"A more timeless measure is needed; gold fits the bill
perfectly."
Mark Mobius
When speaking of the Midas metal, I'm reminded of Mark
Twain's refrain, "The reports of my death are greatly exaggerated."
After years of central-bank selling and a bear market in precious
metals, the Financial Times recently declared the "Death of Gold." But
is it dead?
Following the Asian financial crisis last year, Mark
Mobius, the famed Templeton manager of emerging markets, advocated the
creation of a new regional currency, the asian, convertible to gold,
including the issuance of Asian gold coins. "All their M1 money supply
and foreign reserves would be converted into asians at the current price
of gold. Henceforth asians would be issued only upon deposits of gold or
foreign-currency equivalents of gold." 1 Mobius castigated
the central banks of Southeast Asia for recklessly depreciating their
currencies. As a result, "many businesses and banks throughout the
region have become bankrupt, billions of dollars have been lost, and
economic development has been threatened." Why gold? "Because gold has
always been a store of value in Asia and is respected as the last resort
in times of crisis. Asia's history is strewn with fallen currencies. ...
The beauty of gold is that it limits a country's ability to spend to the
amount it can earn in addition to its gold holdings."
Not Just Another Commodity
Recent studies give support to Mobius's new monetary
proposal. According to these studies, gold has three unique features:
First, gold provides a stable numeraire for the world's monetary system,
one that closely matches the "monetarist rule." Second, gold has had an
amazing capacity to maintain its purchasing power throughout history,
what the late Roy Jastram called "The Golden Constant." And, third, the
yellow metal has a curious ability to predict future inflation and
interest rates.
Let's start with gold as a stable monetary system. With
most commodities, such as wheat or oil, the "carryover" stocks vary
significantly with annual production. Not so with gold. Historical data
confirm that the aggregate gold stockpile held by individuals and
central banks always increases and never declines. 2
Moreover, the annual increase in the world gold stock typically varies
between 1.5 and 3 percent, and seldom exceeds 3 percent. In short, the
gradual increase in the stock of gold closely resembles the "monetary
rule" cherished by Milton Friedman and the monetarists, where the money
stock rises at a steady rate (see Chart I).
Compare the stability of the gold supply with the
annual changes in the paper money supply held by central banks. As Chart
II indicates, the G-7 money-supply index rose as much as 17 percent in
the early 1970s and as little as 3 percent in the 1990s. (Why has
monetary growth slowed, even under a fiat money standard? The financial
markets, especially the bondholders, have demanded fiscal restraint of
their governments.) Moreover, the central banks' monetary policies were
far more volatile than the gold supply. On a worldwide basis, gold
proved to be more stable and less inflationary than a fiat money system.
Critics agree that gold is inherently a "hard"
currency, but complain that new gold production can't keep up with
economic growth. In other words, gold is too much of a hard currency. As
noted, the world gold stock rises at a miserly annual growth rate of
less than 3 percent and often0hes under 2 percent, while GDP growth
usually exceeds 3 or 4 percent and sometimes 7 or 8 percent in
developing nations. The result? Price deflation is inevitable under a
pure gold standard. My response: Critics are right that gold-supply
growth is not likely to keep up with real GDP growth. Only during major
gold discoveries, such as in California and Australia in the 1850s or
South Africa in the 1890s, did world gold supplies grow faster than 4
percent a year. 3
Prices Must Be Flexible
Consequently, an economy working under a pure gold
standard will suffer gradual deflation; the price level will probably
decline 1 to 3 percent a year, depending on gold production and economic
growth. But price deflation isn't such a bad thing as long as it is
gradual and not excessive. There have been periods of strong economic
growth accompanying a general price deflation, such as the 1890s, 1920s,
and 1950s. But price and wage flexibility is essential to make it work.
At the time of the original publication, Dr. Skousen
was an economist at Rollins College, Department of Economics, Winter
Park, Florida 32789, a Forbes columnist, and editor of Forecasts &
Strategies. He is also the author of Economics on Trial (Irwin, 1993),
a review of the top ten textbooks in economics.
1. Mark Mobius, "Asia Needs a Single Currency," Wall
Street Journal, February 19, 1998, p. A22.
2. See the chart on page 84 of my Economics of a Pure
Gold Standard, 3rd ed. (1997), available from FEE. Note how the world
monetary stock of gold never has declined between 18 10 and 1933.
3. Ibid., p. 96.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
September 1998, Vol. 48, No. 9.
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