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Report to the Congress
of the
Commission on the Role of Gold
in the
Domestic and International Monetary Systems
March 1982
Contents of the Commission's Permanent Record
Volume 1
I. Legislation and Legislative History
II. Record of Meetings
III. Press Releases

DEC

5/)

Legislation and Legislative History

— P.L. 96-389, Section 10, authorizing establishment of the
Commission.
**- Congressional Record of Senate discussion of establishment
of Commission, June 16, 1980, S7071-2.
— Congressional Record of House discussion of establishment
of Commission, September 18, 1980, H9136-7.
— Congressional Record of House appointment of members to
Commission, March 23, 1981, H1041.
— Congressional Record of Senate appointment of members to
Commission, May 20, 1981, S5357.
-- Congressional Record of Senate agreement to extend
Commission deadline, September 22, 1981, S10248-50.
-- Congressional Record of House agreement to extend
Commission deadline, September 24, 1981, H6589.
** Missing:

See Legislative History P.L. 96-389 or Congressional Records

P U B L I C L A W 96-389 [S. 2271]; October 7, 1980

BRETTON WOODS AGREEMENTS ACT—INTERNATIONAL MONETARY FUNDQUOTA INCREASE
For Legislative History of this and other Laws, see Table 1, Public
Laws and Legislative History, at end of final volume
An Act to amend the Bretton Woods Agreements Act to authorize consent to an
increase in the United States quota in the International Monetary Fund,
and for other purposes.

Be it enacted by the Senate and House of Representatives of the
Bretton Woods
United States ofAmerica in Congress assembled,
INCREASE IN UNITED STATES QUOTA

Agreements Act,
amendment.

1. The Bretton Woods Agreements Act (22 U.S.C. 286 et
seq.) is amended by adding at the end thereof the following new
section:
22 USC 286e-lg.
"SEC. 32. The United States Governor of the Fund is authorized to
consent to an increase in the quota of the United States in the Fund
equivalent to 4,202.5 million Special Drawing Rights, to such extent
or in such amounts as are provided in appropriation Acts.".
SECTION

BASIC H U M A N NEEDS

SEC. 2. (a) The Bretton Woods Agreements Act is further amended
by adding at the end thereof the following new section:
"SEC. 33. (a) The President shall instruct the Secretary of the International
Monetary Fund
Treasury, the Secretary of State, and other appropriate Federal economic
officials to use all appropriate means to encourage countries, in adjustment
formulating economic adjustment programs to deal with their bal- programs.
ance of payments difficulties, to design those programs so as to 22 USC 286s.
safeguard, to the m a x i m u m feasible extent, jobs, investment, real per
capita income, policies to reduce the gap in wealth between rich and
poor, and social programs such as health, housing, and education.
"(b) To ensure the effectiveness of economic adjustment programs
supported by Fund resources and the reinforcement of those programs by longer term efforts to promote sustained growth and
improved living conditions—
"(1) United States representatives to the Fund shall recomm e n d and shall work for changes in Fund guidelines, policies,
and decisions that would—
"(A) permit stand-by arrangements to be extended beyond
three years, as necessary to enable Fund members to implement their economic adjustment programs successfully;
"(B) provide that in approving any economic adjustment
program the Fund shall take into account the effect such
program will have on jobs, investment, real per capita
income, the gap in wealth between the rich and poor, and
social programs such as health, housing, and education, in
order to seek to minimize the adverse impact of those
94 STAT.
1551
adjustment programs
on basic
h u m a n needs; and
"(C) provide that letters of intent submitted to the Fund in
support of an economic adjustment program reflect that the

P.L. 96-389

Review.

Annual reports
to Congress.

L A W S O F 96th C O N G . — 2 n d SESS.

Oct. 7

m e m b e r country has taken into account the effect such
program will have on the factors listed in subparagraph (B);
"(2XA) before voting on the approval of any standby arrangement with respect to any economic adjustment program, the
United States Executive Director shall review—
"(i) any analysis of factors prepared by the Fund or the
m e m b e r country in accordance with subparagraphs (B) and
(C) of paragraph (1), or
"(ii) if no such analysis is prepared and available for such
review, an analysis which shall be prepared by the United
States Governor of the Fund which examines the effect of
the program on the factors listed in subparagraph (B) of
paragraph (1); and
"(B) the United States Executive Director of the Fund shall
take into account the analysis reviewed pursuant to subparagraph (A) of this paragraph in voting on approval of that standby
arrangement;
"(3) United States representatives to the Fund, to the Bank,
and to other appropriate institutions shall work toward improving coordination among these institutions and, in particular,
shall work toward formulation of programs in association with
economic adjustment programs supported by Fund resources
which (A) will, among other things, promote employment, investment, real income per capita, improvements in income distribution, and the objectives of social programs such as health,
housing, and education, and (B) will, to the m a x i m u m extent
feasible and consistent with the borrowing country's need to
improve its balance of payments position within a reasonable
period, ameliorate any adverse effects of economic adjustment
programs on the poor;
"(4) United States representatives to the Fund and the Bank
shall seek amendments to decisions on policies on the use of Fund
and Bank resources to provide that, where countries are seeking
Extended Fund Facility or upper credit tranche drawings from
the Fund and are eligible to receive financing from the Bank, the
Fund and Bank will coordinate their financing activities in
order—
"(A) to take into account the effects of economic adjustment programs on the areas listed in clause (A) of paragraph
(3),
"(B) to provide, to the extent feasible, Bank project loans
designed to safeguard and further basic h u m a n needs in
countries adopting economic adjustment programs supported by Fund resources, and
"(C) to provide, as appropriate, Bank financing for programs of structural adjustment that will facilitate development of a productive economic base and greater attainment
of basic h u m a n needs objectives over the longer term; and
"(5) United States representatives to the Fund and the Bank
shall request the Fund and the Bank to provide periodic analyses
94 STAT.
1552 programs supported by
of the effects of economic
adjustment
Fund or Bank financing on jobs, investment, real income per
capita, income distribution, and social programs such as health,
housing, and education.
"(c) The National Advisory Council on International Monetary and
Financial Policies shall include in each of its annual reports to the
Congress a statement detailing the actions and progress m a d e in

Oct. 7

INTERNATIONAL M O N E T A R Y

FUND

P.L. 96-389

carrying out the requirements of subsections (a) and (b) of this
section.'.
(b) Section 80 of the Bretton Woods Agreements Act (22 U.S.C.
286e-9) is amended—
(1) in subsection (a) by striking out "entered into pursuant to
loans from the Supplementary Financing Facility";
(2) in the first sentence of subsection (b) by striking out
"entered into pursuant to loans from the Supplementary Financing Facility"; and
(3) in the second sentence of subsection (b) by striking out "by
the Supplementary Financing Facility".
SEC. 3. Strike section 7 of Public L a w 95-435, the Bretton Woods 31u s c 27
Agreements Act Amendments of 1978, which reads: "Beginning with
Fiscal Year 1981, the total budget outlays of the Federal Government
shall not exceed its receipts?', and insert in lieu thereof: "The
Congress reaffirms its commitment that beginning with Fiscal Year
1981, the total budget outlays of the Federal Government shall not
exceed its receipts. .
RECYCLING BALANCE-OP-PAYMENTS SURPLUSES

SEC. 4. (a) It is the sense of the Congress that (1) the interests of the
United States and those of other member countries require an note
effective International Monetary Fund equipped with resources adequate to facilitate orderly balance-of-payments adjustments; (2) persistent balance-of-payments surpluses in oil exporting countries have
placed, and will continue to place, severe strains on the resources of
oil importing countries and on the liquidity of the Fund; (3) these
strains can only be relieved if the oil exporting countries assume a
greater burden for financing balance-of-payments deficits through
direct methods of recycling their surpluses and through proportionally greater contributions to the Fund and to the international
lending institutions; and (4) the Fund must explore innovative
proposals to encourage more direct recycling of oil surpluses and to
increase its own liquidity.
(b) The Bretton Woods Agreements Act is further amended by
adding at the end thereof the following new sections:
"SEC. 34. The Secretary of the Treasury, in consultation with the Stud y and reP°rt
United States Executive Director of the Fund, shall study and, £??<3?S1
following consultations with member countries, shall report to the
Congress prior to M a y 15,1981, with respect to—
"(1) the current adequacy of Fund resources, together with
projected needs of the Fund over the next five years;
"(2) the feasibility of increasing Fund liquidity by encouraging
the Fund to borrow directly from the governments of oil exporting countries;
"(3) the feasibility of increasing Fund liquidity by encouraging
the Fund to borrow in private capital markets through the
issuance of securities backed by Fund resources;
"(4) the feasibility of an offer by the Fund of incentives to oil
exporting countries, including financial guarantees by the Fund
for government-to-government loans to countries with balanceof-payments deficits, in order to promote more direct recycling of
oil surpluses; and
"(5) methods to enhance cooperation between commercial
banks
andforthe
Fund to promote financing.
the availability of adequate
94 STAT.
resources
1553
balance-of-payments

use 286t

P.L. 96-389

L A W S O F 96th C O N G . — 2 n d SESS.

Oct. 7

Report to
Congress.
22 USC 286u.

"SEC. 85. It is the sense of the Congress that the Secretary of the
Treasury and the United States Executive Director of the Fund shall
encourage m e m b e r countries of the Fund to negotiate a dollar-Special
Drawing Rights substitution account in which equitable burden
sharing would exist a m o n g participants in the account, and shall
report to the Congress prior to M a y 15,1981, with respect to progress
toward achievingDEBT
thisRESCHEDULING
goal.".
COMPARABILITY

22 U S C 286e-8.

SEC. 5. Section 29 of the Bretton Woods Agreements Act is amended
by striking out "on the use of the facility".
TAIWAN

International
Monetary Fund
membership.
22 U S C 286v.

22 USC 286w.

Presidential
report to
Congress.

22 U S C 286x.

International
Monetary Fund
salaries and
travel costs.
22 U S C 286a
note.

SEC. 6. The Bretton Woods Agreements Act is further amended by
adding at the end thereof the following n e w section:
"SEC. 36. It is the sense of the Congress that it is the policy of the
United States that Taiwan (before January 1, 1979, known as the
Republic of China) shall be granted appropriate membership in the
Fund and that the United States Executive Director of the Fund shall
so notify the Fund.".
PALESTINE LIBERATION ORGANIZATION
SEC. 7. The Bretton Woods Agreements Act is further amended by
adding at the end thereof the following n e w section:
"SEC. 37. It is the policy of the United States that the Palestine
Liberation Organization should not be given membership in the Fund
or be given observer status or any other official status at any meeting
sponsored by or associated with the Fund. The United States Executive Director of the Fund shall promptly notify the Fund of such
policy.
_
"In the event that the Fund provides either membership, observer
status, or any other official status to the Palestine Liberation
Organization, such action would result in a serious diminution of
United States support. U p o n review of such action, the President
ASSISTANCE
TO T Hto
E PRIVATE
SECTOR
OF EL SALVADOR
N D OTHER
would
be required
report his
recommendations
toAthe
Congress
NATIONS
with regard to any further United States participation in the Fund.".
SEC. 8. The Bretton Woods Agreements Act is further amended by
adding at the end thereof the following new section:
"SEC. 38. It is the sense of the Congress that in providing assistance
through loans or other means to any nation, in particular El Salvador
and Nicaragua, the Fund and the Bank should encourage programs
which assist the private sector to create an environment which will
stabilize the economy of the nation; and that the United States
representatives to the Fund and the Bank shall promote the use of
assistance by the Fund and the Bank to encourage such programs.".
SEC. 9. The United States Executive Director to the Fund shall seek
to insure (a) that Fund salaries do not exceed those levels endorsed by
the Fund Bank Joint Committee on Staff Compensation Issues; and
94 STAT. by
1554
(b) that travel costs are minimized
limiting first class and supersonic travel to instances where no reasonable alternative exists.

Oct. 7

INTERNATIONAL MONETARY FUND

P.L. 96-389

ROLE OP GOLD IN INTERNATIONAL MONETARY SYSTEMS

SEC. 10. (a) The Secretary of the Treasury shall establish and Commission,
chair
establishment.
a commission consisting of—
31 USC 822a
(1) three members of the Board of Governors of the Federal note.
Reserve System and two members of the Council of Economic
Advisors, all of w h o m shall be designated by the Secretary of the
Treasury;
(2) one majority and one minority member each from (A) the
Joint Economic Committee of the Congress, (B) the Committee on
Banking, Housing, and Urban Affairs of the Senate, and (C) the
Committee on Banking, Finance and Urban Affairs of the House
of Representatives, w h o shall be designated by the Speaker of the
House of Representatives and the President of the Senate,
respectively, upon the recommendations of the majority and
minority leaders of the respective Houses; and
Study and report
(3) four distinguished private citizens with business, finance, orto Congress.
academic backgrounds w h o shall be designated by the Secretary.
(b) The commission shall conduct a study to assess and m a k e
recommendations with regard to the policy of the United States
Government concerning the role of gold in domestic and interna92 Stat. 3092.
tional monetary systems, and shall transmit to the Congress a report
containing itsfindingsand recommendations not later than one year
after the date of enactment
of this Act. REQUIRED
FULL APPROPRIATIONS
(c) S u m s appropriated pursuant to section 5 of Public L a w 95-612
SEC
thecommission
Bretton Woods
Agreements
as added 22 use 286e-lg.
shall11.
be Section
available32toofthe
to carry
out itsAct,
functions.
by section 1 of this Act, is amended by striking "to such extent or in
such amounts as are provided in appropriations Acts" and inserting
in lieu thereof "limited to such amounts as are appropriated in
advance in appropriation Acts."
EFFECTIVE DATE

SEC. 12. This Act shall take effect on its date of enactment, except
that funds m a y not be appropriated under any authorization contained in this Act for any period prior to October 1,1980.
Approved October 7, 1980.

22 USC 286s
note^

LEGISLATIVE HISTORY:
HOUSE REPORT No. 96-1018 accompanying H.R. 7244 (Comm. on Banking, Finance
and Urban Affairs).
SENATE REPORTS: No. 96-693 (Comm. on Foreign Relations) and No. 96-794
(Comm. on Banking, Housing, and Urban Affairs).
CONGRESSIONAL RECORD, Vol. 126 (1980):
June 16, considered and passed Senate.
Sept. 17, 18, H.R. 7244 considered and passed House; passage vacated and S.
2271, amended, passed in lieu.
Sept. 23, Senate concurred in House amendments.
W E E K L Y COMPILATION O F PRESIDENTIAL D O C U M E N T S , Vol. 16, No. 41:
Oct. 7, Presidential statement.

94 STAT. 1555

II.

Record of Meetings

**• July 16, 1981, informal notes.
fw^ ^rsr September 18, 1981, transcript. 7 ^^ lo^.J
,**• October 26, 1981, transcript. J ^ vo^ , IA
-- November 12, 1981, transcript.
— November 13, 1981, transcript.
— December 11, 1981, transcript.
tW a&r January 8, 1982, transcript. O > i 6 »/i
**- February 12, 1982, transcript.
— March 8, 1982, transcript.
** Missing

TREASURY l\l
^

artment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
November 4, 1981

Contact:

Mary Boswall Watkins
566-2041

GOLD COMMISSION TO HOLD PUBLIC HEARINGS
The Gold Commission will hold hearings on Thursday, November 12,
and Friday, November 13, 19 81. The hearings will be open to the public
and will begin at 10:00 a.m. on November 12 and 9:30 a.m. on November
13 in the Cash .Room of the Main Treasury Department Building in
Washington, D.C. The public is advised to use the Pennsylvania Avenue
entrance to the Treasury Department.
The following witnesses are scheduled to testify before the
Commission.
Thursday, November 12, 10:00 a.m. - 1:00 p.m.
1. Panel 1

Dr. Robert Aliber
Professor of International Economics and Finance
University of Chicago
Chicago, Illinois
Dr. Henry Mark Holtzer
Brooklyn Law School
Brooklyn, New York
Dr." Allan H. Meltzer
Maurice Falk Professor of Economics and Social Science
Graduate School of Industrial Administration
Carnegie-Mellon University
Pittsburgh, Pennsylvania
Mr. Andrew G. E. Racz
President & Chief Executive Officer
A. Racz & Co., Inc.
New York, New York
Mr. Robert E. Weintraub
Senior Economist
Joint Economic Committee
United States Congress
Washington, D.C,
Thursday, November 12, 2:00 p.m. - 5:30 p.m.
Panel 2
Mr. Ralph Benko, Esquire
Attorney at Law
Pattison, Sampson, Ginsberg & Griffin, P.C.
Troy, New York

R-457

Mr. Edward M. Bernstein
President
EMB (Ltd) Research Economists
Washington, D.C.
Mr. David Bostian
President
Bostian Research Associates
New York, New York
Dr. Peter Kenen
Director, International Finance Section
Princeton University
Princeton, New Jersey
Dr. Murray Rothbard
Professor of Economics
Polytechnic Institute of New York
Brooklyn, New York
Dr. Robert Solomon
Guest Scholar
Brookings Institution
Washington, D.C.
Panel 3 — Friday, November 13, 9:30 a.m. - 1:00 p.
Dr. William Fellner
Resident Scholar
American Enterprise Institute
Washington, D.C.
Dr. Alan Greenspan
President
Townsend-Greenspan, Inc.
New York, New York
Dr. Roy Jastram
School of Business Administration
University of California, Berkeley
Berkeley, California
Dr. Marc Miles
Associate Professor
Department of Economics
Rutgers University, New Brunswick
New Brunswick, New Jersey
Dr. Earl A. Thompson
Professor of Economics
University of California, Los Angeles
Los Angeles, California

Dr. John Williamson
Senior Fellow
Institute for International Economics
Washington, D.C.
Panel 4 -- Friday, November 13, 2:00 p.m. - 5:30 p.m.
Dr. Richard Cooper
Maurits Boas Professor of International Economics
Harvard University
Cambridge, Massachusetts
Mr. Richard Davies
Managing Director
The Gold Institute
Washington, D.C.
Dr. Rudiger Dornbusch
Department of Economics
Massachussets Institute of Technology
Cambridge, Massachusetts
Ms. Helen Junz
Vice President
International Economics
Townsend-Greenspan, Inc.
New York, New York
Mr. Alan Reynolds
Vice President and Chief Economist
Polyconomics
Morristown, New Jersey
Dr. Hans F. Sennholz
Chairman, Department of Economics
Grove City College
Grove City, Pennsylvania

UNITED STATES DEPARTMENT OF THE TREASURY

MEETING OF THE GOLD COMMISSION

U.S. Department of Treasury
15th and Pennsylvania Avenue
Cash Room
Washington, D.C.
Thursday, November 12, 1981
The meeting in the above-entitled matter
convened at 10:00 o'clock a.m.

Diversified Reporting Services, Inc.
P.O. B O X 23582
W A S H I N G T O N . D.C. 20024
(202) 667-6635

1
Commission Members:
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8
9
10
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Secretary Regan
Chairman Weidenbaum
Mr. Coyne
Senator Dodd
Congressman Neal
Governor Partee
Congressman Paul
Congressman Reuss
Governor Rice
Senator Schmidt
Governor Wallich
Congressman Wylie
Mr. Cos tairagna
Senator Jepsen
Mr. Jordan
Mr. Lehrman
Mr. McCracken

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DBS, Inc.

I N D E X
Presentation By:
Dr. Robert Aliber
Professor, Economics & Finance
University of Chicago
Dr. Henry Mark Holzer
Professor of Law
Brooklyn Law School
Dr. Allan H. Meltzer
Maurice Falk Professor of
Economics & Social Science
Carnegie-Mellon University
Mr. Andrew G- E. Racz, President
A. Racz & Co., Inc.
Mr. Robert E. Weintraub
Senior Economist
Joint Economic Committee
U.S. Congress

2(a)
I N D E X

1
2
3

(Continued)

Ralph Benko, Esq.
Attorney at Law
Pattison, Sampson, Ginsberg & Griffin, P.C.
Troy, New York

121

Dr. Bernstein'

129

David B. Bostian, Jr.'
President, Bostian Research Associates
100 Park Avenue
New York, New York

139

Peter B. Kenen
Professor of Economics and International Finance
Director of International Finance Section
Princeton University

147

Dr. Rothbard

160

Dr. Solomon

17*

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P R O C E E D I N G S
(10:00 a.m.)
UNDER SECRETARY SPRINKEL: Good morning, ladies
4 and gentlemen. If we could take our seats, I'd appreciate it
5 Secretary Regan is unfortunately tied up in a meeting in the
6 White House and I have the pleasure of opening these meetings.
7 I am pleased to open this public hearing of the
8 Gold Commission, established, as you know, to conduct a study
9 to assess and make recommendations with regard to the policy
10 of the United States government concerning the role of gold in
1! the domestic and international monetary system.
12 As you also know, we have had three meetings to
13 date. I think we're making good progress in identifying
14 problems and objectives and in defining the ideas to be
15

considered by the Commission.

It
16 is clear from our early discussion that the
17

Commission members agree fundamentally on the essential need

to deal with inflation and restore stability to the U. S

economy,

In justice, though, there is a diversity of views
20
about whether gold can and should play a role in this effort
21
and, indeed, about the role gold has played in the U.S
22
economic history. So, we are pleased this morning to have the
23
opportunity to hear the views and analyses of a number of
24
private experts on these questions.
25

Our total hearing this morning will consist of

2 four panels of experts. This morning, we have Dr. Robert
Aliber from the University of Chicago, an old friend;
Dr. Henry Mark Holtzer of the Brooklyn Law School; Dr. Alan
Meltzer of the Carnegie-Mellon University, another gentleman
6 I've known a long time; Mr. Andrew Racz, of A. Racz and
Company; Mr. Robert Weintraub, the Joint Economic Committee.
8 Welcome, gentlemen. Thank you for agreeing to
appear before the Commission. I will ask that the witnesses
10 proceed in alphabetical order in presenting their initial
11 statements. Then I will invite questions from Commission
12 members and Dr. Schwartz after all of the initial presentation!
13 have been heard.
14 The written presentations of all witnesses will be
15 entered in full in the Commission record. I would suggest that
16 Commission members also proceed in alphabetical order — I
17 believe you are seated that way — in putting your questions
18 to the panel and limiting themselves for the first round of
19 questions, at least, to about five minutes each.
20

don't want to limit any questions or debate, but

we do want to assure that all members — and they are all not
21
here, obviously — have a chance to ask questions. Let's see
22
how this procedure works. If you want to amend it, we'll do
23
so. If it's satisfactory for now, we will begin with
24
Dr. Aliber. Please proceed, Bob.
25

5
1

DR. ALIBER:

Thank you, Mr. Under Secretary.

certainly honored to be invited to appear before the

Commission.

extremely timely.

I am

I think your work is extremely important and

Gold, as we know, has an important monetary history

U. S. gold holdings are the largest in the world.

gold is a $100 billion asset at recent market prices.

summarize in my statement the reason for the Commission is

well established.

Indeed,
I will

We've been unhappy with the inflation and the

monetary instability, the high interest rates of the last ten

or fifteen years.

Gold seems to promise that it might be a

monetary rule which would provide greater stability.
What we are hunting for is

a binding promise, a

binding promise or supercommitment that will limit, prevent

repetitions of the experience of the last fifteen years.

The gold standard appears to some to provide that sort of a

promise.

19
20
21
22
23
24
25

The gold standard is a relatively simple mechanism,
It consists of a parity and price for each country's money in
terms of a unit of gold.

