The Gold Bugs Are Back
Like a genie in a bottle, the idea waits restlessly for a chance to be summoned back to life.
Now, a small but ardent band of believers thinks the opportunity may finally be at hand for a return to the gold standard.
“It’s the only shot we’ve had since 1980,” says economic consultant Jude Wanniski, an advisor to Republican vice presidential candidate Jack Kemp--one of the gold standard’s strongest advocates.
Wanniski and fellow “gold bugs” say restoring the link, severed 25 years ago, between the dollar and gold is a tonic for all ills economic and social: It will banish inflation, cut mortgage rates in half, slash the federal deficit and spur such a surge in investment and productivity that the American family once again will be able to live on a single income.
With Kemp on the ticket--despite running mate Bob Dole’s apparent coolness to the idea--prospects for a return to gold are brighter than they have been since the dawn of the Reagan Revolution, Wanniski believes. (Kemp, however, has been silent on the matter since his nomination.)
Nowadays, the very idea of the gold standard gives off a tinge of flakiness, evoking images of camouflage-garbed survivalists skulking in the woods, barricading themselves with their hoards of bullion against the collapse of the dollar. Even discussing it embarrasses some Republicans, although for generations it was part of the GOP’s philosophical bedrock.
Oddly, it was Richard Nixon, the staunchest Republican of all, who preempted prime-time TV on a Sunday night in 1971 to announce that he was taking America off the gold standard for the first time ever in peacetime.
Nixon was but one in a line of American originals--from William Jennings Bryan to Andrew Jackson to even the creator of “The Wonderful Wizard of Oz”--to be engaged by debate over the gold standard. The issue continues to excite passions today, with its denigrators every bit as dogmatic as its supporters.
“This is kookdom,” snorts Nobel laureate Robert Solow, an economist at Massachusetts Institute of Technology’s Sloan School of Business. “There is no rational reason why you would want the world’s money supply to depend on the vagaries of annual gold production.”
“The gold standard” is a loose rubric for monetary systems that tie a nation’s currency to gold at some target price or price range.
Under a traditional gold standard, currency can be freely converted into pure gold at a fixed rate--meaning a holder of greenbacks could present them to the federal government and walk away with gold bars.
If investors lose confidence in a country’s currency because they fear war or disaster or profligate spending, they flock to the gold window and demand bullion.
And if a nation imports more than it exports--in other words, spends more dollars abroad than it earns back for its own goods--gold flows out of the treasury. As the country’s gold supply runs out, the prices of its goods must fall to make them more attractive abroad, so that exports will rise and gold will flow back home.
Kemp would not make the dollar convertible into raw gold again--Nixon probably closed the gold window for good--but supporters say his plan would share one key trait with the classic system: Gold would provide the backbone, the discipline that would restrain government from reckless debt and overspending.
But such discipline can be harsh. Any climate of falling prices--deflation--can be enormously painful, as Californians know from what happened to the local real estate market in recent years.
One hundred years ago this summer, such a deflationary cycle caught Midwestern farmers in a much worse vise. As crop prices sank, farmers had to pay their mortgages with ever-more-valuable gold-backed currency. Foreclosures were rampant.
Nebraskan Bryan--the Boy Orator of the Platte--swept to the presidential nomination at the 1896 Democratic National Convention by denouncing the gold standard as a scheme to enrich Eastern bankers at the expense of the “plain people” of the heartland.
Bryan and others in the “Free Silver” movement blamed the crisis on the scarcity of gold and pressed the government to begin freely minting more-plentiful silver to boost the total money supply. A nearly identical plea is still heard during recessions, when the government is urged to boost the economy by pumping more paper money into circulation.
Although such inflation may float debtors out of their misery, the counter-argument goes, it robs investors by paying their returns in cheaper dollars.
Bryan didn’t see any difficulty in that choice. “Upon which side will the Democratic Party fight,” he asked in his electrifying 1896 convention address. “Upon the side of the idle holders of idle capital or upon the side of the struggling masses?”
Assailing the Republicans, Bryan thundered: “We will answer their demand for a gold standard by saying to them: You will not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”
Bryan lost the election to Republican William T. McKinley, only to be immortalized four years later as the Cowardly Lion of “The Wonderful Wizard of Oz,” according to scholars who view the 1900 children’s book as an allegory of the Free Silver debate. The author, L. Frank Baum, had spent time in the Midwest, where he marched in some of Bryan’s fervid torchlight rallies.
Literary detectives say the Scarecrow represents the Midwestern farmer and the Tin Woodman the industrial worker. The name “Oz,” they say, is a play on “ounces” of precious metal. In the book, Dorothy’s magical footwear--the ruby slippers of the MGM film version--were actually the Silver Shoes.
Much earlier, Andrew Jackson, the first populist president, had invoked some of the same scapegoats as Bryan--to make the opposite point. Paper money served the sharpers of Philadelphia and New York, Jackson held, whereas gold was the farmer’s friend.
And when Nixon took the country off the gold standard, he fingered yet another band of culprits, saying, “We must protect the dollar from the attacks of international money speculators.”
As did U.S. leaders before him, Nixon worried that if foreign central banks suddenly tried to redeem their greenbacks for gold, there would not be enough bullion in Ft. Knox to hold back the stampede. (Individual investors were not permitted to exchange dollars for bulk gold.)
Ever since Nixon’s action, the gold bugs have been plotting to bring the system back.
