[Congressional Record Volume 140, Number 116 (Wednesday, August 17, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 17, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                                  GOLD

  Mr. BENNETT. Mr. President, in this morning's Washington Post the 
lead story on the front page had to do with the action of the Federal 
Reserve Board, raising the interest rate yet again. This is a deserving 
spot for such news because it is very important to our economy.
  During the debate on health care, we had a great deal of conversation 
about the entitlement commission and the fear that sometime in the next 
century the Federal Government will run out of money. This is tied to 
the size of the deficit. In my view, this morning's news and concerns 
about the deficit are tied together. Because as the interest rate goes 
up, the cost of financing the national debt goes up. When interest 
rates are low, we save a tremendous amount at the Federal level in 
terms of debt service payments. For every 1 percent on $4.5 trillion--
if I get my decimal right--that is $45 billion in annual savings. So if 
the cost of servicing the debt can be brought down by holding interest 
rates down, it has implications for everything we are talking about 
here with respect to the budget deficit and health care costs and 
everything else.
  In that context then, I would like to call the Senate's attention to 
an exchange I had in the Banking Committee with the distinguished 
Chairman of the Federal Reserve Board, Mr. Alan Greenspan. Some 
portions of that exchange were outlined in an editorial piece that 
appeared in the Wall Street Journal last week by Jude Wanniski.
  I ask unanimous consent that article be printed in the Record at the 
conclusion of my statement.
  The PRESIDENT pro tempore. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. BENNETT. The subject I discussed with Chairman Greenspan was the 
question of tying the dollar to gold, that is the price of the dollar 
to the price of gold. Chairman Greenspan said, in response to my 
questioning, that the price of gold was, in his view, a very valuable 
indicator of forthcoming inflation. When the price of gold starts to 
rise, that is an indication that there is inflation on the horizon. 
When the price of gold remains stable, that is an indication that 
inflationary pressures are under control.
  Why is this? This is a question I tried to explore with the chairman. 
In the format of the committee we did not have an opportunity to get 
into it as deeply as I would have liked.
  It seems to me the reason is that gold is the closest thing we have 
in this world to a universal currency. If I were to leave the United 
States and go to some far-flung place and try to buy a suit with 
dollars, they might refuse my dollars, saying ``That currency is not 
good in this society.'' I might reply, ``All right, I will bring you 
something of intrinsic value, then. I will bring you food.'' In the 
terms of the Commodity Exchange, ``I will bring you a pork belly.'' And 
it may well be they would say, in that part of the world, ``We don't 
eat pork. We are not interested in your pork belly.'' But almost 
everywhere in the world, if I say, ``I will give you this small bar of 
gold,'' they would say, ``We will sell you a suit for a bar of gold.''
  All the way back to biblical times and the mythical King Midas, gold 
has caught the imagination of the human race as the one commodity that 
seems to have intrinsic value, regardless of what else changes. Let us 
stop and think about, then, the implications of tying the dollar to 
gold. It would mean, if we were on some kind of a system where the 
price of gold did not change in dollars, that you could predict the 
economic future with far greater certainty than you can today.
  For example, if we were still in a circumstance where a dollar would 
buy one thirty-fifth of an ounce of gold--as we were through the vast 
majority of our historic years--that would mean that if you lent me 
$1,000 for a period of 10 years, you would know that at the end of the 
