A Puzzled George Soros
Jude Wanniski
September 16, 1998


Memo To:The Wall Street Journal
From: Jude Wanniski
Re:  Market chaos

Tuesday’s op-ed by George Soros expressed a growing dismay about the inefficiencies of the free market in currencies and the need for governments to do something to stabilize them. "There is an urgent need," he says, "to recognize that financial markets, far from tending toward equilibrium, are inherently unstable." The statement is true only in the world of floating currencies. If the world's key currency, the dollar, were anchored to gold, the current chaos would subside to equilibrium.

The underlying misconception is that a currency that floats in price represents the free market in action while a currency that is fixed in price is antithetical to the free market. The reverse is true.

This is because each country’s currency is also part of its non-interest-bearing national debt. When the value of the debt freely floats, its price is determined by the 11 voting members of the Federal Reserve’s open-market committee, meeting in secret. When the value of the currency is fixed to gold, the Fed cannot change its price because of the discipline of the marketplace. That is, everyone in the market has a vote on whether the Fed is producing too many dollars, or not enough of them.

Keynesian and monetarist economics are correct in noting that gold is obsolete in most of its monetary functions, particularly as a medium of exchange and as a store of value. It remains the most monetary of all commodities, which is why it remains the truest signal of central bank error. When it produces one dollar too many relative to global demand, the price of gold begins an inflationary rise. When it produces too few relative to demand, the gold price begins to a deflationary fall.

Our first Treasury Secretary, Alexander Hamilton, explained this to Congress in 1791, pointing out that a small group of bankers may avoid monetary error for awhile. In times of distress, though, he said it is so much easier to print money than raise taxes that they invariably succumb. When the money is fixed to gold, he pointed out that an extra dollar will be returned to the bank. A gold standard is the most democratic of monetary regimes and the most compatible to a free market.

The chaos Mr. Soros sees is due almost entirely to the accumulated monetary errors the Fed has made in the past six years, particularly its failure to provide dollar liquidity as the gold price was falling by $100 an ounce since December 1996. Fixing the dollar/gold price around $325 an ounce -- as recommended by Jack Kemp and Steve Forbes -- would end the chaos as nothing else could.