A monetary rule which relates

changes in some aspect of the monetary system, the monetary
base, the money supply, to gold in-flows and out-flows.
Several hundred years ago, David Uhne (phonetic)
provided a beautiful story about the self-correcting,

automatic, mechanism of the gold standard.

It is important

to note that the purpose of the gold standard as it developed
was not to provide price stability.
Price stability was simply an accidental by-product
The purpose of the gold standard was to provide stability to
6 the holders of the money. It was a better money in terms of
default risk, if you want, than any other money.
8 Indeed, if we look at the history of gold in the
9 system and the history of price level movements in the system,
10 then the gold standard appears far less attractive. In the
11 16th Century, the European price levels went up by a factor of
12

five, to six, because the price of gold in the old world was

substantially higher than the price of gold in the new world.

14
15

the 18th Century, the price level doubled. Now,

there are periods when one can, by picking the beginning

16 Period and picking the end period, conveniently find that the
17

gold standard provided price stability over a particular

18 period of time —• over a century,, over 150 years.
19

zt is ver

Y easy, by altering the beginning period

and altering the terminal period, to provide a period in

which price level instability over the long run was associated

with the operation of this self-correcting mechanism.

The

operation of the self-correcting mechanism led

to financial crises. Indeed, in the United States, in the

19th Century, we had financial crises, a bank failure — a

1
2
3
4
5
6
7
8
9

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substantial bank failure, on the average of once a decade.
Indeed, I would argue that it was probably likely that in this
very room, more than a century ago, hearings were conducted
on the need for some sort of a banking mechanism to provide
greater monetary stability than we then had and to provide an
elastic currency. How the situation has turned.
Now, it's instructive to look at U.S. monetary
history. We more or less, when the United States became
independent, inherited the gold parity of Great Britain

although we modified it sliqhtly. Before the first 150 years

of the Republic, the U.S. gold parity was effectively $20.67.

We went off that gold parity twice. We went off of

it the first time, effectively at the beginning of the Civil

War. We went off it because we made an option to finance the

war on the basis of paper money. We returned to that gold

standard, the $20.67 parity, in 1879 after the price level had

fallen by 50 percent. Roughly, it had fallen back to where it

was at the beginning of the war.

The second time we went off the gold standard was,

at the $20.67 parity, in 1933. We returned in March 1933. We

returned to the gold standard arrangement at the end of

January, 1934, with a 75 percent increase in the price of gold.

Now, that gold price increase in the late 1930's,

I would argue, was an adjustment to the substantial increase

in the world price level that occurred about the time of World

8
War I,

although the gold price increase was modestly larger

than one would have predicted from the increase in the world
3

price level at that time.

One consequence, incidentally, of that gold price

increase was that the price of gold in the United States was

higher than that of the rest of the world. We had a tremen-

dous flow of gold to the United States and, indeed, a golden

avalanche.
U. S. gold holdings increased very rapidly in the

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late 19 30's.

are asked to go back on gold the third time in two decades.

I'd like to introduce this by assuming that Rip Van

Winckle was in this room. Rip had gone to sleep in 1960 or

1961. He was asked when he awoke in 1981, "How do we set the

new dollar price of gold?"

Just as a sort of a footnote, I think I was one of

the few economists in Washington in the early 1960's who was

writing that we needed an increase in the price of gold to

solve some international problems because the world price level

had increased since World War II.

The gold price had remained unchanged since 1934 .

In the most heroic or romantic moment, one thought that the

appropriate price for gold in the early 1960's might have been

$70 and up, $80 and 70.

If Rip Van Winckle woke up today and he used the

Let us look at the current situation where we

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traditional calculations to determine what the gold price

should be, he would come up with something like $125 an ounce.

Perhaps, he might make an error. He might say $180 an ounce.

This is extremely important. If there is a stable

relationship between the world commodity price levels and the

dollar price of gold, then the market price of gold is two to

three times as high as the U.S. gold parity should be.

If there is no stable relationship between the

world commodity price level and the price of gold, there is no

case for going back on the gold standard.

If we were to go back to the gold standard arrange-

ments and pick a parity, we would probably have to pick a

price somewhat higher — somewhat higher than the current

market price. In the initial period at least, the U.S.

monetary mechanism would be a buyer of gold.

There is a tremendous risk that if that policy

initially were thought to be successful in achieving price

level stability, that we would end up with a wing-ding

inflation and a golden avalanche, a flow of gold to the United

States out of the mines and out of the hordes around the world

that would make the flow of gold in the 19 30's appear trivial.

That would make the recent inflation appear modest.

We would be moving back toward an inflation the likes of the

16th Century. One of the ironies of the system, then, is that

those who favor a return to gold for domestic money are

10
subjecting us to a risk of tremendous inflation.

Well, my

statement then goes on and deals with gold and credibility
issues. The issue there is can we introduce gold into the
4

system.

Can we introduce gold into the system in such a way

as to provide a stable monetary ruling. The problem with

providing stable monetary rules is that rules are frequently

broken. The issue really becomes one of whether having gold

in the system increases the credibility of any other type of

10 commitment, of any other type of commitment that the government
11 makes or that the legislature makes.
12 Now, it is possible. It will not happen instantly.
13 Then the credibility of the gold standard arrangement will
14 only begin to develop after there have been a number of
15 instances or, indeed, crises, in which the monetary authorities
16 face the option between going off gold — as we have now done
17 three times in our history — or of sticking with the commit18 ment and having a significant financial crisis or disaster.
19 I think we are living in a period in which the
20 likelihood that the U.S. polity would stand for the cost of
21 that commitment is extremely small.
22 My statement concludes by suggesting that gold
23 still has an important international role to play. The gold's
24

role in the future is as an international money, not as a

national money.

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11
As an international money, there are a number of
suggestions in the statement. The first is that it behooves
us to begin to value gold at or near its market price rather
than at the $42 parity.
It is important to begin to standardize the valuation of gold by the National Monetary Authorities. It is
important that we begin to develop trading arrangements,
8

probably based on the market price so that central banks and
countries with payments deficits can have some assurance that

they can trade gold with countries in the payment surpluses on

off-market transactions as a way to help finance their

payments

13
14

At some future date, if we are successful in
reducing the rate of inflation and getting back toward price

15 stability, the gold price would fall substantially. We may
16 begin to think towards developing a parity for gold for inter17 national transactions.
18 Thank you very much, Mr. Chairman.
19 UNDER SECRETARY SPRINKEL: Thank you, Dr. Aliber.
20
21
22
23
24
25

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Dr. Henry Mark Holzter of the Brooklyn Law School.
DR. HOLTZER: Good morning, Dr. Schwartz, Under
Secretary Sprinkel and members of the Commission.
As you know, I am not an economist, but rather a
professor of law at Brooklyn Law School in New York. My field
is Constitutional law. I've lectured and written extensively

12
on the legal aspects of gold and the nature and scope of
government monetary power.
For example, two of my books are entitled The Gold
Clause and The Government's Monopoly, subjects in which I've
had a long interest. I must confess to a certain ambivalence
this morning.
While I appreciate having been invited to testify
8

before this Commission, at the same time, I feel like the
lawyer who must tell a court that it lacks jurisdiction. I

10 have come here to say that despite this Commission's good
11 faith, it cannot discharge its Congressionally delegated task.
12 That is, to make recommendations with regard to the
13 policy of the U.S. government concerning the role of gold in
14 domestic and international monetary systems, without first
15 understanding and then admitting some hard truths about our
16 nation. Let me explain.
17 Dr. Alan Greenspan has written, "...the gold
18 standard is an instrument of laissez-faire and that each implies
19 and requires the other." Of course, he is correct.
20 Economic freedom, more specifically for our
21 purposes monetary freedom, is an indispensable prerequisite
22 to any meaningful financial use of gold. However — and this
23 is the core of the Commission's problem — today there is
24 little economic freedom in America. Almost from our first day
25 as a nation, there was little monetary freedom.
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13
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Now, there is none.

As to economic freedom, tax

laws have redistributed wealth on the basis of need and have

otherwise removed from productive use, capital necessary for

reinvestment diverting it to countless ends disapproved by

those from whom the money was taken.

Anti-trust and fair trade laws have contradictorily

and impetently attempted to compel competition and protect

consumers from themselves. Instead, such laws have caused

business decisions to be predicated not on marketplace

considerations, but on guess work as to how bureaucrats and

judges would interpret unintelligible laws.

Labor laws have created compulsory unionization

with its many attendant problems for unwilling employees and

employers and contributed greatly to America's steady decline

as the world's preeminent industrial power.

Wage and hour laws have required private employers

to establish pay scales and working conditions mandated not by

the free market in mutual agreement, but by government fiat.

Restraints on the use of private property are

commonplace in the name of zoning and so-called civil rights.

Liberty of contract is substantially restricted in the name of

equalizing bargaining power in the so-called public interest.

To understand our lack of monetary freedom, it is

necessary to go back into history. With the birth of our

nation at the Constitutional Convention of 1787, our founding

14
fathers created a new government which possessed expressly
delegated powers. Congress was the recipient of legislative
power. In the monetary realm, it was authorized only to borr»
money, to coin money, and regulate its value and to punish
counterfeiting.
The Constitution also expressly barred the states
from coining money, minting bills of credit, making anything
8

but gold and silver as tender in payment of debts.
Clearly, when the work was finished in that hot

Philadelphia summer of 1787 as to monetary affairs, at least,

the delegates had substantially resisted the siren song coming

from the unfree and semi-free statist European political

systems.

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The resolve of America's leaders soon began to ebb.

Less than four years after the Convention, the scope of our

government's monetary power divided our nation's leaders at

the highest level.

Congress wanted to charter the first bank of the

United States. The question was whether the legislature

possessed the power. President Washington sought opinions

from his Treasury Secretary, Alexander Hamilton, and his

Secretary of State, Thomas Jefferson.

It is popularly believed that the two disagreed.

Actually, on the issue of government power, they were in

complete agreement in principle. Hamilton held that Congress'

15
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2
3
4
5
6
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few delegated monetary powers was sufficiently broad to
encompass chartering the bank, especially if those powers
were loosely interpreted and that Congress even possessed extra
Constitutional powers beyond those which had been specifically
delegated
Although Jefferson denied to Congress the bank
chartering power, he would have granted it to the states,

thus, sharing Hamilton's statist premise about the power of

government over monetary affairs.

When the bank controversy was over, Hamilton's view

prevailed.. Washington signed the Bank Bill. For.nearly 30

years afterwards, few people noticed that the monetary power

of Congress had grown considerably.

Congressional power expanded nearly 30 years later

when Hamilton's views about its extra-Constitutionality became

part of the bedrock of American Constitutional law. In 1819,

John Marshall's opinion for the Supreme Court, McCullock

against Maryland, expressly held that in monetary affairs, the

government of the United States was like the monarchs of

Europe — sovereign.

That sovereignty was never more apparent than

throughout the Civil War's greenback episode, a story much

too well known to the members of this Commission to recount

here. Suffice it to say that in order to fight the war, the

northern government of President Lincoln created legal tender

16
and simply forced individuals

to accept greenbacks no matter

what they thought the paper was worth. As usual, the Supreme
Court of the United States was a willing accomplice to
Congress' usurping of nondelegated extra-constitutional
monetary power.
In the first important legal tender case to reach
the court, Hepburn against Grinswald, while a bare majority
8 held that the Act could not be applied to a debt contracted
before legal tender became law, every one of the justices,
10 majority and dissent alike, nevertheless agreed on the under11 lying principle that Congress possessed a broad monetary power
12 whose outer boundaries were far from clear.
13 Less than 18 months later, Hepburn was overruled
14 by Knox against Lee. Legal tender was expressly held to be
15 Constitutional. At the time of the last legal tender case,
16 some years later, nearly three centuries had passed since the
17 1604 English case of the mixed money had approved Queen
18 Elizabeth's sovereign power to debase her coinage.
19 Despite the fact that in America we had created a
20

different kind of political system, despite a written

Constitution that narrowly circumscribed the power of our

22 government, the foreign sovereign who had been repudiated by
23

the colonists, seemed to have been replaced by a domestic one,

24 at least in monetary affairs.
25 The idea that monetary power belongs to the
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17
sovereign was conceived in Europe.

If despite the United

States Constitution, that idea was born in America in John
Marshall's McCullock decision midwifed by Hamilton's opinion
to Washington in the bank controversy.
It reached its majority in the legal tender
cases. Its maturity came in three 20th Century cases. In
Ling Su Fan (phonetic) against the United States, the Supreme
8

Court concluded that attached to one's ownership of silver
coins were "limitations which public policy may require".

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The coins themselves "bear therefore the impress

of sovereign power". Two months later, the Court went even

further, at least in the Noble State Bank against Haskill.

It held that a state bank could be forced to help insure its

competitors' depositors against insolvency.

In the course of the opinion for a unanimous Court,

Justice Oliver Wendall Holmes actually went so far as to admit

that government monetary power was indeed omnipotent. "We

cannot say that the public interest to which we have averted

and others are not sufficient to warrant the state in taking

the whole business of banking under its control."

Holmes' dictum very nearly became a reality in the

early days of the New Deal. In a statist orgy of rules,

regulations, proclammations, executive orders, resolutions,

decrees and manifestos, America's banks were ordered closed.

Her dollar was devalued. Her gold standard was abandoned.

18
Private ownership of gold was illegalized. Gold
clauses were nullified. Although only the gold clause issue
reached the Supreme Court, when nullification of the clauses
4

was upheld, it was crystal clear that the Court had de facto

approved of all of the New Deal's statist exercises of raw
government power.
Based on a chain of precedents, running back

inexorably, the Noble State Bank, Ling Su Fan, the legal
tender cases, McCullock, the bank controversy, and then the

Elizabethan case of mixed money.

11 Ironically, but not surprisingly, in little more
12 than 300 years, a round trip had been completed from an
13 English monarch's unlimited monetary power to the reposing of
14 identical power in the hands of a supposedly free representa15 tive democracy.
16 When the smoke of the gold clause cases had cleared
17 to profound detriment of individual rights, the government
18 of the United States unquestionably controlled every aspect of
19 this nation's monetary affairs — money, credit, banking, gold
20 the security business and more.
21 In the nearly 50 years since then, that control has
22 both deepened and become considerably more sophisticated, as
23 in the Bank Secrecy Act— emulating other contemporary
24 societies which we rightly disparage for their lack of freedom
25 Under Secretary Sprinkel, Dr. Schwartz, other
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19
1

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members of the Commission, I have come to Washington today to

say that the United States, its government and its people,

cannot have it both ways.

Either we have monetary freedom and a gold standard

or no monetary freedom and no gold standard. Though mine may

be a lonely voice crying in a wilderness of omnipotent govern-

ment, I emphasize that there is no middle ground.

If this Commission wishes to recommend the gold

standard, it must first understand the nature and scope of

our nation's lack of economic and monetary freedom and then

communicate that understanding to the American people.

Only then and in that context can a gold standard

recommendation from this Commission have any real meaning.

Indeed, should this Commission recommend that a gold standard

be instituted and should Congress and the President take the

unlikely followup step of introducing one, even then a gold

standard resurrected under today's economic and monetary

controls would not be worth the paper it was proclaimed on.

Until the government of the United States once and

for all pulls out of the economic and monetary affairs of its

citizens, whether there be a gold standard or not, we cannot

have economic or monetary freedom.

Without it, what we have instead, as uncomfortable

as this may be to admit, are revocable privileges which are

the antithesis of individual rights. Thank you.

20
UNDER SECRETARY SPRINKEL: Thank you, Dr. Holtzer.
Dr. Allan Meltzer of the Carnegie-Mellon University.
DR. MELTZER: Thank you, Mr. Chairman. It is a
pleasure to appear before this Commission and to help in
the deliberation of what is an important issue.
I would like to say that I share Dr. Holtzer's
commitment to a free society, but, alas, that's about the
only point on which I can agree with him.
I believe that while the commitment to a free
society is important, the central question that we have to
address is within the framework of a free society, what is the
best way to accomplish the tasks that are imposed upon the
government.
I would like to begin by congratulating this
Commission. I think it takes up a series if important issues.
It deals
with aa question
question that
thatbadly
badlyneeds
needstotobebeaddressed
addressed
leals with
— —
name!
»ly, what is it that we can do to improve the control of
money in the American economy or, indeed, in the world?
This is a problem to which there is no shortage of
solutions. We have a surfeit of solutions. There are many
ways in which we could end inlfation. There are many ways in
which we could end inflation and maintain a freer society.
The basic question to be addressed by the
Commission is not whether we should control inflation or
whether we should do it within a framework of freedom. Which

21
1

system of monetary control is likely to provide both greater

freedom and greater stability in a world in which we have less

instability in the economy.
We live in a world in which there are risks,
inherent in nature, simply because the rainfall doesn't come,
because trade doesn't proceed at uniform rates, because we are
subject to shocks of various kinds from the demand side, from

the supply side, from the fiscal and monetary systems —• our
own and other countries.

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The issue which this Commission wants to address is

not whether we want to provide price stability in that frame-

work consistent with the maximum freedom that we can provide,

but how can we within that framework reduce those risks to the

minimum that we must bear in a society which is subject to

unforseen changes of various kinds.

There is another reason for congratulating the

Commission on taking the approach that it does. The notion of

controlling money, gold, commodity standards or in general,

expresses a dissatisfaction with the efforts that have been

made on a managed paper system attempting to control money by

estimating what is going to happen in the demand for money, by

trying to outguess the market about what is going to happen

to interest rates and output.

By making these necessarily incorrect judgments and

assessments which have been, I think, the hallmark of the

policy in countries that have tried to control money in the

way in which ours has for so long tried to control it.

The essence of a gold standard or any system of
change is to think about a rule or a method of controlling
money from the supply side. I find that a lauditory and
important objective.
I would like to discuss that objective. That is

the objective of trying to improve the stability of the
American economy, the stability of the monetary system, to

reduce the risks that we must bear to the minimum, that we

must in fact bear and how that relates to the way in which the

monetary system operates in the control of money from the

supply side.

When we think about the control of money from the

supply side, we run against the three classic problems. One

is the mechanism for adjustment. One is the question of

discipline. One is the question of credibility.

We have really only two basic — one basic choice

we must make at the various outset.

whether we are going to have a system of fixed exchange rates,

That system requires necessarily that prices will

fluctuate more and because prices are inflexible, do not

adjust instantly for information for reasons that we partly

understand and partly remain ignorant of.

Output must change. In the choice of a system of

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We have to decide on

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23
fixed exchange rates, it necessarily involves a system in
which prices must fluctuate somewhat more than would be
required under a system of a floating exchange rate.
4

In any consideration of controlling money, we must
make a judgment as to whether in fact that control is going to
be given over to a fixed exchange rate system with the
necessary price and output fluctuations that arise in that

system or whether it is to be done through a floating exchange
rate system under which we allow the exchange value of our

currency against other currencies, against commodities in

general, to move up and down as dictated by the, market.

We make our efforts to control the quantity of

money directly through the actions of the central bank or

monetary authority. That basic question must be the first

matter decided by the Commission.

If the answer is that we prefer or we conclude that

a floating exchange rate system is better, then the answer to

the second question of whether we should have a gold standard

is we cannot. The two are fundamentally incompatible.

Under a floating exchange rate system, we allow

exchange rates to change. Exchange rates fall in a period of

inflation and rise in periods of deflation,.producing a

stabilizing mechanism that helps us to maintain price stability

provided we maintain a rate of growth in the money stock

geared to the long-run rate of growth and output.

24
Prices will not remain absolutely stable from week
to week or month to month under any system. That is because
we live in a world in which there is instability.

There

are shocks that we cannot possibly forsee that have durations
that we cannot possibly imagine and that we are not even
certain about as we pass through them, or even after we have
passed through them.
8 Imagine if someone were to ask you what the price
9 of oil is going to be a year from now or what the price of
10 gold is going to be a year from now or what the price of any
11 commodity is going to be a year from now.
12 Neither you nor I nor anyone else has a correct
13 judgment. The market makes a judgment about each one of
14 those things every day. It corrects its impression on the
15 following day or from minute to minute.
16 Therefore, a system which ties the U.S. economy to
17 the value of the commodity that we choose as money or the
18 paper that we choose as money, to one of those market prices,
19 necessarily means that as those prices move in response to
20

shocks which cannot be forseen in advance, then necessarily

our economy will reflect those changes.

22 Again, I would say the judgment that has to be
23

made is not whether some concept of freedom or some concept of

justice requires us to have one of those systems. It is which

way do we minimize the real cost of bearing the shocks that

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25
must necessarily be born in a world which is subject to
constant change. The changes, whose nature and duration
cannot be instantly appreciated and cannot be forecast in
advance and whose duration is uncertain even at the time that
5

we pass through them.

Who would have predicted in 1972 that the price of

oil would jump? That it would jump again in 1978? Who would

have predicted in 1974 how long that price would remain?

The same is true of gold or of any other commodity.

If we tie our monetary system to one of those commodities, we

in fact impose on the economy., on the real sector of the

economy, a burden of adjustment which in my judgment is larger

than the burden of adjustment that the economy must necessarily

bear under alternative monetary arrangements, such as a

system of floating exchange rates.

A program for restricting the range within which

the money stock may grow — I would like to expand on a few of

those points. The basic problem of discipline is a problem

that arises in any monetary system.

We cannot solve the basic problem of discipline by

imposing upon ourselves a rule such as the gold standard,

because there is no sanction for abandoning the gold standard.

The only kind of rule which will make sense is one which would

carry with it some penalty.

To announce that we go on the gold standard does

not immediately increase credibility.

it raises a whole

series of questions about whether that discipline will be

invoked. What will happen when we run into a crisis? Suppc

the price of oil goes up and the OPEC nations decide to buy

gold? Will the United States then sell all the gold and

deflate its economy?

Will it abandon the gold standard, as it should

properly do under those circumstances? Suppose, in fact, it

goes the other way? Suppose the price of oil goes down?

The OPEC cartel breaks up, the Arabs sell their

gold. Should we put our monetary system in. the real sector

our economy as a hostage for the changes that may occur

because of changes which occur in all parts of the world?

I think the obvious answer is that that would on!

be a sensible solution. It would only make good economic

sense if, in fact, that were the best standard. That is, i:

that were the minimum risk that we could bear.

It turns out, I believe, that careful considerat

of the alternatives will quickly lead you to the conclusion

that I have already reached. Namely, that it is not the

minimum risk standard in the world in which we live.

The minimum risk standard is not a standard in

which we tie ourselves to any single commodity and probably

not to any basket of commodities. For these reasons, I

25 believe there are better alternatives to maintaining monetc

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stability.

27
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3
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Among those alternatives, the one that should be
given the most important consideration is standards which
restrict the power and authority of the monetary authority in
this country, to increase the quantity of money at will, by

amounts which are unrelated to any promise or any performance

standard and without any sanction imposed upon the actions of

the central bank so that there is no penalty on them for

exceeding their own self-announced and self-imposed standard

or for exceeding^ their statements of what it is that the

monetary system would do or for exceeding by large amounts the

rates of growth of money that bear any relation to the

possible rates of growth in the American economy.

Those problems have been with us for a great deal

of time. It is for that reason that I laud the Commission

for taking up these important questions.

What is the basic problem that causes this

question of standards? If we were to depart, if we were to

assume that the rest of the world will be more benign over the

next decade than it was over the previous decade.

The basic problem that we face is that there is in

our system the fact that prices do not adjust instantly. Not

just wages, but many prices do not adjust instantly. When

there are disturbances in the economy, real wages change.