10 years when you got your $1,000 back, every one of those dollars 
would still buy one thirty-fifth of an ounce of gold.
  No matter what had happened to the prices of any other commodities, 
you knew you would get your $1,000 back in terms of gold without any 
erosion of the purchasing power of that $1,000.
  What would this mean to interest rates? This would mean that you 
could depend upon getting your purchasing power back; therefore, the 
interest rate would not have to be so high as to compensate you, Mr. 
President, for the loss of purchasing power that would occur during 
that 10-year period.
  If you assume that the $1,000 you lend me is only going to be worth 
$500 in purchasing power at the end of 10 years, you understand that 
the interest I pay you must not only compensate you for the use of the 
money, but that the interest I pay you must also allow you to recoup 
the $500 loss of purchasing power.
  So instead of a 2- or 3-percent interest rate on the $1,000, you have 
to have a 6- or 7-percent interest rate so that you recover both 
principal and interest at the end of 10 years.
  I have been in business. I understand the value of being able to 
project into the future the value of dollars. If we had a circumstance 
that gave us constant dollars, it would have a tremendous impact on the 
ability of businesses to plan for the future, as well as governments.
  There are lots of arguments that I have heard from people saying we 
must return to a gold standard and, frankly, almost all of them strike 
me as being mystical and occasionally nonsensical. But the idea that I 
was exploring with Chairman Greenspan is neither of those if, indeed, 
it has merit. If, indeed, we could get to the point where there was no 
erosion in the purchasing power of the dollar and finance the Federal 
debt with that understanding, we could save up to $200 billion a year.
  Mr. President, stop and think of all of the efforts we go through on 
this floor to try to cut the budget up to $200 billion a year. If, in 
fact, we could cut the debt service costs up to $200 billion a year, it 
would be more significant than all of the debates we have had on all of 
the other budgetary issues that we discuss here.
  So I think it is appropriate on a day when the Federal Reserve is 
raising the interest rates and thereby raising the deficit because of 
the cost of financing our debt, that we, once again, spend some time 
thinking about the possibility of getting some kind of standard, some 
kind of stability in the unit of account, the money with which we pay 
our bills. I know of no historic standard that has the stability over 
centuries than gold has had.
  So I hope, Mr. President, that as a result of this brief statement, 
economists around the country, people in the Federal Reserve System, 
people on the staff of the various committees that deal with these 
issues in the Congress will, once again, begin to explore the 
possibility that we could return to a historic stance with respect to 
our currency and tie it to some kind of stable commodity that will say 
borrowers can know with a certainty that when they are paid back, their 
dollars, at least in terms of this commodity, will still have the same 
purchasing power at the end of the transaction that it had at the 
first.
  Chairman Greenspan said to me in the exchange we had in the Banking 
Committee, that a nation who had the most stable currency in the world 
would be the nation that had the lowest interest rates in the world, 
and that statement intrigues me tremendously.
  That is my only purpose here this morning, Mr. President. Not to 
offer any specific solutions but simply to raise the issue in what I 
hope is a sober and thoughtful way so that we, as a people, can begin 
to address this question and find that commodity that will give us that 
kind of stability.
  As I say, historically, the only commodity that has approached that 
kind of an impact on economies has been gold. And I think as we search 
for that kind of stability, gold is the place where we should begin. I 
thank the Chair.

