One of our favorite facts about the great economic expansion that was triggered by the Reagan tax cuts of the 1980s and ran, with only modest setbacks, through the end of the 20th century is that this celebrated expansion took place against a historic drop in the price of gold. A lot of people deserve credit for the achievement, including Messrs Reagan, Volcker, and Greenspan. But the fact is that the gold price had peaked in 1980 at more than $800 an ounce, and by the start of the Clinton years it had dropped to $330, as value was restored to the greenback and confidence to the American economy.

Which leads us to remark that it can’t be propitious for President Bush, or most of the rest of us, that yesterday gold futures traded above $425 an ounce for what Reuters called the first time in more than 15 years. The wire reported that gold futures extended their rally on the first trading day of 2004 as investors “continued to diversify out of the beleaguered dollar.” Other precious metals surged as well, Reuters reported, but, it noted, “gold is considered a form of currency and is seen as a hard alternative to the greenback.” The gold runup, Reuters observed, built on last year’s 20% gain as the dollar hit a new low against the euro and fell to its cheapest level against the yen in three years.

What some people will say is that gold at $800 an ounce was an artificial bubble. America had been inflating. Nixon had closed the gold window. The Arab oil boycott and price run-up were launched against us. But others grasped the point that the gold price reflected serious fears about a depreciating currency. This is why the Reaganite policy of tightening money and cutting tax rates on the margin was so shrewd. The famed supply-side policy mix carried the country through the mid-1990s, when the Federal Reserve began to run a deflationary monetary policy. It drove the price of gold, which had been steady in the $350 range, down to $256 in 2001 and brought on a crash in the stock market and a recession.

In response to all this, the Federal Reserve has lowered interest rates to levels not seen in two generations. This has led to a long surge in the price of gold that is approaching three years. We have the sense that sooner or later the policy makers are going to wake up to the fact that the self-proclaimed heirs to Ronald Reagan are running a policy mix decidedly different than his historic breakthrough. His was a reduction in marginal tax rates combined with tight money. The recent mix has been a reduction in tax rates combined with easy money, a different and dangerous concoction. It is going to be hard to look at the price of gold now and conclude that it’s signaling anything other than inflation.

That this clear decline in the purchasing power of the dollar comes in the midst of an election year may be good for President Bush’s chance for a second term. But it can’t be good news for the second term itself. Inflation drives up the effective capital gains tax rates, it drives up spending to the degree that big government programs are indexed, and it undermines the purchasing power of American consumers. It’s hard to credit the notion that any of the current Democratic Party contenders is going to be able to exploit this in the next 10 months. But it’s not hard to imagine a much more explosive set of circumstances obtaining by the time a campaign is launched in 2008 by a Democrat named Hillary Clinton.