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IMF promises to keep scaring gold market right through its meeting in April
4:15p ET Saturday, February 5, 2005
Dear Friend of GATA and Gold:
Over the last week or so there have been some references
to an essay written by Alan Greenspan for The Wall
Street Journal in 1981, four years after he left the
chairmanship of the President's Council of Economic
Advisers and six years before President Reagan
appointed him chairman of the Federal Reserve Board.
The essay is appended here. It was titled "Can the
U.S. Return to a Gold Standard?" and it is heavily
dated by the speculative discussions of the era, in
which the U.S. national administration paid
superficial respect to conservative ideologues.
Today Greenspan's essay may be most notable for
confirming gold's continuing but desperately
obscured centrality to the world financial system,
as when he writes:
"Monetary offsets to neutralize or 'earmark' gold are,
of course, possible in the short run. But as the West
German monetary authorities soon learned from their
past endeavors to support the dollar, there are limits
to monetary countermeasures.
"The only seeming solution is for the United States to
create a fiscal and monetary environment which in effect
makes the dollar as good as gold -- that is, stabilizes
the general price level and by inference the dollar price
of gold bullion itself. Then a modest reserve of bullion
could reduce the remaining narrow gold price fluctuations
effectively to zero, allowing any changes in gold supply
and demand to be absorbed in fluctuations in the
Treasury's inventory.
"What the above suggests is that a necessary condition
of returning to a gold standard is the financial
environment which the gold standard itself is presumed
to create. But if we restore financial stability, what
purpose is then served by a return to a gold standard?"
One can infer from Greenspan's observations here the
reciprocal question: If government can stabilize the
GOLD PRICE, will government really need to stabilize
the fiscal and monetary environment?
As an admitted former gold bug resigned to the fiat
regime of what has been called the welfare/warfare
state, Greenspan, of course, knows all this, and his
essay is important to GATA for showing government's
inherent interest in keeping the gold price under
control -- GATA's interest being the opposite, the
establishment of free markets in gold and silver that
help keep GOVERNMENT under control.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Can the U.S. Return to a Gold Standard?
By Alan Greenspan
The Wall Street Journal
September 1, 1981
The growing disillusionment with politically controlled monetary
policies has produced an increasing number of advocates for a return
to the gold standard -- including at times President Reagan.
In years past the desire to return to a monetary system based on
gold was perceived as nostalgia for an era when times were simpler,
problems less complex, and the world not threatened with nuclear
annihilation. But after a decade of destabilizing inflation and
economic stagnation, the restoration of a gold standard has become
an issue that is clearly rising on the economic policy agenda. A
commission to study the issue, with strong support from President
Reagan, is in place.
The increasingly numerous proponents of a gold standard persuasively
argue that large budget deficits and large federal borrowing
requirements would be difficult to finance under such a standard.
Heavy claims against paper dollars cause few technical problems, for
the Treasury can legally borrow as many dollars as Congress
authorizes.
But with unlimited dollar conversion into gold, the ability to issue
dollar claims would be severely limited. Obviously, if you cannot
finance federal deficits, you cannot create them. Either taxes would
then have to be raised or expenditures lowered. The restrictions of
gold convertibility would therefore profoundly alter the politics of
fiscal policy that have prevailed for half a century.
Disturbed by Alternatives
Even some of those who conclude a return to gold is infeasible
remain deeply disturbed by the current alternatives. For example,
William Fellner of the American Enterprise Institute in a
forthcoming publication remarks: "I find it difficult not to be
greatly impressed by the very large damage done to the economies of
the industrialized world ... by the monetary management that has
followed the era of (gold) convertibility. ... It has placed the
Western economies in acute danger."
Yet even those of us who are attracted to the prospect of gold
convertibility are confronted with a seemingly impossible obstacle:
the latest claims to gold represented by the huge world overhang of
flat currency, mainly dollars. The immediate problem of restoring a
gold standard is fixing a gold price that is consistent with market
forces. Obviously if the offering price by the Treasury is too low,
or subsequently proves to be too low, heavy demand at the offering
price could quickly deplete the total U.S. government stock of gold
as well as any gold borrowed to thwart the assault. At that point,
with no additional gold available, the United States would be off
the gold standard and likely to remain off for decades.
Alternatively, if the bid price is initially set too high, or
subsequently becomes too high, the Treasury would be inundated with
gold offerings. The payments for the gold drawn on the Treasury's
account at the Federal Reserve would add substantially to commercial
bank reserves and probably act, at least temporarily, to expand the
money supply with all the inflationary implications thereof.
