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THE WALL STREET 'OUN,NAI. TUESDAY. SEPTEMBERI. I9EI
ffi
BY Aux Gnnrnsmri
The growlngdlsllluslonrnentlrlth pollu'
cally contmlledmonetarypoUcleshas pro
ducedan Increaslngnumber of advaates
fDr a return to the pld standad-lnclud'
'lng
at tlmes hesldent Reagan.
ln years past tie deslre !o rcturn to a
monetary s'.stem basedon gold was per'
.celvedas nostalSlafor an era when tlrnes
were slmpler, problemsless complexand,
the yorld not tlreatenedwlth nuclearannl'
hltatlon.But after a decadeof destabllltlng
innatlon and economicstagladon, the res'
toration of a gol{ standad hes b€comean
lssuethat ls cteally ilslng on the economlc
policy agenda.A commlsslonto sludy tle
lssue.wlth strong support fmm ffident
Reagan,ls In place.
The lncreaslngly numerots proponents
of a gold standardpersuaslvelyargrtetiat
large budgetdeflclts and large federalbor'
rcwtng requlrementswould be dlfflcult to
finanee under such e standard. Hearry
clatms against paper dollan cause few
technlcal problems. for the Tr€asury can
legally bormw as many dollars as Con'
gress authorizes.
But with unlimited dollar conversion
into gold.the ablllty to issuedollar clalms
. wouldbe severelyllmited.Obvlouslyif you
cannotflnancefederaldeflclts,you cannot
createthem. Elther taxeswouldthen have
to be ralsd or expendltureslowered.The
restrictions of gold convertlbillty would
therefore profoundly alter the polltics of
fixal pollcy that have prevailedfor half a
century.
Dlsnrbed by Alternatlves
Even some of thosewho concludea re
turn to gold ls lnfeaslbleremain deeplydis'
turbedby the currentalternauves.For ex'
ample, William Fellner of the Amerlcan
EnterpriseInstltute ln a forthcomingpubll'
". . . I find lt difficult not
cation remarks
to be gTea0ylmpressedby the very large
damage done to the economlesof the in'
dustrlallzed world . . . by the monetary
managementthat has lollwed the era of
(gold) convertibittty.. . . It has placedthe
Westerneconomles ln acutedanger."
'tet even thoseof us who are attracted
to the prospect of Sold convertlblltty are
confrontedwlth a seemlnglylmPmstbleots
stacle: the latest clalms to gold repre
sentedby the huge world overhangof flat
currency,malnly dollars.
The lmmedlate problem 0f Festortnga
gold standardls flxlng a gold price that ls
conslstentwlth market forces.Obvlotslyif
tle offerlng prlce by the.Treasuty-lstm-
A ,Gonversation
With the French-ForcjgnMinister
By Krnrw Eu.rmr House
, and.Felu.KBssLnn.
PARIS-Wien the SoilalFs dame to
power in France this sprlng, the govern'
ment's first emlssery to the Whlte House
was Claude Cheysson,thls country's re
-^-l,olrlv nrrlcm|ran mlnlc?er nf eyterntl
Return to a Giokf$tandard?
los. or subsequentlyproves to be tm low, ernment-lnducedcredtt enrtlon wodd be (l77cl and tle lonrard dellvery premlums
heavy demandat tle offerlng prtce cmld a stmng pollUcd Sgnal. Evm alter lnlla. of goltl (16% ennual ratel Inferr€d fmm
qulckly depletethe tota.lU.S. government' tbn is brought uder contml the extraordl- June l$Il futures contnrcts. Presumably-
stockol gold. as well as any goltl borrowed nary current pollttcal s€nsluvlty to lnlla- llveyear note lssueswould reflect a siml-
to tlwarl tle assault.At that point, wlti no tion wtll surely rernaln. lar relatlonshlp.
addlUonalgoldavallable.the U.S.wouldbe Concreteactbns to lnstall a gold nan-
off Oe gold standardand llkely to remain dard are prernature.Nonetleless. there A ruk of Exchange [.oss
are certaln preparatorypollcy acttonsthat
' off for decades. The exchangerlsk of the Treasurygold
Alterna[vely.lf the bld price is inlually couldtesl the eventualfeaslbllltyof return- notes,ol course.ls the sarneas that asso
set too hlgt. or zubsequentlyb€comestoo lng to a gold staDdard.that would have
elatedwlth our forelgncurFencyTre:rsury
hlgh. the Treasury would be lnundat€d pcltlve short lerm sntl-lnflatlonbenefits note s€rles.The U.S. Treasury has, over
wlth gold offerlngs. The paymentslor the and llttle costll they lalt.
the years. sold slgnlflcantquantttiesof
gold drawn on'the Treasury'saccountat The major msdblock to restoring the both Germu mark. and Swtss franc-de
Oe Federal Reserryewould add substan- gold standardh the problemof reentry.
nominatedlssues,and both made and lost'
Ually t0 commercla.lbank resenres and \Yith the vast quantlty of dollan world- money In tenns of dollars as exchange"
rates have fluetuated.And indeedthere ls
a risk of exehangelcs wlth gold notes.
Tlw restrietionsol goll. conaertiffiity wouW pro' However,unlessthe price of gold dou-
loutdly alter tfu politics "f liscal policy'*he) lwue bles over a fiveyear period tl69c com-'
poundedannuallyl, interest paymentson
prnailed lor l*U o century. gold notesIn terms of dollars rvill be less
than corwenllonalfinancingrequlres.The
run-up to t8?5per ouncein early 1980was
probablyaet, at least temporarily,to ex- wide laying claim' to the U.S. Treasury's surelyan ab€rratlon.reflectingspecialclr-
pand the moneysupplywith all the inna' 26{ million ouncesof gold. an overnlght cunstancesin the }tiddle East whlch are
tlonary lmpllcatlonsthereof. transitionto gold eonvertlbtlltywould cre unHkelyto be repeatd ln the near future.
