All That Talk About Gold

By John S. DeMott

The debate over an alternative monetary system grows more serious

Europeans are appalled. "It's the silliest financial discipline the U.S. could adopt," says former Dutch Treasury Official Coenrad J. Oort. Many private-sector American economists are aghast. Says Michael Evans, who heads his own economic consulting firm in Washington, B.C.: "There were periodic crashes in which banks collapsed during more than 50 years of the gold standard. I don't think that is what anyone wants." Yet to the astonishment of nearly everyone, important members of Congress continue to give serious thought to the idea of putting the U.S. back on some form of the gold standard. Mindful of how they laughed when some of these same folks first started talking about supply-side economics a few years back, the opponents are paying careful attention.

Richard Nixon ended the last links between the dollar and gold on Aug. 15, 1971, when he said that the U.S. would no longer exchange American gold for dollars held by foreign central banks. But since that time, inflation and interest rates have reached unimaginable levels, stirring longings for a return to the golden days of yesteryear, when the dollar's value was determined not by man-made policies in Washington but by how much gold it could buy.

More than anything else, it is the staggering level of interest rates that has intensified the gold debate. Last week many major banks lowered their prime lending rate to 19%%, sending stock prices temporarily higher. Soon thereafter, though, moneymen predicted that interest rates were likely to remain high, or even increase, later in the year and early next year. Joseph Granville, the widely followed stock market guru, predicted that the Dow Jones industrial average would drop another 200 points to 650 or 550 during the next twelve months. Stocks then plunged anew. At the end of the week, the Dow Jones index stood at 824, a decline of 200 since its high this year of 1024 on April 27. Granville did equal damage while visiting Britain. His prediction of a London stock exchange slump sent the market into a 20.5-point free fall in one day.

The supply-side economists and their supporters, who first sponsored the large tax cuts and budget reductions that President Reagan pushed through Congress earlier this year, are now saying that a return to gold would quickly bring down interest rates. North Carolina Republican Jesse Helms, the Senate's leading backer of the yellow metal and author of a bill to restore the gold standard, claims that such action would reduce interest rates "to probably three or four percent."

The new Gold Commission, an amalgam of 17 Government officials, businessmen, politicians and academics that Congress created to look into the feasibility of restoring the gold standard, held its first public meeting two weeks ago in the Cash Room of the Treasury Building in Washington. The commission had met once before, in July, behind closed doors.

No decisions were reached at the more recent meeting, except one to extend the deadline for the commission's recommendations from Oct. 7 of this year to next March 31. Most of the four-hour session was devoted to discussion of a leaden report by Anna Schwartz, coauthor with Economist Milton Friedman of a classical study of U.S. monetary history, on the American experience with the gold standard going back to 1834.

The commission could not even agree on the conclusions of that report. The members favoring gold said the document supported their views; those opposed said it did no such thing. Lamented Treasury Secretary Donald Regan, who sported a large pair of gold cuff links for the meeting: "We can't agree on the historical facts."

It is widely anticipated that the commission will not recommend a return to the gold standard. Antigold sentiment runs high in the group. What is more likely, predicts Economist Evans, is that the commission will issue a report that will say essentially nothing, and "after that the whole discussion on gold will go away."

Why is the commission deliberating at all? Why has there been such broad interest in a monetary standard that prevailed during the 1800s, when a farm economy ruled the land and the British navy ruled the seas?

Some people are clearly turning to gold out of frustration with recent economic experience. Says Alan Greenspan, the chief economic adviser to President Ford: "There is a growing disillusionment with monetary theory, monetary policy, monetary instruments generally, and people are looking around to see what the alternatives might be. One is gold."

Supply-side theorists argue that a return to gold is an essential precondition for restoring economic stability. Says Economist Arthur Laffer: "We should make money stable by making a dollar bill as good as gold." They maintain that a gold standard would restrict the Federal Reserve's ability to create credit because the long-term growth of money would be determined by increases in the world's stock of gold, which is expanding by only about 2% annually. Thus limiting money growth would create confidence in the value of the dollar, be a blow to inflation expectations and bring down interest rates.

Critics charge that a gold standard would hamstring Government policy and would not solve inflation.

Says Edgar R. Fiedler, chief of economic research for the Conference Board, a New York-based research group:

"Gold is not a magic bullet to eliminate inflation. Inflation is too complex; there is no single answer for controlling it." Opponents further argue that a modern economy has to be able to control the amount of credit that is created. They generally agree that the Federal Reserve and other central banks have let inflation get out of control by permitting money to grow too fast, but they are unwilling to let the amount of credit in the U.S. be determined primarily by the amount of a metal dug out of the ground.

The gold issue is at once simple and boggling in its complexity. Whatever their preference for or aversion to the metal, economists and financial officials agree on one thing: the key to any gold system would be in setting the price for gold. Says Sir Derek Mitchell, a former chief of international finance for the British treasury and now a banker in London: "The biggest problem of all in going back to gold would be fixing the price. Once you've fallen off the high wire, it's not easy to get back on it."

Setting the price too high would aggravate world inflation by having too much gold cashed in for dollars, thus in creasing the money supply. Establishing it too low would cause a run on U.S. gold supplies, as speculators rushed to buy up the undervalued metal. Only 2.8 billion ounces of gold have been mined in history. About 43% of that is now in the vaults of central banks and the International Monetary Fund; another 46% is in the hands of private individuals or churches as jewelry, coins or other investments.

Economists concerned about fixing the right price for gold have been discussing in recent weeks the problems of "re-entry," the space-age term to describe a return to the medieval metal. Laffer says the White House should announce that the U.S. will be going on the gold standard in say, three months. When G-day arrived, the Treasury would begin buying gold at the market price, and the Federal Reserve would partially back its obligations with gold, up to perhaps 40%. Economist Greenspan has another, milder proposal for testing the waters. He suggests issuing Treasury notes whose value is backed by gold. Financial markets would then gradually determine the value of gold by the price investors were willing to pay for the notes.

World financiers believe that a renewed reliance on gold would ultimately carry too painful a burden, disrupting the economies of the U.S. and Europe and possibly sending a number of Third World countries into bankruptcy. Said Ernst Schneider, a general manager of Switzerland's Credit Suisse bank: "I don't believe the world could take the discipline today."

Under a gold system, a country would have to accept severe recessions, or even depressions, whenever inflation exploded because of oil-price shocks or some other uncontrollable event. Neither the U.S., nor any other country, is likely to give up that much control over its economy. The dreams of gold are therefore likely to remain only dreams. --By John S. DeMott, Reported by David Beckwith/Washington and Lawrence Malkin/Paris

With reporting by David Beckwith/Washington, Lawrence Malkin/Paris

This file is automatically generated by a robot program, so viewer discretion is required.