Wall Street Journal Op-Ed
Jude Wanniski
January 8, 1998

Memo To: Website browsers, fans, clients
From: Jude Wanniski
Re: "The Optimum Gold Price"

Those of you who do not read the WSJournal on a regular basis may not have seen my op-ed essay in the Wednesday, January 7 edition, so we run it as part of today's Memo on the Margin. Students of our website's Supply-Side University will recognize the arguments about "The Optimum Gold Price," but still find it useful to see how the material we are teaching comes into play in presenting economic analysis for an elite, mass audience. Perhaps one million of the Journal's several million daily readers read the lead op-ed, partly encouraged by the lead "Review&Outlook" editorial, which commented on Fed Chairman Alan Greenspan's recent discussion about "deflation," and mentioned my op-ed as being a "lucid" case for a gold-based monetary system. We have filed the essay in our archive, where you can access it at any time. Following, though, is a letter sent by Jack Kemp to Alan Greenspan on Tuesday of this week, urging the Fed chairman to act upon his concerns of deflation.

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January 6, 1997

Honorable Alan Greenspan Chairman, Board of Governors
Federal Reserve System
20th and C Street
Washington, DC 20551

Dear Mr. Chairman:

I just finished reading your January 3 speech to the American Economic Association. Bravo. What a fitting place for you to bury the tired old idea of a Phillip's-curve trade off between inflation and unemployment. What an apt time to remind the economics profession that we have achieved price stability with robust growth and that the real threat today is that the Fed might inadvertently keep monetary policy too restrictive and thereby create a serious monetary deflation. As you know, I have been concerned that monetary policy has been too restrictive since the Fed raised interest rates back in the spring. Now, with the price of gold collapsing to under $290 an ounce, other commodity prices falling, and the yield curve flat, I fear deflationary pressures already may be undermining the economic expansion.

I was greatly relieved, therefore, to see you remind the assembled economists of the serious harm a persistent deflation does to an economy. This recognition not only is important to maintaining the economic expansion here in the United States, but it is also vital for Japanese policy makers to understand. For in my opinion, Japan's continuing deflation not only prevents the Japanese economy from recovering, but it also poses an enormous threat to all of the Asian economies.

You also pointed out how small the margin for error is in measuring a decline in the general price level once price stability is achieved. You went on to raise the troubling reality that our measurement techniques have become increasingly obsolete. As I was reading this section of your speech, I was sure you would conclude thattechnological change and increasingly efficient markets inevitably will outpace the ability of technocrats to measure changes in the price level. I was eagerly anticipating the conclusion I have heard you articulate so many times in the past that the best monetary policy, therefore, requires a system anchored to gold or at least to a price rule in which gold plays a predominant role.

You can imagine my disappointment when you ended the speech by merely expressing the hope that our statistical agencies would not m lose the race against technology and that statisticians and economists would be able to solve the increasingly complex conceptual and empirical issues involved with accurately measuring price changes. This hope, I fear, is wishful thinking. As you know, the problem goes well beyond mere measurement deficiencies; it is systemic and indigenous to a fiat money system with no anchor.

You have performed yeoman effort at the Fed in bringing us to price stability. But now the hard part begins maintaining price stability without tipping into a deflation. In my judgment, we cannot rest our hopes for continued price stability on the ability of technocrats to measure price changes. Yet I recognize, as you have observed so frequently in the past, that the political obstacles to re-establishing hard money are daunting. But, Mr. Chairman, who better than you to lead the effort? I urge you, therefore, to speak out for the systemic changes that are required. I pledge my active support and assistance in such an endeavor. As Ronald Reagan admonished us, "If not now when? If not us, who?"

Very best regards,

Jack Kemp