Golden Constant
Jude Wanniski
January 11, 2005


From: Ben.S.Bernanke@***.gov
Subject: Re: Sherlock Bernanke
To: Jude Wanniski < >

From: Ben S. Bernanke, 3:43 pm 1/11/2005


I have the gold price on my Telerate and am always aware of it.


p.s. Re "Sherlock", when I was chair of the economics department my associate chair was Professor (or "Doctor") Watson.

From: Jude Wanniski   <
To:  Ben.Bernanke@* * * *.gov          
Subject: Sherlock Bernanke    01/11/2005 02:35  PM                       
Dear Ben...

A nice little talk last Friday, best line the bagels and doughnuts at Princeton. I gather it is only too true that a chairman of an econ dept doesn't have much more clout than that.

The penultimate graph, though, about Bernanke the detective, is what caught my eye. I do hope you have begun looking in unexpected places for clues, by which I mean the behavior of gold. Note in my Letter to FOMC members yesterday (which I did e-mail to all on the list, voting and non-voting) I mentioned gold being the only commodity that never backwardizes. There is actually a name for that kind of behavior, i.e., "contango." Because gold never backwardizes in dollars, it never does in any other currency either, which means the relationship between currencies in the spot forex market also have the same relationship with other currencies in the futures market, the only gaps being explained by interest-rate variables. Contango.

If you are proceeding along these Sherlock inquiries, I would suggest again you get a copy of "The Golden Constant" by the late Roy Jastram, a Berkeley professor who I guess Eichengreen knew. The text of the book is not essential, but the charts and graphs are. Jastram demonstrates what he called "the retrieval phenomenon," which price data going back to the 16th
century in England and to the 18th century in the U.S.  Prices of a basket of goods will diverge over periods of time, but always come back into relationship with gold. Jastram spent a decade in England reconstructing price indices from the ledgers of the crown, as he realized the kings and queens kept records of everything they purchased beginning in the 16th
century... every chicken, every bushel of wheat, etc.

The book is out of print and if it is available in Amazon used, it will cost about $200 (the last time I know someone who bought a copy). But it should be in the Fed's library.  You should also be able to find Henry Wallich's paper on what we call the treadmill effect.

Good snooping,