A New Cry; Bring Back Gold

By Alexander L. Taylor III

Reagan's supply-siders make a new pitch for a gilt-edged financial system

While gold has not been used to settle accounts between central banks for a decade, it still remains the barometer of world tension. From mud and straw shanties in India to plush villas in France, nervous people stash away Krugerrand coins or gold jewelry at the first sign of any political or economic unrest. Last week, after the Israel's attacked Iraq's nuclear reactor, the price of gold immediately shot up $13.50, to $473.50 per oz.

Now a group of conservative economists is trying to make gold again the anchor of the world's monetary system, a position it held during the late 19th and early 20th centuries. Says Lewis Lehrman, a wealthy businessman and sometime consultant to the Reagan Administration:

"I am convinced that we will be back on the gold standard within ten years." The Administration later this month will announce the appointment of a committee to study the feasibility of returning to the gold standard. The 17 members include House Democrat Henry Reuss of Wisconsin, chairman of the Congressional Joint Economic Committee; Frederick Schultz, vice chairman of the Federal Reserve; and Murray Weidenbaum, head of the President's Council of Economic Advisers.

The basic requirements of a gold standard are that a unit of money be defined by a specified amount of gold and that the central bank be willing to convert money into gold. The gold standard then becomes a mechanism for controlling the money supply, and thus inflation, by linking the growth of currency to a commodity that is scarce, only slowly increasing in supply and indestructible. In times of steady economic growth, the limits imposed by a gold standard restrain spending and curb inflation. But during hard times, this can cause deflation since it inhibits deficit Government spending. The U.S. has not been on a gold standard since August 1971, and for nearly four decades before that, it had only a modified gold system.

A pure gold standard takes primary control of the money supply away from the Government. The growth of the world's money would be determined by the amount of gold dug out of mines in California, South Africa, the Soviet Union and other gold producers. Any country could get additional gold by exporting more goods abroad than it buys there. But buying gold would be the only way that a country could increase its domestic money supply.

Some supporters of the yellow metal favor a "fractional" gold standard in which money would be only partially covered by Government gold stocks. This would not entirely remove the Federal Reserve's role in monetary policy, but would restrain its powers to issue paper money. They believe that the Fed's policy of controlling inflation through the money supply is well intended but ineffectual. Lawrence Kudlow, chief economist of the Office of Management and Budget, says that the Federal Reserve has become a "monetary Gong Show."

The notion of returning to the gold standard comes from the same supply-side economists who fostered the cuts in personal income taxes that President Reagan is now trying to get through Congress. Such supply-siders as Economist Arthur Laffer and Consultant Jude Wanniski have been putting the gold bug in politicians' ears for the past several years. Republican Congressman Jack Kemp of New York, co-author of the Kemp-Roth tax-cut bill, says that he plans to take up the gold banner as soon as he has completed his drive to lower taxes. Republican Congressman Ronald Paul of Texas and Republican Senator Jesse Helms of North Carolina have introduced bills that would restore some version of the gold standard. Says Laffer: "President Reagan is going to have a lot of trouble if he does not go to a gold standard soon." Laffer argues that a gold standard should accompany a supply-side tax cut to give consumers incentive to save.

Eugene Birnbaum, a former official of the International Monetary Fund, argues that the Government must "lick inflation first." Then the gold standard would provide the needed "discipline for politicians and bureaucrats" to maintain stable prices. He and other gold advocates believe that without such a system, governments will always fall to the temptation of inflating their currencies rather than taking prudent anti-inflation steps.

Probably the most difficult part of any return to gold would be to establish a suitable price for the yellow metal. In the past decade, gold has been as low as $35 per oz., but in January 1980 it hit $850 per oz. If world leaders fixed the price of gold too low, it could result in a severe depression, because there would not be enough cash to keep the economy running smoothly. If the price was set too high, it could cause more inflation, because the gold would have created too much cash and credit. Roy Jastram, a professor of business administration at the University of California at Berkeley, has studied the world prices of gold and other commodities going back to 1560. He concluded that the historic price of gold, in relation to the prices of those other products, would now be about $250 per oz. Some gold bugs, though, insist that the price under a new gold standard should be as high as $1,500 per oz.

So far the gold advocates have won few converts among leading economists. Opponents argue that a gold system would be far too rigid for the modern international economy. Says Otto Eckstein, president of Data Resources Inc.:

"To tie the world economy to an asset that represents such a small part of the total monetary system is really impossible. You could as well stabilize the world economy on the cabbage standard. It is absurd." Adds the Fed's Schultz: "You have to get inflation down before you link the dollar with any commodity. Otherwise there will be turbulence and disruption as the real value of the dollar erodes and people demand their gold."

A new gold standard could perhaps increase the financial and political clout of the world's two major gold producers:

South Africa and the U.S.S.R. South Africa mines more than half the world's gold, 21.7 million oz. last year. Most of it is extracted by black miners, whose treatment by their apartheid government is a matter of international concern. In the case of a revolt or strike by the workers, a halt in production could drive up prices and disrupt world commerce. The Soviet Union holds an estimated 60 million oz. of gold and has unmined reserves of perhaps 250 million oz. more. At today's prices, that would give the Soviets a $146 billion stranglehold on Western economies.

World financiers show scant interest in going back to gold. Says European Gold Expert Paul Jeanty of London's Samuel Montagu & Co. Ltd.: "Returning to gold would only force the Saudis to buy it with their oil profits at enormous cost to the dollar. Nobody I know of takes the notion seriously." Hermann Abs, former head of West Germany's Deutsche Bank, says that "the fluctuations of the gold market preclude the establishment of gold as a standard of value."

There is doubt about whether Reagan is seriously interested in bringing back gold. During the 1980 presidential race, he made pro-gold campaign statements, and the Republican platform hinted at endorsing "hard" money. But some observers doubt that the President will actually follow through with any move toward gold. Says the vice president of a large New York bank:

"This commission is a very considered maneuver by the Reagan Administration to allow conservatives to have their day.

It is a way of diffusing sentiment--a masterful stroke."

The new Government committee is unlikely to endorse a return to gold. Although there are several gold advocates like Lehrman on it, a majority of the 17 members can be expected to come out against a restoration of the gold standard.

Says Representative Paul: "The important thing is that we're finally talking about it. Sooner or later, it will all dawn on people."

The final word, however, has surely not been heard from the gold supporters.

As long as governments around the world let inflation run wild and debase the value of their currencies, a relentless chorus of hard-money advocates will continue to demand that their money be made as good as gold. --By Alexander L Taylor III. Reported by David Beckwith/Washington and'Frederick Ungeheuer/New York

With reporting by David Beckwith, Frederick Ungeheuer

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