Publisher Steve Forbes took up the golden cudgel in his unsuccessful bid for the Republican presidential nomination earlier this year, dubbing his plan for a flat tax and a re-linkage of the dollar to gold “The Flat Yellow Brick Road to Prosperity”--an ironic echo of that earlier anti-gold tract. (Forbes said in an interview that he was unaware of the Oz symbolism and chose the slogan simply “because I liked the movie.”)
Some Republicans, wary of charges of extremism or economic quackery, are downplaying the significance of Kemp’s views on gold.
Wayne Angell, a former Kansas state legislator and Federal Reserve Board governor who now is chief economist at the brokerage firm of Bear Stearns & Co., said that Dole, not Kemp, is the presidential candidate. Although Angell is a Kemp confidant and a leading gold-standard advocate, he worries that the issue is politically unripe.
“I don’t think Dole is going to want to saddle his ticket to the gold standard,” he said.
Forbes agreed, saying: “I think the big issue [for Dole] is going to be taxes. Monetary policy’s a little arcane. The groundwork hasn’t been laid for it.”
Indeed, Dole’s closest economic advisors act as if the gold standard is the farthest thing from their minds.
Stanford University economist John Taylor, who helped write Dole’s economic program, said he was unfamiliar with Kemp’s views on gold. Although Dole considers price stability an important goal of monetary policy, Taylor said reinstating a dollar-gold link is “far from any discussions I’ve been involved in.”
For gold bugs still ardently pursuing a return to the gold standard, however, there’s no time like the present (with the possible exception of the past).
Wanniski, a New Jersey-based consultant, said in a recent interview that President Reagan should have capped his economic revolution a decade ago by re-linking the dollar to gold but that he was talked out of it by “monetarists” in his circle of advisors.
Now Wanniski’s hopes rest with Kemp, who staked out his own ground most recently in a June 18 opinion piece for the Wall Street Journal.
In it, he said the president should issue an executive order instructing the Treasury secretary “to stabilize the dollar value of the nation’s gold reserves, say within a $30 [per ounce] band, as a critical first step toward restoring sound money to America.”
Without the risk of inflation eroding their assets, he argued, investors would accept much lower interest rates--”eventually as low as 3% on 30-year bonds [from 6.8% now] and 4% on 30-year mortgages.”
The lower rates would save the government as much as $1 trillion in interest payments on the national debt over the next decade and in the private sector would foster “a dramatic increase” in savings, boosting productivity and raising living standards, Kemp said.
Another idea that enthralls the gold bugs--and unnerves gold opponents even today--is the very notion of taking control of the dollar’s value away from flesh-and-blood policymakers.
Since Nixon ushered in the current system of “floating” exchange rates, that role has belonged to the governors of the Fed, who monitor a bewildering array of economic statistics and commodity prices to help them decide when to raise interest rates (which theoretically raises the value of the dollar relative to other currencies) and when to lower rates, which has the opposite effect.
Supporters of a dollar-gold link say the beauty of their plan is that it would replace the judgment of a few individuals with the collective wisdom of the marketplace.
If the price of gold, as set every day in the world market, strayed from the permissible range--Kemp’s proposal would allow it to move $15 above or below an as-yet-unspecified target price--the Fed would be required to take steps to bring the price back into line by either shrinking or expanding the money supply.
Economist Lawrence Kudlow, another Kemp advisor, argues, “The markets have more information and more wisdom than the most well-intentioned government official.”
But as Roger Murray--a retired Columbia University finance professor who is a longtime chief economist for Bankers Trust in New York and advisor to numerous investment funds--contends, what attracts people to the gold standard may be its simplicity.
Of his former colleagues on Wall Street, Murray says: “They prefer not to have to think about things. [They think,] ‘Let’s find a simple answer so we can concentrate on making money.’ ”
The reality, he says, is that “no country is really prepared to abdicate decisions relative to economic policy to the price of a precious metal.”
Rather than induce a harrowing bout of deflation to pull the gold price back into line, Murray believes, Congress probably would simply repeal the law outright or devalue the dollar, as has been done before.
Even if the United States had the political will to stay on the program, tying the dollar to gold would put a “straitjacket” on the economy, denying government the flexibility to cope with rapidly changing events, such as technological breakthroughs and the opening of vast new overseas markets, said Wall Street economist Robert Brusca of Nikko Securities.
MIT’s Solow and others note that the dollar’s 70% drop in value against the Japanese yen between 1985 and 1995--a fall that is credited with restoring the competitiveness of U.S. manufactured goods abroad and shrinking the nation’s trade deficit--would have been impossible had the dollar, the world’s reserve currency, been tied to the price of gold.
Moreover, the timing is odd, Solow said. He pointed to the current climate of low inflation and moderate growth as proof that the economy can be managed effectively without a golden tether.
The Republicans are unlikely to push the discussion during this election season, Solow said, adding, “I’m sure whatever Jack Kemp says, he wishes he hadn’t made those comments.”
Good as Gold
The price of gold soared after President Richard Nixon severed its tie to the dollar in 1971. Today, the price remains fairly stable. A look at average annual prices since 1968.
Dollars per ounce
Friday: $380.80
* Note: The annual average price is taken from average afternoon prices fixed by London bullion dealers.
* Sources: Metals wWeek, OPM Group.
* Researched by Jennifer OLDHAM / Los Angeles Times
