A gold standard coming - Gekko's Guide to Prosperity - Cover Story

National Review, Feb 6, 1995 by Jude Wanniski

SOMETIME in the next few years, the President of the United States will sign an executive order directing the secretary of the treasury to stabilize the price of our international gold reserves. He will follow this up with a legislative proposal to make the directive permanent, which would require the Federal Reserve to maintain the dollar/gold ratio at, let us say, $350 per ounce. The United States, which was on a gold standard from 1791 to 1971, with the exception of only a few years during the Civil War era, will once again have a dollar as good as gold.

The reason this will happen, under President Clinton or his successor in 1997, is that it is the easiest way to save $1 trillion in debt-service costs.

How does restoring the dollar-gold link save $1 trillion? By removing the risk of dollar devaluation faced by those who lend money to the U.S. Government. This is what a "gold standard" is all about: a government guarantee to its creditors that when it borrows an ounce of gold today, it will pay back an ounce of gold a year or ten years or thirty years from today. It is a "golden handshake" between the government and the people.

Throughout history, when people believe the paper money the government issues will hold its gold value, they have been willing to lend resources to their governments at interest rates around 3 per cent or even below. During World War II, with the U.S. Government pledging to keep the dollar as good as gold, it could finance a national debt almost twice as large as today's at an interest rate of about 2 per cent. With the government now offering no assurance of any kind, it must pay almost 8 per cent to float a thirty-year bond. The arithmetic is simple. If we can refinance our national debt of $5 trillion at 3 per cent instead of 6 to 8 per cent, the savings would be at least $125 billion a year. Compounded, that amounts to $1 trillion over seven years.

Senator Robert Bennett (R., Utah), a member of the Senate Banking Committee and of the Joint Economic Committee, has undertaken to explain these enormous savings to his colleagues through a simple equation: 1 per cent = $46 billion. That is, for each 1 per cent that can be lopped off long-term interest rates, the government will save $46 billion in debt service, year in and year out.

In his eight years as President, Ronald Reagan repeatedly urged his Cabinet and advisors to consider reestablishing the gold link. "I know of no great nation in the history of the world that has left the gold standard and remained a great nation," is the way the Gipper put it. However, with his advisors divided on the question and Democrats in control of the House Banking Committee, there was never a serious attempt to refix the paper dollar to a gold guarantee.

In those days, gold advocates were usually dismissed as eccentric "gold bugs." In this second wave of the Reagan Revolution, it is only a matter of time before the issue becomes an imperative. The most persistent advocate of a gold-dollar link in recent years has been Jack Kemp, who introduced gold-standard legislation in the House in the early 1980s. Kemp's allies then--who continue to be sympathetic to his gold arguments--include House Speaker Newt Gingrich, Senate Majority Whip Trent Lott, and Senator Connie Mack, chairman of the Joint Economic Committee.

Federal Reserve Chairman Alan Greenspan is an advocate of a renewed dollar-gold link. Former Federal Reserve Governor Wayne Angell, now chief economist of Bear, Stearns, remains a staunch advocate of gold, Angell is one of the closest outside advisors to Senate Majority Leader Bob Dole.

Of course, there is much more involved than interest savings. Money, after all, is what makes the world go around. If the money has constancy, integrity, predictability, the world that revolves around it will reflect these virtues. Workers can have confidence in their contracts with management. Creditors can have confidence in their contracts with debtors.

In an ideal world, in which everyone could trust the word of everyone else, the level of business activity could rise to a peak. When the level of trust diminishes, because the government can no longer be trusted, not only does business activity diminish, but the level of morality in all of society declines. The incredible inflation in Germany in the early 1920s contributed to the moral breakdown of a normally fastidious people. At a lesser level, the U.S. Government's inflation of the last quarter-century may well have contributed to the unprecedented level of wariness that American citizens feel toward one another.

A currency devaluation by the government is a reneging of its promise to pay back what it borrowed. When the government borrows an ounce of gold and decides to pay back half an ounce, it has devalued the dollar by 50 per cent, cheating its creditors.

Why did we leave gold in the first place? Governments always leave gold when those of its citizens with the greatest debts--the elites who are able to borrow vast sums--persuade the government to devalue the currency. The ordinary people, who are always the nation's primary and creditors, are the ones who lose in this zero-sum game.