On A Gold Roll

Former Federal Reserve Chair Alan Greenspan is on a gold roll. In September, Greenspan published a thought piece in Foreign Affairs musing on the indubitable monetary qualities of gold. “If, in the words of British economist John Maynard Keynes, gold were a ‘barbarous relic,’” Greenspan wrote, “central bankers around the world would not have so much of an asset whose rate of return, including storage costs, is negative.”

Then, at the home of the magazine’s sponsor, the Council on Foreign Relations, Greenspan was at it again. In response to questions, Greenspan reminded his audience that the last time the world got together to reform the monetary system, in 1944 at the Bretton Woods resort in New Hampshire, the level heads opted for gold.

“The real intellectual debate [was] between those who wanted an international fiat currency which was embodied in John Maynard Keynes’s construct of a banker, and he was there in 1944, holding forth with all his prestige, but could not counter the fact that the United States dollar was convertible into gold and that was the major draw,” Greenspan said.

Greenspan is no lone wolf. Central banks are holding onto gold—even as they will protest that they are not. The United States, Germany, Italy, France, and the Netherlands—five of the eight richest big countries—hold more than half of their official monetary reserves in gold. And the Swiss are feeling the pressure.

Yet Ben Bernanke, Greenspan’s successor at the Fed, used to say in response to Rep. Ron Paul’s questions that the only reason central banks held onto gold was “tradition, I suppose.”

Actually, the reason is that gold performs the principal function that money must function when the currency system goes bad, care of central bankers. This is the function of holding value in a readily exchangeable form. You can have your housing bubbles and credit default swaps when the Fed goes on one of its great money binges, but those things take fussy, individual buyers if you want to unload them. Not gold. It goes up when the Fed gets weird, and you can sell it to anybody all the while.

It turns out to be very convenient for central bankers to hold gold when they overprint. Their reserve asset goes up in value, and stays fungible. It’s a cui bono problem of the first order.

These days, gold is going down. It’s about 35 percent off its peak of a few years ago, though still perhaps twice its equilibrium price, were we to have small government and a truly free market.

We all should take a pledge. We should resolve to take advantage of the next time gold really drops and stays down, in the form of changing the official structure of our monetary system.

What a low and stable price of gold means is that investors are satisfied that currency alternatives are not very necessary anymore. The general feeling is that you can invest in dollars with confidence that they will not lose value or get siphoned off by taxation. In the macroeconomic language, gold is low and stable when monetary and fiscal policy are right, which is to say modest.

It is a shame that every time monetary and fiscal policy does get modest, and gold settles into a low and stable state (prime example: the 1980s and 1990s), we lack the motivation to formalize the role of gold in the monetary system. Maybe it’s because the times are so good. In the salad days, who thinks about reform?

Were we to take advantage of prosperity by putting in place gold standard, we would take a step toward ensuring that the prosperity would last indefinitely. For the only reason the great eras ever end is that fiscal and monetary policy get ambitious again—which would be hard to do if the currency had to be redeemed in gold, by convention if not law.

As Lewis E. Lehrman and John D. Mueller wrote in the Wall Street Journal the other day, “the world’s monetary authorities still hold nearly 900 million ounces of gold, which is enough to restore, at the appropriate parity, the classical gold standard.” If Obama keeps acting like a lame duck, the Fed keeps up the tapering, and the Congress starts shrinking government, that parity will emerge clearly enough as gold falls, on account of people selling in order to dive into the great new opportunities offered by the real economy left in the wake of government’s withdrawal.

Which is why Greenspan’s comments are so apt and timely. When gold goes down in price, it is time to take an interest in preparing a formal role for gold in the monetary system. Gold is blessedly bounding down once again, and the prosperity of the 21st century may depend on whether we take advantage of the opportunity.

Books on the topic of this essay may be found in The Imaginative Conservative Bookstore. Republished with gracious permission of the author.