The Moment for Gold

The speed with which money is flowing out of gold — and American government bonds — and into stocks reflects the improving economic outlook, according to a telegram sent out this afternoon by the economist David Malpass. He notes that gold has fallen $115 dollars since its $1,431 intra-day peak on December 7, while the 10-year Treasury yield has risen to 3.4% from a low of 2.4% on October 7. He reported on a recent conference at which investors passed around “large gold nuggets” and at which Paul Volcker pointed out that a rising gold price is, as Mr. Malpass put it, a “negative assessment of a central bank.” But he thinks the trend in the past month reflects the economic outlook.

Not a bad moment to sketch this newspaper’s interest in gold. We look at it not with the investor’s eye or the speculator’s motives, though we respect both investors and speculators. Our interest in this beat has to do with the long struggle for monetary reform. It’s our view that the difficulties our economy have been going through have their roots in the un-soundness — the fiat nature — of what currently passes for American money. We comprehend that the dollar can gain in value even without a repair of the monetary system, as fiscal, political, and related matters and even the business cycle can change the outlook for growth.

If, however, we are to reduce the danger of future busts, the most important reform would be to restore sound money. By that we mean the kind of gold- or silver-based money contemplated by the Founders of America. It happens that during a period in which the value of the dollar is collapsing — such as the past decade when it fell from more than a 300^th of an ounce of gold to, at one point, less than a 1,400^th of an ounce of gold — the logic of monetary reform seems to be plain on its face. When the dollar is gaining in value, as it has been in recent weeks and as it began to do in the Reagan years, the logic of sound money isn’t as pressing.

This is what happened in the early 1980s, which we’d thought was a marvelous moment for monetary reform. After the great inflation unleashed by the failure of the Johnson and Nixon administrations to make hard fiscal choices during the Vietnam War — Johnson insisted on both guns and butter — the dollar collapsed to less than an 800^th of an ounce of gold from the 35^th of an ounce that it had been at, by law, during the years of Bretton Woods. So in 1981 Congress set up the United States Gold Commission, also known as the Reagan Commission, to look into what role gold might play in a monetary reform in America.

Eventually the commission rejected the idea of a return to gold, though it issued a famous minority report by two of its members, Lewis Lehrman and Ron Paul. But a the dollar was rescued, at least for a while, by the rise of Paul Volcker to the chairmanship of the Federal Reserve. His was a long reign of tight money that conquered inflation and started moving the value of the dollar back up. Mr. Volcker was able to do this because his tight money regime was operated in tandem with the tax cuts and other supply-side measures being put through by President Reagan.

The combination of policies touched off the Reagan boom, which ran through what the editor of the Wall Street Journal called “seven fat years,” and eventually it was extended into the 1990s and, after some retreats, into the 21^st Century under George Bush. It is astonishing, at least to us, to think that at the start of George W. Bush’s administration, in January 2001, a dollar was worth a 265^th of an ounce of gold.

What nags at us is the question of whether the momentum for monetary reform which gathered as the castrophe of the collapse of the dollar has come into focus could be lost in the economic growth we are experiencing today. The position of the Sun is that there are three circumstances when it makes sense to move to a system of sound money. One is when a currency is collapsing. Two is when it is steady. And three is when it is appreciating. What one really wants, at any point, is the confidence that the dollar will remain exchangeable for gold over a long period and that people will have confidence in that.

David Malpass’s conclusion is that the risks of severe inflation and deflation are abating at the moment. But he closed his wire to clients and others with a warning that information on debt problems is still coming out. He noted that the Congressional Budget Office had just put out what he called a “daunting” report on America’s fiscal deficit, that Standard and Poore’s has just downgraded Japanese debt, and that the Fed seems intent, following the meeting Tuesday of the board of the Open Market Committee, to plow ahead with its plan for a second quantitative easing. All the more reason for the leadership in Congress to heed Representative Paul Ryan’s pointed reference to the need for sound money in the policy mixture currently being crafted by the Republicans and, one would like to at least hope, the Democrats.