THE BARRIERS REMAINING

There are still barriers to overcome on the way to a gold Polaris. The monetarists continue to oppose a fixed gold system by advancing the concept of a currency board as a suitable replacement for a central bank that pegs to the dollar or to gold. If Mexico had a currency board at the opening of 1994, it would have been able to use its dollar reserves when presented with surplus pesos, but could not have reissued the pesos until presented with dollars or other "hard currencies." It could run its reserves down to the size of its monetary base, but then would have to live with whatever interest rates the market demanded to accommodate the risk of devaluation. Clearly, a currency board would have been superior to the Bank of Mexico's conduct of 1994, and it is clearly superior to all sorts of mindless monetary systems associated with the pure floating of a currency. Its deficiencies, though, point up the clear advantages of a gold-based unit of account properly managed by a central bank.

In testimony on the peso crisis before the House Banking Committee on February 10, I compared gold to the North Star and a currency board to "the Pleiades, a cluster of stars that tracks through the heavens." For navigational purposes, it is of course better to have the Pleiades as a reference point than none at all. In a word without a gold Polaris, it is not accurate to refer to floating dollars, DM and yen as the "hard currencies" that would "back" the soft peso. There are now no "hard currencies" in the world, which is why Domingo Cavallo, the finance minister of Argentina, is now having difficulties with his currency board. This, despite the fact that there is nobody who has a keener appreciation of the philosophy of social contracts embedded in a country's currency. In 1991, he told David Asman of The Wall Street Journal that "each peso is a contract between the government and the peso holder. That contract guarantees that each peso, as a unit of value that the worker has worked hard to get, will be worth as much tomorrow as it is today. If the government breaks that contract, it is breaking the law. The only role of the government in the economy should be to guarantee the integrity of market transactions."12

With this kind of commitment, one would expect the Argentine peso to be as sound as a dollar, in that for three years it has been pegged one-to-one with the U.S. dollar. And Cavallo will issue no new pesos unless his currency board is asked for them with dollars or other "hard currencies." Inasmuch as the dollar is a currency with the mass and contract maturity of an elephant and the peso has the three-year stability of a mouse, we see the Argentines being steadily "dollarized." That is, despite the fervent commitment of dollar convertibility, the dollar is still superior to the peso for contract purposes because it can more easily absorb errors made by the Fed. Businesses and households are steadily converting to dollar contracts and Argentina's banks find it more profitable to hold pesos in reserve and lend in dollars. We now see how true this is since the Federal Reserve transmitted its error of late 1993 to the Argentina peso through that umbilical cord. If anything, the error was magnified in Buenos Aires as compared to Mexico City, which had a six-year history of peso stability against the dollar compared to only three in Argentina.

Not only is Argentina losing the considerable seignorage associated with management of sovereign coin, it is also hostage to any further flawed experiments at the Federal Reserve. Domingo Cavallo's sacred commitment to the citizens of Argentina is thus a sacred promise to convert the peso into the floating promise of a dollar, supported by a currency board that is backed with a bouquet of other floating promises. If we were transported back to August of 1971, when the dollar was about to quickly lose 75% of its value relative to gold and the other "hard currencies," clearly a currency board would do almost as poorly. This enables us to see the inherent implausibility of a currency board. Put another way, imagine designing a unit of measure for a country based on the average of several units of measures of other countries, when each of the several units are not fixed. Throw together a floating yardstick, a floating meterstick, a floating rod, etc., average them together at a moment in time, and define your non-interest-bearing national debt in this mish-mash. The only people who really benefit from this method are those who have designed and patented it. They get to travel from country to country setting up currency boards.

We run into the same problem with any monetary system built around a reference point composed of a mixture or "basket" of commodities. In September 1987, Treasury Secretary James Baker addressed the annual meeting of the IMF and recommended a reform of the international monetary system that would fix a "reference point" for central banks around a "basket of commodities, including gold." Once again, we get back to an imperfect, wobbly unit of account. When there are only two commodities in the basket, as we had in the United States during the bi-metalic era, Gresham's Law takes over and bad money drives out good. That is, one commodity will always be more plentiful than the other, and it will be the one chosen to pay debt and taxes. The scarce commodity will be held back. This was the basis of William Jennings Bryan's complaint about the "cross of gold," a reference to the Gold Standard Act of 1873 that restored the pre-Civil War gold parity at $20.67 per ounce, but which ignored the pre-war gold/silver ratio. The debtors who flocked to Bryan's cause in the monetary deflation that followed wished to pay their debts and taxes in cheap silver rather than dear gold. For this reason, it is not likely that we will see "baskets" of commodities or currencies again.

