CAN THE U.S. RETURN TO A GOLD STANDARD?

Wall Street Journal ^ | September 1, 1981 | Alan Greenspan

[I got the rope]

The growing disillusionment with politically controlled monetary policies has produced an increasing number of advocates for a return to the GOLD STANDARD - including at times president Reagan.

In years past a desire to return to a monetary system based on gold was perceived as nostalgia for an era when times were simpler, problems less complex and the world not threatened with nuclear annihilation. But after a decade of destabilizing inflation and economic stagnation, the restoration of a GOLD STANDARD has become an issue that is clearly rising on the economic policy agenda. A commission to study the issue, with strong support from President Reagan, is in place.

The increasingly numerous proponents of a GOLD STANDARD persuasively argue that budget deficits and large federal borrowings would be difficult to finance under such a standard. Heavy claims against paper dollars cause few technical problems, for the Treasury can legally borrow as many dollars as Congress authorizes.

But with unlimited dollar conversion into gold, the ability to issue dollar claims would be severely limited. Obviously if you cannot finance federal deficits, you cannot create them. Either taxes would then have to be raised and expenditures lowered. The restrictions of gold convertibility would therefore profoundly alter the politics of fiscal policy that have prevailed for half a century.

Disturbed by Alternatives

Even some of those who conclude a return to gold is infeasible remain deeply disturbed by the current alternatives. For example, William Fellner of the American Enterprise Institute in a forthcoming publication remarks "...I find it difficult not to be greatly impressed by the very large damage done to the economies of the industrialized world... by the monetary management that has followed the era of (gold) convertibility... It has placed the Western economies in acute danger."

Yet even those of us who are attracted to the prospect of gold convertibility are confronted with a seemingly impossible obstacle: the latest claims to gold represented by the huge world overhang of fiat currency, many dollars.

The immediate problem of restoring a GOLD STANDARD is fixing a gold price that is consistent with market forces. Obviously if the offering price by the Treasury is too low, or subsequently proves to be too low, heavy demand at the offering price could quickly deplete the total U.S. government stock of gold, as well as any gold borrowed to thwart the assault. At that point, with no additional gold available, the U.S. would be off the GOLD STANDARD and likely to remain off for decades.

Alternatively, if the gold price is initially set too high, or subsequently becomes too high, the Treasury would be inundated with gold offerings. The payments the gold drawn on the Treasury's account at the Federal Reserve would add substantially to commercial bank reserves and probably act, at least temporarily, to expand the money supply with all the inflationary implications thereof.

Monetary offsets to neutralize or "earmark" gold are, of course, possible in the short run. But as the West Germany authorities soon learned from their past endeavors to support the dollar, there are limits to monetary countermeasures.

The only seeming solution is for the U.S. to create a fiscal and monetary environment which in effect makes the dollar as good as gold, i.e., stabilizes the general price level and by inference the dollar price of gold bullion itself. Then a modest reserve of bullion could reduce the narrow gold price fluctuations effectively to zero, allowing any changes in gold supply and demand to be absorbed in fluctuations in the Treasury's inventory.

What the above suggests is that a necessary condition of returning to a GOLD STANDARD is the financial environment which the GOLD STANDARD itself is presumed to create. But, if we restored financial stability, what purpose is then served by return to a GOLD STANDARD?

Certainly a gold-based monetary system will necessarily prevent fiscal imprudence, as 20th Century history clearly demonstrates. Nonetheless, once achieved, the discipline of the GOLD STANDARD would surely reinforce anti-inflation policies, and make it far more difficult to resume financial profligacy. The redemption of dollars for gold in response to excess federal government-induced credit creation would be a strong political signal. Even after inflation is brought under control the extraordinary political sensitivity to inflation will remain.

Concrete actions to install a GOLD STANDARD are premature. Nonetheless, there are certain preparatory policy actions that could test the eventual feasibility of returning to a GOLD STANDARD, that would have positive short-term anti-inflation benefits and little cost if they fail.

The major roadblock to restoring the GOLD STANDARD is the problem of re-entry. With the vast quantity of dollars worldwide laying claims to the U.S. Treasury's 264 million ounces of gold, an overnight transition to gold convertibility would create a major discontinuity for the U.S. financial system. But there is no need for the whole block of current dollar obligations to become an immediate claim.

