Paul Volcker gold commission
Paul Volcker

The Republicans have put some serious oomph in their presidential campaign over the last month. First Mitt Romney picked Rep. Paul Ryan as his running mate, a move which not only fired-up a very good portion of the electorate, but by all accounts lifted Romney’s own spirits on the trail.

Now the Republicans have made it part of their party platform to officially look into putting this country back on the gold standard.

Win and win. The thing about these moves is that they respond precisely to the two things that have become the top concerns of the public as these unacceptable last four years have unfolded.

Now to be sure, the greatest worry of the American people today is that economic growth is horrendous and stands to remain so, just like in the bad old days of the 1930s. But concerns 1-A and 1-B have been these: the rapid growth of the federal government’s fiscal problem since 2008; and the stunning readiness over the same period of the Federal Reserve to debase the nation’s currency while keeping the biggest of the big financial shops in clover.

In Paul Ryan, he of the “roadmap” (towards fiscal solvency), we have a direct response to 1-A. And in the gold platform, we have the same toward 1-B. You win elections by playing the to real interests of the public, and that has been the effort of the Romney campaign this August.

A few words about the last time a Gold Commission was tried, back in 1981-82. First of all, all hail Howard Segermark, the intrepid Jesse Helms staffer (and political seer today) who put that commission together back in Ronald Reagan’s first years as president. In bipartisan spirit, Segermark had to include fierce anti-gold politicians, such as Rep. Henry Reuss of Wisconsin. Reuss is the one who predicted, as the U.S. delinked from gold at $35 an ounce in 1971, that the price would dive to $6. In no time it went to $200, then $800 an ounce.

And in establishmentarian spirit, the commission also had to have as its chairman the über-monetarist Anna Schwartz, who along with Milton Friedman had staked her claim on the idea that good fiat monetary policy is indeed possible, if not yet exampled by any iteration of the Federal Reserve.

But in a spirit of intellectual ambition, the commission also included Texas Rep. Ron Paul—and this was long before the time of his celebrity—and monetary sage and coming New York gubernatorial candidate Lewis E. Lehrman. As it turned out, Paul and Lehrman held quite a bit of sway as the commission deliberated through early 1982, and it was never quite clear until it reported in March which way it was going to go.

In the end, two reports were released, the majority one authored by Schwartz. It passed on recommending a return to gold. Instead, as I wrote of it in my book about this era, Econoclasts, the majority report “looked sternly at the Fed and asked for better.” But the minority report, that of Paul and Lehrman, did recommend gold, and it remains to this day one of the scintillating documents of recent public policy. It might as well be a blueprint for 21st-century monetary reform.

My own hunch (and it was journalist Robert Novak’s too), as I expressed it in Econoclasts, was that the reason the Fed finally got serious about both not overprinting the dollar and not having wild gyrations in monetary production (the two things that bedeviled monetary policy since 1971), in other words trying to provide as much money as the real economy needed for growth, was that the Fed was scared it might be put out of business by the Gold Commission.

There are other accounts of this period, such as Allan Meltzer’s big history of the Federal Reserve, and the intriguing new book by William Silber, Volcker: The Triumph of Persistence, but the fact remains that over Paul Volcker’s first two and two-thirds years as Fed chairman, from the summer of 1979 through the spring of 1982, the progress he made on coordinating monetary policy with real economic growth was zero.

But after the spring of 1982, there all of a sudden arose a close sequential relationship between a declining price of gold and Fed easing, and a rising price of gold and Fed tightening. It’s probably the single greatest secret in the history of modern monetary policy. After mid-1982, it looks like the Fed followed a gold price rule for quite a while. This, of all things, is where we got both the defeat of the horrible stagflation of the previous dozen years and the mega-boom of the 1980s and 1990s.

The secret wasn’t Volcker or monetarism or anything like that. It was adherence to the market price of gold. One piece of evidence we can all look up: As the Gold Commission was gathered and convened, the price of gold tumbled from the 1980 peak north of $800 and in 1982 began to hover around a $350 price, give or take a few gyrations, totally mild by today’s or the 1970s standards, for the next two decades of boom-time economic growth.

I’m ready to say that the Gold Commission of 1982 is by rights one of the unsung heroes at the origins of the Great Moderation. Ultimately the recommendation was the wrong one, but what with Paul, Lehrman and the scold Schwartz on it, the commission put a good fright into the Fed.  The fear was that a substantial part of its beloved discretion might be removed from it. Therefore the Fed’s top men set to watching the price of gold like a hawk for two decades. In the meantime, unheard-of prosperity deadened everyone’s senses to the fact that there was ever a problem with the Fed to begin with.

The missed opportunity, of course, was not to formalize the gold-price rule, say through a commitment to convertibility. This would have been a piece of cake to do at any moment in the eighteen years after 1982, since the market price of gold was parked in a tight band. It was never done, and sure enough the Fed tired of stabilizing gold. Money got loosed in the early 2000s, and gold headed up big time to Fed indifference. Thence came the housing bubble and the Great Recession, thanks a lot and very much.

Hillary Clinton ran for president on the nostalgia ticket in 2008: “I’ll bring back the 1990s.” How about we bring back both the 1980s and 1990s, though corrected with monetary convertibility. That’s what’s in play with the Republicans’ new Gold Commission.

Books on the topic discussed in this essay may be found in The Imaginative Conservative BookstoreOriginally published at the essay is reprinted here with gracious permission of Brian Domitrovic.

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