Prices and relative prices, the price of one thing

relative to another, changes. This causes real changes in the

28
economy.

Those real changes in the economy have real costs

which American citizens in other countries must bear. In
such a system, if we peg the price of the exchange rate or <
other price or the price of gold, in addition to the rigidiwhich is built into the system through contracts, through
historical procedures, for lack of confidence about what th<
future will be, to risk sharing arrangements, to whatever
8

devices men have come up with in order to pool those risks.
If we impose upon that standard in addition a

fixed price for gold, we increase the burden of adjustment

that system and make the system less stable than it would b

12 if we provided an adjustment for other prices, including th
13 relationship between the dollar and other currencies or
14 between the dollar and gold.
15 Now, we have a lot — of history. Much of that
16 history comes from a system which is more favorable to the
17 gold standard than the present world is.
18 Most of that history of the gold standard comes
19 a relatively small world in which the number of large trade
20 who would be potential buyers or sellers of gold was relati
21 ly limited. It doesn't come from a world in which there ai

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Idi Amins and Khoumeinis and Quadafis and people who might

delight in causing us harm even at their own expense.

We live in a world of dispersed power in many

countries. It is a system which is less friendly to a

29
unilateral gold standard than even the 19th Century standard
was. In the 19th Century standard, if we look at the 19th
Century we are left with this very important fact.
If we compare the monetary history and the real
history of the United States, from 1854 to 1980, what we find
6

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is — leaving aside all wars — that one regularity stands

out. It takes two years from the peak of a cycle to the

trough of the cycle. Two years from the trough to the next

peak. We have four year cycles.

Four years from peak to peak. Four years from

trough to trough. Our post-war experience is remarkably better

Non-war business cycles have had longer expansions and shorter

contractions.

Although we have had difficulties and problems with

inflation, our record in this period has not been so bad that

we should abandon the benefits of the greater stability that

we have achieved in order to pursue some standard which worked

more poorly during the period in which it operated.

On a world wide basis, not on a unilateral basis

and in a multi, much more limited range of power positions and

not in the multilateral powered world that we live in today.

I conclude from that that the gold standard is an

idea whose time has passed. The central problem that the

committee faces is an important problem. It turns out that

there are better ways to solve the problem than the one which

30
has been proposed most recently by a limited number of peop
desirous of returning to a system that perhaps had worked
better in retrospect than it ever did at the time.
4

Thank you.

UNDER SECRETARY SPRINKEL: Thank you, Dr. Meltze:
Mr. Andrew Racz of A. Racz and Company.
MR. RACZ: Mr. Chairman and members of the Gold

Commission. When President Reagan first mentioned gold pri<
to the 1980 election and when President Reagan created the

Gold Commission, he had already made monetary history.

11 This Administration has reversed the mistaken
12 philosophies of previous Administrations by recognizing thai
13 gold is a monetary asset. Gold has an increasing, as oppos<
14 to a decreasing, role in international monetary affairs.
15 The existence of the Gold Commission is one of tl
16 first and maybe the most significant victories of what is
17 called Reaganomics today. The purpose of my presentation i;
18 number one, to state that gold is a monetary asset.
19 Two, to state that gold and silver are vital
20 strategic American assets. Three, to propose a viable,
21 constructive and aggressive American gold policy. Four, to
22 prove that the United States is the world's most powerful
23 monetary power.
24 This Administration can combine monetary policy
25 with foreign policy to achieve prosperity at home and to pi

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1

a forceful role in constructive foreign policy. Let me now

turn to some specifics.

I suggest that this Commission immediately

recommend that the President declare number one, gold and

silver are vital national monetary assets. Two, an embargo on
any further sale of gold and silver except under those
policies as recommended by the Gold Commission.

Three, immediate re-evaluation of gold and silver
holdings at current market prices and an incorporation of thosef

figures into our National Reserve assets.

These points which form the first but elementary

part of my recommendation require nothing more than a philo-

sophical change from the neglectful attitude of some previous

government officials of not obscure positions who wanted to

squander American gold. They did.

Their intention was to put gold next to pork bellies

in the commodity pages where they thought it belonged. Those

policies were totally and utterly mistaken.

President Reagan should declare that the era of

government illiteracy as far as gold is concerned is over.

In practice, the Commission should recommend that it accepts

that it is the policy of the United States to increase, as

opposed to decrease, our gold and silver reserves.

Two, this Commission should recommend the creation

of a department which would empower the Treasury to enter the

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1 future marketing of gold, whether it is Chicago, London,
2 Hong Kong. Three, the Treasury should be given information
3 for its agents to acquire gold in private transactions from
4 other countries, from mines in any part of the world.
From newly acquired gold, the Treasury is empowe:
to seek to take eventual profits, treating gold no differem
7 than central bank has carried its currency purchases and swap
8 arrangements, sales, in what they consider a time-honored
fashion.
10

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Basically, there should be no conceptual differer

between buying and selling Swiss francs, yen, or buying and

selling gold and silver. The only difference is that it is

our stated national intention to increase our assets in this

vital, strategic, monetary reserve.

Apart from the strength and integrity of the

dollar, gold could be construed as the most vital monetary

reserve asset we have. The increase in the price of gold ha

if anything, a favorable implication for the United States c

America.

Point number five. The Treasury prepares for the

immediate sale of approximately $50 billion gold backed bond

at seven percent coupons, converting the gold at $550 with

five years of maturity in the denomination of $550 each.

Bonds can be marketed for American and foreign

residents. Simultaneously, the Treasury should declare that

33
it is the policy of the United States to purchase gold on the
open market, either in the physical form or, as I mentioned
previously, the future market.
Details of those transactions should not be
disclosed. Members of the Gold Commission are to be reminded
that the Soviet Union is not in a position to do the same.
Whatever gold it has is needed to finance its food bill.
8 There is no $50 billion surplus that can be had
9 for five years within the Soviet colonial system. As stated
10 in this statement -- that's my professional opinion.
11 In today's Wall Street Journal, I found that Soviet
12 deposits have declined in one year from $8.5 to $3.6 billion.
13 They have today in the reserve, with those of Chile and
14 Malasia. Soviet borrowing in the last 12 months managed to
15 increase by $750 million. That's how far their credit goes.
16 The immediate effect of such issue is not only
17 pure interest savings, although it is very significant. $50
18 billion at seven percent. It would divert borrowing from the
!9 government bond markets, particularly in the short-term market
20 which governs the most important interests.
21

It would lighten the pressure on corporate borrowing

22 Most importantly, however, it would demonstrate the tremendous
23 monetary power of the United States. We are the only country
24 with gold that is basically unimportant to carry out our export
25 import business and monetary transactions. We are the only
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34
1

country with the integrity to redeem a $50 billion gold issu.

either in gold or in dollars. It is unquestionable.

Should the Republic of France, the bank of inter-

national settlement follow our leadership, perfect. It woulc

simply create an extra page in the London Financial Times anc

gold and silver backed bonds would be treated similarly as tl

Euro-currency bonds are traded in Swiss francs, the mark, th<

pound, sterling, yen and Canadian dollars.

If gold and silver backed bonds expand on that in

the international capital markets, so much the better. Let

me say that this subject is not new to me. In 1976, July,

when gold hit 100, I happened to be in Johannesburg.

I recommended to the government of South Africa t<

market 1,000 denominated units with five ounces of gold at

10 percent interest and five ounces of gold to be bought at

$145. This recommendation was reviewed in the front pages o

the Johannesburg Sunday Times.

Subsequently, I received several interviews with

Dr. Dietrick (phonetic), the state president, who was, of

course, personally a financier. In early 1980, when the sil

backed bonds were brought first to the limelight by the fame

silver crisis, the issue was again mentioned in The New YorJ

23
24
25

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Times.
A subsequent article, I stated it is almost
inevitable in an inflationary atmosphere that government as

35
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well as corporations and mining causes would eventually go via

a silver and gold denomination and raise extra capital at low

interest rates.

Now, today lower interest rates and all balance

sheet financing, at a time when the Euro-currency market has
increased from $70 billion in 1972 to $1.2 trillion today.

All balance sheet financing for governments and corporations i

a matter of prime importance.

Let us carry this argument a little bit further.

10 If our friendly governments, financially powerful governments
11 and corporations, bought maybe $100 or $200 billion in that
12 manner, the whole world interest rate market would vastly
13
14

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change
With lower interest rates, that is vast savings in

balance of payment expenditures.

of the United States — demonstrate our monetary superiority

together with the monetary Allies vis-a-vis the Soviet Union.

This Administration has come to power to achieve

military parity with the Kremlin at the cost of $1.5 trillion,

30 times more than the initial $50 billion gold backed bonds

which I'm recommending.

I have estimated that in the next 14 years, the

military expenditures the United States might need would be

exactly $4 trillion, which is roughly equivalent to the

estimated gross national product of the whole country, the

We would —

the government

36
United States of America, in 1986.

This $4 trillion simply

doesn't exist.
Having been born in Hungary, let me say that I am
very grateful that President Reagan fully understands the
necessity to stand up to Russian Imperialism. At the same
time, let me point out that by combining monetary and militai
policy, we can achieve military supremacy of the United State
8

Accordingly, I hereby recommend that in order to
take advantage of the resulting and very obvious savings of

floating one or several gold and silver backed bonds with

different characteristics, the Treasury creates a nonmarketat

eight percent, so-called trade-on bonds, which this governmen

can offer to all of the American banks that are currently

stocked with uncollectible debts from Eastern European countr

In exchange for unsound paper issued by Poland,

Romania, East Germany or Hungary, the banks should be offered

the opportunity to pass on their dead assets to an eight

percent, ten year debt to the Treasury, with the commitment

that no further loans would be issued to the above-mentioned

countries.

The German and French banks could always be bailee

out by their own respective gold reserves. The Japanese, of

course, have their trade surplus and England has its oil. Tl

freedom bonds, of course, are made possible because of the

25 savings created by gold backed bonds and the potential drop

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37
1
2
3
4

I'm only talking, by the way, about

$25 billion. That is why I want to call gold and silver
backed bonds the defense bonds.
Let us visualize the subsequent events. If Romania

wants to roll over a $5 billion obligation of which $2 billion

is now held by American banks, negotiations about late

interest payments or possible roll over refinancing would be

handled not as a commercial but as a political transaction.

I therefore recommend the establishment of a

standing committee headed jointly by the Secretary of the

State and the Secretary of the Treasury where each and every

one of our newly created customers — namely, the debt-ridden

desperate members of the Russian empire, would come for a

loan

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in interest rates.

Let me now call a spade a spade.

Who is financing

the troubles today in Central America?

Cuban troops galavanting in Africa? Who is really paying for

the Russian grain imports? Finally, who paid for the military

equipment sent to Viet Nam to slaughter American boys and

indirectly force two American Presidents out of office?

Let's stop living a lie. Directly or indirectly,

all of these monies were borrowed by the Soviet Union, by

Eastern European satellites. Chase Manhatten and our most

respected financial institutions lent them the money. The

time to demonstrate our monetary supremacy and enter into

Who is paying for

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constructive negotiations, is about to begin.

I have had

countless discussions on this subject or part of this subject

with many well known Americans, some of whom held high office

in the last ten years in the Nation's Capital.

None has been more helpful than former Secretary

of Treasury, Governor John Conolly, who asked me to convey a

single message today. The time for action was yesterday.

Let's visualize for a single minute that by cutting

off Eastern European and Russian credit, the President could

start negotiations with the leaders of the Kremlin. There

would be no need to .go to Geneva.

Borrowers always go to the lender. We can negot-

iate right here in Washington. In Washington, a day after

issuing the gold backed bonds, the freedom bonds, we can

start negotiating about reducing the $1.5 trillion defense

appropriations.

If we achieve a five percent savings — and we have

to trust President Reagan who has already proven his negoti-

ating skill in reducing the budget — let us see what we have.

A 75 to $100 billion cut in defense spending. A single digit

prime rate and probably not more than seven or eight percent

inflation rate.

The stock markets would probably go up to 500

points. I estimate that with such a scenario, 100 points is

equivalent to at least $100 to $150 billion increase in the

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39
1

gross national product. Each $150 billion GNP increase would

represent at least $30 billion in tax revenues.

It is easy to see, Mr. Chairman, that in 1984,

instead of talking only about the balanced budget, this

Administration will be the first to discuss a second tax cut

in the first four years of its existence.

It is far too obvious that this Republican

Administration has already created a revolution in its economic

policies. Is it our next objective to build bombers and be

remembered as a government which has the architects to build

the most sophisticated military equipment?

Why not go down in history as the Administration

who made the dollar the most respected currency? If we called

gold into active service and via its gold policy, used mone-

tary as opposed to military, power to negotiate the military

budget. Let 1981 be the year when we make the world recognize

our monetary power.

Accordingly, we must create an active gold policy

which could bring about the credibility of our monetary .

supremacy. We could have the upper hand in negotiations and

in bringing about a more stable international environment.

We could make the Soviet Union recognize that its

military supremacy was built on credit -- American credit. It

is a shaky foundation. It is a thing of the past. The

monetary supremacy of the United States will become immediately

40
1

recognizable.

Washington and ask for $2 billion.

and his $6 billion yearly alimony from the Kremlin.

go on and on.

Just let the Romanian delegation come to
They can talk about Castro
We can

We can talk about Afghanistan.

The borrower is always begging the lender.

The

discussion about the permanent use of gold is a healthy and
constructive undertaking.
8

issue.

I have concentrated on only one

We have to recall, and recall immediately, gold into

active service.
Make it an active as opposed to a passive reserve

10
11

asset.

None of this discussion would have been possible if not for

the foresight of this administration which pushed gold into

the forefront of study and evaluation.

Substitute military supremacy with monetary supremacy.

15
16

The monumental significance of the Gold Commission,
Mr. Chairman, is already a matter of historical record.

XXX

UNDER SECRETARY SPRINKEL:

Thank you, Mr. Racz.

Finally, Dr. Robert Weintraub, of the Staff of the Joint

Economic Committee.

MR. WEINTRAUB:

My statement will differ somewhat from my written

submission.

shorter.

24
25
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Thank you, Dr. Sprinkel.

Mostly, you will be grateful to hear it will be

As it was implemented in the United States, the
gold standard had three elements.

One was convertability.

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The Treasury bought gold from and sold gold to all comers at

a fixed dollar price. International claims were settled by

gold transfers.

Second, gold was used as money, as exchange media.

Third, after their creation in 1913, the Federal Reserve

banks were required to hold gold certificate reserves behind

their currency or note liabilities and their deposit liabili-

ties in ratios prescribed by law.

Today, none of these provisions is in effect. As

described in my prepared testimony, my proposal is to provide

once again for a certificate reserve requirement for Federal

Reserve liabilities.

My proposal requires that gold certificate reserves

be kept behind only Federal Reserve notes. However, it would

be easy enough to amend my proposal to cover the Federal

Reserve's deposit liabilities as well if you find that the

proposal to reinstate a certificate reserve has merit and that

broadening the coverage would improve it.

The purpose of my proposal is to put a lid on the

growth of the nation's exchange media and, thereby, inflation

Our exchange media population is very accurately measured by

the sum of publicly held coin, non-bank traveller's checks,

currency and deposits in depository institutions that can

be withdrawn by check.

The Fed now calls this sum M-l-B. It will be

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called M-l in 1982 and that is what it should have been

called always. There are some, perhaps many, who will assert

that it is unwise to focus monetary policy on constraining the

growth of our exchange media.

, let it suffice
For nowto say that I believe it is

unwise not to do so. I will develop my reasons for saying so

later on. In my proposal, the limitation on M-l-B growth is

enforced by tying the maximum allowable growth of currency in

every 12-month period to a programmed increase that period in

the value of the Federal Reserve's gold certificate.

The official price of gold, which is now $42.22 an

ounce, and as correlaries, the value of the Fed's gold certi-

ficiates and the maximum growth of currency issues will be

allowed to increase percentage wise each period by enough to

offset a predetermined increase in the certificate require-

ment, which starts at nine percent, plus the maximum desired

growth in M-l-B, plus an. adjustment for changes in the checking

deposits to currency ratio.

The adjustment will be made by application of a

formula that will permit reaching, but not exceeding, maximum

M-l-B growth if the deposit to currency ratio changes. The

formula is given in my prepared testimony.

In essence, the price of gold is increased faster

than the programmed increase in certificate requirement, plus

the limit on M-l-B growth, if the public prefers to hold more

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2
3
4

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exchange media in the form of currency, it would rise more
slowly if there was an increase in the checking deposits to
currency ratio.
With the adjustment, my plan is flexible enough to

allow the public to hold any fraction of its total exchange

media in the form of currency that it wants to.

Thus, my proposal will in no way prevent the

Federal Reserve from meeting all demands for liquidity and

from carrying out its responsibility to furnish an elastic

currency.

My plan does not require or in,any way provide for

Treasury sales of gold at a fixed price to anyone at this time

or in the next few years at minimum. However, it paves the

way for future consideration of this question.

It can be considered when the official price of

gold equals or exceeds the market price. As was noted earlier

my plan provides for yearly increases in the official price or

book value of gold.

The official price, now $42.22 an ounce, is

essentially programmed to rise in a period of eight or so

years to the market price. Capital gains accruing to the

Treasury from raising the official price would be used to

retire Federal Reserve held Treasury debts.

The time table for increasing the official price of

gold can be changed if desired. Whatever time table is

44
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adopted, and I think mine is reasonable if not optimal, we

should put off until the official price is equal to or greater

than the market price, the decision on whether to again

require Treasury to buy gold from and sell it to all comers

at a fixed price and settle international claims by gold

transfers.
Historically, as Richard Zecker has observed,

7
8

convertability was used not to restore stability in a monetary

crisis but to preserve the value of the dollar after monetary

stability had been restored as, for example, in 1879.

My plan can be improved by amending it to provide

immediately for coinage of gold by Treasury as suggested by

Dr. Paul and Mr. Costamagna.

Under their proposal, as I understand it, gold

coins would be sold to all comers at market prices, plus a

small fee to cover coinage costs. Exactly how gold coinage

would be incorporated into my gold certificate reserve plan,

even while the official price of gold is below the market

price, is detailed in an appendix to my proposal which I have

submitted this day, marked Weintraub Appendix A. I believe

it has been distributed.

Finally, to make the coinage provision meaningful,

we have to make sure, as Richard Raun has pointed out, that

increases in the dollar price of gold coins are not subject

to capital gains taxes or losses deductible. That, too, I

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recommend.

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45
To recapitulate, at this point, my amended
proposal is to reinstate immediately two of the three elements
that comprised the gold standard as it was implemented in the
United States until 1933.
5

To lay the foundation for review and consideration

of the third element — convertability at a fixed dollar price

in about eight years. If adopted, my proposal would produce

important benefits.

Most important, it would provide our monetary

system with the anchor that it now lacks and which it needs

to promote price level and economic stability. It would

legislate the currency and exchange media growth be reduced

to noninflationary levels and kept there.

The importance of doing this is shown by the fact

that over the years as the growth of our exchange media, or

what is now called M-l-B, was speeded up, inflation accel-

erated. From 1956 to 1967, yearly M-l-B growth averaged 2.4

percent. Yearly GNP inflation averaged 2.2 percent.

From 1968 to 198 0, both averaged 6.4 percent.

From 1977 to 198 0, yearly M-l-B growth averaged 7.5 percent.

Yearly GNP inflation was 7.7 percent.

Some will quarrel with focusing on exchange media

or what is now called M-l-B. They will say that until 1980,

we did not measure exchange media to include NOW and ATS

accounts and credit union share drafts.

46
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That is true.

But all it testifies to is that the

Federal Reserve was slow to recognize the obvious. Therefore,

it is important to define check deposits generically as my

proposal does, and not try to provide a list now for all time.

Critics also will argue that the relationship

between M-l-B growth and current dollar GNP growth is slippery

and has changed in recent years because of the shift in money

demand. They are wrong.

Their demand functions probably are misspecified.

10 The fact is that measured from one three-year period to the
11 next, in the post-Korean War period, yearly percentage changes
12 in GNP and M-l-B have been very closely related.
13 Quixotic concerns with complicated econometric
14 forums and short-run myopia cannot be permitted to blind us
15

or to blind you to the stability and closeness of the M-l- •B

current dollar GNP relationship over a three year period, a

not very long run.

That relationship is captured in the chart labeled

Weintraub Chart 1, which also has been distributed. The chart

plots yearly average percentage increases in M-l-B on the

horizontal axis and yearly average percentage increases in

nominal or current dollar GNP on the vertical axis.

The data are grouped in three-year non-overlapping

periods from 19 56 until now. The chart shows the relationship

between the two is close and stable.

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That, in turn, means that despite all the new

financial instruments and innovations in recent years, RP,

Euro-dollars, Money Market Mutual Funds, NOWs, minimum

balance banking, streak banking, credit cards, et cetera.

The rate of rise of M-l-B's velocity remains what

it was in Eisenhower's presidency, about 3.3 percent per year

As a result, it has been and continues to be a pretty good

bet that in any three-year period, current dollar GNP will

increase percentage wise by 3.3 percent plus the percentage

increase in M-l-B.

The percentage increase in M-l-B will equal the

percentage increase in GNP minus 3.3 percent — apretty good

bet. Let me add that measured from one year to the next as

well as from one three year period to the next, this has been

an even better bet since 1972 than before 1972.

In other words, the volatility of the rate of rise

of M-l-B's velocity has been less recently than in the 1950s

and 196 0s. Add also that nothing — nothing whatever —• is

gained by increased M-l-B growth.

When all is said and done, accelerating M-l-B

growth increases the inflation component of GNP, not real

growth. The record displayed in the chart refutes those who

talk about $40 or $50 billion of missing money.

There are no missing exchange media to speak of.

If there were, the rate of rise of M-l-B's velocity would have

48
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been substantially higher in recent years than in the

Eisenhower and Kennedy years. It hasn't been.

The fact that Federal Reserve officials refuse to

recognize the stability and closeness of the exchange media

current dollar GNP relationship and refer instead to shifting

demands, missing money and slippery relationships, is precise^

why it is important to legislate lids on currency and exchange

media growth.

Our fiscal and regulatory programs will not be

credible until we do. No one can be sure what the Federal

Reserve will do or even what it will focus on next year and in

later years until we do.

Until we do, financial markets will be unnecessarily

volatile and investors unnecessarily hesitant. It is also

important that we tie these lids to gold. In this regard,

former Federal Reserve Board Chairman William Martin, told

the Senate Banking Committee in 1965, "By retaining the

traditional gold backing for federal reserve notes, the pro-

posal, a proposal to repeal the certificate of reserve for

federal reserve bank deposits, would be reassuring to those

who in their continuing concern for the stability of the

dollar see in a gold cover requirement an important element

of strength.

The value of any currency is so much a product of

confidence that one should not disregard this advantage."

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49
Later, in the same hearing, Chairman Martin,
responding to questions by Senator Douglas, stressed that,
"The gold cover requirement has some valuable disciplinary
effect."
Let me close by noting that my proposal, despite

5
6

what a subsequent witness, Robert Solomon, asserts, gives the

Federal Reserve ample discretion to meet with any liquidity

crisis and to implement counter-cyclical policies.

I have already discussed how my proposal allows the

Fed to meet any liquidity crisis. In regard to counter-

cyclical action, first if the trend rate of. rise of M-l-B's

velocity jumps well above the 3.3 percent average of the past

25 years, inflation would rise unless offsetting action was

taken.

