The P~ice of Gold

...l I f we do it, Lew, how do we figure out the right price...

...F o r this reason, Mr...

...Supply-side money will be given all of 15 minutes to work, so the price had better be right...

...Regan did in late 1982...

...Commercial bill rates fell to 2 percent and France grew faster than both the U.S...

...When banks expect inflation, they will charge a higher interest rate to cover the fact that the dollars they will someday be repaid are likely to be worth less...

...Gregory A. Fossedal is an editorial writer for the Wall Street Journal and co-author (with Daniel O. Graham) o f A Defense that Defends, published earlier this year by Devin-Adair, Greenwich, Connecticut...

...To take an extreme example, suppose the Fed engineered a vicious drop in the price of gold over the coming weeks to, say, $200...

...Lehrman propounds a third model for finding the right price...

...The banks must either eat the losses, or hide them by denying troubled loans are troubled-and, ultimately, they must charge 12 THE AMERICAN SPECTATOR JULY 1984 somebody a higher rate of interest, even if it is only U.S...

...I think those people are terribly brave, terribly bold, and maneuvering brilliantly for a group that is caught in a cruel crosscurrent of social forces...

...He would not simply freeze gold at its present price...

...Interest rates and stocks both posted their healthiest movement as the price of gold surged to $450 and $500 from the fall of 1982 to March of 1983...

...too low, deflation...

...Either one can cause interest rates to rise...

...When gold rises, signaling an inflation, past changes in the price level...

...Precisely because gold runs ahead of other signals in the economy, what the present price of gold "means," in an age of changing gold prices, is uncertain...

...By Monday, May 14, the White House was begging for mercy...

...This doesn't mean that the Fed hasn't been too tight since the spring of 1983, or that rising interest rates in 1984 are not attributable to Mr...

...What if it suddenly takes, say, twice as many barl'els of oil, or tons of coffee, or bushels of wheat, to pay back a dollar-denominated loan...

...Indeed, there have been more than a dozen returns to gold in recent history...

...A year after Churchill, by contrast, France simply pegged at the market price of $25 an ounce...

...This is exactly what happened from 1980 to 1982, and is being signaled again by a falling gold price in 1984...

...One way not to get off this treadmill is for the White House to launch a frontal assault on Mr...

...Such jawboning of the Fed not only fails to clarify for the public the real issue of monetary policy, which is how to replace the money supply targets with something better...

...Well, this is going down...

...The present price of gold can be leading us into a deflation even if the economy is growing, and even if prices which lag behind gold--the kind measured by price indexes--are rising too...

...The problem is the present policy framework itself, which cannot provide the insurance of a stable dollar that markets require to lend out money at low interest rates...

...But nations have returned, each time producing a dramatic fall in interest rates, steady prices, and growth...

...borrowers who don't benefit from the largess of Chase Manhattan abroad...

...This is not to say there are not other nuts-and-bolts worries caused by the gold standard, such as: How will markets know that future administrations won't violate it...

...They would take the price of gold where it is now and freeze it...

...prices were essentially unchanged through 1930...

...A better method than Laffer's has been suggested by Jude Wanniski and Robert Mundell...

...Yeah, I was looking for you, too...

...When it falls, you lower them...

...Or: What's to stop the Soviets from dumping all their gold on the world market...

...One could arrange this policy with a phone call...

...I'm sorry...

...Interest rate targeting gave us OPEC and inflation...

...I'm not going to do another one of those hatchet jobs on the black middle class...

...At a press conference days later, he issued a dreadful statement that many supply-siders feared would kill chances for their gold plank...

...A firmer test would be to urge the Federal Reserve to lower interest rates until gold hits $500...

...Wanniski argues, "You have to think in three dimensions...

...If $300 gold caused a 1982 recession, it could do the same in 1985...

...The fullemployment price of gold, logically, is the price at which idle resources of production are brought back into use...

...Advocates argue that steady gold means steady money, with the attendant benefits of price stability and low interest rates...

...The most recent policy experiment--of having no policy at all--has run its course...

