A Golden, Golden Oldie
Jude Wanniski
September 28, 1999


Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: Does This Sound Familiar?

A significant number of SSU students and website fans were not born by March 31, 1976, which is the date of The Wall Street Journal editorial I've chosen for today, while I am still recovering from my vacation in Ireland with Patricia. The name Richard Cooper will not mean anything to you, but not long after this editorial was written, Jimmy Carter was elected President, and Dr. Cooper was named Undersecretary of State for Economic Affairs. He's still around, so I won't make too much fun of him. Actually, as dumb as he now sounds in the editorial, he was among the better Keynesian economists of the era, and actually argued against the tax increases that President Ford proposed (on the advice of his CEA Chairman Alan Greenspan) to "whip inflation now." Remember this is Wanniski, 39 years old, not 63, writing about a commodity standard. If you want to start a revolution, you must start young if you want to see it through to its successful conclusion, because it might take 35 or 40 years. The SSU upperclassmen will note that I was still a bit off key in this piece, still being tugged at by Milton Friedman's quantity theory of money, which doesn't work. But I did get gold right.

The Wall Street Journal
March 31, 1976

Buffering a Commodity Boom

Yale economists Richard Cooper and Robert Lawrence, writing in the current Brookings Papers, argue that the boom in commodity prices in 1973-74 was the result of "speculation" that could have been blunted by U.S. sales from its stockpile of strategic materials. We think the Cooper-Lawrence prescription is one worth thinking about.

Which is by no means to say we agree with their analysis of the cause of the commodity boom. We are dubious about blaming speculators for market movements, believing as we do that economic forces are fundamental, and cannot be changed by speculators any more than a big bet can change the odds on a roulette wheel. Thus, we are troubled by the Cooper-Lawrence suggestion that commodity prices ran up because a book called The Limits of Growth was published in 1972, causing people to worry that the world is running out of resources. The book, after all, is still for sale, yet commodity prices have collapsed. We're troubled, too, by their suggestion that the rise in the price of oil fueled the speculative boom. Commodity prices went up, they are saying, because commodity prices went up.

Their third rationale is that speculators believed there would be more inflation with the coming of floating exchange rates in 1973, and dashed out of currencies into commodities. But everyone can't dash out of currencies into commodities, for whoever sells commodities winds up with currencies. Our idea comes closest to this third rationale, however. Commodity prices ran up because, with the ongoing collapse of the Bretton Woods exchange rate system, governments around the world printed money at a feverish pace. When there are X number of goods and X amount of money, the price of each good is 1. When the number of goods is X and the amount of money is 2X, the price of each good is 2.

Still and all, Messrs. Cooper and Lawrence are on the right track, it seems to us, when they argue the U.S. government could have blunted the commodity boom by selling commodities from the strategic reserve. That is, if one branch of government increases the amount of money by X, making it 2X and another branch increases the amount of goods by X, making it 2X , by putting goods on the market from reserves, the price will remain 1.

What the two economists have, in essence, proposed, is a commodity standard. We have no doubt it would work as long as the government's commodity stockpiles were large enough to last until its printing press broke down. For that matter, if the government took the dwindling of its stockpiles as a signal to slow down the presses, the commodity standard could keep prices stable indefinitely, or at least until the government forgot how the system is supposed to work.

It's inconvenient, of course, to stabilize world prices by maintaining and managing large reserves of wheat, oil, copper and zinc. Such materials are bulky, and since they are widely used in commerce their prices relative to one another often change. It would be much easier simply to pick the most convenient single commodity, stabilize its price and use its supply as a signal to speed or slow the printing presses. Why, the whole thing could be done with a not very large vault and a small desk at the New York Fed if you picked a commodity like, say, gold.

This is of course precisely how the gold standard worked as long as the governments remembered the rules, and in publicizing the Cooper-Lawrence plan, what the Brookings Institution has done is inch toward its reimposition. We hasten to add that there is nothing magic about gold. As Nobel Prize winner F.A. von Hayek says, the function of gold in the gold standard was to scare the politicians. The loss of gold frightened them into slowing the printing presses.

The most efficient standard of all is an intellectual standard, which would even enable the Fed to do away with its small desk and not very large gold vault. The intellectual standard is simply the universal acknowledgment that when the number of goods is X, governments only cause inflation when they print more than X amount of money.