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Maxwell Newton, “Back to the gold standard?,”
The Australian, September 17, 1981, p. 6.

In the past eight years, prices in America have doubled. President Reagan is trying to smash this inflation by a policy of “hard money” — restricting the amount of money which the Federal Reserve, America’s central bank, may issue.

Since the early 1960s, the Federal Reserve has consistently issued far too much money.

A new team team is in the White House and a new team is in the Treasury. In combination, they believe they can bring the Federal Reserve into line — force it to reduce the rate of growth of money from the average 7 per cent of the last decade down to 2 per cent.

The “monetarist revolution” in the Treasury is thus designed to rectify almost 20 years of monetary profligacy and excessive cash creation in the Federal Reserve.

Some influential Americans, however, have become so disillusioned that they want a far more radical change.

They do not believe that any group of politicians and bureaucrats will ever give America sound money again. Government has got to be too big, they say. Growing government spending is ingrained in the very bones of the American body politic. We must get politicians’ dirty fingers out of the nation’s money barrel, they argue.

How can this be done? Very easily, answer a number of these influential Americans. We can go back to the gold standard.

What does this mean in practice? It means that at some point the US Government, through the President, would declare:

As from today, all American paper dollars will be convertible into gold at a fixed rate, say $400 per ounce of gold. Anyone who wants to have gold instead of paper money can come and get it at that fixed price.

Stripped of all the complexities which can be added on, that is what a return to the gold standard would amount to.

The proposed return to the gold standard is being put forward as a means of keeping politicians honest — as a means of removing virtually entirely the discretion of the Federal Reserve, as the central bank of America to increase the amount of money on issue.

Henceforth, under the gold standard, anyone with paper dollars could always, by law, go to the Federal Reserve and demand gold instead of paper money.

This way, it is argued, any tendency for the amount of money to increase excessively would be frustrated, because people would simply go and change it for gold. Alternatively, if the amount of paper money was deficient, they would go and change gold for paper money.

Increases in the quantity of money would then occur only in response to an increase in the availability of gold. Advocates of this system tell us that it worked well for long periods in the past, but many historians have stated that politicians, central bankers and bureaucrats managed to fiddle things in the olden days just as they do today.

As between nations, the system would also work in that a country which was tending to develop a surplus of paper money would find itself losing gold — it would then experience a recession, due to the loss of gold, and eventually things would balance out.

At present, in the U.S., many very determined people are pushing for a return to the gold standard, so bitter is the disillusion with the system under which politicians and bureaucrats have such discretion over the amount of money being created.

A Gold Commission has been set up by President Reagan headed by Dr Anna Schwartz an outstanding monetarist economist and co-author, with Milton Friedman, of The Monetary History of the United States.

Pressure for a return to the gold standard is also being used as a weapon against the President. It is being stated in effect that even President Reagan cannot be trusted with the nation’s money and it will have to be taken out of the hands of all politicians.

Senator Jesse Helms is another forceful advocate of the gold standard idea and within the Administration plenty of moles are leaking ammunition to the gold standard advocates.

The Wall Street Journal, that tremendously influential element in American life and thought, has turned thumbs down on the idea, arguing in the broad that the gold standard system just takes too much discretion out of anyone’s hands to try to deal with problems of cycles in business activity. The journal showed that gold output has fluctuated widely in the past, that the gold standard has long been associated with long periods of price stability, but that there have been other very long periods in which the U.S. was not on the gold standard and in which prices were exceptionally stable.

Soon the debate in America will become much hotter as the Gold Commission is expected to issue a report this year.

Advocates of the gold standard in America are carrying on to yet another stage, the deep-seated counter-revolution against the welfare state and against big government, which was so clearly stated in the election of President Reagan.

They are really saying that neither President Reagan nor his team can ultimately be trusted with the money of America.

Maxwell Newton, “Fed’s failure puts shine back on the gold standard,”
The Australian, September 18, 1981, p. 16.