Monetary offsets to neutralize or "earmark" gold are, of course,
possible in the short run. But as the West German monetary
authorities soon learned from their past endeavors to support the
dollar, there are limits to monetary countermeasures.
The only seeming solution is for the United States to create a
fiscal and monetary environment which in effect makes the dollar as
good as gold -- that is, stabilizes the general price level and by
inference the dollar price of gold bullion itself. Then a modest
reserve of bullion could reduce the remaining narrow gold price
fluctuations effectively to zero, allowing any changes in gold
supply and demand to be absorbed in fluctuations in the Treasury's
inventory.
What the above suggests is that a necessary condition of returning
to a gold standard is the financial environment which the gold
standard itself is presumed to create. But if we restore financial
stability, what purpose is then served by a return to a gold
standard?
Certainly a gold-based monetary system will not necessarily prevent
fiscal imprudence, as 20th-century history clearly demonstrates.
Nonetheless, once achieved, the discipline of the gold standard
would surely reinforce anti-inflation policies and make it far more
difficult to resume financial profligacy. The redemption of dollars
for gold in response to excess federal government-induced credit
creation would be a strong political signal. Even after inflation is
brought under control, the extraordinary current political
sensitivity to inflation will surely remain.
Concrete actions to install a gold standard are premature.
Nonetheless, there are certain preparatory policy actions that could
test the eventual feasibility of returning to a gold standard and
that would have positive short term anti-inflation benefits and
little cost if they fail.
The major roadblock to restoring the gold standard is the problem of
re-entry. With the vast quantity of dollars worldwide laying claim
to the U.S. Treasury's 264 million ounces of gold, an overnight
transition to gold convertibility would create a major discontinuity
for the U.S. financial system. But there is no need for the whole
block of current dollar obligations to become an immediate claim.
Convertibility can be instituted gradually by, in effect, creating a
dual currency with a limited issue of dollars convertible into gold.
Initially they could be deferred claims to gold -- for example, five-
year Treasury notes with interest and principal payable in grams or
ounces of gold.
With the passage of time and several issues of these notes we would
soon have a series of "near-monies" in terms of gold and,
eventually, demand claims on gold. The degree of success in
restoring long-term fiscal confidence will show up clearly in the
yield spreads between gold and fiat dollar obligations of the same
maturities. Full convertibility would require that the yield spreads
for all maturities virtually disappear. If they do not,
convertibility will be very difficult, probably impossible to
implement.
A second advantage of gold notes is that they are likely to reduce
current budget deficits. Treasury gold notes in today's markets
could be sold at interest rates approximating 2 percent or less. In
fact from today's markets one can construct the equivalent of a
22-
month Treasury gold note yielding 1 percent by arbitraging regular
Treasury note yields for June 1983 maturities (17 percent) and the
forward delivery premiums of gold (16 percent annual rate) inferred
from June 1983 futures contracts. Presumably five-year note issues
would reflect a similar relationship.
A Risk of Exchange Loss
The exchange risk of the Treasury gold notes, of course, is the same
as that associated with our foreign currency Treasury note series.
The U.S. Treasury has over the years sold significant quantities of
both German mark and Swiss franc-denominated issues, and both made
and lost money in terms of dollars as exchange rates have
fluctuated. And indeed there is a risk of exchange loss with gold
notes.
However, unless the price of gold doubles over a five-year period
(16 percent, compounded annually), interest payments on gold notes
In terms of dollars will be less than conventional financing
requires. The run-up to $875 per ounce in early 1980 was surely an
aberration, reflecting special circumstances in the Middle East
which are unlikely to be repeated in the near future. Hence,
anything close to a doubling of gold prices in the next five years
appears improbable. On the other hand, if gold prices remain stable
or rise moderately, the savings could be large: Each $10 billion in
equivalent gold notes outstanding would, under stable gold prices,
save $1.5 billion per year in interest outlays.
A possible further side benefit of the existence of gold notes is
that they could set a standard in terms of prices and interest rates
that could put additional political pressure on the administration
and Congress to move expeditiously toward non-inflationary policies.
Gold notes could be a case of reversing Gresham's Law. Good money
would drive out bad.
Those who advocate a return to a gold standard should be aware that
returning our monetary system to gold convertibility is no mere
technical, financial restructuring. It is a basic change in our
economic processes. However, considering where the policies of the
last 50 years eventually led us, perhaps there are lessons to be
learned from our more distant gold-standard past.
-------------
Mr. Greenspan, of the economic consulting firm of Townsend-Greenspan
& Co., was chairman of the Council of Economic Advisers, 1974-77.
----------------------------------------------------
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