Once Again, $350 Gold Jude Wanniski April 26, 1993

Over the last several years, the gold price has swung up and down around the pivotal $350 — precisely 10 times the price fixed by President Franklin Roosevelt in 1934 and then agreed upon in 1944 at Bretton Woods by the Allied war powers. President Nixon devalued the dollar by raising the gold price to $42.50 in 1971, on the advice of devaluationists who said a cheaper dollar would reduce our trade deficit with Japan. The paper dollar and the "specie" gold were formally "unhinged" in 1973. Keynesian devaluationists, led by Yale's James Tobin, were joined by the monetarists, led by Chicago's Milton Friedman, in arguing that a floating dollar would be just dandy. For having nudged President Nixon into the most destructive economic policy since Herbert Hoover's tariff act of 1930, Professors Tobin and Friedman were awarded Nobel Prizes.

Federal Reserve Governor Wayne Angell, who was sworn in seven years ago on a day when gold was exactly at this pivotal price, has been the single most important policymaker on earth in leading the world toward refixing currencies to gold. A former professor of economics and member of the Kansas legislature, Angell had known Senator Bob Dole since 1963, when Dole was a young congressman planning to vote against the Kennedy tax-cuts along with most of his party, led by its Goldwater wing. On a visit to Washington, Angell persuaded Dole to vote for the tax cuts, a vote that history has proven to be correct. In 1985, Senate Majority Leader Dole instructed the Reagan White House to name Angell to an open Fed seat, and he was sworn in Feb. 7, 1986. Impressed with his confirmation hearings, I asked for a meeting. He acknowledged at that meeting, that while he remained a monetarist, he believed the price of gold to be the single most important piece of information available to him on a daily basis. I called Senator Dole and told him, to his obvious delight, that if he never did anything else in his political career, history would reward him for having gotten Angell a seat on the board.

Now the most senior member of the Fed, his term ending next February, Angell has embedded the concept of Price Level Targeting at the Fed. Within this context, he has also steadily coaxed Fed Chairman Alan Greenspan into elevating the gold price as a policy guide — which I believe is the principle reason why gold comes back again and again to $350. Another reason is that The Wall Street Journal for a decade has argued for a ref ixing of gold at $350, and Robert Bartley, editor of the WSJ, is a friend of Alan Greenspan's. Finally, as a young man Greenspan had written of the importance of a dollar as good as gold on a moral plain. There is, after all, practically nothing more destructive to the fabric of society than the devaluation of the whole peoples' savings by their government.

In his autumn years, Greenspan has returned to gold for its information content on the value which the people put on the government's paper money. He is now the most important man in the world, I told him last week at dinner in Washington. This, after we'd been turned away in the rain from the Metropolitan Club and the Army-Navy Club, finally finding a noisy empty table at the Watergate, next to the kitchen. "You are the boy with your finger in the dike," I suggested, which brought a wan smile. His speech to the New York Economic Club last Monday is his latest, best attempt to alert Wall Street and Washington that the most important man in the world is the equivalent of the little Dutch boy at the dike.

President Clinton's political people tell me he loves Greenspan, not only because the bond market has been a bright spot of his first hundred days, but because they get along surprisingly well in their personal meetings. Treasury Secretary Lloyd Bentsen, of course, is also a Greenspan friend and ally, as he has made clear on Capitol Hill in public testimony. If Greenspan didn't have this kind of support, the dam would break, bonds would collapse, and the economy would be headed toward major recession.

My concern is that the Clinton Administration will nibble away at the credibility of U.S. monetary policy, all the while embracing Greenspan. We seem to be back in 1971, for example, with Commerce Secretary Ron Brown, suddenly an expert in exchange rates, gloating over the appreciating Japanese yen — because this will reduce their trade surplus with us! In fact, Secretary Bentsen and the President himself have in one way or another indicated satisfaction with an appreciating yen. In the wake of the Administration's problems in the Senate with its domestic economic program, it's to be expected that there would be some congratulations on seeing the yen climb to 110, on the hoary argument that this will create U.S. jobs at the expense of Japan. The yen's decline to this level, though, has coincided with the rise in the gold price to $350 from $330. This leads us to wonder if this is simply the result of the Greenspan Fed getting back to where Greenspan wants to be on gold. In fact, we observe an easier stance by the Fed in the last ten days. As David Goldman reports:

 "Small changes in the fed funds rate continue to control the gold price, as they have during the past four months. Gold  rises when the Fed permits the fed funds rate to trade marginally below its imputed 3% target and vice-versa. Analysis confirms this visual impression. The Fed's evident willingness to give ground to a rising gold price leaves the long-term bond market highly vulnerable in the short run. Our daily bond yield model shows that the relative stability of the 30-year bond yield during the past week conceals a delicate balance between forces pushing in opposite directions. The near-term volatility of the gold price represents a big negative for the bond yield. On the other hand, the bond market evidently does not believe that the dollar's present weakness against the Japanese yen will prevail. Expectations of an eventual dollar recovery and ensuing capital gains in foreign currency terms are the most important factor supporting the bond yield at the moment. Given the pressure on Japan from Washington to continue forcing up the yen's value, though, these expectations regarding an eventual reversal of the dollar's weakness could dissipate very quickly. On several occasions during the past few years, we have seen the bond yield fall in response to foreign-exchange considerations only to run back up when the wind shifted — notably between January and March of 1992. Even assuming that the Fed will act to prevent gold from rising much above $350, for the bond yield to fall much further the markets would require an extended period of gold price stability in a narrow range, by way of reassurance."

Either that, or Greenspan and Angell could be finding ways to discuss the importance of the price of gold in their thinking. The gold price has begun to show up in the Fed minutes as one indicator of the absence of inflationary impulses in the economy. Eventually, we have no doubt, the dollar/gold link will be fixed de jure, if only to drive down the colossal cost of debt service. Between now and then, with time running out in their terms of service, it would be useful to have all the Fed governors step back and discuss their philosophy of money and banking. They've all learned a lot in the last several years. If they would share their wisdom with us, that alone would reassure the creditors of our government and bring down long term rates. As it is, the loose lips of Ron Brown, Mickey Kantor, and other leading monetary experts in Washington make us nervous. Or so I advised the most important man in the world.