Such a jump in velocity could occur in a war or

war-scare emergency.

innovations and new money instruments allowed proportionately

greater economizing on holding exchange media than innovations

and money instruments did in the past.

Whatever the reason, in the event the appropriate

It could occur if future banking

antidote is to keep currency and M-l-B growth well bel ow

the legislative lids. That can be done just as easily under

my proposal as now.

The Fed will be free to operate under the legis-

lative maximums under my proposal. However, if the rate of

50
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rise of M-l-B's velocity should fall, the three percent lid <

M-l-B growth recommended for 198 4 and later years might have

to be increased
The Fed would have ample discretion to deal with

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this case as long as M-l-B's velocity is rising. If it is

rising even one half of one percent, there would be no reason

for change.

However, an upward revision of the lid on M-l-B

growth would be warranted if velocity exhibits negative

growth — an unlikely case, I think. It would be easy enough

to provide for revision were this case to come to pass.

Indeed, the legislation can provide for automatic

review every four or five years to determine whether a higher

lid is warranted. In any case, it would be unwise not to

legislate safeguards against the recurring nightmare we have

been living with, a nightmare of persistent excesses of

currency in exchange media growth just because there is a

chance that the time will come when we want to relax these

safeguards.

Laws are made not to stop us from ever, come hell

or high water, doing what now appears to be dangerous, but

only to make us deliberate before we do.

I would think in this regard that the Federal

Reserve would welcome the legislation that I propose. It will

not diminish the Federal Reserve's independence. It will

51
increase it.

It will increase it by providing a buffer

against strong, sudden, ephemeral and perverse political winds
Recent history shows that this buffer is needed. Thank you.
UNDER SECRETARY SPRINKEL: Thank you,
Dr. Weintraub. You have now heard from each of your invited
panelists. I'd like to proceed to the questioning by alphabetical order. We have about an hour and 45 minutes
8

remaining. If you could keep the initial questioning to
something near five minutes, I think we'll have adequate time.

The first member of the Commission, by alphabetical

order, Mr. Costamagna what questions do you have?

MR. COSTAMAGNA: May I ask, Chairman Sprinkel, as a

point of order, are our questions to be directed to all

speakers at this time or just one individually?
UNDER SECRETARY SPRINKEL:

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Whomever you would

prefer.
MR. COSTAMAGNA: I mean all of my questions will

have to be taken up at this time?

UNDER SECRETARY SPRINKEL: It's up to you, sir.

I doubt we can in five minutes.

MR. COSTAMAGNA: My first question is of Professor

Holtzer. Doctor, first of all, I want to thank you for sending

us a copy of your book. Being a lawyer myself rather than an

economist, I found it particularly interesting reading.

DR. HOLTZER: Thank you.

52
MR. COSTAMAGNA:

My question is in terms of a

domestic ownership of gold. What legislative changes do you

think would have to be made in order to allow Americans to be

able to own gold if possible?

DR. HOLTZER: Well, is this —

MR. COSTAMAGNA: I would phrase that more in terms

of gold as money. I know that we can currently own gold.

DR. HOLTZER: I was going to address the question

as asked. We lawyers characterize it as leading. It is my

contention just by way of preface that there is no right to

own gold.

At the moment, Americans may own gold just as they

could before Roosevelt came into this city. Shortly there-

after, they couldn't. I envisage the day when we won't be

able to.
It isn't a right,

as I characterized in my

testimony today, or an irrevocable privilege.

most fundamental question is how can Americans be assured of

the right to own gold. I would add somewhat redundantly,

permanently, forever, unsaleably, unconditionally, et cetera,

I don't know whether, even through the device of

Constitutional amendment, that can be done anymore than

speech can be assured to be free notwithstanding the First

Amendment saying that Congress shall make no law respecting

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speech.

To m e , the

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The fundamental cleavage here, I think, is between

rights and privileges. The only way that we have a chance, I

think, regarding gold as now owned or as an integral part of

the monetary system, would be through amendments to the

Constitution. I am not even completely sanguine about that.

The devilish minds of judges, as you well know,

seem able to surmount almost anything. I think they would

have a more difficult time of it. I think if anyone could

ever get an amendment enacted to that effect, it might reflect

sufficient public feeling on the subject so as to perhaps

dissuade them.

At the bottom of it, owning gold just for security,

owning gold as money, owning gold for whatever disparate

reasons that people might wish to ultimately rests, I think,

on the recognition of individual rights, as I said in my talk.

Until and unless that happens, either in a general,

diffuse, widespread public way or an institutionalized way

through an amendment of some kind, it is hopeless largely.

You know and I know and I think everybody in this

room knows, if they will admit it, that the Congress of the

United States could tomorrow morning nullify the gold clause

which is now legal.

They could nullify the so-called right to own gold.

They could do whatever they damn pleased about all of it. If

the President approved it or even if he didn't, there could be

54
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an override, we'd be out of the gold business tomorrow.

Suddenly, it would be FDR all over again.

We will be told, of course, that it is important,

It is necessary. It has to do with the smooth function of

the government and the monetary system. That is nonsense.

If we were on the street, I would characterize it differently.

I'm sure everyone knows what I mean.

It is simply an issue of statism. Either we're

going to have a government which has either total or virtually

total or lots of power over people — economically, political-

ly, monetarily, socially, et cetera — pr we aren't.

The gold issue is simply a subcategory of that

much wider problem. Just to finish this quickly, I started

out thinking about a Constitutional amendment for gold. As

you know from my book, I finally took the position that there

has to be a complete separation of government and money.

Short of that, it won't work. Even at that, it

may not work.

MR. COSTAMAGNA: Then you feel that what appears td

be happening as a de facto ownership of gold and the possibi-

lity of a de facto domestic gold system developing by virtue

of Americans being able to by at least foreign coins.

23
24
25
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Maybe that is the best that we can have at the
moment?
DR. HOLTZER:

De facto and not de juris if that

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is the distinction you wish to make?

MR. COSTAMAGNA: Yes, I am.

DR. HOLTZER: There is no question about it.

MR. COSTAMAGNA: My next question if I still have

time is of Mr. Racz. In the paper which you supplied us,

rather than in your talk, I noticed you made a statement here

that I am quoting — Well, you were quoting, I should say,

President Reagan's statement .

That "Money in the hands of the people is more

valuable than money in the hands of the government". I don't

know if you recall that in your writing. ,

MR. RACZ: Yes. That was before the election, when

he discussed this.

MR. COSTAMAGNA: I understand your thoughts of

having convertible bonds. I also appreciate your saying that

these bonds and their conversion privilege would allow the

individual buyer to ultimately have gold if he wishes to

convert.

MR. RACZ: That's correct.

MR. COSTAMAGNA: Can I say then that you would

agree with the further statement, if I may take the liberty

of further adding to that quotation, that gold in the hands of

the people is more valuable than gold in the hands of the

government? Would you comment on that?

MR. RACZ: What I am saying is more assets in the

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hands of the American government and American people and our

allies is better.

What has happened in the last 20 years is first,

we have given out a lot of power as a country and as a nation

because of Viet Nam. In the subsequent ten years, because we

were ill prepared and we had some domestic problems.

We have given up a lot of power for oil. What I

am foreseeing here — and believe me, somebody who has lived

inside the Soviet empire, through military spending, we are

absolutely jeopardizing our whole future.

In the next 14 years, we don't have $4 trillion to

spend on defense. Now, unfortunately, I've never been an

attorney but I've been a businessman all my life and I am a

member of the New York Stock Exchange.

When I structure a project, I try to foresee the

pluses and minuses. This problem of standing up to Russian

Imperialism and that's what I want to call it, is a necessity.

They are in Afghanistan. They are in Somalia. They are in

South Yemen. They are in Central America. They are in Cuba.

They are all over the place.

Because of the last Democratic Administration or

because of other mistakes, we have to stand up to them. Not

at the price of $4 trillion. We don't have it. What we have

to do — and we have found out that we have the assets. We

can stand up to them.

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We have money.

we discover we have gold. We use gold in an imaginative,

sophisticated manner like an investment banker, so we can tell

the other guy, "Now, look fellow. You want to fight with us?

You want to compete with us? You want to be arrogant with us?

We'll teach you a lesson fast."

7
8

Not next month.

Not two months from now, but next

MR. COSTAMAGNA:

Then you would be advocating that

week

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the government use the gold as an asset rather than the people

MR. RACZ: As an individual, naturally, I don't

know how to negotiate with the Kremlin. They never came to

me. Today, the market is open. Any American citizen can go

to Chicago and our firm would be delighted to take their order

for Americans. They can buy gold and silver — no problem.

They just place an order.
MR. COSTAMAGNA:

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To make our money more valuable,

They can't buy American gold,

though.
MR. RACZ:

They can buy American and foreign gold

because we are willing to take both of them.

Just call early

enough in the morning so that we can go to the London market

or the Swiss market.

The contract is an $85 commission, any time, sir.

People today can buy gold and silver. Let's get this point

clear, okay? What I am saying is the gold and the silver that

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the government has gives the opportunity to the Treasury or thi

government in a highly sophisticated, imaginative way, to

raise maybe $100 or $200 billion which doesn't have to go
into the short end of the market. This daily decides the
prime rate, et cetera.
Use this leverage immediately to negotiate on this
$4 trillion defense expenditure. Frankly, I fully trust,

8 just from observation, of course, in reading the paper, the
negotiating power of President Reagan. He will use it.
10 I don't want to advocate that tomorrow morning I
11 want to bankrupt Eastern Europe. If necessary, use it.
12 UNDER SECRETARY SPRINKEL: Gentlemen, thank you.
13 If we could proceed, the time is up.
14 MR. COSTAMAGNA: Yes, sir.
15 UNDER SECRETARY SPRINKEL: The next member is
16 Mr. Coyne who is not here. He has submitted two questions
17 that he requested I ask. I'll be glad to ask one of them if
18 that is agreeable to the Commission. Otherwise, we'll do it
19 later.
20 MR. COSTAMAGNA: Wouldn't it be in the interest of
21 time to follow the usual procedure, which is simply to submit
22 the questions and have them answer them on the record?
23 UNDER SECRETARY SPRINKEL: Yes. I'd be pleased to
24 do that as well. The next member of the Commission is
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Senator Dodd.

Do you have some questions, sir?

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SENATOR DODD: Thank you, Mr. Chairman. Let me
express my apologies to the Commission for not having been
here earlier. I was a little bit late this morning.
I would like to ask a series of questions, a couple
if I could, to Mr. Weintraub, having arrived a little after
the testimony of the earlier witnesses. I'll be going over
those and will possibly have some questions on the next goaround.
Mr. Weintraub, on page four of your testimony —•
now, this is the prepared testimony that you submitted ahead
of time. You link money growth under your proposal with the
assumption that the number of ounces certified by the
certificate reserves does not change.
I'd like to ask you a couple of very brief
questions. How valid is that assumption? Wouldn't all gold
sales and purchases have to be prohibited in order to validate
that assumption?
MR. WEINTRAUB: I think I covered that at the end
of my prepared testimony, Senator, when I referred to the fact
that the final question concerns possible Treasury purchases
and sales of gold on pages 12 and 13.
I said in this regard that if the Treasury
purchased gold, greater growth of currency would be allowed
than the protype plan contemplates unless the requirement
ratio was adjusted commensurately. You could do that.

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As long as the legal value of gold is below the

market value, such purchases are unlikely at least on a scale

large enough to be concerned about.

This is because the Treasury's immediate spending

power would be decreased by such purchases by an amount equal

to the difference between the market and legal values of gold

times the number of ounces purchased.

It is highly unlikely that Treasury would make any

purchases. Gold sales, of course, are possible. However, if

there were sales they would reduce the allowable growth in

currency in the current and all future years.

That prospect, I think, would act as a very strong

deterrent to future gold sales until such time as the price

of gold were equal — the official price were equal to the

market price.

At that point, I'm recommending we.re-examine the

question of convertability. I don't think it represents any

real problem, Senator.

SENATOR DODD: You sort of anticipated the next

two questions. It would appear at first glance that your

proposal is incompatible with convertability proposals, where

sales and purchases of gold would be permitted to take place

as market conditions dictate.

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That would appear to be the case and therefore,
confronted with that incompatability, how would you respond to

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that?

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MR. WEINTRAUB: I think that in eight years, we
might want to face up to that. We may view my proposal as a
bridge to that point in time.
I think that if we were to go to convertability,
then it is clear you'd have to have another set of guidelines
for guiding monetary growth. It may be that in eight years,
we would decide that this system has worked well enough.
8 Let's leave it in place. Let's keep affixed an
official price of gold at which we neither buy nor sell gold.
10 SENATOR DODD: The base price, as you pointed out,
11 is $42.22, obviously much lower than gold's market price
12 today. Under a system of convertability, such a low price in
13 a pure gold regime would have a massive counteractionary
14

effect.
I wonder if you have any similar problems under

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your proposal.

MR. WEINTRAUB: No. Keep in mind that the official

price is the price at which gold is neither being bought nor

sold. There is no problem here whatever.

Any sales or purchases by Treasury in the next

eight years would have to be at market prices under my plan.

SENATOR DODD: You are not using the base price?

MR. WEINTRAUB: No. The base price is simply

used as a means of increasing the maximum allowable currency

growth.

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SENATOR DODD: In effect, what you are suggesting

here is we don't really need to use gold. We could use any

commodity where you had a fixed supply, where you fixed the

supply. You could use paper clips, in effect.

MR. WEINTRAUB: Yes, indeed. You certainly could.

You could even do without this. However, I would again remind

you of former Chairman William Martin of the Federal Reserve

Board's statement that this is indeed a valuable discipline.

It does give people confidence. It would have some

10 welcome effects. I don't think we should ignore that at all,
11

Senator.
SENATOR DODD:

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Mr. Chairman, I'll pass at this

point.
UNDER SECRETARY SPRINKEL:

Thank you, Senator Dodd,

Senator Jepsen is missing.

some questions for the panel?

DR. JORDAN: I would like to ask a question for

each of Professors Aliber, Meltzer and Weintraub to answer.

If you consider a monetary rule, whether or not

it included a gold reserve certificate, do you believe that

a legislative statute would be sufficient to give the

sufficient probability that it would be adhered to and to give

credibility to the rule? Or do you think it would require

a Constitutional amendment?

DR. ALIBER: I think your question can be

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Dr. Jordan is here.

Do you have

63
rephrased in terms of another question. That is, how much
credibility do you want? How much credibility do you think
you can get? How much credibility are you willing to pay for?
The legislature can establish a monetary rule
which will give some credibility. A Constitutional amendment
would undoubtedly provide greater credibility. A Constitutional amendment with severe penalties for failing to adhere
to the rule would even provide greater credibility.
Credibility can be thought of in terms of a ladder.
You can buy more of it at higher legislative or Constitutional
costs. It's important to note that the legislation credibility should be distinguished from what the public believes
about credibility.
Rules become credible only when the authorities
face a choice, a problem, a crisis, a choose to abide by the
rule rather than to incur the costs of deviating from the
rule.
DR. JORDAN: Do you have a recommendation as to
what you would like to see done?
DR. ALIBER: At this time, it seems to me that the
costs of trying to introduce gold into the domestic monetary
system are just so high, the risk is so immense, that the
use of gold I think should be limited to trying to improve
the functioning of gold in international monetary arrangements, I have so indicated some arrangements in the

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concluding part of my testimony.

DR. MELTZER: Think about the debt ceiling that

we are all familiar with. It is a rule without any sanction.

Consequently, it turns out to be no rule at all.

So any rule has to have some sanction. A rule

that says you have to provide for two to four percent growth

ide aprov
sanction of what would
in the money stock doesn't

happen in the event that the rule were breached or the

Congress would decide to breach it because of some perceived

or imaginary crisis, is not a rule.

It would have low credibility. Therefore, I would

think what is important in thinking about rules is to make

the rule carry with it a sanction. That is a sanction which

was time honored at one time was that whenever the finance

minister devalued, it was considered a mark of shame. He had

to resign.

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In our day, it's considered to be an achievement

and he is applauded.

something about the nature of the society and what it wants

to do.

In order to achieve something with a rule, there

must be a sanction in the rule which is there and which is

imposed. For example, I would have as a sanction that when

the rule of two to four percent money growth is breached,

that the entire Federal Reserve Board or the people

I would think that that represents

65
responsible for the rule, would be forced to resign. That
would be one type of sanction.
MR. WEINTRAUB: I guess I'm a little more
sanguine, Dr. Jordan, about laws. I think, as I said in my
testimony, that they are intended not to make us, come hell
or high water, never do something. Rather, to make us
deliberate before we do it.
We actually do that even with the debt limit,
although that might become something of a charade. There is
no doubt that Congress has to raise that debt limit before
the Secretary of the Treasury can order the issuing of new
debt.
I might add that in the case of my own feeling
that I wish to place on the growth of currency and, thereby,
M-l-B, there are sanctions that would be involved. They are
the usual ones, as I think I pointed out on October 26.
The governors of the Federal Reserve could be
removed for cause by the President if in fact there were some
deliberate violations of that ceiling. Congress could
impeach. Private citizens could go into court and get a
writ of mandamus demanding performance.
It should also be noted that in placing the lid on
currency, the Secretary of the Treasury will also be
involved. He's got to sign the request of the Federal
Reserve to print more currency.

66
There are a lot of people who might stop the

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printing press in this case. I think it would work rather

well. I am not so sanguine as to understand that there might

not come a time when the rule would be changed.

UNDER SECRETARY SPRINKEL: Thank you, Dr. Jordan.

Mr. Lehrman and Dr. McCracken are missing. Congressman Neal?

CONGRESSMAN NEAL: I guess my interest in this is

along the lines indicated by the questioner, Mr. Jordan. I

am particularly intrigued with Dr. Weintraub's proposition.

As I understand it, it would require essentially

that we go to a monetary rule. Isn't that essentially,

Dr. Weintraub, what your thinking is?

DR. WEINTRAUB: Yes, at a maximum. There would be

no minimum, of course, Congressman Neal, but you might say

it is half of the loaf of the bill that you put into the

hopper several times in the past to control money growth.

CONGRESSMAN NEAL: I also think I have more faith

in our system and so on than I hear indicated by some. I

think that if we had in law a monetary rule that it would be

the intent of the Congress and the authorities that would

administer the law to do it in good faith.

The difficulty I'm having with your proposal, which

I certainly find very fascinating and very useful, is that I

still can't see the advantage of it over a legislated monetary

rule.

67
The disadvantage I see is that it seems to me that
it's quite complex. I think because of its complexity, there
would be difficulty in communicating just what had transpired
should we move in this direction.
Of course, it would require legislation also. Just
the recommendation of this Commission would not bring it
about. In the bill that I've introduced and other proposals
also, there is the possibility for some flexibility.
That is, if a super majority of the Board of the
Fed, the Market Committee of the Fed, voted for some emergency
reason to exceed the limits, then that would be entirely
possible under your proposal.
I don't know that we would have that kind of
flexibility. I'm just sort of thinking out loud with you and
it seems to me that if there were a general agreement that we
ought to move in the direction you suggest, and of course, I
would love to see that.
I can't see the advantages of your proposal over
legislating a monetary rule. It seems to me the disadvantages
of your proposal would be that it is complex. It might not
be the flexibility that there would be under the legislated
proposal.
I am just anxious to hear your comments and those
of Dr. Meltzer and Dr. Aliber and others also.
DR. WEINTRAUB: There is no question but that much

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My system and my proposal is

more complicated than a simple "put a lid on M-l-B growth"

would be, which is more easily understood.

That is its principal disadvantage. I think

people could understand that that's what its purpose was.

There is, however, an advantage.

The advantage is, as I said before, we are linking

the growth of money to gold through the certificate reserves.

That does have a psychological advantage. I'm not a psycho-

logist, but I do know that such people as former Chairman

of the Federal Reserve Board, William Martin, who was an

outstanding chairman as we all know, well understood this

pschology.

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of what you say is correct.

As a result, he favored retention, right up until

the very end, in keeping the gold certificate reserve on in

the 1960's.

I might add the problem with that gold certificate

reserve was that it would not bend. It could only be broken.

The proposal I have put forth is one that would bend but not

break. You could gradually ease it.

I would also say that the plan is very easily

amended. I think it is a good idea to put in an emergency

clause. By a super vote of the Federal Reserve Board or the

Federal Open Market Committee, you could get a limited

waiver for a short period of time.

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bill. Instead of a three percent maximum, if there were

such a period, where there was a sudden scare and everybody

began to hang onto money and the rate of rise of velocity went

below zero for a short period or even for a longer period,

the Federal Reserve could, by this super vote, essentially

provide more currency than the three percent maximum that I

envision.

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This is essentially what was envisioned in your

On the other hand, I think that should be done

—

that should not be done lightly. One should put all manner

of safeguards in there to make sure it's done only for very

good reasons.

I think I also said that the Congress should

probably review every four or five years what the lid is. I

do believe that it is plenty flexible. I don't think you

would want to get it anymore flexible or you'll be back to

where we are right now, which is no constraint whatever.

I think it is terribly important to realize that

no one in this room, including the three Federal Reserve

Governors, can guarantee that we will not have nine percent

money growth again next year, or starting next month.

They just can't guarantee it. One reason for it

is they have no constraint. They will play it by ear.

DR. MELTZER: I am very much in favor of your

proposal. I agree with the merits that you have suggested

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Namely,

it is simple, easily understood, clear, and it accomplishes
the major purpose.
That is it doesn't provide perfection, but it
provides much greater stability and would have prevented us
from having the last 15 years of inflation if it had been
adopted some time ago.

I would only amend your proposal. I would be

very happy to see your proposal enacted into law. I would

think that it would be an important step in the right

direction. I think the proposal perhaps would function

better if it contained a sanction that would help to estab-

lish credibility

the sanction if that could be achieved.

CONGRESSMAN NEAL: Dr. Aliber?

DR. ALIBER: Yes. I think it is a theorum that

simple rules are preferable to more complex rules. Therefore

it seems to me that the Weintraub Proposal is unnecessarily

complex

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that it has relative to Dr. Weintraub's proposal.

I would be willing to accept it without

Moreover, it seems to me that the Weintraub

Proposal really goes back to a view of gold, the credibility

of gold, that is passe. You may remember that in

Schlesinger's book on Kennedy, he wrote that the only decision

which President Kennedy thought more dangerous and more costly

than dropping the bomb was changing the dollar price of gold.

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devalued in 1971, it was a mouse. It was not an explosion.
I think the effort to attempt to figure out a way to use gold
to get credibility into the system simply does not pay off

in terms of cost-benefit analysis.

CONGRESSMAN NEAL: Thank you.

DR. WEINTRAUB: May I add one word to this? It is

always possible that as a proposal such as mine grinds its way

through this Commission and out into the legislative process,

it could be amended to become the proposal that Congressman

Neal has suggested.

I personally would favor sticking with mine. I

think it has certain advantages. I do think that in this

Commission's deliberations, that's the one that's got to be

considered. I personally would favor continuing to consider

it through the legislative process.

CONGRESSMAN NEAL: May I just make one comment?

I just wanted to let the record show that I meant no

criticism of Dr. Weintraub. I think he's been a great

champion of promoting the idea of stability in our monetary

system. He has been a great warrior in the battle against

inflation.

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When we change the dollar price of gold and we

I hold his views in very high regard.

I just

wanted the record to show that.
UNDER SECRETARY SPRINKEL:

Thank you very much,

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Governor Partee?

GOVERNOR PARTEE: To continue along more or less

the same theme for just a little bit, it does seem to me that

we have two subjects that we're discussing today and that

were presented by the witnesses.

