A golden anchor?

Jude Wanniski

Remember the good old days, when your breakfast news was not cluttered with routine reports on the price of gold and nervous items about plunging dollars and soaring yen? Well, Roy W. Jastram, a pro, fessor of business administration at Berkeley, has written a book about the good old days. The Golden Constant: The English and American Experience, 1560-1976.

' True, it is considered impolite to discuss the gold standard in front of children or modern economists. Children might ask embarassing questions. Modern economists might be embarassed, at least those who advised us that inconvertible currencies and floating exchange rates would do wonders for us all. But they can leave the room. '

It's still a safe bet that when President Carter asks his viziers how to keep the US dollar from floating further into the abyss, not one will suggest the golden constant, the golden anchor. Here is one thing the economists of Brookings and the economists of the American Enterprise Institute viziers left and right -will agree upon. Gold is barbaric metal. It just isn't modern. It's not nice.

Mr Jastram makes a terrific case for gold in his statistical data, which he began collecting in 1936. But alas, he too succumbs to the pressures-of the Viziers Union and proclaims that while gold worked wonderfully for 400 years, times have changed. We can't, he says, be 'nostalgic.' For this reason, his book is not necessarily one we should smuggle to the President (that he might read under the covers, by flashlight).

The essence of Mr Jastram's book, though, is not his political or economic analysis. His contribution is the construction of an original wholesale price index for Great Britain between 1560 and 1976. The bulk of the effort went into ccrnputerizing several centuries of wage and price data compiled by Lord Beveridge in 1939. Against this series Mr Jastram sets an index of the price of gold and then derives an index of the purchasing power of gold over the period. He does the same for the United States from 1800 using the existing wholesale index.

The results are entertaining. Having set the base year for his wholesale commodity price index at 1930 equals 100, Mr Jastram can trace backwards in time along his table and find the WPI again and again crossing 100. It does so in 1914-15, in 1874-75, several times between 1821-1860, and several times in the 18th Century. The earliest point the index hits 100 is in 1718-19. And : December 22, 1717, just happens to be the .; day Sir Isaac Newton, Master of the Mint, unwittingly put Britain on a gold standard

of 3 pounds, 17 shillings, LOS pence per ounce.

Convertibility at this price was interrupted only during the Napoleonic wars and World War I. The index, meanwhile, went as high as 182.5 in 1813 and 258.8 in 1920. Going back further than 1717, we find the lowest point on Jastram's index in 1564, when it was a mere 32.0. Prices doubled between 1585 and 1718 and then more or less remained stable until 1930. The importance of all this is to remind us that price inflation is not part of the human condition, but is rather a gift of modern economics. Can these tables alone be smuggled to President Carter?

The President could also observe the movement of the index after Britain in 1931 put economists and bureaucrats in charge of regulating the money supply, instead of keeping gold at that job. By 1946 it was at 162, by 1956 at 406.1, by 1966 at 506.8, and by 1976 at 1248.4. Yes, that's 1248.4. Except that the United States maintained a semblance of convertibility until 1971, when it became free at last of the barbaric metal, its experience has been similar. The wholesale commodity index is at 100 in 1804 and in 1930 it's also at 100. As recently as 1940 the index was at 90.8. It then went to 185.7 in 1948, 204.3 in 1951, and 247.5 in 1970. In 1976 it was at 410.2.

The value of Mr Jastram's book is in this statistical sweep, which suggests that we've forgotten more than we know. If we wish to end inflation, it certainly seems foolish to begin the process by disregarding any idea of using gold. Why, then, does Mr Jastram do so himself, implicitly accepting the notion that gold is gone and inflation is here to stay? It is useful to see how he misinterprets his own statistical contribution to try to persuade us on this point.

After powerfully demonstrating that gold maintains its purchasing power over long cycles, for example, he presents a startling 'discovery' that in the short run gold is a poor hedge against inflation. The common idea that it is a good hedge, he argues, is a 'myth'. He statistically 'proves' that gold's purchasing power falls behind commodity prices during inflations, although catching up with them during deflations. This he calls the 'Retrieval Phenomenon.'