                               Exhibit 1

                     Help Greenspan, Commit to Gold

                           (By Jude Wanniski)

       In hearings before Congress in July, Federal Reserve 
     Chairman Alan Greenspan reaffirmed that he valued gold as an 
     indicator of inflation expectations. He also readily agreed 
     with the reasoning of Sen. Robert Bennett (R., Utah) that if 
     the dollar was again fixed to gold, the U.S. probably would 
     have the lowest interest rates in the world.
       The Fed chairman's words were important. the lowest 
     interest rates in the world would mean that America would 
     boast rates lower than Japan--currently on the order of 3%. 
     If the U.S. could refinance its $4.5 trillion national debt 
     at 3%, as it matures, the annual savings in debt service 
     would amount to perhaps $120 billion a year. This is a 
     painless way to eliminate more than half the federal budget 
     deficit.
       Why does this important information get so little 
     attention? It is because Mr. Greenspan's views on gold are 
     held in disdain by the great majority of this fellow 
     economists. Over the past 30 years, Mr. Greenspan has 
     consistently made the case for a monetary role for gold--
     especially as a means of economizing on government finance of 
     its debt. In the last two years, he has repeatedly dismissed 
     the importance of money-supply statistics as reliable signals 
     of future inflation. Yet he as often insisted that it is the 
     gold price that has always been best at anticipating 
     inflation.
       Look at our own era. It was only after President Nixon on 
     Aug. 15, 1971 severed the dollar's link to gold that 
     inflation raced out of control, interest rates soared and the 
     federal budget deficit and the national debt spiraled. The 
     price of gold, at $380 an ounce, is almost 11 times higher 
     than its official price of $35 in 1971. The general price 
     level is roughly 10 times what it was back then. The national 
     debt of $4.5 trillion is 11 times higher. The cost of debt 
     service, at $210 billion, is 12 times the $17 billion of 
     1971.
       The reason gold has this special utility as a standard of 
     value is that for at least 3,000 years, until 1971, it has 
     served as civilization's primary money. Throughout history, 
     gold has been the benchmark used in almost every marketplace 
     of the world, against which the people measured the official 
     money of governments.
       The truth is that, in a certain sense, we never went off 
     the gold standard. The people of the world did not stop using 
     gold as this benchmark simply because the U.S. led all the 
     world's currencies away from gold in 1971. Since 1971, 
     governments whose currencies have performed worst against the 
     gold benchmark have been those most punished by their 
     creditors--for the most part their own citizens. The price of 
     gold in Japanese yen has risen only threefold, the best 
     performance of any government in the world in that time. 
     Hence the low interest rates enjoyed by the Japanese 
     government.
       Since 1987, when Mr. Greenspan was named chairman of the 
     Fed, the fluctuations in the gold price (between $320 and 
     $420) have been in a much narrower range than they were under 
     his predecessor, Paul Volcker (between $240 and $850). This 
     is no coincidence. Mr. Greenspan has kept an eye on gold from 
     the day he arrived, as a reality check on his performance.
       Indeed, the creditors of the U.S. rewarded the Greenspan 
     Fed with steadily declining interest rates, especially 
     insofar as he seemed able to keep the gold price in the range 
     of $350--10 times the Bretton Woods target. It has only been 
     since last September, when gold began another climb from that 
     level, that the bond markets have turned cold.
       Mr. Greenspan undoubtedly had hoped the tightening the Fed 
     began on Feb. 4 would chase gold into retreat. This would 
     assure the owners of the nation's $4.5 trillion national debt 
     that the value of their holdings would not suffer the 10% 
     devaluation implied by the higher gold price. That's a $450 
     billion loss--big money indeed. Again and again, Mr. 
     Greenspan has raised the overnight interest rate--the only 
     rate over which the Fed has direct control. Still, gold has 
     not dropped much below $380.
       Academic economists hostile to gold dominate the entire 
     Federal Reserve system. The chairman has only one of 12 votes 
     on the Federal Open Market Committee. Absent a political 
     consensus, it is therefore very difficult for Mr. Greenspan 
     to simply aim his mighty monetary weapon at gold without 
     legislation to back him up. If the Fed could fix the gold 
     price at $350, it would simply do so by adding or subtracting 
     dollars from the banking system, adding when it falls below 
     that level, subtracting when it rises above it.
       Gold would quickly sink to $350 and interest rates on 
     government debt would resume their fall toward the 3% range. 
     The value of all financial assets, stocks as well as bonds, 
     would quickly rise, anticipating robust, noninflationary 
     growth ahead.
       Yet, to keep the academics happy, the Fed must target 
     overnight interest rates, hoping the higher rates will cause 
     bank reserves to fall to a certain level, in a way that 
     eventually causes the gold price to fall and bond prices to 
     rise. This is the equivalent of trying to kill a mouse by 
     shooting a dog, so it will fall on a cat, which eventually 
     will fall on the mouse. Maybe.
       Politicians like Jack Kemp have lately recommended 
     targeting gold, rather than simply hiking rates again. It's 
     time to legislate instructions to the Fed to commit to gold. 
     Academic economists argue that this is ``price fixing,'' and 
     that only the market should establish the price of gold. They 
     fail to appreciate that it is the value of its debt that the 
     government is fixing, not the value of gold.
       In World War II, after 150 years of keeping the dollar 
     defined as a specific weight of gold, the U.S. financed the 
     largest deficits in its history, bigger than any since, with 
     2% bonds. When it is as good as gold, the dollar will once 
     again be as good as it can get.

  Mr. CAMPBELL addressed the Chair.
  The ACTING PRESIDENT pro tempore. The Senator from Colorado is 
recognized for not to exceed 5 minutes.

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