One is what the role of gold should be. The other

is the desirability or undesirability of a monetary rule.

Dr. Weintraub has ingeniously joined these two things. It

seems to me, Bob, that there is -- going back to Senator Dodd'

question.

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Congressman Neal.

It seems to me that the practical effect of your

proposal is to immobilize the current gold stock pretty much.

As you said, in response to him, the Treasury wouldn't buy

any gold, because it costs too much. They wouldn't sell any

gold, because it would reduce the monetary base on which money

growth could be based.

Dr. Aliber, for example, suggested — if I

understood him correctly — that in time, we ought to seek a

market value of gold that would look forward to its being

traded again among central banks.

That is, that there would be an official position

for it. Dr. Racz suggested that we should use gold as a

collateral for a convertible bond that would be available at

a lower percentage interest rate than nonconvertible bonds are

It seems to me one other possible disadvantage of

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your program, other than those that were mentioned by

Congressman Neal, is that it immobilizes gold and means that

you can't have free use for other purposes. What would you

say to that?

DR. WEINTRAUB: I would say that it might

immobilize it for a few years. Let's ask ourselves what

would be the result of selling gold rig'ht now?

That is, if we wanted to do this. First off, it

would decrease the monetary base, as you know. Of course, you

could compensate for that by open market purchases.

We would then have to decide what to do with the

Treasury's capital gain. Of course, you could do the same

thing that I'm recommending. ' Namely, to use it to retire

Federal Reserve debt.

I don't see any advantage in this. I don't really

see why we would want to sell gold. On the other hand, I

don't want to say that such a case is impossible. I would

simply say to that that in that event, one can go before the

Congress, the President can go before the Congress, and ask

for a waiver, a change in the scheduled certificate reserve

requirement increase.

If in fact you were selling gold for some emergency

reason, then at that point in time, what you would want to do

is to reduce the certificate reserve requirement commensurate-

ly. It is easily done, Governor. I don't see any conflict

74
whatever.

It would, of course, require a change in the

schedule. We all know that Congress can do things very fast
when it wants to.
In my lifetime, they've declared war several times.
I can't miss this opportunity to say something to my friend,
Dr. Aliber. I didn't think dropping the bomb was costly at
all. Maybe that's because we were in different places at
8

the time.
GOVERNOR PARTEE:

had in mind. I thought that the suggestion was that more in

the ordinary course, you would expect that the central banks,

the governments, might trade gold to settle — as a reserve

asset, to take care of balance of payments, deficits and

so forth.

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Let me ask Dr. Aliber what he

You couldn't ask for a Congressional waiver every

time the United States wanted to do that.

comment on this question of immobilizing the gold?

DR. ALIBER: U.S. owned gold has a market value

in excess of $100 billion. I expect that market value is

going to fall because this Administration's policy will be

successful in bringing down the rate of inflation.

The market price of gold will fall substantially.

We should all be thankful for that. But perhaps, the market

value will trough at $60 billion or $50 billion. One can

easily think of occasions in which we will find it to our

What would be your

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advantage to wish to sell gold as a way to help stabilize
activity in the foreign exchange market or U.S. intervention
in the foreign exchange market.
That may not seem immediate. I think it's not

likely to be immediate. There have been occasions in which

that has been useful in the past. There will be, almost

certainly, likely to be occasions in which it will be useful

in the future.

It seems to me, to lock up $50 or $100 billion of

gold for what is essentially a window dressing operation is

a rather expensive form of drapery^

DR. WEINTRAUB: Let me make a further comment on

this. My plan doesn't lock it up forever, as you know. When

the official price gets to be equal to the market price — I

think that will be in about eight years under my time table.

We can then make a decision as to whether or not

to have full scale convertability. Some people might look

forward to that. I certainly don't want to say yes or no to

it at this point in time.

I also point out that my time table is a little

lengthy for some people- You can shorten it. It's easily

done. The numbers are easily manipulated.

I do want to caution all of you of Richard Zecker's

point which I raised in my prepared testimony. One doesn't go

to the gold standard during periods of monetary instability.

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Basically, we have gone to the gold standard
convertability in settlement of international claims against
the dollar by transfers of gold only after we have restored
economic and monetary stability as, for example, in 1879.
That is what my plan essentially is looking forward

to do. It may be that four years from now, Dr. Aliber can

come before the Congress and say, "I think it's time to have

full scale convertability", and I may at that time say yes,

it is. I surely don't think we ought to do this tomorrow.

10
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12

May I ask just one more

question?
UNDER SECRETARY SPRINKEL:

Surely.

GOVERNOR PARTEE: Mr. Racz, you proposed at one

point in your paper the issue of, I believe you said, a $50

billion bond at a seven percent interest rate with a convertible

feature for gold at $550 an ounce.

May I ask you how you arrived at those two

figures — seven percent and $550?

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GOVERNOR PARTEE:

MR. RACZ: It's very simply a market judgment.

What I also stated with respect to a previous question was

the American government could actually both the physical

and the future market. In case the gold — in other words,

if we are selling a convertible on bonds at $550 and the

market price is $420, I see absolutely nothing wrong since we

have the dollar in case of redemption, to pick up the

77
equivalent value in gold even at lower prices or even buy
more. I appreciate we have a value of gold holdings at
$100 billion, a national debt of a trillion, a Euro-currency
market of $1.2 trillion.
I would say a constructive policy is to have
constantly increasing gold supply and a series of bonds sales
in gold and silver.
8

DR. MELTZER:

May I just add one thing to the

question that was asked previously, Governor Partee?
10

that there is a fundamental difference between Dr. Aliber and

Dr. Weintraub which is being lost in this discussion.

That is, if I understand Dr. Aliber's point of

wanting to make transfers in gold to settle international

transactions, he obviously is thinking about a fixed exchange

rate system of some kind.

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Whereas, I believe Dr. Weintraub's proposal does
not require a fixed exchange rate system of any kind.
GOVERNOR PARTEE:

I don't know.

of a fixed rate system!

DR. MELTZER:

why we would have to transfer gold

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I think

Were you thinking

If he is not, then I don't understand

GOVERNOR PARTEE:

It's an asset that could be used

to settle a debt.
DR. MELTZER:

asset could be used

So could anything.

I mean, any

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This is an asset whose total value

is now 100 plus billion. We could think of countries under

the current system that have actually sold gold or have

mortgaged their gold — Portugal is one example.

Long before we get back to the fixed parity or

fixed exchange rate system or pegged exchange rate system, we

w ill find numerous occasions in which central banks will

intervene in support of their currencies in the exchange

market. They find it very useful to get the foreign exchange

by selling gold.

It would be advantage to sell that gold to other

central banks off market rather than to sell that gold on the

market. There is no automatic association between gold

transactions among central banks and a fixed exchange rate

system.

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DR. ALIBER:

That was characteristic of a brief period in

monetary history unlikely to be characteristic over the next

25 or 50 years.

DR. MELTZER: I would only add that I see no

advantage in that system. Under the present arrangements,

anybody can sell gold. Any central bank can sell gold at any

time at the world market price. As you point out, they do.

SECRETARY REGAN: Congressman Paul, before you

start your questioning, may I apologize to the members of the

Commission and to the witnesses for not being here during

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their opening statements and during the early questioning.
I assure you I will read the record carefully in order to
find out what transpired in my absence.
Unfortunately, I had to be at a series of meetings
across the street. That required my being there rather than
here. I assure you I will be here for the remainder of the
session.
8

Congressman Paul, would you make your questioning?

CONGRESSMAN PAUL: Thank you, Mr. Chairman.

I find it rather frustrating to try to ask question^

to five individuals in five minutes. I guess that leaves us

one minute per individual.

I would like to make sure that the rules are clear

that by submitting questions, we can have those answered in

writing if we don't get them asked.

SECRETARY REGAN: Right.

CONGRESSMAN PAUL: I have two questions, essentially

that I would like to direct to the panel in general. The

first one has to do with something a little less complicated

than the Weinstraub plan.
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It is something that I think needs to be discussed

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because I think it's at the base of all of our discussions

and it is the essence of all of our discussions. That is

trying to understand the monetary unit and the definition

that we might ascribe to this piece of paper we call the
dollar.

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It is my understanding, under the gold standard a

definition is precise. We have a precise definition. We

either say that the monetary unit is a specific weight in

gold or that this dollar is defined in a precise, specific

amount or weight of gold.

The argument for this is that this provides trust

in the money. It allows people to save with confidence that

they will get back something of equal worth at a later time.

This also begs the question about who shall have

the authority to make new money. Is it somebody who has

control of the printing press that makes this or shall new

money come about by sweating and working and somebody who

earns new money.

Who has this authority to make new money? Does it

instill or give power to that individual who has this

authority to create new money?

My first question, to be more precise, is what is

the definition of the dollar in your minds? In the same

line, I note on here it says on here the Federal Reserve note.

In the old days, a note meant a promise to pay.

I see this is even signed by the Secretary of

the Treasury. The Treasury signs this. It's a promise to

pay our people something. I want to know whether that is a

misnomer, whether we should change the name and call it

monopoly money, paper money, counterfeit money or shall we

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continue to call it a Federal Reserve note?

A note means a

promise to pay. Today, I understand that if you turn this

in, they pay you but they pay you with another Federal

Reserve note.

I think it's not very surprising that people have

lost a bit of trust in the money. The second question I have

for the panel is to defend the system that we have.

It seems to me that we've had a pretty fair

chance to work with the paper. We've had ten specific years.

As a matter of fact, ten years distinctly different from any

time in our history. The record is rather poor.

Interest rates are very very high. Unemployment

is high. For the first time in our history, real wages are

down. Bankruptcies are higher than ever.

I think that if anybody defends the paper system

and the opportunity for government to manage money, they must

defend this past ten years or explain it or tell me how it

won't continue, as long as the authority exists in government

to continue running off these (indicating).

DR. HOLTZER: Congressman Paul, let me make a

quick answer to the question you raised. As you were saying

that and before you began, I was toying with something I

carry in my pocket just to keep my hands busy.

It's an 1886 silver dollar. Now, the difference

between that and what you have in your hand is explained by

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two words — government power. As long as government has

anything to do with either this or that, you're going to

continue to get the difference between this and that.

The only way to bridge that gap, the only way to

stop this from turning into that is by getting the government
out of this whole business completely.
As a matter of fact, with all respect, if I were

an economist, I wouldn't come down here and go through this
kind of a ritual. It's absolutely pointless wheel spinning.

No matter what is decided, it's going to be and it certainly

can be undecided the next day..

Then there's going to be another set of hearings.

There's going to be another Commission, more study, more

legislation and more pen signing ceremonies at the White House

no matter who is up there. Then it's going to change.

Then there's going to be a war or an oil embargo

and monetary problems. We're going to slam the window shut.

We're going to open the window up. We're going to have

convertibility. We're not going to have convertibility. It's

going to go on and on and on.

That is my answer to the question you raised,

which is a very good one and which needs to be answered and

defended, as you say, by people who have a different attitude

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from mine.
DR. ALIBER:

Congressman, you raised four questions

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and I will try to answer two of them. In terms of the promise

to pay, as long as the Secretary of the Treasury is willing

to take that Federal Reserve note in settlement of my tax

bill, then I am sort of comfortable with the system.

It is true we've lived through a disastrous

decade. It would be a misreading of history to believe that

we have not lived through disastrous periods in which gold has

served as money.

I referred in my testimony to the 16th Century.

If the money misperforms, the nature of the political system

is to change the nature of the monetary arrangement. The

reason we've had the Federal Reserve system was that the U.S.

monetary system misperformed in the 19th Century.

For 30 or 40 years, there were hearings like this

one on how do we develop a stable monetary mechanism.

MR. RACZ: The problems of the last ten or 15

years have been largely political problems. They are all well

known. As a result, frankly, any vast revolutionary change in

the monetary system, in my opinion, is totally impractical

and impossible.

To stop currency fluctuations, to stop interest

rate fluctuations, I don't know any cure. I never had any

cure. I read quite a number of international and American

newspapers. It is a painstaking process. It will not be

finished in the first four years of this Administration.

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It means painstaking budget cuts, needing a

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revolutionary change in the tax structure where it was

possible to make a tax change. It may need a re-evaluation

in the value of gold. It may mean a total change in our expor

policy. It will take many many years.

Until all of these changes happen, any revolution-

ary change and theoretical discussion, I think is just a total

waste. We just have to get down to the day-to-day pedestrian

tasks

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The Gold Commission has a tremendous historical

achievement.

It opens the tension, on important national

assets. It is only one little step in the long picture.

DR. MELTZER: Let me try to answer your two

questions, Congressman. First, the monetary unit and its

precise definition — of course, it's nominal value is that

it's just a piece of paper with the unit that we've put on it,

one dollar. We could call it by some other name.

Its real value is the value of the goods and

services that it exchanges for or the physical assets against

which it exchanges. Its real value, of course, is only

determined by the number of nominal units that we produce

relative to the goods and services for which we can exchange.

The real value changes all the time. It changes

in response to the way in which the public perceives the

future. What we would like to do —• it would be a great

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we could do a better job of stabilizing the real value.

Indeed, I aimed my remarks in my testimony at

precisely that issue. The issue before the Commission is

precisely the one that you posed. What is the best way to

stabilize the real value of our currency?

Every system of stabilization is going to have

some benefits and some costs, as all things do. We are not

going to get perfect stability. We would like to know what

system of stability will produce the minimum variability at

the lowest cost.

Second, and I will come back and make a few

remarks about that at the end. Second, you asked to comment

or defend the present system. I have no desire to defend the

present system. As you know, I am a critic of the present

system,

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service to our people and to people throughout the world if

I think that among the systems that are available

to be considered, the present system would stand low.

matter what present commitment this Administration, this

Federal Reserve Board may have, no one can believe that the

future will either be a period of noninflation or nondeflation

Our record over the past 50 years is a record of

periods of very severe deflation followed by periods of very

severe inflation, interrupted briefly by a period of stabili-

ty which is much shorter than either the periods of deflation

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or the periods of inflation.
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We have absolutely no belief that a future system

such as the one we have, whether it's tied through or whether

it is untied, that that system would produce stability. Nor

is there any reason to believe that we cannot do better.
I believe that the way to do better is to adopt

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do. One is the Neal proposal. Adopt that. Sell gold out of

the Treasury to people who would like to buy it at their

demand,

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some fundamental changes, which this committee could very well

Adopt parts of Senator Simm's proposal which would
allow people to buy gold out of the Treasury and make it

subject it to no taxes on the transaction. There would be a

warning system to the Treasury.

When people come to buy the gold at the market

price, that would be a warning to the Treasury that people

had lost confidence in the money. That would produce some

system which would keep us.

The combinations of those things I think are very

salutory steps in the direction of providing greater stabili-

ty than we have had over time. I can elaborate on some other

changes that I would like. I share your view that it would be

very useful to take back the gold from the International

Monetary Fund and other steps along that line and allow that

to be part of the government's gold stock which would be

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available for sale to the public.

I believe that kind of a sanction is a very useful

device for making sure that the monetary discipline that is

so badly needed in this world has a better chance of being

maintained. No system will give us an absolute guarantee in a

world that is subject to the kinds of changes that ours is.

DR. WEINTRAUB: I guess I would repeat Alan's

remarks as I associate myself with them in many respects.

The system hasn't worked very well that we are

operating under. That's why the Commission exists. The

plain fact of the matter is I think it behooves all of you to

recognize that and to come up with a recommendation that

would strengthen the system.

Particularly, strengthen its ability to prevent

persistent inflation and periodic periods of deflation. I

do believe that the plan that I have proposed, although

somewhat complicated perhaps in comparison to the Neal bill,

and I have no ego involvement in this.

As Congressman Neal knows, I had some input as a

staffperson on that bill. It would accomplish at least the

prevention for a while, as long as the law lasted, in

persistent excesses in the creation of currency and money and

thereby inflation.

I don't believe for a minute that one ought to not

recommend something because it is somewhat complicated. I

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don't think that my plan is terribly complicated. I think it

would do the job. If you have a more simple plan that you can

recommend, surely I would be for that.

If you are constrained in any way, then I think

you ought to at least consider this plan. Consider it very

seriously. The reason you are here is basically to find ways

of improving our current monetary system.

CONGRESSMAN PAUL: Thank you.

SECRETARY REGAN: Congressman Reuss?

CONRESSMAN REUSS: Thank you. Mr. Weintraub,

you list yourself as a staff member of the Joint Economic

Committee. As you know, the Democrats in this Congress

control the chairmanship of that committee. I happen to be

the chairman and Dr. Galbraith is our staff director.

You're not a member of that staff; are you?

DR. WEINTRAUB: No. I am a member of the

Republican staff, Mr. Reuss.

CONGRESSMAN REUSS: Thank you. You have, for a

good many years, been advocating the use of a monetary rule

by the Federal Reserve, one which would restrict the issuance

and the creation of new money to something like three percent

a year; have you not?

DR. WEINTRAUB: Yes. On occasion, I've been very

happy when you joined in that proposal.

CONGRESSMAN REUSS: Did you during those many

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years and prior to your surfacing of your gold linkage
proposal, in recent weeks after the Gold Commission got going
Did you, during those years ever suggest in
writing or in your relationships with members of Congress
that there should be a gold gimmick attached to your proposal?
DR. WEINTRAUB: I don't know that I ever suggested
it to anybody in the Congress. I know that I did discuss it
with Milt Friedman some time ago, a long time ago.
CONGRESSMAN REUSS: Did you ever write anything —
DR. WEINTRAUB: On more than one occasion.

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CONGRESSMAN REUSS:
Weintraub plan?

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about the so-called

DR. WEINTRAUB:

No.

I never have written anythi ng

until now.
CONGRESSMAN REUSS:

This is a mighty name here,

Chairman William Martin.

the gold cover requirement had some valuable disciplinary

effects. As a matter of fact, a year or two after that,

Bill Martin was before the Congress advocating the total

removal of the gold cover requirement, wasn't he?

DR. WEINTRAUB: Yes. He was wrong the second time.

CONGRESSMAN REUSS: You aren't suggesting that

Bill Martin supports your proposal, are you?

DR. WEINTRAUB: I'm suggesting that in 1965, he

saw the value of tying the issue of currency to gold

You quote him as saying in 1965 that

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certificate reserves. I think he was correct at that time.

If he has since changed his opinion — and I would have no

way of knowing where he would stand now.

He obviously changed it in 1968. He saw some

reason for repealing that law. I would hope that he would see

the value of again reinstating it, but I don't know that for

sure. I would say his opinion in —

CONGRESSMAN REUSS: As you know, Bill Martin is

very much alive and if he does support your proposal, I would

ask that you include that in the record.

DR. WEINTRAUB: I really don't know Mr. Martin and

I don't want to ask him. I might also point out something to

you, if I could. In 1968, had you asked me was I in favor of

repealing the gold backing behind currency, I would have said

of course I was.

Then I didn't realize that we needed the constraint

I now realize that we do.

CONGRESSMAN REUSS: I'm sorry I didn't ask you.

Now, Mr. Racz, you had me right along with you, sir, when you

said that we have to stand up to Russian Imperialism. I'll

go with that.

MR. RACZ: Thank you, sir.

CONGRESSMAN REUSS: Then you lost me when you

suggested that we go on the gold standard. That would

provide a marvelous floor price for those Russian Imperialists

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and do you really want to do that?

MR. RACZ: Sir, look at some numbers. The Russians

today have to sell every ounce of gold they produce. Russia
today, as well as Eastern Europe, is bankrupt. Totally

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bankrupt. We can give them that help.

I am advocating that since they cannot float gold

backed bonds — because in order to do so, they have to have

the currency reserves. You have to keep the currency and the

gold in case I come in and buy gold and get the dollars back

or the Swiss franc or whatever they choose.

We can do that. That's the American monetary

supremacy that comes into question. This is what I have never

seen in the newspapers. I have never seen a leading American

politician stand up and say, "Gentlemen, the world is in

trouble, but we are the most powerful monetary power in the

world. Therefore, we can set the rules."

Now, in setting the rules, one of our keys is that

not only do we have surplus gold, but we can acquire addition-

al gold in the open market or from central bankers who need

money. We should be very aggressive as a monetary power.

We don't have to spend vast sums of money as a

military power. I —

CONGRESSMAN REUSS: I still don't understand why,

if the Russians are so bankrupt and have to sell every ounce

of gold they can mine before it stops rolling, that we want to

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put together a bail out program and give them a floor price

on it.

They're not Chrysler.
MR, RACZ:

Why would we want to do that?

They are selling the gold on the open

market in any case.
CONGRESSMAN REUSSr

Yes, but if we put the

Treasury on an enforced basis as a purchaser of gold, which I
take it your program mandates, that's great news in the
8

Kremlin.

MR. RACZ:

May I ask you how is it, if the Russian

gold is so much and we don't —

of the exact statistics.

wasn't so long ago.

let's assume we don't have all

The gold went to 700 or 800, which

This is exactly in the last 18 months.

The whole of Eastern Europe and Russia fell on its

face.

East Germany is going to follow and then, of course, all of

the satellites.

Romania is 12 months away from where Poland is today.

I have no knowledge, of course, except that I read

the situation in Russia is not better.

we have to give something in order to gain much more.

appreciate if they would be selling their gold at four, maybe

they would be selling at 500.
w

Like in any business,
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So, it's a business transaction and on balance, we come out

ahead.

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They've got a floor.

CONGRESSMAN REUSS:

Thank you.

My time is up.

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SECRETARY REGAN:

GOVERNOR RICE: Thank you, Mr. Chairman.

Professor Meltzer, if I understood you correctly,

Thank you.

Governor?

you said that one of the disadvantages of the gold standard
was its regidity and it would increase our vulnerability to
shocks of various kinds.
How would, say, a commodity standard based on a
8

collection of a number of basic commodities, a basket of basic
commodities, meet this problem that you have with the gold

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standard?
DR. MELTZER:

It is a fundamental theorum of modern

economics and one for which James Tobin just won the Nobel

Prize. A basket of commodities is going to be more stable

than any single commodity in its element, because of course,

each price may change. You only, when any price changes, you

only take one-tenth, one-eighth, one fraction of that into

consideration.

You would always have a more stable commodity

basket if you took a basket of commodities than if you chose

any single commodity basket. That is, you would always have

the expectation that that would be true.

It may turn out that one commodity would remain

stable over time. We have no way of knowing that. Our

problem is, of course, to deal with a world which is changing

In such a world, our expectation would be that a basket of

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commodities would be more stable than any single commodity.
2

•It is my judgment that we can do even better than that.

GOVERNOR RICE: By adopting a rule?
DR. MELTZER: My adopting a quantity standard,
that's right. A rule tied to the range of fluctuations within
which money growth could occur.
GOVERNOR RICE: I take it that if we were to go to

some kind of materials standard, you would prefer a commodity
standard then?

DR. BELTZER: I would prefer a multiple basket

commodity standard over any single commodity standard. I

believe that that's the testimony. That's not an opinion. I

think that's the judgment of modern economics.

GOVERNOR RICE: Thank you. Mr. Weintraub, in your

proposal, is it possible to have a currency shortage as a

result of supply of currency that people want to hold bumping

up against your legal cover ceiling and if so, what would

happen?
DR. WEINTRAUB:

It won't.

It's not possible,

because of the adjustment.

As the deposit to currency ratio

falls or as the currency to deposit ratio rises, then the

maximum allowable currency growth rises commensurately. So,

it's not possible to have a shortage at all.

