Three Golden Cheers for JBIII Jude Wanniski September 21, 1992

The skin-of-the-teeth Maastricht victory in yesterday's French referendum is just enough to keep a pulse beating for European economic integration. The very notion of integration without a fixed-rate monetary system -- a common currency, if you will -- is nonsensical. Without it, the EC remains at best a customs union. If Europe is to integrate, as the 13 former colonies in the New World did 200 years ago, the countries of Europe must solve the sovereignty problem posed by the inherent flaw of Maastricht. The only solution we can think of that makes any sense is that which James Baker III offered in September 1987, which would establish "a commodity basket, including gold," as an independent reference point that would signal which central banks were being too tight, which too loose, and which just right. (Goldilocks, right?) As in the new United States, this takes monetary policy out of the hands of the elites and puts it in the hands of the people.

At the obvious instigation of JBIII, President Bush yesterday invited the G-7 finance ministers to the Oval Office and revived the gold initiative at exactly the right moment. In those few minutes, the President did more to re-establish his leadership than anything he has done since Desert Storm. This isn't European integration that is at stake. It's the future stability of the entire world economy that President Bush has within his grasp -- a position that could rescue his re-election prospects if he presses this advantage in a way that becomes clear to the American people. There is nothing in Governor's Clinton's experience that enables him to grapple with this key issue of international money and banking. There is nobody on his economic bench who can hit these kinds of curve balls the way JBIII can. If we put aside all the gibber-jabber of family values, Governor Clinton's draft dodging, and who raised taxes the most or least, the issue that will finally decide the November 3 election is personnel. In 1976, the only reason I decided to vote for President Ford over Jimmy Carter was that Don Rumsfeld was in the Ford Cabinet, giving me at least an inkling what the next four years might be like. If Jim Baker keeps the ball rolling in the next six weeks to November 3 -- and it is also made clear he is prepared to remain as chief-of-staff for as long as it takes to get the President's economic program enacted -- the President could overtake Clinton's seemingly insurmountable lead. The voters will have sufficient assurance that the second Bush Administration will be Reaganesque.

Today is only the first day of JBIII's third week in the saddle. He tried to break out of the Brady-Darman mode by pushing indexation of capital gains by executive order. But the bureaucrats at Treasury and Justice blocked that initiative. He could have gone ahead with even an amber light from Attorney General Barr, as I know he wanted to do, but without the backing of Nick Brady that was impossible. He faced the threat of a number of subcabinet resignations if he ploughed ahead.

The gold initiative had Treasury over a barrel. Brady and Undersecretary David Mulford clearly did not want the President to do this. They preferred to simply bash the Bundesbank into lowering interest rates, which is all they know about monetary policy. The fact that JBIII had already introduced the gold initiative exactly five years ago left Brady no arguments on why it could not now be done. The press accounts make it obvious that Brady's drones are cool to the idea. "It needs a lot of work," one senior Treasury official told The Wall Street Journal today. According to the Times, the President also told the G-7 ministers that in addition to the gold/commodity mechanism he thought it would be okay if they also looked at trade flows and domestic growth differentials to decide on monetary policy. This baloney, which could not have come from JBIII or Bob Zoellick, who wrote the statement, is Treasury dogma. No fixed-rate system can possibly exist for very long if member states could alter their rates when their trade position changed from surplus to deficit, or vice versa, or if they began growing faster or more slowly than their neighbors.
 
(In the first years of the Reagan Administration, I made this point to JBIII when he was chief-of-staff: How long would an exchange-rate system between the 50 states hold together if Texas could change the value of its dollar relative to, say, New York's dollar, because Texas found itself growing more slowly than New York? Or, if California could devalue its dollar because it found itself running a trade deficit with Kansas?) 

The value of money must be constant, and constancy can be maintained simply by agreeing upon an international convention. Under a pure gold standard convention, which exists only in theory, a country with a trade deficit must ship gold to the country with a trade surplus to keep the exchange rate constant. More than 30 years ago, Robert Mundell showed that a country with a trade deficit need only ship paper to the surplus country -- the paper being capital: private equity or public or private bonds. In such a system, gold need only serve as an error signal, alerting central banks as to when they should be lowering or raising short-term interest rates in order to adjust capital flows. If such a system existed in recent months, it would have been clear the Bundesbank was not only damaging all of Europe with its DM deflation, but also damaging its own economy by unnecessarily starving it of liquidity. After all, no convention can long exist unless it serves the interests of all participants. 

This point must be made here in the United States because we are not likely to get much help from London. Former Prime Minister Margaret Thatcher is now the dominant voice in London, to which the world's attention will now turn regarding the future of Maastricht. Lady Thatcher, unhappily, remains in the grip of Milton Friedman. She spoke Saturday morning in Washington at CNN's "Global Economic Development Conference" (at which I spoke Saturday afternoon), denouncing the very idea of European integration. She celebrated Friedman by name in her advocacy of central bank independence and floating exchange rates, pointing to the Bundesbank as clear evidence that fixed rates can never work absent a pure gold standard. Obviously, her Friedmanite advisors never told her that Mundell solved that problem. Some 100 Tory backbenchers have announced they will vote against Maastricht when it is voted upon in Parliament next month. As two-thirds of the British public is now indicating opposition to Maastricht, its pulse beat may soon be gone altogether unless Prime Minister John Major borrows President Bush's gold initiative to solve the sovereignty issue. This idea should not take long to get around. It was nice to see IMF President Michael Camdessus today saying nice things about the Bush gold initiative, for example. It solves a lot of problems: IMF bureaucrats know there would be a role for them in a new international monetary system. Also, Maastricht supporters still don't know how to deal with Denmark, whose people formally voted down Maastricht in a June referendum. I believe Denmark's constitution would permit a new referendum if the Maastricht Treaty were amended to include gold as a means of solving questions of monetary sovereignty.

There is this window of opportunity now. It exists solely because the President fell so far behind Clinton in the polls that he was forced to bring Jim Baker into the White House. Fed Chairman Alan Greenspan, who now has an ally in the White House for the first time in the Bush Administration, is becoming bolder in pushing the gold/commodity arguments. Last week he totally dismissed the relevance of the monetary aggregates as useful signals to central banks. Wayne Angell is publicly advising the world that he is not alone at the Fed in targeting gold and commodities. Where he had for months been shy of criticizing the Bundesbank for its deflation, as central bankers are not supposed to critique each other publicly, he finally decided ten days ago to let it rip. He's told people he realized that the argument was coming down to whether the Bundesbank or the Fed was in error, and he was not going to sit quietly on that question.

As ripe as the issue is, though, it's difficult for JBIII and his crew to capitalize on it as long as Treasury hangs back, with Brady damning it with faint praise. I'd expressed impatience with Baker last week, wondering where the follow-up was to the Detroit Economic speech. I only needed to wait another day to see reports of the President's speech in Enid, Oklahoma, which was the sharpest, most effective statement of economic principle I've seen in his Presidency -- courtesy of Bob Zoellick. Now that JBIII has the great golden ball rolling, there's palpable reason for a breath of optimism. Even if it is too late to pull it out for the President, the debate that is shaping up can only benefit the country, Europe and the world. Even the Clinton team might learn a thing or two.