[Congressional Record Volume 140, Number 97 (Friday, July 22, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: July 22, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                        BRETTON WOODS REMEMBERED

                                 ______


                          HON. PHILIP M. CRANE

                              of illinois

                    in the house of representatives

                         Friday, July 22, 1994

  Mr. CRANE. Mr. Speaker, 50 years ago this past month, a very 
important agreement was made at Bretton Woods that stabilized the U.S. 
economy for decades. This agreement was the convertibility of most 
major currencies around the world into a gold standard. Unfortunately 
in 1971, President Richard Nixon suspended gold payments to foreign 
governments ending an era of economic stability.
  From 1944 through 1971, consumer prices only increased an average 
annual rate of 3.2 percent, the lowest since World War I. Since the 
destruction of the gold standard by President Nixon, the average annual 
consumer price increase has been 6 percent. This unreasonable rate has 
slowed domestic production and international trade. Returning to the 
gold standard will create new international trade ventures with the 
former Soviet Union and South Africa.
  I urge my fellow Members of Congress to read the following article. I 
would like to submit the following article written by Lewis Lehrman and 
John Mueller. I believe to stabilize our country's economy once again, 
the dollar must again be associated with the gold standard.

                     Redeem Us With a Cross of Gold

                  (By Lewis Lehrman and John Mueller)

       Fifty years ago this month, the Allied nations met at 
     Bretton Woods, N.H., to create the postwar monetary system. 
     Bretton Woods re-established international convertibility of 
     the major currencies into gold or gold-convertible dollars. 
     The system lasted until Aug. 15, 1971, when President Nixon 
     suspended gold payments to foreign governments.
       Measured against the period since 1971, Bretton Woods seems 
     almost a golden age. Consumer prices more than doubled 
     between 1944 and 1971, an average annual rise of 3.2%; but 
     after the Korean War the average rise was 2.3%. By contrast, 
     since 1971 prices have multiplied 3.5 times, an average 
     annual rise of 6%.
       In broader historical perspective, however, Bretton Woods 
     is a distant second best. The record of price stability under 
     the classical gold standard, from 1834 to 1862 and 1879 to 
     1913, is without parallel. U.S. consumer prices varied in a 
     26% range in those 62 years, and stood at almost exactly the 
     same level at the beginning and end of both periods. Average 
     inflation was zero, while the average annual variation of 
     prices in either direction was 2.2%. From 1879 to 1913, when 
     the U.S. and most other major nations shared the gold 
     standard, U.S. consumer prices ranged only 17% in 34 years. 
     Average inflation was again zero, and the average annual 
     variation of prices, up or down, was 1.3%. This stands in 
     sharp contrast to the average price gyrations during and 
     after the Civil War (6.2%), the period from World War I to 
     Bretton Woods (5.6%) and the period since Bretton Woods (6%).