'
Monetary offsets to neutralize or ate a major discontinuityfor the U.S. fl- Hence.anythingclo6eto a doublingof gold
"earmark" gold are, of course,possiblein nancial system.But there ls no need for prices in 4fie next five years appearsim-
tle shorl run. But as tie lvest German the whole block of current-dollarobllga-- ppbable. On the other hand,if gold prices
monetary autiorilies soon learned from tionsto becomean immhlaie claim. remalnstableor rise moderatety.the sav-
thelr past endeavorsto suppon the dollar, ings could be large: Each 310billion in
Convertlbllltvean be instltuted srad.
there are limlts to monetarycountermea- ,"riv tvfin"rir..r.'.r"iti1g i-ou.l"cur- equivalent gold notes outstandingwould,
sunes, ;;;;, ,afi'; ii;niieir-rsr";-6r oorrirs ion- -under stable gold prices,save Sl.i biilion
The only seeming solution is for the urrttUf. into Sota. Inltially they could be per year in interestoutlays.
U.S.to cr€atea fiscal and monetaryenvl' deferredclaims to gold, for example.fiv*
ronment which tn effect males the dollar
as gmd as gold, i.e., srabilizesthe genera.l iear
rreasury notes-wiur tnterestinapnn- **ffil$,f#S n','r$ffi!!?foffi $;
' price cipal payablein grarnsor ouneesof gold. " ,t"no".o ln terms at prices and lnterest
level and by interencethe dollar
prlce of gold bullion itself. Then a rnodest Witi the passage of time and several is- _rates that could put ddditional political
Feserveof bu.llloncould reducetle remain- sues of thes€ notes we would smn have a Dressureon the administration and Con-
series of "near monies'ltn tgrms of gold
ing narmw gold price fluctuations effec' Lressto moveexpeditiously towardnon-in-
demand claims on gold.
Uvelyto zem,allowlngany changesin gold and evenlually, ha1onary polici*. Gold nbtescould be a
-reversing
The degfee of success ir restoring long' case of Gresham's [aw. Gmd
,supplyand demandto be absorbed,influc' term tiscal confidencewill showup clearly
tuatlonsin the T'reasury'sinventory. rnoneywould drive out bad. :
yield spreads behr/e€n gold and fiat
What tle abovesuggestsis tlat a neces' in the -oUtigations
aottar of the same maturities. Thosewho advocatea return to a fold
sary condltlonof returnhg to a gold stan' skndad should be aware that returning
dard ls the financlal envircnmentwhtch f'Ut con"e"rtibllltywould rqulre that tle
yreld spreadsfoi all maturities vlrtually our monetarys'tstemto goldeonvertibility
the gold standad ltseUls presurnedto cr*
iisappe'ar. If they do not, convertibility ls no'mere techntcal,financialrestruclur'
ate. But, lf we restore financia.lstabiliry, probably impossibld. ing. It is a baslc changein our economic
what pulAoseis then xrved by a return to wrll'be very dlfftcirlt. processes. However,eonsldering wherethe
a gold standard? to implemdnt
Certalnly a gold-basedmonetarys)Gtem Asecond advanrage orcol9l9!:'r, p1l H'*A:LT.',*#'Kfi,'ffHijyj*
' .will not necessartlypneventflscal lmprud' theyare
llkelyto dyl_:Ynlt - past..
ligg.gi ;ilrfi;i,i-rne,it-iiitint'iilo.stanoaro
ence,as'20ti Centuryhistoryclearly dem' deficits.Tleasurygold notis tn today's
onstrates.Nonetleless.onceachleved.the marketscouldbesold at interestrates ap -
dlsclpltne of the gold standard would proximatlng2% or less. In fact fmm to
surrly relnforte anU-lnflatlonpollcles,and day's marketsoneeanconstructthe equlv' Mr. Greensrr'n,ol the econornit'consult.
make tt far more dlfflcult to resurneflnan' alent of a 22-monthTreasury gold note ' ing lirm ol Twcnsend-Greenspan & C'o.,
clal pmtllgacy.The redemptionof dollars yielding l%, by arbitra$ng regular T?ea- wos clwirman of the Councilof Econotrtic
for gold tn respooseto excessfederal gov; surf note yrelG lor -June,lllS3.rnatudues. Aduisers"l97l-n.,. - 1..--- ,, .: --- - , ,
"ln the beglnnlng lt seemedthat you and the Carlbbean.and thls ls what we
supportleftists; hencetielr Joint declara-
tion over the weekendwlth Mexico that were only interested ln Soutlr Africa be shallsay all over tie world.Our positionis --,
they recognlz€leftlst guerrillas ln El Sal' eauseSouti'Afrlca has mlnerds. a stmng,' much.cleareuthan any prlvious-pvern'
-fiese , strate8lc posltion, a very bn8tt hdustry ment."
vador, though the U.S.-refusesto,
prlorlUesand pollcles.so sharply at odds and a develop€dsoclety.Why botler wlth For all these reasons. Mr. Cheysson
wlth the U.S., puzde and annoy many tie rest? But pro8Tesslvely, one coujd see
tie rest of Alrica comlnglnto tle plcture." s3y5,France wlll pusl hard at tlle meeting
Amerlcans. of leaders from lndustrtal and developlng
lF a wont (ntdnr{drrt lfr /rhorrccnn --..--- l- F^--rt- rt^vl^^ navt h^hth t^.