If the public is demanding to convert deposits
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into currency, the Federal Reserve can meet that demand.

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GOVERNOR RICE:

But the cover is against only

currency. If people choose to hold more than a certain amount

don't they run into the cover ceiling?

DR. WEINTRAUB: Because that would change the

deposit to currency ratio. I have a formula which adjusts the

maximum allowable currency growth for changes in that ratio.

So if the public demands more currency relative to

deposits, then the Federal Reserve can supply it. There is an

adjustment. That would of course keep still the money growth,

the total of currency and other exchange media, within the

desired limit.

The partitioning as between checkable deposits on

the one hand and currency on the other could be anything that

the public desired.

GOVERNOR RICE: I'll have to study your proposal.

DR. WEINTRAUB: I would be very happy to come and

see you sometime and try to explain it at greater length if

you would like, Governor.

GOVERNOR RICE: I might have to ask you to do that.

DR. WEINTRAUB: Thank you.

GOVERNOR RICE: Professor Holtzer, do you favor

returning to the gold standard at the present time, given our

present statism as you call it?

DR. HOLTZER: To the extent, Governor, that doing

so would invoke or necessitate an act of government, as indeed

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it would, I would have the reservations I have expressed here

earlier today more than once.

A slightly fuller answer, I think is in order.

I think a return to gold can be facilitated by government

while in the process of getting old of the gold, money, et

cetera business, by allowing or recognizing the right of

individuals to deal in gold in some kind of a monetary unit.

There are some bills in Congress, I understand, now

to that effect. I think a gold standard is better than a non-

gold standard. I think a gold standard is better than un-

backed, fiat, monopoly, funny money.

My reservations, each time I say that, cause me to

say instantly thereafter that if it's government that "allows

it", makes it possible, does it, et cetera, it's usually a

short term solution.

I am for a gold standard if that is what evolves

in the free market. If the government can facilitate that by

withdrawing as in retreat on a battlefield, I would be

delighted. So, it's difficult for me to give you a yes or no

answer.

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If I say yes, I am in favor of returning to a gold

standard, there are too many governmental implications in that

If I say no, it's at risk of indicating I don't believe that

the free market would choose gold -- as I do, by the way.

So, if we can work it out somehow that the free

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market can and will adopt gold and government will act in a
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sense of benign neglect, I would be delighted. I would give

government no other role other than that.
Government, after all, has tinkered, in my view,
long enough. I believe, in other words, in the complete
separation of government and money, which I know is a
heretical thing to say — probably here, certainly in this

city, let alone to governors of the Federal Reserve System.
I don't believe that government ought to have any

role whatever regarding the subject of money. It's none of

government's business — money. Money is to facilitate

private, voluntary transactions between free people.

Once you've said that, you've damn near excluded

any reference justifiably to government at all. Thank you for

asking me that question.

GOVERNOR RICE: Thank you.
SECRETARY REGAN:

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Governor

Wallich?
GOVERNOR WALLICH: Mr. Chairman, I would ask

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Thank you, Governor.

Mr. Aliber.

Would you have any guess as to what would be the

effect on the private demand for gold in the world of a

return to some fixed price of gold by the U.S.?

DR. ALIBER: It would be helpful if you tell me

whether we're going to return to gold at the price of $200

an ounce or $800 an ounce and relate that to the then

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anticipated price level.

GOVERNOR WALLICH:

My presumption would be that if

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this were done, it would be done somewhere in the neighborhood
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of the price that would have developed in the market as the
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time approached.
What I am concerned with is many people hold gold
because they expect a rate of return on it, and some only for
diversification. If that rate of return is credibly removed
by fixing a dollar price for gold that lasts into the indefinite future, do you foresee heavy unloading of gold by those
holders?
DR. ALIBER: There is one practical aspect of the
gold fixing.and of fixing the gold parity. If it were fixed
tomorrow, one would have to come in slightly above the market
price so that the Secretary would not be embarrassed by
having to sell a lot of gold immediately.
If the gold parity were $450 an ounce and given the
price level expectations the U.S. government would end up
buying a tremendous amount of gold, just a tremendous amount
of gold.
That's because we would have, for awhile at least,
find that the rate of return on U.S. government securities is
substantially higher than the rate of return on gold.
Now, what's the volume? Well, in the six year
period from 1934 to 1939, our gold holdings more than doubled.

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One could easily imagine that the market value of U.S. gold

holdings would increase by tens and even hundreds of billions

of dollars if one came back into gold at the current price.

GOVERNOR WALLICH: Is it your understanding of

what is commonly meant by the gold standard that then the mone^

supply would have to be allowed to rise? In other words,

if the gold stock should determine the money supply?

DR. ALIBER: I think that if one asked the man

in the street what do we mean by the gold standard, he would

come up with three answers. There's a fixed price. There's

convertibility and in flows and out flows of gold affect the

money supply.

So, tying this into the previous question, the

paradox is, the irony is, that the people who view gold as

being a way toward price stability would, under this scenario,

subject the U.S. to a very sharp increase in the money supply

and to a sharp increase in the U.S. price level.

We have a wonderful analogy. It is Spanish gold

and the impact of Spanish gold on Europe in the 16th Century.
GOVERNOR WALLICH:

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Mr, Racz?
MR. RACZ:

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Could I address a question to

Yes, sir.

GOVERNOR WALLICH: You seem to be familiar with

data. Do you have an estimate as to the share and total gold

supply in the world that is held by private non-official
holders?

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• MR. RACZ:

Yes.

Approximately one million ounces,

It's about 50 percent held by central banks, 25 percent by
various other agencies and 75 percent private. I have the
numbers here.
GOVERNOR WALLICH:
6

holdings are a larger part of the total?

MR. RACZ: I think it's about 75 percent. Now, may

I answer your previous question which ties together? One of

the factors which makes this world very unstable is that one

million barrels of oil, let's say, at $30, is roughly

equivalent to an annual income of about $10 billion.

Now, if we assume that in the 1980's, the big oil

boom is over, you can always assume that the Persian countries

which are now in the process of acquiring assets other than

oil — which is natural for them. They could acquire a

tremendous amount of American government gold if we opened

the market
Consequently, I am not in favor of Treasury

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selling any gold whatsoever except for strategic purposes.

I think if we open American gold for central bank transaction

or if we open it up to American citizens or directly to other

citizens, I think it would lead to a tremendous national

tragedy. There are consequences that today we cannot

foresee.

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In other words, the private

Just as it has become clear in the last few years

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that we need an energy independence, I would say that we need

a monetary independence.

If we consider gold as a reserve asset, as I do,

we need independence from any eventuality.

GOVERNOR WALLICH: Could I just ask you a couple of

specific points on your bond proposal?

MR. RACZ: Yes, sir.

GOVERNOR WALLICH: Are you familiar with the gold

convertible bonds issued by the French government?

MR. RACZ: Yes, sir, and I think it was very badly

constructed. It was a bad investment. That's all.

GOVERNOR WALLICH: Let me ask you then, if instead

of making such a bond convertible at a price somewhat above

the market, that you make it convertible at the present market

price at the times the bonds were issued.

MR. RACZ: Yes.

GOVERNOR WALLICH: Would you need any interest to

be paid on that at all or more than a nominal amount of

interest?

MR. RACZ: The issue would sell out in two seconds.

GOVERNOR WALLICH: So, essentially, it's the

appreciation of the gold and not the gold backing of the bond

that provides the equivalent of interest?

MR. RACZ: Yes. It would be selling very well. The

interest savings would be more. They would be larger. We

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would be achieving our immediate purpose better.
GOVERNOR WALLICH: Would the existence of such a
gold bond issued presumably by the U.S. government have any
influence on interest rates on non-gold bonds issued by
corporations?
MR. RACZ: In terms of comparison, we have now a
case in point. When the Treasury has to — I think 15 percent
8

of our expenditure is servicing the national debt. When we
look at 1982, which is a critical year, I think we have to use

what you call surgical steps.

If we can lower interest rates and we liberate

money, for instance, which is tied up in money market funds

et cetera, we could have an invigorating economic recovery

which would create the tax revenues.

I am talking of a practical program for 1982.

However, sir, I have also proposed that there should be a

series of gold and silver backed bonds. Today, I would be

concentrating on what would knock down the interest rates

fastest and what would prove American monetary supremacy

easiest.
GOVERNOR WALLICH:

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Okay.

Do I have time for

another?

SECRETARY REGAN:

GOVERNOR WALLICH: All right. Thank you.

SECRETARY REGAN: Dr. Weidenbaum?

I'm afraid not, Governor

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DR. WEIDENBAUM:

who raises the important subject of sanctions to enforce

rules, whether they are monetary rules or gold rules under

the jurisdiction of this Committee.

You cite the public debt ceiling. Although I must

say that gives me a rare opportunity to correct my good

friend. The sanctions there are powerful. On rare occasion,

when Congress hasn't increased the debt limit, the result has

been awesome.

As a result, if you look at the operation of the

debt ceiling, you don't find appropriations cancelled in order

to stay within the debt limit. You find that the rule itself

is constantly amended.

DR. MELTZER: Correct.

DR. WEIDENBAUM: Hence, my question is does the

role of sanctions vis-a-vis adaptation of the rules in the

case that you raised in your testimony bring to mind any

application to the current deliberations of the Commission

whether it be on a monetary rule or a gold rule? The subject

of sanctions, enforcement and hence the feedback on the rule

itself.
DR. MELTZER:

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I have a question for Dr. Meltzer

Yes.

Well, you are correct in what

you say.

That is that the debt ceiling rule does have a

sanction. We are never willing to exercise the sanction. So

in fact, the expectation is the next time we hit the debt

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ceiling, we will not exercise the sanction again.

the case, I think, more properly and you're correct in calling

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it to my attention.
What we have is really an ex post sanction. After

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we have taken the action, we come up against the problem.
Then we have to decide what to do.

Sometimes, the easiest

thing to do is to remove the restriction by raising the debt

ceiling.

Perhaps a better way to state my point would be to

say that we need to have some kind of a sanction which would

be more likely to be binding such as, under the gold standard

to take an example.

Under the proposal that I made a moment ago where

we had a monetary rule and people have the right to buy gold,

the sanction would be that they would begin to drain the gold

out of the Treasury.

The Treasury would see that.

It would either have

to take action or it would have to do something.

gold would be free to rise.

incentive as well as provide a check on the rate at which

they would do it.

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That's

The price of

That would give people some

So, that would be a rule which would work and the

sanction would be self-enforcing.

A sanction which said

that when we came to the point where we reached the monetary

rule, the governors of the Federal Reserve System would have

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to resign. That would be to some extent a self policing

sanction. At least we would have the opportunity of getting

new people who might try to remain within the system.

I think that that's quite proper. What you're

pointing out is that it isn't a matter of whether we have the

sanction or whether we don't, but whether the sanction is a

self-enforcing sanction or whether it's something that requires;

us to make a decision at the time where the most pallatable

decision may be to remove the gold clause or to raise the

debt ceiling or something of that kind.

I think that's an important matter which should be

brought. That is, any system which we're going to come to, if

it's going to be effective, it must have a sanction. The only

way in which we can get the system to work is to recognize

that there has to be some constraint on the behavior which

makes it worthwhile for the people operating the system to

believe that it's in their interests to get the system to work

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DR. WEIDENBAUM:

Thank you, Mr

Chairman.

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Thank you.

DR. WEINTRAUB:

Could I make a comment on that,

if I might?

SECRETARY REGAN: Go ahead.

DR. WEINTRAUB: On the debt ceiling, it occurred

to me as I was listening to the dialog that we all know now

that the debt ceiling limit is going to have to be raised in

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the future.

There isn't any question about that.

It's just

a question of when.

Therefore, there is no possibility of enforcing it

the way we now put it up. I would make the strong suggestion

that what we do with the debt ceiling is to put it at a level

like one and a half trillion dollars, effective, let us say,

in 1986. Then that might be enforceable.

DR. WEIDENBAUM: Dr. Weintraub, the reason I

raised the point is that it had occurred to me that under the

proposal that you've been suggesting, a comparable situation

might occur with comparable results.

DR. WEINTRAUB: It's not quite the same. There

might be a period in the future when you'd want to have

faster money growth than I envision us wanting now. I think

that as a result of that, I have proposed that the Congress

review the lid every four or five years.

I think that's a sensible thing. It isn't quite

the same thing where you know right now that the debt ceiling

is going to be breached — the one that's in place. I mean,

there's not a slightest possibility that Congress isn't going

to have to raise that limit some time in the future. It's not

an effective discipline as a result.

SECRETARY REGAN: Congressman Wylie?

CONGRESSMAN WYLIE: Thank you, Mr. Chairman. I

want to commend the panel for taking their valuable time to

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think we can accomplish very much if I've interpreted what

you've said correctly.

That may not necessarily be bad. May I say, Mr.

Chairman, that I had the pleasure of moderating a panel at

Ohio State University on monetary policy of which Dr. Meltzer

was a member.

I know that you have some very definite views,

Dr. Meltzer, on monetary policy vis-a-vis inflation. I

wonder if you'd be willing to submit for the record your

latest opinion on controlling monetary supply.

I don't think you can get into that in any depth

here, but one of the reasons that we're talking of going to

the gold standard here this morning is to control the money

supply. I wonder if you might do that for me, at least for

the record,

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come here this morning, even to tell us that you don't

DR. MELTZER:

May I just clarify?

You'd like me

to state in general statement, not about the current policy,

but about the general problem? Or would you like a statement

about the record of the last several years or both?

CONGRESSMAN WYLIE: I'd like to have your view of

what you think is the best way to control money supply

vis-a-vis inflation. I know, in moderating a panel, that you

didn't think the present policy was all that good and you had

some definite suggestions.

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I wondered if there were some modifications since

the time that we had the panel on this.

DR. MELTZER: I'd be pleased to do that.

CONGRESSMAN WYLIE: Dr. Weintraub, last month,

I remember you agreed with Governor Wallich when he said that

your plan for backing Federal Reserve notes with gold could

just as easily be used to control the growth of Federal Reserve

notes by tying the notes to some other commodity.

I think Governor Wallich mentioned the possibility

of including paperclips in that, a percentage of paperclips

in jest of course. But I have the feeling, if you might

allow me to make this observation, that you're groping.

I think you are groping rather constructively,

I might say, to find a useful function or any useful function

for our 264,000,000 ounces of gold.

I make the same observation with Mr. Racz and his

statement in that he says let us activate gold. Gold is an

active reserve currency, an active monetary asset, an active

American asset.

What's wrong with the reasoning that says times are

so uncertain, why not just keep gold in stock because of the

uncertain future?

DR. WEINTRAUB: Of course, my plan would keep it

in stock for quite awhile, until at minimum the official price

equalled the market price which I think would take about eight

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years.

At that time, we might want to consider taking it out

of stock. At that time, I believe if my plan were implemented

or something similar to it, times would not be quite as

uncertain as they are now.

We would have resolved the monetary instability

problem. So I would say there is nothing wrong with keeping

it in stock. In fact, I would propose that we do that right

now, that we do keep it in stock until such time as the

official price equals the market price and until such time

as the rate of inflation is zero or very close to it.

CONGRESSMAN WYLIE: Mr. Racz, you mentioned on

page seven that you are in favor of a gold backed bond, a

freedom bond you call it, which this government can offer to

all of the American banks which are currently stocked with

uncollectible debts from Eastern European countries.

In exchange for the unsound of paper of Poland,

Romania, East Germany and Hungary, the banks would be

offered the opportunity to pass these dead assets on.
How does that involve the American who wants to

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own gold?
MR. RACZ:

I suggested gold backed bonds which we

have discussed.

To your previous question, I am in favor of

increasing our national amount of gold.

The second thing I suggested, for 25 billion, is

to take out all American banks who lend money to Eastern

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European countries thereby making them indebted to the

Treasury. I would want to use it as a leverage to negotiate

and conduct international negotiations using American

monetary supremacy as a weapon as opposed to engaging in a

$4 trillion defense expenditure.

CONGRESSMAN WYLIE: How does that fit into

convertability of gold for the U.S. citizen?

MR. RACZ: I presume gold is the catalyst. The

Gold Commission, which I commend, highlight that we have a

national asset which we haven't been using. By using this

national asset and using our tremendous monetary power, our

economic power, we can float gold backed bonds.

We can lower interest rates and at the same time,

by a different kind of Treasury bonds, nonmarketable bonds

made possible by the drop in interest rates. We can actually

put ourselves in the position where we can use the defense

expenditure.

I'm. putting forward a practical policy. It may

take several steps. Let us say that there is a monetary

crisis in the world but America is the strongest. One of

the assets which makes us strong besides the strengths of

the economy, et cetera, is gold.

CONGRESSMAN WYLIE: I'll read that when I look at

the record again. Dr. Aliber, you said that you think there

is a proper question here as to how do we fix the new price

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of gold.

That's been a problem for me.

If we set it between

$120 and $180 an ounce, there would be a deflationary impact,

I think you said. If we set it at the current market rate

which is about $450 to $500 an ounce, it would have an

inflationary impact.

What about setting the price somewhere in between

$180 and $450, which would be about $350 an ounce?

DR. ALIBER: Let me go back to my Rip Van Winkle

story. The gold price was right in 1955 and if there is a

historical relationship between the monetary price of gold or

the price at which we set the parity and the price level,

then the current price of gold should be something in the

order of $140 or $150.

If we pick a higher price, then we're making one of

two statements. Then we are saying that there is no stable

relationship between the world commodity price level and the

price of gold -- in which case the whole argument for a gold

standard evaporates.

Alternatively, we are saying we believe there is

a stable relationship and we are willing to accept the

inflationary consequences of pegging to gold at a price

substantially higher than the price that we infer from the

Rip Van Winkle story.

$300 an ounce, on the basis of the historical

data, is simply much too high.

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Thank you.

SECRETARY REGAN: Thank you, Congressman Wylie.

Dr. Schwartz, I understand that you have not asked the

witnesses any questions. Would you like to?

DR. SCHWARTZ: Let me just ask Dr. Aliber, is your

interest in having gold assets revalued strictly so that they

would be useful for purposes of intervention in the exchange

markets? Is that what I heard you say?

PR. ALIBER: I presume there will be many times

in the near and distant future in which the U.S. Treasury

will find its interests served in terms of buying and selling

gold in the foreign central bank.

It will be inconvenient to do so if we retained an

obsolete parity set in 1973.

DR. SCHWARTZ: But the purpose would be for

affecting the exchange rate of the dollar or some other

commodity?

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CONGRESSMAN WYLIE:

DR. ALIBER:

No.

I think we or other countries

will want to intervene in the foreign exchange market. To

finance that intervention, we can obtain foreign currencies

by selling gold to the foreign central bank; yes.

DR. SCHWARTZ: But if one were more or less a

confirmed believer that government intervention in the

foreign exchange markets is costly and ineffectual, how would

you answer that?

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DR. ALIBER:

Then I would suggest that those

confirmed believers look at the evidence of the exchange

rates in the last two or three years.

Changes in the exchange rates bear no relationship

to what has been happening to contemporary relationships

between our price levels and foreign price levels.

We have seen the real price of the dollar change

by as much as 40 percent in a three-year period. That is a

tremendous shock that the adherence to that belief is imposing

on the American economy.

To go from a highly undervalued dollar in 19 77 and

1978 to a highly overvalued dollar in 1981 — no economic

purpose is served by such tremendous changes in real exchange

rates.

DR. SCHWARTZ: But the question is whether inter-

vention actually achieves the aims that it supposedly has?

Apparently, from the research I've seen on the question, all

that it does is cost the taxpayer money.

Let me not pursue that question any further. I

just wanted to assure myself of what your purpose was in

arguing for a revaluation of gold.

Professor Holtzer, can you cite an example any time

in history of a government that has not exercised sovereignty

over the national money supply?

DR. HOLTZER: I wish I could. We came close in

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1787, Dr. Schwartz, when the monetary powers were delegated by

the people or their delegates to the federal government.

Now, I suggest to you that proof that something

went awry is found in the discussion today here, measured

against the power to coin money and regulate the value

thereof.

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been made is that all governments prior to 1787 throughout

the world were one form or another of sovereignties,

despotisms, dictatorships, totalitarian states.

The United States of America was generous. It was

the first time anybody had tried to create a free country

from the bottom up. When that free country was created, the

notion of sovereignty was explicitly rejected in several

respects as the debates in the history of that time make

very clear.

What we have now is sovereignty over money.

DR. SCHWARTZ: Yes. I've read those chapters in

your book. As you make clear, in the big debate between

Jefferson and Hamilton, what was at stake was whether the

states would be controlling the money supply or the federal

government, neither —•

DR. HOLTZER: Yes.

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I would add further that the fatal mistake that's

DR. SCHWARTZ:
interference

-- of whom abjured governmental

lib
DR. HOLTZER:

You are quite right.

I referred to

them as statists.
DR. SCHWARTZ:
4

As I say, I don't see where you find

in the American experience, support for your view that
something went awry.
DR. HOLTZER: I told you amount ago. In the first
place, Hamilton and Jefferson were subsequent to the

Constitution.

If you begin with the debates, as I'm sure you

have and I know your familiarity with the subject, it's quite
10

clear that a paper money, government power of money issued

existed at the Convention.

It was resolved by giving the government few

powers. So, I would ask either rhetorically or otherwise, as

it suits you, what happened from the power to coin money,

regulate the value, to M-l and M-l-B and the Federal Reserve

System and this huge, barnacled super structure that we've got

now over what started out to be the power to coin money and

regulate its value?

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DR. SCHWARTZ:

Yes.

The economy has become more

complicated.
DR. HOLTZER:

And so has the power of government

become more powerful.

DR. SCHWARTZ: What I would like to know is what

kind of transition period you visualize?

DR. HOLTZER: You are asking me how I would

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unscramble an omelet.
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DR. SCHWARTZ:

Yes.

DR. HOLTZER: I wish that there were some serious
measure of interest down here to pursue that. I think indeed
that's what a Commission ought to be appointed to do.
My answer, in principle, is this. A gradual withdrawal of the federal government from money and monetary

power. You could start where you like. Perhaps the first
thing we'd do is abolish the Federal Reserve System.

10 Maybe we would allow private coinage of monies.
11 There is a bill in the hopper now, I understand. Maybe we
12 could Constitutionalize somehow the right to own gold and to
13 use gold clauses and that kind of thing so as to insulate it
14 from the next New Deal that comes down the line that wants to
15 tinker with it.
16 There are.a lot of ways to start.
17 DR. SCHWARTZ: I can think of one way the Treasury
18 tried to get out of the private money market, by establishing
19 its own Treasury —• I've forgotten the technical term that
20 was used. In 1846, when the Treasury established the Treasury
21 Independent Bank.
22 DR. HOLTZER: It was the Treasury that established
23 it. That's one of the problems. What the government giveth,
24 the government can take away.
25 DR. SCHWARTZ: The Treasury, unfortunately, is

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taxes and spending them.

There is just no way, it seems to me, to insulate

the Treasury from what is going on in the monetary economy.

Let me stop there.

Professor Meltzer, I want to ask you one question

that has arisen in the proceedings of the Commission. Can you

visualize the domestic gold convertibility with a floating

exchange rate system?

DR. MELTZER: Domestic gold convertibility with a

floating exchange rate. Let's be clear. Individuals would be

free to go to the Treasury and buy gold at whatever the

market price of gold would be?

DR. SCHWARTZ: No, no. It would be some kind of

fixed price for gold domestically. It would not be a floating

rate system of gold within the — It would be true convertibi-

lity.

