Gold in a Deflationary Economy™ - Part- XIII

Talk of returning to a gold standard conjures up images in most investor's minds of government confiscation of gold and tight money supply, among other things. While government confiscation of gold is possible, a look back in time to 1981 at a proposal by Federal Reserve Board Chairman Alan Greenspan reveals it doesn't have to be difficult. In fact, only if the price of gold were fixed by legal mandate would confiscation become possible (or necessary). Otherwise, a gold standard with a freely fluctuating market price of gold is not only possible but desirable and is the most likely scenario.

Back then, in 1981, Alan Greenspan, then a partner in Townsend-Greenspan & Company, an economic consulting firm, wrote in a Wall Street Journal article that he not only supports a return to the gold standard (talk on the street is that he still favors that now) but that it would not be difficult and the transition from the present system to the gold standard could be easily monitored by investors and by the government and could be abandoned if the market reveals problems. Greenspan had also been the Chairman of the Council Of Economic Advisors from 1974 to 1977, a period that witnessed dramatic changes in the price of gold in the post-Bretton Woods environment after 1971.

Specifically, Greenspan proposed that to make the transition back to the gold standard the U.S. Treasury should issue 5-year Treasury Notes maturing in gold and paying interest in gold that would be issued at the time the government expected to initiate the transition to the gold standard. Simultaneously, 5-year Treasury Notes are issued maturing in the usual U.S. dollar fiat currency, paying interest in dollars as they do now. This would serve not only to assist in the transition from the fiat currency to a gold-backed currency, but would allow the free market a way to monitor progress toward the gold standard, all the while easily able to assess the risk by watching the spread between the fiat Treasuries and the gold-denominated Treasuries.

This is very important not only to our forecast for an ultimate return to a form of the gold standard, but also for our Forecast '96: A Global Turning Point prediction for a new type of gold-backed debt instrument designed to finance the entrance of emerging countries into the increasingly unifying global economy. As that December 1995 forecast went:

Backed by dozens of participating Global Village countries and by gold, this [new gold-backed World Bank debt instrument] will create a new type of opportunity for global investors to invest in the New Era sweeping the globe, and will provide necessary liquidity to enhance the entrance of countries into the global economy and at the same time will mitigate foreign exchange-related problems associated with such entrance....A new agency similar to the World Bank, therefore, is likely to supervise the globalization of countries as they emerge into the Global Village.

Little did I know at the time that Alan Greenspan in a 1981 op-ed article proposed gold-backed Treasuries, too, to assist in a monetary transition. Taking Greenspan's proposal into consideration, the idea of an international agency issuing gold-backed instruments appears even more feasible than I had thought in 1995. Movement toward international agencies, in fact, is already accelerating, with the World Trade Organization playing an important role in the global economy and now with the imminent rise to power of the European Central Bank that will independently govern the monetary policies of European Monetary Union and the new euro.