Convertibility can be instituted gradually by, in effect, creating a dual currency with a limited issue of dollars convertible into gold. Initially they could be deferred claims to gold, for example, five-year Treasury Notes with interest and principal payable in grams or ounces of gold.

With the passage of time and several issues of these notes we would have a series of "new monies" in terms of gold and eventually, demand claims on gold. The degree of success of restoring long-term fiscal confidence will show up clearly in the yield spreads between gold and fiat dollar obligations of the same maturities. Full convertibility would require that the yield spread for all maturities virtually disappear. If they do not, convertibility will be very difficult, probably impossible, to implement.

A second advantage of gold notes is that they are likely to reduce current budget deficits. Treasury gold notes in today's markets could be sold at interest rates at approximately 2% or less. In fact from today's markets one can construct the equivalent of a 22-month gold note yielding 1%, by arbitraging regular Treasury note yields for June 1983 maturities (17%) and the forward delivery premiums of gold (16% annual rate) inferred from June 1983 futures contracts. Presumably five-year note issues would reflect a similar relationship.

A Risk of Exchange Loss

The exchange risk of the Treasury gold notes, of course, is the same as that associated with our foreign currency Treasury note series. The U.S. Treasury has, over the years, sold significant quantities of both German mark - and Swiss franc denominated issues, and both made and lost money in terms of dollars as exchange rates have fluctuated. And indeed there is a risk of exchange rate loss with gold notes.

However, unless the price of gold doubles over a five-year period (16% compounded annually), interest payments on the gold notes in terms of dollars will be less than conventional financing requires. The run-up to $875 per ounce in early 1980 was surely an aberration, reflecting certain circumstances in the Middle East which are unlikely to be repeated in the near future. Hence, anything close to doubling of gold prices in the next five years appears improbable. On the other hand, if gold prices remain stable or rise moderately, the savings could be large: Each $10 billion in equivalent gold notes outstanding would, under stable gold prices, save $1.5 billion per year in interest outlays.

A possible further side benefit of the existence of gold notes is that they could set a standard in terms of prices and interest rates that could put additional political pressure on the administration and Congress to move expeditiously toward non-inflationary policies. Gold notes could be a case of reversing Gresham's Law. Good money would drive out bad.

Those who advocate a return to a GOLD STANDARD should be aware that returning our monetary system to gold convertibility is no mere technical, financial restructuring. It is a basic change in our economic processes. However, considering where the policies of the last 50 years have eventually led us, perhaps there are lessons to be learned from our more distant GOLD STANDARD past

[Jaysun]

That is what Greenspan was talking about. We would have to have a mechanism to protect ourselves. I don't know what that it but I think Greenspan was hinting at a political/legislative solution.

Right, but in my opinion Europe wants to see us flat on our backs. So it will be interesting to see what is proposed. If the idea involves cooperation from Europe, I think we can forget it.

[fourdeuce82d]

I don't know much about the GOLD STANDARD but I would like to learn more about the GOLD STANDARD because it sounds as though the GOLD STANDARD could be a good thing.

Would a GOLD STANDARD be better than not having a GOLD STANDARD? A GOLD STANDARD might be better than a nonGOLD STANDARD. Once we left the GOLD STANDARD things were worse than before, when we had a GOLD STANDARD.

I Dont Imagine Other Things could be worse than a GOLD STANDARD. As Soon aS Humanly pOssible, Lets Examine returning to the GOLD Standard.

[I got the rope]

You might be an Airborne Soldier if...

You say "Hooah" whether you understand or not

[endthematrix]

We've been duped here! We are talking about the history/future of money, while it is best to discuss the historic and future motives of international finance institutions.

[Nick Danger]

It ain't gonna happen, folks. When Greenspan wrote this, the inflation rate was 12%. It had been in double-digts for two years. If that wasn't bad enough, the unemployment rate was 8%, on its way to 10%.

If ever there was a time to sell the people of the United States a reform like returning to the gold standard, that was it. Greenspan even took a stab at "how to get there from here."

If it didn't happen then, it's not gonna happen. I know there are people for whom this is their life's crusade, but broadly speaking, there is no energy on this subject. There wasn't even much energy on it after two years of double-digit inflation.

