We’re Learning from the 1980s’ Push for Gold, At Last

By: Brian  Domitrovic (Gold Advisory Board Member)

Published in Forbes, 1/24/12

“Six down quarters of GDP growth, unemployment that pushed 11%, a stock market that hadn’t made money in over a decade – it’s a wonder that we’ve had the temerity to call ours the worst economic crisis since the 1930s. For the previous statistics apply to the horrid years of 1980-1982.

It’s been strange that during this Great Recession we haven’t thought to apply the solution that met the ’80-’82 crisis, given that the great booms of the latter 1980s and the 1990s were what resulted – with unemployment and inflation vanishing from the scene, the stock market quintupling, and all the rest.

The solution done back then: stabilize money and cut taxes.

To be sure, on the latter front, we have proved sufficiently skittish about raising taxes. In 2010, President Obama even went in for extending the George W. Bush-era tax cuts at the margin.

But stabilizing money – no way, no how have we seen that half of the supply-side solution.

Let’s go back to 1980. In that year, the Federal Reserve was undergoing one of the worst episodes in its history, feeding an inflation that was running at 14% while pumping interest rates well into the double-digits. In this sour context, Sen. Jesse Helms of North Carolina decided it was time for action. He got Congress to set up a commission to study returning to the gold standard, with a recommendation to be made within two years’ time.

Helms’s intrepid staff lieutenant, Howard Segermark, went to work getting members for the commission, and the trick was to make sure that it was not stacked with anti-gold partisans. Of the non-politicians appointed to the commission, the two most notable were Anna J. Schwartz (Milton Friedman’s collaborator) and Lewis E. Lehrman, the entrepreneur and author.

When the commission reported in early 1982, the majority and minority reports were authored by these two individuals, respectively, with Lehrman assisted by his commission coequal Rep. Ron Paul. The Schwartz report came up just short from recommending a return to gold, while the Lehrman/Paul report made the case for gold absolutely.

In the meantime, the Fed could not be certain which way the commission was going to go. If it went for gold, and Congress obliged the recommendation, so much of discretionary monetary policy would be scratched from the Fed’s toolkit. Probably as a measure of self-preservation – that is, to prevent an outright call for a return to gold – the Fed started targeting the gold price in its monetary policy operations.

In other words, the Fed knew all along in its secret heart that the gold price is the best monetary policy target. When faced with a real threat of Congressional action toward gold convertibility, the Fed at last got serious about making a role for gold in its own decision-making process. Thus could the clamor for convertibility be staved off.”

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