now bawl that if the federal deficit is not cut interest rates will not come down...

...Before the lunch I had a chance to talk to Rees-Mogg, who was wearing a grey pin-striped suit and occasionally brushed a hank of hair out of his eyes as he spoke...

...When a country is on a gold standard, the Treasury buys and sells a fixed weight of gold for a fixed number of dollars...

...If gold is flowing into the bank, that is a sign that money is too " t i g h t , " and the monetary authorities respond--as they did at the Bank of England when Britain was on the gold s t a n d a r d in the nineteenth century--by lowering the bank r a t e , or, as it would be in the United States today, by lowering the discount rate...

...there is "no shortage of noughts," he has written...

...This means adding up all the money in different categories, M1, M2, M3, monetary base, and so on, and deciding that these aggregates should grow at a slow but steady pace--comparable to the growth of the economy itself...

...Paul Volcker nor Mrs...

...I, for one, find it almost impossible to believe that more than a handful of the solons--and a very small handful at that--know much more about the economy than a college sophomore with an introdudtory economics course behind him and a bartender in front of him...

...In other words, the demand for money goes up when inflation goes down (i.e., the "velocity" of money declines under such circumstances...

...A little light went on in his cranial cavity, and he proudly declared that he too had kept up with the state of economic inquiry...

...Gold's contemporary lack of respectability is itself an extraordinary thing, and no doubt short-lived, given the enduring worldwide enthusiasm for the metal...

...Today's inordinate money:derives from our reluctance to allow that man's genius, his capacity for manipulating mathematical equations and the like, should be subordinated to anything, let alone the "handcuff~ of gold," to use the New York Times's phrase...

...If there were a porkbelly s t a n d a r d , a bacon inflation would soon follow...

...the ~hree billion' ra t:her.than~iihe ~hree, hundred), Kerr~p, a:phys.~d~lor+ made a monetary observation .t~ore ;~I~!sticated than .one la+a+rs ftomSdae mouths ofmonetadsis...

...N0ri~ig .~.~he...

...If so, it fails to recognize (to revert to Jack Kemp's term) that when inflation declines the quality Of money improves, so the demand for it picks up, and so the quantity of it held by the public increases...

...i But it was left to Rep...

...Indeed it may soon become derailed altogether...

...The point is that your decision to let your money linger in a checking account is beyond the control of the Fed, because neither Mr...

...S i n c e gold was delegitimated and officially disconnected from money, there has been an attempt to restore ordinacy to the currency by means of a "quantity rule...

...Then he divulged the details of his lucubrations: He was a reader of Newsweek, and he had once meditated upon an interview with Milton Friedman in Playboy magazine...

...Silence from the hand-shakers of Capitol Hill will be a welcome release...

...The Hon...

...Such is state-ofthe-art Western wisdom...

...In 1971, when the United States finally stopped exchanging gold for dollars, the last connection between the monetary realm and the real economy was broken, and the world has suffered from disordered money ever since...

...The level of economic discourse in Washington has now descended to the level of gibbering...

...As I write, we are in a period of rapidly declining inflation...

...So there is not much it can do...

...outset that he, ,repres.entckl .t~r .pl~s.ed majors of the world~ (i.e...

...Just as man is subordinated to God in a Christian society, so dollars are subordinated to gold in a properly ordered economy...

...Most are not so knowledgeable...

...The monetary authormes should once again observe a price rule, not a quantity rule, in regulating money...

...This is called monetarism...

...Adapted from RET's weekly Washington Post column syndicaied by King Features...

...Nancy Teeters can tell you when to spend your money, or how much of it to spend...

...One can write down $100 or $100 million on the same piece of paper...

...He said t h i s seemed to be a time when governmerits were unable to come up with effective solutions, whatever the problems might be...

...And unlike porkbellies-Milton Friedman's facetious substitute for the yellow metal--gold is not susceptible to economies of scale in production...

...The "money supply" (M1), consisting of currency plus money in checking accounts, is about $450 billion, What happens when inflation goes down...

...True to form, Rees-Mogg then quoted Stanley Jevons, a Victorian economist, who said that the monetary authorities do not really have any way of knowing the quantity of money that a nation needs...

...But about a dozen Years ago the ties that bind the lines were deliberately removed by the United States government (then at a low ebb, plagued by an unpopular foreign war), and since then the economic locomotive has not been running so well along the increasingly rickety track...

...The vice-chairman of the National Bank of Hungary has been quoted as saying that "there are about 300 economists in the world who oppose gold, and about three billion people in the world who believe in gold...

...One looks forward to its f u r t h e r decline...

...Then there is Congressman Henry Reuss (D-Wis...

...And if everyone behaves the same way, then M1 will naturally tend to rise when inflation declines...

...societies, in particular the strong push in the West to displace Christianity...

...That is no doubt about right, yet the Washington Post recently called the U.S...

...The increase conTHE AMERICAN SPECTATOR MAY 1982 5...

...The best way to do this, it has been demonstrated over the centuries, is to let gold " s t a n d i n " for all other things produced in an economy...

...The p r e s e n t solemnities issuing from the honorable gentlemen on Capitol Hill remind me of an evening some years ago in the company of some learned economists and one senator...

...E D IT O R I A L WITH-THE SENATOR FROM NEWSWEEK Tax i n c r e a s e s ! Depression...

...Your willingness to hold dollars goes up...

...A l a s , the senator whose economic researches take him into the arcane world of the newsweeklies is a very sophisticated statesman...

...So the Federal Reserve cannot directly control M1...

...Rees-Mogg was the main speaker at the lunch, which was attended by a sizable group of legislators, including Sens...

...Admittedly a drop in interest rates is essential for economic revival, but more inflation will not bring down interest rates and raising taxes will not stimulate economic activity...

...who demands that b y R. Emmett T y r r e l l , J r . Paul Volcker end the F e d ' s antiinflation policy 'and plug in the magic money-making machines...

...The analogous craving for inordinacy in human nature was described by Dr...

...Gold Commission a "national embarrassment," comparable to a " f l a t earth commission...

...How he found himself in such company I have never been able to ascertain, but the learned fellows expatiated on and on, as learned fellows will, about the latest economic t r e a t i s e s to appear in such scholarly journals as the Journal of Law & Economics...

...Consider those Republicans who were brave taxcutters last summer...

...For example, he said, if the Federal Reserve tries to get interest rates down by increasing the money supply, then interest rates will most likely go up instead, and if it decreases the money supply, then interest rates will still go up...

...Two centm',es later, discont'ent h a s both multiplied andigathered many re-" spectable intellectuals and economists to its cause...

...How might this affect M1, the alleged "money supply" ? If you are no longer so worried that things will be more expensive in a few months, you are more inclined to let your paycheck rest undisturbed in your checking account for a longer period...

...Tile qua'lity Of money, be said, is more important than its quamity...

...allowing the size of the "money s u p p l y " to be determined mechanically by the inflow or outflow of gold from the central bank...

...Next will come gurgling, then a diapasonal and hysterical shout, then silence...

...Strom Thurmond, David Boren, and Ernest Hollings (the latter a devotee of higher income taxes all 'round...