If Reagan had wanted this, he would have had it. He was elected in a landslide with a very clear mandate to fix the economy, and fix it fast. He did fix it, and he was re-elected in an even bigger landslide. But no gold standard.

I think we can guess why. We do not have a king who is overspending. The best argument for the gold standard is that it keeps kings honest. But we, meaning the "body politic," do not want an honest king, because we are the king.

We vote for this crap. Well, maybe not us Freepers, but a majority of voters in the United States cannot get enough of government spending. The day the people want this to stop, it'll stop. But hey, it's fun spending money. Let's go the Moon! Hell, let's go to Mars! Let's buy all the old people their medicine! Let's have more endowments for the arts! Let's have a million-dollar swimming pool for tadpoles!

No gold standard is going to stop this. Any legislation that puts in a gold standard can take out a gold standard. The truth is, "We, the People" do not want spending restraint. If "we" did, we would have spending restraint and we wouldn't need gold to do it.

[neverdem]

At this hour, when the Treasury is printing as much paper as it pleases, and we have a debt of about 7 trillion, not counting unfunded obligations, you must be kidding. Rest tight, Airborne!

[Heartbreak of Psoriasis]

Obviously if you cannot finance federal deficits, you cannot create them.

That sorta says it all, doesn't it?

[Free Vulcan]

Only when the current order crashes into dust, assuming there is anything left.

[M-cubed]

Why bother with a gold standard?...Greshams law and supply and demand are providing a simple "gold standard"....the price of gold and silver is inversly proportional with the race to inflate all the "fiat curriencies" throughout the world...gold and silver are doing what they have always historically done...provide a "store of value" for ones labor

[Xthe17th]

Since gold is the only Constitutionally-authorized money

I don't think the Constitution specifically mentions gold. However, the word "dollar" is mentioned twice, and it thus refers to the dollar in common circulation at the time, i.e., the Spanish milled silver dollar (which was later specifically defined by the Coinage Act of 1792 to be precicely 371.25 grains of silver in weight).

[ChefKeith]

It will never happen because the gold would be to hard for the politicians to steal because they could not carry it around like they can transfer funds from place to place.

[jla]

^

[Jim Noble]

CAN THE U.S. RETURN TO A GOLD STANDARD?

No.

[Jim Noble]

I don't think the Constitution specifically mentions gold

But you're wrong.

Article I, s. 10 is very clear.

[Mulder]

I don't think the Constitution specifically mentions gold

The Constitution gives the Federal government the authority to coin money. It does not give them the authority to print it.

It doesn't specifically mention gold, but the word 'coin' refers to either silver or gold.

[Mulder]

gold and silver are doing what they have always historically done...provide a "store of value" for ones labor

An ounce of gold would have bought a man a new suit and a new pair of shoes in the days of the Roman Empire.

And an ounce of gold will buy you the same thing today.

Can anyone name a fiat currency which has that staying power?

[Mulder]

I started this thread because of what was happening here. The poster had a good idea, but he didn't get his point across, because he was basically advertising a product on FR. Maybe we can discuss it here.

THere is a really good book that explains all this stuff (gold, federal reserve, etc....)

It's called "The Creature from Jekyll Island" by G. Edward Griffith.

[Mulder]

Go read " CRUCIFIED ON A CROSS OF GOLD ".

Where do you find that book? I did a search on amazon and couldn't find it (I've noticed lots of good books on amazon haven't been 'out of print' recently, but maybe they've taken the next step and simply purged the good ones).

Who was the author? Maybe I can find it doing a search on the author.

[the invisib1e hand]

yes, lets peg the dollar to gold again. then let a motherlode be discovered in, say, egypt.

yes, that would be wise. imagine the political repercussions of tying one's currency to a commodity that is mined in other nations.

You talk about 'no borders!' You piss and moan about the UN!? Right off the bat you'd be fast tracked to a single world currency just to maintain 'peace.' And I wonder who would be in charge of that project...

like the '55 Chevy, the gold standard has come and gone.

[general_re]

False. Compare the price of consumer goods - e.g., the CPI - to the price of gold for a definitive refutation of this oft-repeated, but incorrect, bit of trivia...