Gold’s Fools
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

In respect of the gold price, which is at a 16-year high, we’re well aware that Keynes called the gold standard a “barbarous relic,” but we’re just foolish enough to believe that the marketplace for gold is a good place to go in order to get a glimpse at future price inflation. We can’t help but notice – nay, savor – the irony of the left, which has consistently looked down upon “gold bugs” as economic Neanderthals, suddenly touting it as a great measure of America’s economic health. It seems that no principle is so important for the American left that it cannot be scrapped in order to take shots at the Bush administration. If gold is low and stable under President Reagan, who cares? If gold is high under President Bush, then it’s a clear sign of economic panic.
In reality, gold is neither. Instead its price is an indicator as to the future level of price inflation/deflation in the currency of the particular nation under discussion. Keynesians see growth as inflationary in and of itself and recession as deflationary. Monetarists recognize that “inflation is always and everywhere a monetary phenomenon,” but tend to measure money supplies using backward-looking counting techniques. Supply-siders know that prices are driven up and down by the number of dollars created and destroyed, but hold that “market sensitive indicators” are better than last quarter’s bank balance sheets. History has been kinder to the supply-side hypothesis than to the other two.
That’s why the recent run-ups in gold prices stir in these columns concern about inflation. Add to gold the recent declines in the dollar in foreign exchange and that leaves two out of the three market-sensitive indicators pointing toward inflation. The third, long-term interest rates, are quite low but increasing slightly. None of this should be any surprise. The Fed may have held interest rates too low for too long. When the Fed funds rate is below the market rate, banks can borrow low and lend high, in essence, leaving the money spigot on. That money starts showing up in higher prices of gold and euros and yen, oil and steel and lumber, and eventually in cars and washing machines and cheeseburgers.
This problem stems partly from the attempt to pull America out of the 2000-2001 recession through only modest tax cuts and easy money. Eventually, the president got all of his tax cuts through in May of 2003 and the economy started booming and the artificial stimulation of easy money was neither needed any longer nor welcome. They Fed may sense that it is now in a position to trust the growth effect of last year’s supply-side measures, and raise rates. Friday’s jobs numbers show that the boom is certainly alive. The way to address the concerns of the barbarous relic is to implement the rest of the president’s supply-side program, starting with reform of the tort system and social security. When the price of gold stabilizes, the leftists will have something else to complain about.
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This article was corrected to make more accurate the reference to a barbarous relic.