In a Focus on Gold, History Repeats Itself

The author of this article compares 1980 to present day comparing both the political situations and gold's behavior. In 1980 gold had risen to new highs as the election approached as a nominee hinted at returning to a gold standard. Will history repeat itself and will we see gold reach new highs once again?

By FLOYD NORRIS
Published: February 2, 2012
NY Times

As it was in 1980, could it be again in 2012?

The 1980 presidential election was fought by a Democratic incumbent weakened by a poor economy amid worries that the United States had lost its ability to compete in the world. Gold prices had risen to unprecedented levels as the election approached, and the Republican nominee hinted he might propose a return to a gold standard.

That Republican, Ronald Reagan, won the election and soon appointed a commission to study the role of gold in monetary systems. To gold bugs, it appeared to be the best chance in decades to move the country toward gold and away from what they like to call “fiat money,” a currency anchored by nothing more than government dictates.

Last month, Newt Gingrich, seeking to widen his support in the days leading up to the South Carolina primary, promised that he would appoint a new gold commission. “Part of our approach ought to be to re-establish something Ronald Reagan did in 1981 and that is to have a commission on gold to look at the whole concept of how do we get back to hard money,” he said in a speech.

“Hard money is a discipline,” he added. “It is very important for us to understand in finance that the entire contraption that has been built up over the last thirty or forty years has so much paper in it, so much debt, so much leverage, that we probably have a fifteen- or twenty-year period of working our way out of it. And yet, the alternative is to get sicker and sicker and sicker.”

That call may have helped him in South Carolina, where he scored a victory over Mitt Romney, but it did not do much for him in Florida, where he finished a distant second in this week’s primary. His strategy now is to present himself as the only conservative with a chance, and thereby persuade supporters of Rick Santorum and Ron Paul to unite behind him. Support for a gold standard is a major part of Mr. Paul’s platform.

Mr. Gingrich, it should be noted, did not promise to support a gold standard, only to appoint a commission. If he is serious about following Mr. Reagan’s precedent, there may be little chance of a move to gold even if Mr. Gingrich does win the Republican nomination and the November election. In office, Mr. Reagan showed no inclination to buck the collected wisdom of most economists, whether Keynesian or monetarist.

The 1980 Republican platform denounced “the severing of the dollar’s link with real commodities in the 1960s and 1970s,” which it blamed for inflation. “One of the most urgent tasks in the period ahead will be the restoration of a dependable monetary standard,” it added.

As Anna Schwartz, an economist who served as the gold commission’s staff director, later wrote, that section could be seen as a “veiled reference to a prospective return to a gold standard.”

Under a gold standard, the dollar would be valued at a certain number of grams of gold, and the government would be ready to buy or sell gold to anyone based on that value.

The commission’s report was delayed and when finally released called for a continuance of the monetary status quo, albeit with the possible issuance of American gold coins to compete with the South African krugerrand. The platform plank turned out to have no real meaning, and gold bugs were outraged.

The commission, Murray N. Rothbard, a libertarian economist, later complained, was “overwhelmingly packed with lifelong opponents of gold who buried any call for a hard currency.” Ms. Schwartz noted that Treasury Secretary Donald T. Regan, who was the commission’s chairman, and Murray Weidenbaum, a member who was Mr. Reagan’s top economic adviser, “did not tip their hands until the final two meetings of the commission.”

Mr. Gingrich did send a signal that his commission would be different. He said the co-chairmen would be Lewis Lehrman, the author of a recent book titled “The True Gold Standard,” and James Grant, the editor of Grant’s Interest Rate Observer.

“The fundamental conclusions of a Lehrman-Grant commission to consider a gold standard may be foregone: We’re for it,” Mr. Grant wrote in the latest issue of his publication.

Mr. Lehrman, in fact, was one of the two dissenters to the Reagan commission report. The other dissenter was a Texas congressman named Ron Paul.

More than almost any other dispute in economics, gold often seems to be a matter of theology. To supporters, gold has been money for thousands of years, and a return to it is the only way to keep politicians from debasing currencies. To most current economists, gold is a commodity, subject to the normal fluctuations of supply and demand. To them, the supply of money should be controlled based on economic principles. With a gold standard, the amount of gold available to back money could grow only at the same rate that gold stocks increased, something that depends on mining successes, not on the needs of an economy.

The University of Chicago last month asked a panel of 40 economists, including former advisers to both Democratic and Republican presidents, if they agreed that “price-stability and employment outcomes would be better for the average American” if the dollar’s value were tied to gold. Every one of them disagreed, some with more than a little incredulity that such a question was worthy of discussion.

“Why tie to gold?” asked Richard Thaler, a University of Chicago professor. “Why not 1982 Bordeaux?”

“Eesh,” responded Austan Goolsbee, a Chicago colleague and former adviser to President Obama. “Has it come to this?”

Even economists with some sympathy to gold opposed the idea. “The gold standard adds credibility when a country lacks discipline,” said Edward Lazear of Stanford, who served as chairman of the Council of Economic Advisers under President George W. Bush. “The cost is monetary policy flexibility. The trade-off is unclear in the U.S.”

Nowhere was the chasm in perception about gold clearer than at a Congressional hearing in July, when Mr. Paul asked Ben S. Bernanke, the chairman of the Federal Reserve Board, “Do you think gold is money?”

The Fed chairman appeared to be surprised by the question and paused for a few seconds before replying, “No.”

Then why, asked Mr. Paul, did central banks hold gold reserves? Why not diamonds?

“Well,” Mr. Bernanke replied, “it’s tradition.”

It is no coincidence that gold is back as an issue now, more than 30 years after its last significant appearance in presidential politics. It was the vanquishing of inflation by the Federal Reserve in the early 1980s under Paul A. Volcker that led to a collapse in the price of the precious metal and to the widespread belief in the wisdom of central bankers.

That reputation suffered badly in recent years. There is little doubt that the Fed, under Alan Greenspan, helped bring on the housing bubble through a combination of easy money and loose regulation of banks. But to most economists, the fact that central banks can err does not prove they should be replaced by an inflexible gold-based regime, which many think contributed to the Great Depression.

“A gold standard would have avoided the policy mistakes of the 2000s,” conceded Daron Acemoglu of M.I.T. in his response to the Chicago survey. But, he added, “discretionary policy is useful during recessions.”

At the Congressional hearing in July, Mr. Paul pointed out that the gold price had doubled over the previous three years. “When you wake up in the morning,” he asked Mr. Bernanke, “do you care about the price of gold?”

“I pay attention to the price of gold,” the Fed chairman replied, “but I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as a protection against what we call tail risk — really, really bad outcomes — and to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”

Mr. Bernanke has a point. The price of gold in recent decades has been a reflection of the waxing and waning of fears of “really, really bad outcomes.” When the Reagan gold commission issued its report in March 1982, the economy was in a severe recession but gold cost about half what it had gone for when the 1980 Republican platform was being written. The country was regaining its confidence.

In the current cycle, gold peaked at $1,900 an ounce last fall amid worries that the American economy was headed for a double-dip recession and that the euro zone would collapse. Those fears have since receded, although gold has climbed back over $1,700 since Mr. Gingrich called for a gold commission.

You don’t have to be a conventional economist to hope that gold prices are going to decline over the next few years, just as they did after the 1980 peak.

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