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going to be dealing with money if it's only collecting your

DR. MELTZER:

That is internally, we would have in

a sense, a gold convertible standard.

Externally, we would

have a floating exchange rate?

DR. SCHWARTZ: Right.

DR. MELTZER: I find it difficult to see how that

system could work for very long periods of time at a fixed

price of gold. The reason being, of course, that, as I think

you and other members of the Commission well know, there would

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substantial changes in the value of the currency relative to

gold that would be occurring in the world market.

That would produce substantial changes in the

amount of money in the system. It would make the U.S.

monetary system rather more unstable than it is now.

DR. ALIBER: Might I just answer that question?

It's really a very easy answer to that question in the techni-

cal sense. It really is a Canadian decision.

For example, there is the choice of the Bank of

Canada or the Canadian government, to either peg to the U.S.

dollar under that arrangement or to permit the Canadian

dollar to float. So, it is possible to have it both ways.

We will find that some countries, under the arrange

ment you stipulate, will continue to permit their currencies

to float relative to the U.S. dollar while other countries

will peg to the U.S. dollar or peg to gold or the parity

commensurate with that of the U.S. gold.

DR. MELTZER: Or change their minds from time to

time as to which one of those things they would want to do.

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DR. SCHWARTZ:

Also, convertibility to their

domestic

—

DR. ALIBER: Again, they can have it either way,

The French can offer convertibility to their domestic

residents while the French franc floats. In terms of the

dollar, the Canadian can deny domestic convertibility to

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their residents while they peg the Canadian dollar to the
U.S. dollar.
SECRETARY REGAN: Mr. Costamagna?
MR. COSTAMAGNA: With the nonfixed price of gold
domestic?
DR. MELTZER: No, I see no reason why we should
abjure that. I said if the removal of the taxes on sales
taxes, not capital gains taxes. But the sales taxes on gold
at the state level — I would like to have a monetary rule.
I think that would be a perfectly appropriate

thing with the right of individuals to convert dollars to

gold at the current world price of gold, which would be a

floating price of gold with a floating exchange rate.

That would just be giving the American public the

right to buy gold from the Treasury instead of buying it from

the marketplace.

SECRETARY REGAN: Mr. Racz, do you have a final

comment?

MR. RACZ: In 1971, the Republican Administration

called it the gold window. We opened this gold window today,

it would lead to a national tragedy. We would give up our

national assets in a period of monetary, economic and

military circumstances are totally unforeseeable for the next

two, three, five, ten years.

It would be one of the greatest tragedies in

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American history.
SECRETARY REGAN:

Thank you, Gentlemen.

appreciate the work that the panel has put into their

appearance here this morning and the patience they've exhibited

while answering the questions from the members of the

Commission.

I think . you are to be commended for your work and

you can rest assured that all of your work and your answers

will appear in the record.

This meeting is adjourned. The next meeting of

the Commission will be at 2:00 o'clock this afternoon right

here with another panel.

(Whereupon, the Gold Commission panel meeting was

adjourned, to reconvene at 2:00 p.m. at the same location, as

described above.)

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I really

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A F T E R N O O N

S E S S I O N
(2:00 p.m.)

SECRETARY REGAN:

I think we should get going here.
«

I'd like to welcome the members of the panel here, Mr. Ralph

Banko, Mr. Edward Bernstein, David Bostian, Dr. Kenan,
Dr. Rothbard — where is Dr. Rothbard? Is he coming in
late — great, and Dr. Solomon.
Well, if I might lay out a few ground rules here.
8 Each of you gentlemen, in alphabetical order, should make
your opening statement and then members of the Commission
10 will question you, again, in alphabetical order,
11 It's my understanding that some of the members of
12 the Commission have to attend a memorial service. We'll
13 miss those members.
14 And it is my intention, if at all possible, to
15 close this hearing around 4:00 o'clock or in through there,
16 if at all possible.
17 So, with that, Mr. Benko, do you want to start,
18 Dlease.
STATEMENT OF MR. RALPH BENKO
MR. BENKO: Before beginning the paper proper,

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there's one or two minor housekeeping details I'd like to

mention.

I've taken the liberty of sending away for copies

of Dr. Melchior palyi's book, The Twilight of Gold, for each

member of the Gold Commission, paid for out of my own

depreciating dollars, for which I will not submit a

122
reimbursement claim, because my present to the Commissioners I especially commend Dr. Schwartz to the volume since he
analyzes and exposes what he considers to be some flaws in
Dr. Freedman's analysis of the monetary history of the
United States.
I hope it's a volume of interest to the
Commission, although it doesn't bear directly on my testimony.
8
9

The next item is -- you heard, this morning,
from Dr. Holtzer, who is a prominent libertarian thinker and

he cited some of the same authorities that I will, but I am

just an average, garden variety member of what I am told is

a dying breed —

13
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15

I'm a Democrat —

I hope it's not so.

But, although we sometimes use the same
authorities, I think we draw substantially conclusions,
• Finally, the full paper has been submitted for

the record. It's about 30 pages long.

minutes of exerpts that I will read orally for the

Commission.

I have about 10

But I would request that the Commissioners would

at least glance at the full paper, because it's hard to

compress the argument into 10 minutes

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Whether to return to the Gold Standard is as much
a political question as an economic one.

relevant to examine the thoughts of the greatest of
American political intellects on this topic.

5
6

It is therefore

19 81 is not the first debate on the merits of
a precious metal currency versus paper money.

The .most

important debate on this topic in our history was during

the Constitutional Convention.

delegates took up the question of whether to give Congress

On August 16, 1787, the

the power to issue paper money.

The Articles of Confederation, Article 9,

Paragraph 5, had set forth that the United States and

Congress assembled shall have authority to borry money or

emit

bills on the credit of the United States.

Under the power to emit bills, Congress had

issued paper money which experienced severe depreciation

causing general inflation.

What is now Article 1, Section 8, Clause 2, of the

Constitution, the original draft gave Congress the power to

borrow money and emit bills on the credit of the United

States.

Convention debate over this language, that is to

say the language over to emit bills, is notable mainly for

the vehemence with which the vast majority of delegates

opposed this as a power to issue paper money.

The Convention

124
voted overwhelmingly against the power.
Whether the Convention voted to bar the power to
issue unbacked paper money absolutely and in all events or
to borrow except for in extreme emergencies, there is no
serious question but that they did bar it or thought they
6 had.
Absolute prohibition was urged by Oliver Ellsworth,
8 later second Chief Justice of the U. S. Supreme Court and
Senator who decisively shaped the Federal Judiciary.
10 The Record states: Mr. Ellsworth thought this
11 a favorable moment to shut and bar the door against paper
12

money.

The mischiefs of the various experiments which had

13 been made were now fresh in the public mind and had excited
14 the disgust of all the respectable part of America.
15

By withholding the power from the new government

16 more friends of influence would be gained to it than by
17

almost anything else.

18 Paper money can in now case be necessary. Give
the
19 government credit and other resources will offer. The
20

power may do harm, never good.

21 reservation of an emergency power was urged
The
22

by James Madison, chief architect of the Constitution, author

23 the Bill of Rights, 4th U. S. President.
of
24 journal of the proceedings, which was Madison's
he
Trt-i

own records:

This vote to bar the oower in the affirmative

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by Virginia was occasioned by the acquiescence of
2

Mr. Madison who became .satisfied that striking out the

words would not disable the Government from use of public

notes as far as they could be safe and proper, and would only

cut off the pretext for a paper currency and particularly

for making the bills a tender either for public or private
deb ts.

The motion to strike Congress * proposed power to
issue unbacked paper money was carried, nine states, aye;

10
11

two, no.
Please contrast Madison's throughts to the legend

on our Federal Reserve Notes today, "Legal tender for all

debts public and private."

Among other implacable foes of paner money was

Alexander Hamilton, our first Secretary of the Troasury, who

historians conclude in economic terms literally built the

United States.

"Paper money," he said, "is so certain of being

abused that the wisdom of the Government will be shown in

never trusting itself with the use of so seducing and

dangerous and expedient."

Chief Justice John Marshall also condemned paper

money as did all the great members of the Revolutionary

Generation, our founding fathers.

Marshall said of paper money, "It's value is

continually changing.

126
And these changes, often great and

sudden, expose individuals to immense loss or the sources
ruinous speculation and destroy and confidence between man
and man."
All of the great minds agreed in this. It was not
until the Civil War and Reconstruction, our greatest
Constitutional crisis, that later generations undermined
their good work.
Even the politicians of the late 19th Century
dared not stray from the gold standard for long. The gold
standard is the only one able enough to support the immense
dynamism of an industrial or post-industrial economy. Our
institutions change, but the human mind our institutions
serve ar changeless.
Unless one is ready to hold the First Amendment
or representative democracy out of date, the ideas of
Madison and his peers cannot be dismissed as inapplicable
to today's conditions.
Since the other political institutions these men
built for us continue to serve so well, we should not so
casually dismiss the gold standard as a product of another
age.
Madison's ideas are very modern. In one of his
lesser known works entitled "Money," he examines the
defects of monetarism. Monetarism is no new invention. In

127
the 18th Century, it was asserted by Hume and Montesquieu.
Madison was aware of its claims and calmly set forth the
sounder classical doctrine.
"Inflation," wrote Maidson in 1780, "has not been
the effect of the quantity, considered in itself, but
6 considered as an omen of public bankruptcy." He presents
telling arguments to prove tljis case.
8 The Constitutional history of the requirements that
U. S. currency be backed by precious metals is best summed
10 up in the legal opinion of U. S. Supreme Court Justice
11 Steven Field in the case of Julliard v Greeman, dissenting.
If
12 you care to follow along, this is on Page 20
13 of the full testimony:
14 "If there be anything in the history of the
15 Constitution which can be established in moral certainty it
16 is the framers of that instrument intended to prohibit the
17 issue of legal tender notes both by the general government
18 and by the state and thus prevent interference with the
19 contra,ts of private parties.
It would be difficult to believe, even in the
20
21

absence of the historical evidence we have on the subject,

that the framers of the Constitution, profoundly impressed

by the evils resulting from this kind of legislation, ever

intended that the new government, ordained to establish

justice, should possess the oower of making its bills a legal

128
tender,-which they were unwilling should remain with the
states, and which in the past had proved so dangerous to the
peace of the community, so disturbing to the business of the
people, and so destructive of their morality.
The great historian of our country has recently given to
6

the world a history of the Convention, the result of years
of labot in the examination of all public documents

relating to its formation and of the recorded opinions of
its framers; and thus he writes:

'With the full recollection of the need or seeming need

of paper money in the Revolution, with the menace of danger

in future time of war from its prohibition, authority to

issue bills of cred that should be legal tender was

refused to the General Government by the vote of nine states

against New Jersey and Maryland.

the vote of Virgini, and he has left his testimony that

the pretext for paper currency, and particularly for making

the bills a tender, either for public or private debts, was

cut off.

the time of its adoption, alike by its authors and by its

opponents, accepted by all the statesmen of that age, not

open to dispute because too clear for argument, and never

disputed so long as any one man who took part in the framing

of the Constitution remained alive. History cannot name a

man who has gained enduring honor by causing the issue of

It was Madison who decided

This is the interpretation of the clause made at

±z
paper money.

Wherever such paper has been employed it has

in every case thrown upon its authors the burden of
exculpation under the plea of pressing necessity.
And when the Convention came to the prohibition
upon the states, the historian says that the clause, 'No
state shall make anything but gold and silver a tender in
payment of debts,' was accepted without a dissentient state.
'So the adoption of the Constitution,' he adds,
'is to be the end forever of paper money, whether issued
by the several state or by the United States, if the
Constitution shall be rightly interpreted and honestly
obeyed.'"
Gentlemen of the Gold Commission, recorded
thoughts of our greatest scholars, judges and statesmen
established beyond doubt the intellectual legitimacy of the
gold standard.
Let us not fear to end the most recent discredited
experiment with paper money.
SECRETARY REGAN: Thank you, Mr. Benko.
Dr. Bernstein?
STATEMENT OF DR. BERNSTEIN
DR. BERNSTEIN: The function of the monetary
system is to regulate the production, distribution and
23

utlization of the national income.

24 To perform this function, the monetary should
25 facilitate a fairly steady growth of output at a reasonably

130
stable level of prices.

It's by this test that we should

judge the gold standard in a classical period and it's by
this test you should judge proposals for restoring the
gold standard.
The period of the gold standard in its classical —
6

or greatness —

from, say, 1873 to 1914, was a period of

considerable instability of prices.

The hardship that was

caused by the decline in prices in the last quarter of the

19th Century can only be exceeded by the Great Depression.

We have underestimated this.

It's not —

it's

good evidence of the —

seriousness of this problem that the British Government

appointed two Royal Commissions, a Royal Commission on

the depression of trade and industry in 1886 and another

Royal Commission on the value of gold and silver in 18 37.

of contemporary views of the

People are not aware —

or most people are not

aware that the theory that there was a relationship between

the behavior of prices and interest rates was first

propounded by a Professor Fisher to explain the low

interest rates of the 1880's during the deflation of that

period.

22 On Page 2 of the paper I have submitted to you, I
23

have reproduced the table on business cycle expansions and

contractions in the United States prepared by the National

Bureau of Economic Research.

13U
The bottom table —

the bottom part of the

table — the averages are nine rather than the original
table.
But you'll notice that from 1854 to 1914 the
average duration of a contraction was 22 months. The
average duration of an expansion was 25 months. Contrast
that with what has happened since, say, 194 5.
8 The average duration of a contraction is 10 months,
the average duration of an expansion is 49 months.
10 I think we can say that is, in effect, the
11 consequence of first having the rigidity of the gold
12 standard and the second, having the greater flexibility
13 although retaining some of the features of the gold
14 standard.
15 Now, why do prices rise and fall over long
16 periods of 20 and 30 years during this period? Professor
17 Castle has said it was due to the fact that the growth of
18 the gold stock, the monetary gold stock, was very irregular.
He
19 pointed out that the price level in the United
Kingdom
in 1850 and 1910 were much the same and that he
20
found
that the gross — or the difference between the gold
21
stock
in 1850 and 1910 represented an average annual rate
22
of
23 growth of 3 percent.
He
24 concluded that if the rate of growth had been
regular,
we would have had relatively stable prices in this
25

I3j
period.
Now, of course, the reason why the growth was not
regular was that the production of gold wasn't regular.
On Page 4 of the paper that I have submitted to you
I have plotted the gold production from 1873 to 19 33 because
6

I think that's the true period of the gold standard.

have done that on isoropic (phonetic) lines or logarithmic

scale in which the figures are automatically reduced by

3 percent a year, though you can read the actual figures

And I

from the chart.

I've also published —

put next to it —

charted —

the wholesale price index of the United States for this

period as shown by the Bureau of Labor Statistics.

You can see from this chart that there is a

remarkable pattern of coincidence between the production of

gold relative to a 3 percent rate of growth and the whole-

sale price index of the United States with a lag of a few

years.

The gold standard as it was in the classical

period disappeared in the Great War, 1914, and was really

never restored.

^ e inflation during the war caused every

beligerant to terminate the gold -- the conversion of

currencies into gold.

unanimous agreement that we should all return to the aold

And after the war there was almost

13
standard.

A number of international conferences were held

for this purpose. All of them, however, were somehow
slightly worried about the problem of could the world go back
to gold in the old way.
Now, as a matter of fact, the General Conference
6 instructed the Bank of England to take active steps for
international cooperation on this question.
8 It did not do it, but the Conference in any case
9 recommended returning to the gold standard, but the gold
10 exchange standard.
11 At the same time there was a great deal of fear
12 that there wouldn't be enough gold production to sustain the
13 higher level of prices of the post-war period.
14 And the champion of this view was Professor
15 Castle who pursuaded the League of Nations to appoint a gold
16 commission, a commission of experts on which the United
17 States had John Williams to report on this question of gold
18 in the 1920*s and its outlook for the future.
19 When they published their report — their first
report by 19 31, England was already off the gold standard and
20
we were only two years away.
21
When the Great Depression, which resulted in
22
25 percent unemployment rates in the United States in 19 32 —
23
when the Great Depression was on, there were a good many
24
people who said the way to get out of it is to terminate
25

134
the gold standard or raise the price of gold. As you may
know, two gentlemen from Cornell, Warren and Pearson, were
great champions of the view that if we only put in less gold
in a dollar, or to put it another way, raise the price of
gold, the fall in farm prices would come to an end.
Now, when President Roosevelt came to office and
declared the bank holiday, he really suspended the conversion
of the dollar into gold. The Reconstruction Finance
Corporation was authorized to buy gold at rising prices.
And by 19 —• January 19 34, the President thought we had had
enough correction and he was ready for restoring or
reestablishing the gold standard.
In fact, however, I don't believe that what we
got after 19 34 was really a gold standard in the traditional
sense.
First, we didn't have private conversion of
dollars into gold. We didn't even allow private holdings of
gold.
The Secretary of the Treasury did issue regulations,
he was authorized to do this, allowing foreign central banks
to buy gold from the Treasury for international settlement.
And we did that, as you know — this is a unilateral thing.
It's not in the legislation, it was merely authorized by the
legislation, until it was terminated in August 1971 by the by Secretary Connally

135
The reason I think though that this was not really
a gold standard is deeper than that.

The test of the gold

standard is not merely that you get a piece of gold for your
money, it's also that the monetary authorities are restrained
or limited in the issue of money by the need to keep gold
reserves.
As a practical matter, there was no time after
19 34 when our monetary authorities were willing to allow the
money supply to be limited by the lack of gold reserves.
In 19 45, I appeared with the Secretary of the
Treasury before the Senate to request the Congress to reduce
the reserve requirement of the Federal Reserve to 2 5
percent from 35 and 40 percent against deposits and notes.
In the 1950's we got rid of the requirement on
deposits.

In the 1960's we got rid of the requirement al-

together.
This seems to me to indicate that there really
was no gold standard in that traditional sense.

That is to

say, that the meaning of the standard is that it will limit
the quantity of money.
Now, as a matter of fact, it's hard to blame the
monetary authorities for this.

The biggest period of the

fall in the gold reserves of the United States was from
19 5 8 to 1955, maybe we could have gone a year or two later.
But if you loo?: at Pago 7, there's a table there

136
that shows the balance of payments of the United States,
at least the trade balance, and the balance on current
accounts and the change in gold reserves.
In these eight years, the gold reserves of the
United States fell by 3 8 percent.
6

It was also the period

of the greatest stability of prices, and in the case of the
prices of manufactured goods, or better still, the unit

labor cost in manufacturing actually declined over this
period.

And the price deflator of manufacturing rose at

an average annual rate of one-tenth of one percent.

are more details about that in this paper.

There

Now, in my opinion, the problem of restoring the

gold standard is far more difficult now than it has ever

been.

under which the gold standard worked as it did.

We don't appreciate the very favorable circumstances

We had 100 years of peace in Europe.

There was

only one great war that lasted more than a few years, and

that was our own Civil War.

in the gold standard.

It was an important element

This was a period, too, when budgets were balanced

20
21

everywhere and the concept of having a budget deficit was

fatal to government.

23
24

At least two governments in the United Kingdom were,
in fact

—

or least two Prime Ministers in the United

25
Kingdom,
let's say both Disraeli and — would you believe it

137
slipped my mind — that other great man. They both were
in trouble with their budgets, and Disraeli lost an
election because he couldn't balance the budget, or didn't
balance it.
SECRETARY REGAN: Gladstone?
6 DR. BERNSTEIN: Gladstone, excuse me. Gladstone
actually gave up the job of being Prime Minister rather than
8 approve five million pounds for the —• for a new dred
9 mort (phonetic).
10 This is the sort of budget problems we had in
11 those days. Today —
12 SECRETARY REGAN: Dr. Bernstein, I'll have to
13 limit your oral testimony to about another three minutes,
14 if you would.
15 DR. BERNSTEIN: All right, I'll move right on.
16 Instead of going into the history, I'd like to mention this,
17 I don't think it's feasible to restore the gold standard
18 with conversion of dollars into gold in a world in which a
19 few countries already have a surolus, a current account
20 surplus of $100 billion.
21 They now have to invest this in whatever assets
22 there are available. If they could get gold from the
23 United States for that, they would, in fact, in my opinion,
24 take a great deal of gold if for no other reason than to
25 diversify their assets

138
There's $160 billion of official holdings in the
United States. Many countries that were unable to get gold
before for their dollars would hasten to convert some of
these holdings into gold now.
I would suggest that the greatest danger comes
from the fact that the public is a great buyer of gold and
it would buy infinite quantities from the Treasury if they
8

regarded the price set for a new gold standard as too low.

They will sell their enormous quantities to the

Treasury if it were too high.

I would suggest that there are certain features

of the gold standard that were desirable, for example, the

limitation on the creation of money.

I think the gold standard contributed to stability

through the fixed parities that it created. I think the

gold stardard also imposed discipline— well, so did the

Britain wood system — on countries that were deficit

countries.

I think we ought to look and see all the ways in

which we could get something like this same discipline in the

international monetary system and in our own monetary system

[without the gold standards.

I have a feeling that we can approximate it. And

if we do, if we get the fact of stability of exchange rates -

if we end the inflation, that'll be time enough to consider

139
whether we need a gold standard.
2 SECRETARY REGAN: Thank you very much,
3 Dr. Bernstein. Mr. Bostian?
STATEMENT OF DAVID B. BOSTIAN, JR.
4
MR. BOSTIAN: Mr. Chairman, and members of the
Gold Commission, I'm David Bostian, Bostian Research
6 Associates. We engage in economic and investment research
for a number of institional and corporate clients.
8 I cannot bring to this Commission the illustrious
9 experience of Mr. Bernstein, but we have done a great deal of
10 research, and I'm going to briefly summarize it, though I
11 would ask you to read my entire statement.
12 The major positive statement that can be mgde
13 about a return to th^ gold stan-!ar:1, as well as the existence
14 of these hearings, is that they have a plus *rom the
15 standpoint of reducing inflationary expectations. They're
16 making believe that the government is indeed serious in
17 pursuing this goal.
18 As opposed to the expectational benefits, as I
19 phrase them, there are a number of risks that I find very
difficult
to overlook.
20
Probably
the first, given the world situation
21
that
we have, with massive domestic and international debt
22
structures,
is that it is extremely difficult, without
23
substantial
risk of deflation, to go back immediately to any
24
25

full gold standard.

140
Perhaps a simple and maybe even crude analogy
would get the point across more bluntly: the world economy
as I see it is analagous to a person who has been on drugs
for a substantial period of time. The drugs, of course,
being inflation.
6 You do not take a drug addict away from his drug
without some type of a withdrawal therapy, lest he either
8 die or go beserk. It's a crude analogy, but it does get
the point across. We have to bring inflation down slowly,
10 and a sudden return to the gold standard given the rigidities
11 inherent in it could create immense problems.
12 Secondly, there is a problem of price. I don't
13 know what price gold could be set at which would be the fair
14 or correct or flexible — feasible price. I talked to a
15 lot of our corporate and institutional clients whom I respect
16 in terms of their intelligence and neither do. they know the
17 right price.
18 Thirdly, both the price movement and production of
19 gold has historically been extremely volatile. It bothers
2o me that Russia and South Africa are the two major producers
21 of gold. Both of those regimes are somewhat controversial.
22 MY suspicion is that Russia might even like to
23 see us go back on the gold standard. Certainly, any
24 unilateral move to the gold standard would create immense
25 domestic problems given world volatility.