Why do economists spend so much energy turning simple ideas into complex ones? It only takes a moment's thought, not a book of argumentation and statistical proof, to understand the Jastram 'Retrieval Phenomenon.' When money is bound to gold and prices rise relative to money they of course rise relative to gold. But we find in his own index the important point: that when money is bound to gold nobody needs an inflation hedge.

Here, for example, is the 'great inflation' of 1623-1658 when money was bound to gold, yet gold was losing 34 per cent of its purchasing power. Mr Jastram himself observes that the 51 per cent price rise in the period is trivial, breaking down to an average annual compounded inflation rate of E2 per cent. Who needs an inflation hedge at that rate?

And here is Mr Jastram straining to show further proof of gold's failure as an inflation hedge when it is not bound to money. In Britain between 1933 and 1976 commodity prices rose by 1434 per cent, yet gold loses 25 per cent of its purchasing power. An unsatisfactory hedge, says he. The purchasing power of British currency fell by 1434 per cent and the purchasing power of gold fell by a mere 25 per cent. A magnificent hedge, say we.

In more typical fashion Mr Jastram then presents a review of the many difficulties in getting back on gold; we might as well forget the lessons of the golden constant, he says. First, we'd have to decide if we want a gold-coin standard or a gold bullion standard. Then we have to decide which form of intervention to permit government. Do we, for example, manipulate the 'gold backing for a circulating paper issue?' Or, if we want the price of gold held constant by the marketplace, 'gold must be bought or sold by the government in quantities precisely decided by the government: or interest rates adjusted by central banks. If it is to be held constant by 'edict,' the government will have to forbid exports, embargo imports, outlaw private holdings, 'and so on.' And what if the world price of gold increases 'drastically' as it has lately? Won't this mean the admissible volume of paper currency will automatically inflate 'or the required reserve ratio of gold will have to be reduced correspondingly?'

Unhappily, in these several sentences near the end of his book Mr Jastram gives it away. He doesn't know any more about how the gold standard worked than did the economists who have been advising US Presidents for the last few generations. The government doesn't run a gold standard by decreeing a currency's gold backing, or decreeing the tonnage to be bought or sold in the marketplace, or decreeing export or import constraints. The whole point of a money 'standard' is to get the government out of the decreeing business. Nor does the price of gold increase 'drastically' and thus force up the volume of paper money. Professor Jastram has this backwards, at least if there is any meaning at all to the rest of his book and the notion of golden constancy,.

All of the Jastram difficulties are imaginary. Our ancestors could not have run a gold standard for centuries with such success, as he himself demonstrates, if it were a difficult thing. We have not concurrently forgotten how to build wheels or make fire. Only economists can forget how to produce money to a reliable standard.

The gold standard did not work because of gold's mystique, but because of its ridiculous simplicity. When a citizen comes to the Treasury with gold, he is given money. When he comes with money, he is given gold, and the Treasury takes this as a sign that it should stop producing money until the populace again is showing up with gold.

You don't have to have a lot of gold to run a gold standard. The Bank of England kept a tiny inventory in the 200 years it showed how it could be done. Indeed, it doesn't even have to be gold. Almost anything that requires man's labour in fashioning a planetary resource will do. Platinum, silver or cinder blocks. Without fail, inflation would end and we would no longer have to listen to gold fluctuations and monetary gyrations with our breakfast news.

Will it happen? You can bet on it. Professor Jastram's charts will now be available to our university students. Someday Ralph slader will have a son, and Junior will decide it is time to protect consumers of money after examining the Jastram charts. He might fool around first with a glassbead standard or even cinder blocks and discover any standard is better than none at all. Don't be surprised, though, if eventually he discovers gold. You should pardon the expression.

This article first appeared in the Wall Street Journal.