The recent upsurge of interest in the gold standard in the United States reflects the disillusion which has developed over the failure of the Federal Reserve to control the growth of money since the middle 1960s.

In the past 15 or 16 years, the rate of growth of money in the US has been wildly excessive and has been the principal cause of inflation.

Gold standard advocates try to remedy this situation by removing the discretion of the monetary authorities.

Putting to one side the question of the practical possibility of making such a revolutionary change, we may ask: Have the financial markets themselves not already removed all discretion from the Fed to make excessive increases in money?

And if this is so, may we not already be in a position where the Fed is locked into a policy of restraint on money growth — and consequently of restraint on economic growth — until the confidence of the financial market is restored, interest rates are reduced and inflation is laid to rest?

In a recent paper given to the Atlanta Federal Reserve directors, Mr Leif Olsen, chairman of the economic policy committee of Citibank, raised this central issue:

Laying aside the debate over why the Federal Reserve has been excessively expansionary, there can be no denying that it has and that inflation in the United States has grown progressively worse over the past 15 years.

Nor can there be any quarrelling with the proposition that in the past two years inflation expectations have responded promptly and positively to evidence that monetary policy was endeavouring to forestall recession by rapidly increasing the rate of growth of the money supply.

These expectations have manifested themselves in a sharp and rapid discounting of the value of financial assets, with the resulting rise in interest rates.

This was spectacularly illustrated in the second half of 1980, when interest rates more than doubled between July and December, in spite of the fact that the economy was operating well below capacity and the Federal Reserve was pursuing a highly expansionary monetary policy.

There is no near-term historical precedent for such a phenomenon. In the two to three years following the recessions of 1969-70 and 1973-74, interest rates remained relatively low.

Excess capacity in the economy, coupled with a cooling of inflation, combined to moderate the overall demand for credit.

Following last year’s recession, inflation has moderated and it does not appear that the overall demand for credit has been particularly strong.

Yet interest rates rose, not just slightly, but as though the economy was operating at peak capacity, with inflation accelerating, neither of which was occurring.

One possible explanation for this apparent anomaly is that interest rates to a much greater degree than before are now being determined in the short run by those who make markets in such financial instruments as Treasury bills, certificates of deposit and commercial paper as well as longer-term bonds.

The reactions of the markets may be excessive in the opinion of the monetary authorities. There may also be a misreading of the policy-makers’ intent, but exasperation of officialdom will not counter the instability of the market.

The excessive response of the market to every turn in policy and every nuance in the public policy record has apparently developed as a result of a long history of disappointments and confusion between what market participants have been led to expect and what actually happens.

In other words, the very failures of the Fed in the past may have removed its discretion to make excessive or unstable increases in money today.

Mr Olsen has already reached just such a tremendously important conclusion. He said:

The evidence of the past year suggests that it is fallacious to assume that the Federal Reserve can reduce interest rates by applying a more expansionary monetary policy.

Our financial markets have been in an almost continuous state of disequilibrium over the past year. It is a highly unpredictable market.

Furthermore, we have had very little experience with interest rates continuing at high levels such as we have seen over the past year.

We don’t yet know what the ultimate consequences of such rates may be.

We do know, however, that an acceleration in economic growth and any indication that monetary policy was conducting business as usual would likely aggravate conditions in the financial markets.

This suggests that monetary policy no longer has the latitude — except at the risk of severely destabilising the credit markets — to engage in any substantial or protracted acceleration in the money supply in order to achieve a significant increase in the rate of growth of nominal GDP.

Monetary policy adjustments are becoming increasingly asymmetrical, adjusting more towards moderation and less towards acceleration. This means that the US economy will continue to grow at very slow rates.

By the first quarter of 1983, it is probable that real activity in the US economy will have increased at an annual average of only 1.8 per cent for four years.

In an economy that continues to operate with excess capacity, it becomes competitively difficult to raise prices and pass on higher costs.

The cooling off of inflation that we are witnessing this year on average is probably an early indication of the effects of keeping growth at well below the country’s potential.

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