Another reform variation that complicates the gold discussion is that of the "global monetarists," followers of the late French economist Jacques Rueff. The Rueffians, led by Lewis Lehrman of New York, are gold money advocates, but insofar as they focus on the world money supply, they diminish the importance of money as a unit of account. They argue that no major country should hold in its central bank the reserve assets of another country. The idea follows from Rueff's belief that the 1944 Bretton Woods international monetary agreement became unstable because the United States could print surplus liquidity and force other nations who acquired it to accept U.S. dollar bonds in exchange. Rueff argued that this somehow increased the world dollar supply and potential dollar inflation. The Rueffians obviously oppose currency boards, which require a country to back its own currency with the reserve assets of the "hard currency" countries. At the point where the U.S. government is ready to fix the dollar to gold again, the Rueffians will attempt to have their formula at the center of the reform. The only real problem they would pose is that they insist the optimum gold price is somewhere above $500 an ounce, based on theorems that have always eluded me.

The greatest difficulty in returning to a gold Polaris is that those who benefit most, the mass of ordinary Americans, are not organized for that goal. And the elites who benefit from an unstable money still represent a powerful force for continuance of that instability. Just as there is an enormous industry in the United States devoted to grappling with the complexities of the federal and state tax codes, there is an industry devoted to the world of monetary instability. The entire financial services industry is geared in one way or another to earn its way by guiding the commercial world at home and abroad through the choppy waters of dollar fluctuations. With a gold dollar once again fixed in the galaxy, most of these costly functions would be unnecessary and would soon disappear. In his presidential farewell, President Dwight Eisenhower warned of the influence of a military-industrial complex. The combine would use its massive political weight to exaggerate or aggravate tensions abroad, in order to profit by supplying the offensive and defensive goods at taxpayer expense. It does not operate as a conspiracy, but naturally organizes along pessimistic principles and attitudes, preparing for worst-case scenarios. Unless there is a democratic check on the complex, it will drain all of a nation's resources to insure against defeat by an imagined foe. There is also an environmental/industrial complex, which will use its influence in government to an equal extreme. Unless checked, it will close down all enterprise to save spotted owls and such.

So, too, with the "misery industry," which profits by defending Americans against the complexities and excesses of government at all levels. It is in the interest of this industry to explore to the nth degree the possible profits to be had in litigating between adversaries in the law courts, for example. It also profits by guiding 90 million or so taxpayers through the myriad volumes of the tax code, and by serving domestic and international clients by providing novel instruments to protect against monetary instability. The International Monetary Fund, which has effectively distanced itself from democratic restraints, is the most dangerous of the forces of pessimism. The United Nations bureaucracy also represents a threat in that it can offer to lead peacekeeping efforts in the wake of IMF programs, which create conflict through its promotion of instability.

If it were not for our democratic institutions, these various industries that serve the dark side of society would engulf all the forces of optimism with their demands on resources. They are now in their weakest condition in generations, because of the end of the Cold War between the nuclear superpowers. This has removed one of the greatest sources of pessimism the world has ever known. It has also opened wide the opportunity for our democratic institutions to seize the moment both to refix the gold Polaris and to streamline the tax codes. The efficiencies to capital that these reforms would bring would quickly occupy the energies of the military-industrial complex and the other segments of American society that are necessary to serve the downside of life. Swords into plowshares.

It is a tall order for our democratic forces, as there is no realistic possibility that any other nation or group of nations is positioned to lead the way. It would be at least another generation and likely two or three before the European bloc or the Asian bloc could reach a consensus on monetary reform. The dollar is thoroughly embedded in the international psyche and its commercial fabric as the global unit of account. The American democratic system is also the only one in the world strong enough to overcome the entrenched forces of pessimism that have grown like coral reefs during the 20th century wars against fascism and communism. There is a window of opportunity to get the job done before the 21st century begins. It is only a window, because the longer the forces of pessimism can remain entrenched during peacetime, the more likely they will be able again to generate war.

Realistically, restoration of the gold Polaris will not come unless the President takes the initiative. The Constitution gives the Congress authority over money, but the President is the only person who is elected by all the people. The diffusion of power in Congress makes it too easy for the special interests that gain from monetary instability to distract Congress from monetary reform. In an essay I wrote for National Review, February 8, "Gold Standard Coming," I suggested the likeliest scenario would be one in which an executive order began the process. Theoretically, President Clinton could issue the order, but practically, his administration is dominated by advocates of floating money. It would more likely be a Republican President, who would promise a dollar as good as gold in his campaign. In his 1980 campaign, Ronald Reagan wanted to seek a gold mandate, but was persuaded by his advisors to drop it from his platform. For that purpose, they brought in George Shultz, who as Treasury Secretary in 1973 had presided over the official floating of the dollar.

How difficult would it be? All it requires is that the new President instruct his Treasury Secretary to stabilize the dollar value of our international gold reserves. The Secretary would then have to ask the Federal Reserve to follow the Hamiltonian practice of adding or subtracting dollar liquidity to keep the value fixed. Having gotten this far, legislation to make the stabilization permanent would not be difficult to enact. The hardest part is finding a President who will seek the gold mandate and follow through on it.

* * * * *