...Lehrman is right that there is a better way to go, and that arguments for gold-at-any-price may not convince a hesitant Donald Regan and Ronald Reagan to take the plunge...

...You can keep the other can't-go-back arguments in their proper perspective by remembering what a gold standard is, in its essence...

...The method has intuitive appeal: If other prices have moved up, say, by three times since 1971, why not put gold at three times its 1971 price of $35 and be done with it...

...Reagan still has doubts as November nears, there are plenty of ways to test the water...

...and Britain, sticking with gold (and largely avoiding the Depression) until 1936...

...At such times, scholar Roy Jastram notes, the price of gold relative to other commodities often rises: Gold becomes a hedge against further capricious changes in the value of money...

...Either move would invigorate the economy, help the President's reelection chances, and set the stage for a firmer move to gold during or after the campaign...

...Well then, it must look like up to you...

...Even so, finding the right price is important...

...The standard could be solidified later in Congress and at Bretton Woods II...

...Volcker to "loosen" up on the money supply in an election year...

...Both grew less encouraging when gold fell below $400 last summer, and the prolonged $375 price has driven stocks down and interest rates up...

...On the dark side, he might ask, "Will I have a second term--or more to the point, will my young turk supporters in Congress have one--if the interest rate squeeze continues into the summer...

...Interest rates are down too, to 12 percent or more for a home mortgage...

...Given the state of the economy--solid growth began as gold stabilized between $425 and $450--"anywhere between $350 and $500 looks safe," he argues...

...answered, at least not systematically...

...If gold really is the best proxy for goods and services, we are talking about changing the whole price level in order to suit wholesale prices falling 48 percent from 1920 to 1923--were a sign that the British pound had already been severely deflated following the country's violation of the gold standard...

...Heads, wearied with grief, nodded as a few responded, "Amen...

...Assuming the reports are accurate, the President's return-price query may presage serious consideration of a gold plank to be offered next month at the GOP convention in Dallas...

...If $700 gold had inflation reeling in 1979, it might again...

...Wanniski: "What if you chose the wrong price...

...But I simply can no longer believe that white America is the main cause of black pegple's problems...

...Reagan, by contrast, raises the one question that has not been 'The two papers for the uninitiated are Jude Wanniski's "Gold Standard Q-andA," available from Polyconomics in Morristown, New Jersey, and Lew Lehrman's longer, historical study of gold for Morgan Stanley in New York...

...Then came monetarist stagnation...

...The 200-or-so black professionals who spent three days discussing the black family last May on the Fisk University campus spent a lot of time playing at being oppressed...

...The Fed would cease open market operations and maintain the discount rate within half a point of rates on commercial paper...

...We know the entire black community is under siege from a hostile society," affirmed one speaker...

...The gold standard is simply a rule that tells the Fed when to lower interest rates and when to raise them...

...We are fitting the leading indicator to lagging indicators...

...Regan, the one Administration member who still talks about monetary reform and further tax cutting...

...That we have had 17 months of growth testifies to Mr...

...The Washington Post joined in by launching a pair of vicious attacks on Mr...

...I think the internal exile to which most black people seem to feel they are relegated is imaginary at best, self-imposed at worst...

...Volcker himself offered an important insight in this regard in a speech delivered last December in San Francisco...

...But that retreat can only prolong the White House's monetary anguish--and come August, there will only be one other game in town...

...But they played very hard...

...Where to freeze, though, can only be viewed as a fullemployment problem...

...you raise interest rates...

...And they drove Winston Churchill into the political wilderness for a decade...

...One piece of evidence in Lehrman's favor is the markets themselves...

...As we hit the second-floor mezzanine, the doors opened and there stood another middle-aged black professional...

...But interest rates are rising and have many supply-side forecasters, including David Ranson, predicting growth of below 4 percent in 1985, with a possible recession late in the year...

...Yet at the same time, almost every speaker expressed the anxiety that black people might be losing their identity by 14 THE AMERICAN SPECTATOR JULY 1984...

...In fact, if there was anything that came out of the Black Family Summit, it was that black people obviously feel an enormous ambivalence about the possibility that they actually are being assimilated into the mainstream of American culture...

