Early in 1998, when I first became concerned about the impact Y2K might have on the global financial system, it occurred to me that it would be a good idea if the floating currency regime at least temporarily were fixed to a gold anchor: "The only reason the business world can exist in its present form of floating exchange rates is the computers that are capable of juggling myriad rates of exchange and currency contracts." ["Y2K Opportunities" March 31, 1998] I had hoped the precaution could be taken by the end of last year, but realized that we would have to get closer to Y2K before the political class would be able to focus on this. On June 11, Jack Kemp wrote a letter to President Clinton recommending the temporary dollar/gold peg. On August 11, having had no response, he wrote a second letter to the President, only to find that Clinton had written a letter August 5, which arrived at Empower America on August 13. No doubt written by Treasury Secretary Larry Summers -- now the Y2K point man on economic matters outside the purview of the government computers -- the idea was rejected. The President wrote: "I do not believe that fixing the price of gold and the dollar would achieve the objective of stability in the event of Y2K problems. It is unlikely that the Federal Reserve could implement such a policy without risking substantial distortions in the U.S. money supply and the availability of credit. This conclusion is consistent with the 1982 Report of the Gold Commission, which addressed a broad range of issues related to gold and financial stability."
By citing the 1982 Gold Commission, Summers shifted responsibility to the Reagan Administration and its Gold Commission, which had been mandated by Congress the previous year because of the efforts of Sen. Jesse Helms [R-NC], a gold advocate. Supply-siders lost that battle when Treasury Secretary Donald Regan appointed a student of Milton Friedman's, Beryl Sprinkel, as Under Secretary for Monetary Affairs. Sprinkel then named as Executive Director of the Gold Commission, Anna Schwartz, Friedman's collaborator in their Monetary History of the United States. White House Chief of Staff James Baker III leaned on Regan to have Lewis Lehrman named to the Commission as its only gold advocate. Lehrman attended the first meeting and no others, telling us Schwartz already had decided that gold would risk substantial distortions in the money supply, and that was that. The commission had been rigged by their guys, not ours.
The Clinton letter to Kemp would have ended matters then and there, but for former Vice President Dan Quayle. He knew of the Kemp June 11 letter and the President's response, and decided to put in his own two cents. Quayle had already initiated the criticism of the Fed's monetary deflation and its effect on commodity prices as he campaigned through Iowa, with Steve Forbes joining in on the issue as well. It helped that Quayle's campaign manager, Kyle McSlarrow, had read the Austrian economists and was comfortable with gold as a stabilizing force. A Quayle letter to Clinton was sent on Monday, urging that Kemp's proposal be reconsidered, and that Fed Chairman Alan Greenspan be consulted. Here is how Quayle put it:
As I understand it, Mr. Kemp is simply suggesting we take precautionary measures to provide an anchor for our currency and all the world currencies that wish to link with the dollar in order to simplify financial transactions and record-keeping. The simple fact of the matter is that the global banking network, which not long ago relied on calculators and pen-and-ink ledgers, is now completely reliant on computers. "Money" is now largely electronic. Even if our financial markets are the most Y2K compliant in the world, a breakdown anywhere in this incredibly complex system may feed back to us in ways we cannot foresee or imagine. We need to think through what steps we can take right now to ensure the integrity of this system.
Jack Kemp's recommendation that you instruct the Federal Reserve by executive order to temporarily peg the price of gold -- as we did in the Bretton Woods system from 1944 to the early 1970s -- seems a credible one for this circumstance. The Fed's current attempt to manage the growth rate of the domestic economy should be briefly suspended in order to guarantee the stability of the dollar against commodities and other currencies as the world crosses the Y2K threshold. As disappointed as I was in your cursory rejection of Jack's proposal, it occurred to me you might reconsider if you asked Alan Greenspan to give it serious thought. As chairman of the most important central bank in the world, presiding over the management of the world's most important currency, he surely must worry about the issues we raise here. Your letter of rejection suggests you are simply prepared to wait for Y2K to see what happens before any precautions are taken in this most critical area.
In your response to Jack Kemp, you dismiss this concern and address a much different issue: whether fixing the dollar/gold rate is the right long-term policy. That is an issue that can be debated at another time. For now, a short-term plan for dealing with potential disruptions deserves your closest consideration. If you are to act on the proposal, it should be done early enough to give the other governments of the world the opportunity to link into the system. No other country can provide this kind of currency umbrella to see us through a Y2K storm, should one occur.
What this letter does is shift the responsibility for killing the idea -- if it is killed -- to living people, not a dead 1982 commission. Greenspan knows the President can order the dollar/gold price fixed by executive order -- at a level that would undo the worst of the commodity deflation. Greenspan, who also has eschewed responsibility for any economic problems elsewhere in the world (e.g. the Asian crisis) because they are outside his legal purview, might find it harder to argue that the rest of the world should float as best it can through Y2K. Once the press corps understands what is at stake, all the other presidential candidates will be asked whether we should fix or float through Y2K, including Vice President Gore. Bill Bradley, who understands the arguments and has always been "anti-monetarist" and more comfortable with "fixed exchange rates," might join Kemp, Quayle, and Forbes (whom I assume would join the party). To say this precaution should not be taken is one for which Vice President Gore might have to answer, come January 1. How well would he do in the New Hampshire primary if the world economy should be in significant distress, and he is on record pooh-poohing this simple, temporary precaution? The idea may have legs.