                          after the breakdown

       What accounts for the difference? The level of consumer 
     prices has always mirrored a measure we have named the World 
     Dollar Base--the sum of ``high-powered money'' including U.S. 
     currency, bank reserves and foreign official dollar reserves. 
     In our chart, the World Dollar Base is shown relative to 
     growth (for our calculations we used an annual trend of 1.9% 
     growth per capita, the average growth rate of real income as 
     far back as we have records). The supply of dollars exploded 
     after the breakdown of Bretton Woods.
       Let's take a moment to review the reasons for this change. 
     The fluctuations in the chart reflect changes in the 
     standards by which money is issued. High-powered money is 
     simply the standard (gold or paper) money in circulation, 
     plus any official monies convertible into standard money. 
     Before 1914, high-powered money meant metal and paper 
     currency held by banks and the public. In 1914, the Federal 
     Reserve system added a new form of high-powered money--bank 
     deposits at the Fed, which substitute for vault cash. Then, 
     after World War I, foreign central banks created a third 
     category of U.S. high-powered money when they began to accept 
     foreign exchange--chiefly dollar or sterling assets--in lieu 
     of gold.
       This ``gold-exchange standard'' was formalized in the 
     Bretton Woods agreement. Since 1971, official reserves have 
     mostly been in foreign exchange. It might seem that this 
     would not affect the high-powered money of a reserve-currency 
     country like the U.S. Foreign central banks typically convert 
     their dollar holdings in U.S. Treasury securities. But this 
     is the whole point--just like bank deposits at the Federal 
     Reserve, these dollar reserves substitute for official 
     payment in standard money. They behave as a form of U.S. 
     high-powered money, and fuel the kind of growth the chart 
     reflects.
       Gold itself stabilizes. Under an international gold 
     standard, the supply of gold coins or bullion responds to the 
     level of prices generally. For an individual country, a rise 
     or fall in prices relative to other gold-standard countries 
     leads to an outflow or inflow of gold money. A world-wide 
     rise in wages and prices discouraged gold production (it 
     raised mining costs), while a fall in prices stimulated gold 
     production. So, absent sharp expansions or contractions of 
     credit, the price level varied within narrow limits.
       Gold convertibility also regulates the supply of paper 
     money. But swings in credit permit sharper price fluctuations 
     than would otherwise have been possible. Without 
     convertibility, this constraint is removed altogether. A 
     detailed analysis shows that all major inflations and 
     deflations, under every U.S. monetary standard, have involved 
     credit. They have been driven by variation in the 
     ``fiduciary'' part of the World Dollar Base, the part based 
     on credit rather than precious metals.
       In fact, the Bretton Woods system contained in the seeds of 
     its own destruction. Like the interwar gold-exchange 
     standard, Bretton Woods differed from the gold standard in 
     one essential respect: the use of foreign exchange along with 
     gold as international reserves. And this turned out to be its 
     fatal flaw. Steady expansion of dollar reserves contributed 
     to rising prices, and rising prices steadily diminished the 
     supply of new gold. In 1960, Jacques Rueff and Robert 
     Triffin, economist-statesmen, predicted the eventual run on 
     the dollar. This would lead to either deflation or suspension 
     of gold payments and continued inflation.
       The world had stumbled into deflation under similar 
     circumstances in the 1930s, with foreign exchange playing a 
     key role. From negligible levels in 1913, official sterling 
     and dollar reserves mushroomed to more than 60% of the value 
     of world gold reserves in 1928. From 1929 to 1932, during 
     runs first on sterling and then on the dollar, almost all 
     these foreign-exchange reserves were liquidated, sucking 
     prices down toward their prewar levels. A surge of gold 
     money, which accelerated to a flood after the dollar's 
     devaluation in 1934, was what stopped the deflation.
       Yet in 1971, the U.S. chose to suspend dollar-gold 
     convertibility, and the world moved onto today's loose 
     ``dollar standard.'' This was not merely throwing the baby 
     out with the bathwater--it was a case of throwing out the 
     baby and keeping the bathwater. Gold was always the element 
     of price stability and foreign-exchange reserves the element 
     of instability in the international monetary system. We kept 
     foreign-exchange reserves and got rid of gold.
       A stable system could have been re-established--and still 
     could be--if the major countries restored a gold standard 
     without foreign-exchange reserves. This would be, basically, 
     Bretton Woods minus dollar reserves. Of course, the gold 
     value of convertible currencies must be properly chosen to 
     avoid any deflation. The proposal was in fact made in the 
     1920s and 1960s but rejected. The experts had other ideas. 
     Yet over the years, all the arguments against returning to 
     gold have withered and dropped like leaves in autumn.
       It used to be claimed that inflation is necessary to keep 
     unemployment down, but we've learned from bitter experience 
     that this simply isn't true. It was said that the gold 
     standard caused deflation, but as we have seen, all the major 
     inflations and deflations were due to paper, not gold. It was 
     said that adjustments under floating exchange rates would be 
     smooth and gradual, but this hasn't happened either.
       There are also the celebrated predictions that if gold were 
     delinked from money, its price would plunge to $6 an ounce 
     from $35--proving that paper money ``supported'' gold. Yet 
     the dollar now trades for less than a tenth of its former 
     gold value. Finally, it was argued that a return to gold was 
     unthinkable because it would benefit the Soviet Union and 
     South Africa; today, of course, we want to integrate both 
     countries into the world trading system. It has been said--
     including on this page--that we could manage the current 
     system just fine by targeting the money supply or commodity 
     prices. But the quantity of foreign-dollar reserves cannot be 
     targeted and commodity prices respond after a good two 
     years--too late. There is no argument left against gold 
     except ``you can't turn back the clock.''
       Credit has continued to be the problem here. Since the 
     Civil War, nearly all of the credit behind the World Dollar 
     Base has gone to the U.S. Treasury. The nontechnical answer 
     as to why prices have risen nearly fourfold since 1971 is 
     that the (mutated) financial system has absorbed (monetized) 
     over $2 trillion in Treasury debt since then. This is what 
     has permitted ever larger federal deficits.


                           Political Dangers

       Some think this arrangement is just fine--financial and 
     commodity speculators say so all the time. To judge by 
     President Clinton's first appointments to the Fed, he, too, 
     is partial to inflation. Yet, like President Bush, Mr. 
     Clinton is about to learn the political dangers of monetary 
     instability.
       Back in 1988, we correctly predicted that U.S. consumer 
     price inflation, then 4%, would peak between 6% and 7% in 
     mid-1990, followed by a mild recession. That combination was 
     enough to cost Mr. Bush re-election. Based on a similar 
     analysis, we now predict a rise in consumer price inflation 
     from 2.3% over the past 12 months to a peak of 4% to 5% by 
     mid-1996. The rise of inflation should be associated with a 
     slowdown of real economic growth, from almost 4% over the 
     past year to near zero in 1996. This may not, by itself, do 
     in Mr. Clinton, but it will make the 1996 election 
     interesting.
       Perhaps one day even politicians, who made the wrong choice 
     in 1971, will get fed up. They will reject the ``cross of 
     paper'' and return us to the only money that has worked: 
     gold.

                          ____________________