...Answer: They won't, just as no one knows for sure that every team in the National Football League will show up in the right stadium...

...it also, clearly, doesn't work...

...Changes in the price of gold, conversely, have bad effects: too high, inflation...

...Remember what we are talking about when we discuss taking the price of gold back down to $250...

...Those numbers could mean an unemployment rate stuck above 7 percent indefinitely...

...Reagan's question about finding the right return price suggests a serious interest in exploring the alternative to the monetary morass caused by the Federal Reserve's flationists...

...Volcker wrote in 1983, "enforcing stability in those commodity prices would require declines in labor or other input costs...

...President Reagan even issued a statement defending Volcker and blaming any rise in interest rates "on the belief that we may not really have licked inflation yet...

...On the one hand, they remain hypersensitive to every one of life's little frustrations, quickly identifying every adverse event as some new form of "discrimination...

...The reason for this turnabout is growing recognition that there may be no alternative to gold...

...What will happen is that debtors required to make such unexpectedly large payments will begin to go broke...

...The question has significance on several levels...

...If they sold everything they own the price would change by less than 1 percent...

...He might simply talk about a monetary reform, as Mr...

...Few supply-siders would then advocate freezing the price merely because to do so would prevent further declines...

...Volcker's skill...

...It follows that the return price matters...

...Hell, no," the other said, stepping off just as the doors closed, and then, dropping into the vernacular, he intoned, " l ' v e been down all my life...

...Instead, he would establish a period of, say, one year between the date a return to gold is announced and the date the price is set...

...What we want is to do just the opposite--stop changing the value of the dollar now, and let other prices drift down or up to equilibrium...

...It would have to be well off the mark, up or down, to offset the great gains the system as a whole would enjoy...

...I was probably in the wrong mood when I attended the conference, l had just read Thomas Sowell's brilliant book, Ethnic America, which, like everything I have read by Sowell, left me with a sense that I would never quite see the world in the same way again...

...That's what Ronald Reagan is said to have whispered across the table recently to political ally and monetary scholar Lewis Lehrman, capping an hour-long session on the gold standard...

...The squeeze in prices will cause some debtors--Brazil, Argentina, Poland-to default, even as previous Fed tightenings led to Volcker Coups in Nigeria and at Continental Bank...

...Falling prices drove up the value of unemployment compensation to 58 percent of a typical worker's pay by 1927, compared to 17 percent in 1920...

...The mechanics varied widely: different return prices, degrees of convertibility, and exchange rate arrangements...

...Economist Alan Reynolds recently studied five: the U.S...

...Hey, Charlie, how you been...

...The case for gold is that the price of gold tells us something about the economy...

...Hours after Larry Speakes and Treasury Secretary Donald Regan suggested the Fed was clamping down too hard, a legion of tight-money supporters rode to the Fed's rescue...

...One return price model, suggested by Arthur Laffer, would essentially compare the movement of gold to that of other commodity prices and adjust gold accordingly...

...Volcker has been somewhat tight~.within the present framework of policy, though tight he has been...

...Thus the problem with interest rates is not that Mr...

...Getting back to gold will involve political courage, and some attention to the return-price details...

...Pained faces, set in masks of despair, listened as speaker after speaker recited the indictment that charged white America, once again, with consigning black America to a permanent, internal exile...

...Yet the question remains: How do we know that the present price of gold, depressed to below $380 from $500 early in 1983 and $650 in 1980, really is " s a f e " ? Yes, there is a recovery going on today...

...If Mr...

...This is readily understood...

...But a schedule certainly increases the odds...

...Indeed, past gold reforms suggest that setting the right price is the one potential sticking point...

...After all, the Fed was well within two target ranges for money and was above them, i.e., too loose already, by a third measure...

...Hence, to blame interest rates on expected inflation, as President Reagan and his advisers repeatedly do, is to capture half the problem, but only half...

...I didn't see you last night," said my fellow rider...

...But such cavils have already been answered ably.' Mr...

...Everyone laughed, and as the elevator moved again, my companion shouted back through the doors: William Tucker is a contributing editor of Harper's...

...I ' m going up to my room...

...But there's still one matter that will require resolution...

...Deflation costs the banks money in a direct sense, depriving them of loan payments, and also causes the market value of loans to other rickety borrowers to decline...

...A wholesale price inflation rate of 50 percent fell to zero in six months...

...The real problem, as one supplyside economist puts it, is simply "flat i o n " - - t h e knowledge in financial markets that the Federal Reserve may be driving the dollar up or down, with bad consequences either way...

...But it now seems clear that the Volcker savvy cannot get banks to lend out 30-year mortgages at 3 percent or less, the historic norm under gold regimes...

...My guess is that Wanniski and Lehrman are both right...

...When the White House attacked the Fed in early May for a Fed-induced rise in interest rates, it was forced to back o f f almost immediately...

...Lehrman uses the gold mine as a proxy for full employment in the economy just as one uses the price of gold as a proxy for the general price level...

...As Mr...

...I f a good many commodity prices are below longer-run costs," Mr...

...The optimal price of gold would be the "clearing price" of mining an ounce out of one of those mines at full production...

...In 1925, Winston Churchill, observing the downward drift of various commodity prices, decided to return Britain essentially to the pre-War price of gold at $4.86 an ounce...

...More than that, though, the question is the right question...

...Of course, those falling commodity prices-Once laughable, the gold standard is now respectable, even fashionable, among the policy elite...

...Volcker's tightening...

...But it's no more impossible than picking up a telephone and saying, "let's do i t . " [] William Tucker BLACK FAMILY AGONISTES How c a n it be said t h a t b l a c k f a m i l i e s a r e " b r e a k i n g u p " when t h e y a r e n o l o n g e r even forming...

...1 was riding with a fiftyish black college professor--prosperous, articulate, intelligent...

...But what if the dollars are suddenly worth more...

...It has and they are...

...This would allow free markets to set interest rates based on the demand for credit--and also based on the knowledge of an impending return to gold...

...Arthur Burns, Henry Kissinger, Francois Mitterrand, Helmut Schmidt, Richard Nixon--all endorse a Bretton Woods II...

...F o r me, the prototypical moment of the Urban League/NAACP's "Joint Summit Conference on the Crisis in the Black Family" came as I was riding down one of the plate-glass, open-view elevators that spider up and down the walls of the stunning, 23-story atrium inside the Nashville Hyatt Regency...

...Answer: Nothing...

...Once laughable, the gold standard is now respectable, even fashionable, among the policy elite...

...It does mean that the only way we know the Fed has been too tight is not by the money supply figures, which are irrelevant, but by the price of gold...

...Such a market adjustment period would smooth many uncertainties, and indeed was a feature of several past THE AMERICAN SPECTATOR JULY 1984 13 returns...

...Even so, it isn't foolproof, and thus during that adjustment period Lehrman would have the Treasury Secretary keep close track of the activity of marginal North American gold mines, those mines that are the last to be brought into production as the price of gold nears a fullemployment level...

...Commenting on the Fed's gains against inflation, the chairman suggested that an effective monetary policy must combat not only a falling dollar, i.e., inflation, but also a rising dollar, i.e., deflation...

...For Lehrman, in other words, the problem of a changing price level is resolved by freezing the price of gold in the future...

...Then, as the other man started to get in the elevator, my companion said: "Well, you're not getting on, are you...

...A second glance, however, suggests serious flaws...

...To begin with, it suggests the President has leaped beyond conventional thinking and is seriously considering how to maintain and institutionalize the Reagan Prosperity in a second term...

...You don't want to go down, do you...

...in 1792 and 1879, England in 1921 and 1925, France in 1926...

...Given the movement of commodity prices since the collapse of Bretton Woods, gold would come down to $250 under the Laffer model...

...Inflation is down, but only to 5 percent, a level once thought intolerable...

...Wanniski is right that even a freeze would produce substantial benefits, and that within the $350-500 range, the price debate probably does not much matter...

...The question also parallels a growing openness to gold-based reform among other Western leaders...