141
I am also inclined to believe that if we were to
go back to anything approaching a full gold standard that it
would have to be international in scope. I think a unilateral
move — while there are people who argue for it — would be
very difficult to support.
6 Having said those negative assessments, I would
conclude with a positive observation, at least with resepct
8

to the gold standard.

As I stated, there are expectational benefits
10 and a serious discussion of the gold standard.
11 Clearly, if government securities were backed by
12 gold there is a plausible argument that the interest rate on
13 those securities would be substantially less given the
14 trillion dollar national debt and the incredible interest
15 expense. Doing something to decrease that interest expense,
16 even gradually, would be beneficial.
17 I am inclined to suggest that the Commission give
18 serious thought to an experimental issue of a gold backed
19 bond or note, not of major size, but enough to be meaningful
20 and watch very carefully the free market reaction to that
21 particular gold backed note or bond in terms of the yield
22 spreads between it and other non-backed government securities
23 I think that's a way to further the expectational
24 benefits of the exploration of the return to the gold
25 standard without a great deal of risk, and possibly, in

142
terms of those people who advocate i t , see that there may
be more value there than some of us who are skeptical might
think at first glance.
The real question, however, about the whole issue
of a return to the gold standard is the broader question of
6

does the society have the discipline to adhere to any
standard.

Clearly, if we went back to a full gold standard
it would be a risk, and I don't think this Commission is

going to recommend that if the society does not have the

discipline to follow a standard, gold or otherwise, it will

ultimately break down.

The real problem, though . it does not directly

address the gold standard, in my view it is the most important

thing in my paper, is not the gold standard, but the quest

f ° r real long-term economic growth.

standard is not an end in itself, but has some greater

economic purpose.

Any type of monetary

And, clearly, I think, most of us are not satisfied

with the degree with real long-term economic growth we've

gotten during the decade of the 70's.

the

Paper, I discussed the quantity theory

of money or the quantity theory of the economy as the

classical economic theory.

overly simplistic, but in its simplicity, I think it get J at

Some people might view it is

143
the basic problem that we are faced, that this Commission has
to consider, in terms of assessing the importance of a
3

gold standard.
That theory says that the quantity of money times
the velocity equals the quantity of goods and in that

category you can put services times the price.

And most of

the endeavors in this country, in economic circles and in
8

government circles in recent years, has focussed on the less

side of the equation.
Looking at velocity and more importantly at the

10
11

quantity of money and the impact of the Federal deficit and

does that force the Federal Resrve to support deficit

spending and so forth.
These things are important.

I'm not suggesting

that they are not, but the real measure of economic wealth

come from the right side of this equation and that simply

is the quantity of goods and services.
And when we are focussing on a gold standard or

18
19

anything in the area of monetary policy, we are not directly

focussing on the ultimate measures of real economic wealth

which is the quantity of goods and services available in the

country.

You look back at the decade of the '70's and you

will see, for example, that apart from what happened after

'71 in the unilateral ending of our convertibility, i.e., the

144
official end to the gold standard, in President Nixon's new
economics, there were other problems that developed, so you
3

cannot point strictly to that one incident.

Productivity declined throughout the entire
decade.

And, specifically, in late 1973, there was the

OPEC embargo and the substantial multiple increase in the
price of oil.
8

Now, you can argue that would not have happened had

not the world been off the gold standard and dollars debased.

On the other hand it was, as I phrase it

an act of economic warfare, maybe you would call it a

survival act on the part of OPEC.

in the statement,

It caused a great deal of monetarization

of those

prices increases.

Reserve or the Federal Government did through some policy.

That was an exogenous event which caused inflation to

sky rocket.

It was not something that the Federal

One could question what would have happened had

19 we been on the gold standard at that time with the rigidities
20
21

involved in it.
There is a second and even more important point that

I would raise.

I have studied several papers recently which

raise the possibility that it is not the behavior of the

24 monetary authority of the Federal Reserve that really
25

determines the money supply, but it is the price and wage

145
procedure of the public sector that ultimately does i t , i.e.,
the causalities exactly the reverse from what is generally
accepted.
In other words, consumers and businessmen go to
the bank demanding a loan for their —

to support their

economic behavior, whether it be the takeover of an oil
company or to support higher wages in your company, or to
8

buy a home, or what have you, the bank makes the loan and
looks to the Reserve in a secondary fashion.

If this is the case, the monetary standard is not

the real problem.

The real problem is wage and price

behavior on the part of the public, and I'm not in any way

alluding to a suggestion of controls, I'm just trying to

state what I perceive to be perhaps an economic factor.

If you look at these things, you can see that

there are major problems in trying to solve our economic

problems by focussing on the left side of this quantity

theory of money equation.

19
20

My suggestion, and I hate to use a word which is
admittedly overused, is to have an intense focus on producti-

vity, i.e., increasing the quantity of goods and services.

It's not a simple solution to the problem, but I think it is

the only long-run problem.

of the debt-ridden morass that we are involved without

risking substantial deflation and all the attendant economic

I think it is the only way out

146

problems that go with it.
I refer on Page 13 and Page 13(A) to the famous
Laffer-curve. I think Dr. Laffer deserves great credit for
having directed our attention to the importance of incentives.
But I suggest that the heighth of the Laffer curve is
6 probably as important as its shape.
I suggest that in a high technology, highly
8 productive economy, which hopefully will be more so later
in the decade, that revenues will be substantially higher,
10 the Laffer curve would be higher.
11 In an editorial in the

7all Street Journal, not

12 long ago, Dr. Laffer suggested that if we do not return
13 imne liately to a gold standard, that we will risk substantial
panic
and tumult of many types. I am fearful that an
14
immediate
15
return to a gold standard, given all the short
term
16
instabilities attendant to it, that the Laffer curve
17
would
actually shrink in height, i.e., it would be a great
18
deal
of economic trouble, and that the revenues to the
19
government,
given the already swelling deficit, would
shrink
even more and the problem would grow.
20
21 summary, I would say three things. There is
In
22
merit
in discussing return to the gold standard, but we should
go
23 very, very slowly.
24
Secondly,
if we are to return, I think it has to
25 on an international basis and, therefore, a meeting of the
be

147
IMF should, indeed, be convened, admitting all the problems
2 that would be attendant to it, but nonetheless to discuss
3

this seriously in a global framework.

4
And,
thirdly, I would suggest that this
5

Commission recommend in its final paper that a productivity

6 commission or something of that type be established to deal
with the real basis of our long-term economic problems.
8

Thank you.

9 ' SECRETARY REGAN: Thank you, Mr. Bostian. I
10 might add, parenthetically, a productivity commission was
11 named, although it didn't get much publicity, just the day
12 before yesterday. Former Secretary Simon is the chairman of
13 it.
14

STATEMENT OF PETER B. KENEN

15 DR. KENAN: Thank you, Mr. Chairman.
16 My prepared statement, sir, has four parts. I have
17 distributed it to you. I should like to read only exerpts of
18 the statement to you now covering each of the main themes
19 that I developed there.
20 Your Commission has received and discussed a number
21 of proposals to give gold a central role in the domestic
22 monetary system. Thos proposals differ widely and so do the
23 arguments advanced on their behalf.
24 I will comment briefly on four main lines of
25 thought. Some tell us that gold is an honest money. And they

148
say that money should be costly to produce so that it may
have intrinsic value.
Those who bring goods and services to the market
could be paid in money containing an equivilent in real
resources.
6

This doctrine appeals to concepts of value and

justice handed down for centuries, and it embodies views
8 about the nature of the social contract between the citizen
and sovereign. Mr. Benko invoked some of those views
10 earlier today.
11

Exponents of this argument say that paper money

12 should be fully backed by gold and freely convertible into
13 gold coins. Some go further. They say that demand deposits
14 should be fully backed by gold. In other words, the bank
15

should become a pure service institution.

16 If the United States Government were required to
17 mint new gold coins from the output of gold mines in the
18

United States, those coins would embody the real resources

required to produce them.

20 But I submit that this is not sufficient reason
21

for us to regard gold as honest money.

22 The ultimate value of money derives from our
23

ability to use it, to exchange it for goods and services,

not from the cost of producing it.

25 An honest money is one whose purchasing power is

149
stable over time.
If there were new discoveries of gold in the
United States, or dramatic improvements in methods of gold
mining, the real resource cost of the gold coin would fall
sharply and those who accepted gold coins yesterday would
be cheated tomorrow by a rise in the prices of other goods
and services.
Now, I'm not saying that these discoveries are
likely to take place, but I do use the illustration to
identify what seems to me the fallacy underlying the
identification of gold with honest money.
This brings me to a second and third argument
advanced by the advocates of gold. We are told that the
gold standard is in practice the best available way to
maintain price stability over the long run.

We've also been

told that the decision to adopt a gold standard will spell
uncertainty in the short run.
I have doubts about the promise of long-run
stability. You went over the record at one of your meetings
when you discussed the excellent paper by Dr. Schwartz.
Edward Bernstein has done so again today.
Looking over that review of our monetary history
and examining the histories of other countries, I'm inclined,
Mr. Chairman, to agree with the conclusion that one of you
dreT>7 during that earlier meeting, there are two ways of readin

150
1

the historical record.
Some would say that gold gave us comparitive price

2
3
4
5

stability. It may be more accurate that we were able to
stay on the gold standard during periods that were intrinsically
stable and had to abandon gold when those periods ended.
I'll return to the subject of long-term

6
7
8
9
10
11
12
13

stability in a moment. First, let me deal with the argument
that we've been hearing recently that a quick return to gold
will dispell uncertainty about the future, help us to bring
interest rates down, and insure the success of the economic
policies adopted by the present Administration.
This claim, it seems to me, is based on two
suppositions. The first is the one I have already examined

briefly, that a gold standard will confer long-term price

stability, and I am skeptical.

The second is the promise that the elimination of

uncertainty would, in fact, bring down interest rates and

pave the way for a rapid supply side growth. I am very

skeptical.

But let me grant both premises for the sake of

analysis. It is still very hard for me to see why a speedy

return to gold would eliminate uncertainty.

I submit that it could instead intensify and

prolong uncertainty.

Consider, by way of illustration, the legislation

151
introduced by Senator Helms.

Six months after the Congress

adopts* the Senator's bill, the Federal Reserve banks will
start to buy and sell gold freely at a so-called standard
4

price.

This will be the average of the market prices
6

prevailing in the week before the resumption of convertibility
There is no way to know how passage of this

legislation would affect market prices during that critical

week.

10 More importantly, there is no way to know what
11

would happen once the standard price has been adopted.

price might be one at which the public started to sell large

quantities of gold to the Federal Reserve banks.

The

If this happened the legislation mandates an

expansion of the monetary base at a rate much faster than

any rate we have seen recently.

which the public starts to buy large quantities of gold, in

which case, of course, the legislation mandates a rapid

contraction of the monetary base.

The price might be one at

In either case, Mr. Chairman, the Federal Reserve

system might have to declare a so-called gold holiday within

a year or so after which it could start over again.

It seems to me that this is a proposal for

heightening and prolonging uncertainty about the economic

future, not a way a way of ending that uncertainty quickly.

152
Before returning to the problem of long-term
stability and its implications for the type of gold standard
we would have to adopt, let me say a word about the fourth
line of argument advanced on behalf of gold.
This is case for going back to pegged exchange
6

rates.

I'm going to say more about the international

aspects of the gold standard in just a moment.
8

Let me

confine myself here to these three observations.

First, it is not necessary to bring gold back into

the monetary system internally or internationally in order

to peg exchange rates.

in the functioning of Britain w o o d s , a great system.

Gold did not play an important part

Second, one must ask whether we should go back to

peg rates at all.

floating rates have been a major cause of international

disorder since 1973.

Those who favor this option believe the

Here, again, another interpretation is more

plausible.

economies and monetary systems from disturbances produced in

part by other countries' policies, disturbances that began

to afflict us before the adoption of flexible exchange

rates.

Floating were adopted to insulate national

Third, I would remind those who favor pegged

exchange rates that we cannot adopt them unilaterally.

do so de facto we would require the cooperation of the other

153
countries whose currency we wanted to peg the dollar.

2 do so de jura, we would require a formal decision by the
3 membership of the international monetary fund.
Recalling the events of 19 71, moreover, I would
warn emphatically against a move to any pegged rate system
that deprives the United States of a large measure of control
over the exchange rate of the dollar.
8 Exchange rates cannot be pegged immutably as
9 gold peg them immutably. The world is changing too
10 rapidly. r7e should not have to do what we did in 10 71 when
11 we had to attack the pegged rate system itself in order to
12 alter our own exchange rate and then had to expend much
13 political capital in an aborted effort to reconstruct the
14 pegged rate system.
15 At one of your sessions, Mr. Chairman, someone
16 said that he favors the development of a gold standard and
17 not a return to the gold standard, and I take this distinction
18 seriously.
19 If a gold standard is to have any chance of
conferring long-term stability, it must be a very different
20
gold standard than those we have known historically.
21
It must be able to prevent the monetary system
22
from creating or accommodating inflationary pressures. To
23
this end the supply of gold would have to control completely
24
the supply of money. It would be necessary, moreover, to
25

154
back the currency —

it would be necessary to back the

currency by gold and likewise to bank — back bank deposits

2
3

by gold or bank notes.
It would not be sufficient, I submit, to restore

convertibility at the margin while leaving the supply of
money under partial control of an independent central bank.
Even these radical reforms might not go far
8

enough. During the last decade we have been assaulted by a

dozen definitions of money. And this barrage reflects

uncertainty about the rightness of any single concept. It
10
also reflects the important process of financial innovation.
11
The attempt to control one monetary agregate has
12
fostered the creation of substitutes of some of the
13
components of that agregate.
14
When the monetary authorities have clamped down
15
on the supply of one monetary asset, the financial system
16
17

has produced substitutes for that particular aspect,

The very attempt to control a monetary agregate

systematically reduces the relevance of that agregate. The

same thing would happen over time once we tried a particular

monetary agregate to gold.

I have been discussing the case for a gold

standard to maintain domestic price stability. Most

discussions focus on another purpose. In the vast

literature on the theory and history of the gold standard,

155
it is viewed as a way of imposing balance of payments
discipline even when submission to that discipline could destabilize the domestic economy.
In most descriptions of the gold standard,
national money supplies are regulated primarily by gold
flows between countries and only secondarily by flows between
the central bank and the country's own citizens.
In your deliberations, you have concentrated on a
return to gold by the United States acting unilaterally. I
understand your reasons for doing this. Nevertheless, you
should pay close attention to the international ramifications
of any unilateral decision.
Under present international monetary arrangements,
a foreign government is free to peg the value of its
currency to the U. S. dollar.
To this extent the United States•cannot decide
unilaterally the dollar exchange rate should flow.
Under present arrangements, however, a country
that pegged its currency to the dollar can maintain the peg
only by purchasing and selling dollars as circumstances
dictate.
A number of countries operate this way.

Other

countries buy and sell dollars too as a way to maintain a
fixed peg to some third currency or to limit fluctuations
in floating exchange rates.

156

If the United States restored convertibility between
the dollar and gold, there would be one important change.
Other countries could still peg their currency directly to
4

the dollar, they could also move to the gold standard which
would likewise fix the prices of their currency in terms of

the dollar.
More importantly, both groups of countries, those

pegging to the dollar and those pegging to gold, might buy
gold from or sell gold to the United States.

There is another difficulty.

Foreign governments

and central banks owe some $167 billion in balances with

U.S. banks, Treasury bills and other dollar claims.

13
14
15

In addition, they hold some $80 billion of your
dollar deposits.
Private institutions and individuals abroad also

hold dollars.

United States, and the monetary base would thus be affected

significantly by foreign purchases having nothing to do with

ongoing balance of payments flows.

These could be used to purchase gold from the

A gold standard might not stabilize the money

supply in the United States.

It might, instead, impose a

food sort of balance of payments discipline that would not

be imposed symetrically on all countries.

imposed irratically and irregularly on the United States by

the gold transactions of foreigners.

It would be

157
Finally, an international gold standard whether
put in place by formal agreement or by the sequential
decisions of individual governments is utterly incompatible
with exchange rate flexibility.
Unless you believe that we should go back to
pegged exchange rates, you must ask whether the United States
should chart for itself a course that it would not want other
8

countries to follow.
Some of the proposals put before you attempt to

rule out these possibilities.

and the dollar would be available only to citizens of the

United States.

This limitation would have to be enforced

very strictly.

I can think of two methods.

Convertibility between gold

First, one could require citizens appearing at the

gold window to declare under oath that they are acting for

themselves or for other citizens and not for foreigners.

17
18
19

Second, the United States could impose a strict
embargo against gold imports and gold exports.
One of those things would have to be done.

Those

techniques might not work very well.

rewarded handsomely whenever there was a large gap between

the official price of gold in the United States and the price

on the international market.

24
25

The violators would be

Mr. Chairman, countries which have left the gold
standard were sometimes made to do so by international crisis

158
or by the policy mistakes of other governments.
Great Britain returned to the gold standard in
1925 in an unreal is tically high price for the pound. It was
forced the leave the gold standard only six years later in
19 31, because France had returned to the gold standard at an
unreal is tically low gold price for the Franc.
The two countries unilateral decisions had
created an unsustainable exchange rate relationship between
their countries — currencies.
A repetition of this step-by-step return to the
gold standard with each country free to choose the gold
price for its currency could produce nonsensical exchange
rate relationships.
This is the lesson drawn from the episode involving
Britain and France. It was the lesson that inspired the
decision taken at Britain Woods to establish the new par
value system multilaterally with the aid and advice of the
International Monetary Fund.
If we do not domesticate the gold standard
completely, by prohibiting the export and import of gold or
by some other device, we may wander into the same sort of
muddle again.
If the United States does not move to a gold
standard, and I hope it will recommend against that course
for all the reasons I have been listing, what sense can one

159

make of the present situation.

2 The United States holds 264 million ounces of
3 gold worth more than $110 billion at current market prices.
4 If gold is to play no major role in the monetary system,
5 should the United States continue to sit on this huge pile
6 of metal.
7 If the United States could sell its gold without
8 depressing market prices, the Treasury would have a profit
9 approaching $100 billion, the difference between the current
10 market price and the old official price at which the
H Treasury would have to redeem gold certificates.
12 It could use the windfall to solve the problem
13 of the Social Security Trust Funds and halt the upward
14 creep of Social Security taxes.
15 It could use the windfall to finance the budget
16 deficit and thus spare itself the need to borrow.
^7 I hope you will not take these suggestions
18 seriously. The United States should hold on to its large
19 gold stock even though this may seem illogical.
The
20 United States also has an extensive stock
21 of tanks, aircraft and missiles. It does not want to use
22 them, but it cannot get rid of them.
Would that we could beat our swords into plow
23
shares
and sell off the plow shares to finance budget
24
25

deficits, we would probably be accused of dumping plow

160
shares.
The United States should keep its gold for the
same reason that it holds these other stocks, because the
future is uncertain and unsafe. One can conceive of
circumstances in which gold might be the only acceptable
means of payment internationally.
One can likewise conceive of circumstances in
whi^h wo might want to redeem dollars held by foreign
governments or to back them with gold as part of some new
sweeping agreement on reform of the international monetary
system.
This Commission, sir, should not try to concoct
a new use for gold.
In the words of another economist on another
occasion, "Don't just do something, stand there."
SECRETARY REGAN: Thank you, doctor. Dr. Rothbard;
STATEMENT OF DR. ROTHBARD
DR. ROTHBARD: Thank you very much.
Mr. Chairman, members of the Commission, I hope
my — the reforms that I will propose today will be radical
enough to suit Professor Kenan.
The most important aspect of the gold problem it
seems to me is how we answer this seemingly simple but vital
question, whom do we trust, the people or the government.
In recent years, the economists and other analysts
have come more and more to see the errors and fallacies of

161

government control in central planning, and the great
importance of maintaining the rights of private property and
of free markets and free enterprise.
But while the economics of free market and property
rights has been extended at least a decade, there is still
6 one glaring gap, a crucial area of money, why are we ready
7 to accept freedom and private property, why are we ready,
8 in short, to trust the people in all their economic affairs
9 and yet make a glaring exception in the case of money.
10 do we favor freedom in many areas and yet
Why
11 advocate total control over the supply and lending of money
12 in the hands of the central government.
13

If we leave it up to the Federal Government to

14 control the issue of dollars and demand liabilities to
15 dollars, which we're doing now, they're granting us this
16 vital power.
IV Money is relevant to the lives of every American.
18 And, yet, we are willing to pledge or to put a pledge, our
19
lives,
and our fortunes, if not, perhaps, our sacred honor,
20 in the hands of the Federal Reserve, a monopoly creator and
21 controller of all dollar issues.
22 the field of money, we have allowed the U.S.
In
23
Government
to confiscate everyone's gold in 19 33, supposedly
24 for the duration of the Depression emergency. The
25 Depression emergency is long gone, the gold is still there.

162

Here we are nearly half a century later, and
the people's gold seized from them still remains buried at
3 Fort Knox.
4 If we truly believe in free markets, free people
5 and private property, we must proceed, it seems to me, to
6 denationalize gold and let the people take back their gold
7 property which was, in effect, stolen from them in 1933, and
8 never returned.
9 Let us get &ack to our central question, do we
10 trust the people or the government.
11 I'd like to submit, precisely in the area of
12 money, an area nationalized, indeed, throughout the world,
13 where we cannot trust government at all, even less so than
14 other areas of the economy.
15 The government operation using tax payer money,
16 rather than voluntary investment or payments from consumers,
17 always tends to be unsatisfactory and hopelessly inefficient.
18 In the area of money, there's another vital
19 factor to that, that is the government tends to be inherently
20 inflationary. Most economists, I think, will concede that
21 the major, if not the sole cause of our chronic and ever
22 accelerating inflation, is the excessive creation of new
23 money.
24 There's only one institution to blame for this,
25 let's face it. There's only one institution that we all

163

recognize to be the sole issuer, controller of dollars,

2 the Federal Government, particularly the Federal Reserve.
5 If, as I maintain, government is inherently
4 inflationary, and putting the Fed or any other government
5 institution in charge of the supply of money is equivilent
6 to letting the proverbial fox guard the chicken coop.
7 Why do I say that the government is inherently
8 inflationary. Simply because government, like many of the
9 rest of us, if not all, is chronically short of funds, that
10 is it would like to spend more than it can take in taxes
11 without stirring up too much political unrest.
12 To pay for the remainder, it can borrow from the
13 public, or better yet, from its point view, it can create
14 new money and use it to finance its ever larger deficits.
15 The point is that economically, if not legally,
16 the Federal Government and now the Federal Reserve enjoys
17 the monopoly of legalized counterfeiting, creating new
18 money out of thin air or out of paper and ink, to be more
19 specific.
20 I submit that any institution, no matter how
21 noble its possible motive, will use any power that it has,
22 and especially the power to counterfeit, by creating new
23 money, the government can finance its deficits and subsidize
24 favored political and economic groups by supplying cheaper
25 credit than they would otherwise enjoy.

164

1 Since the government as the monopoly issuer of
2 money has the power and the ability to counterfeit, it will
5 tend to keep using such power.
4 If we look at the records of government throughout
5 history we see a dismal story of such counterfeiting amply
6 confirmed. Run-away inflation has wiped out entire classes
7 of people as well as destroying the value of the nation's
8 currency.
9 There's no economic holacaust, no recession or
10 depression, however, great that can touch the widespread
11 and intense agony of run-away inflation.
12 And if we continue our present course of trusting
13 government rather than the people or the market, we will have
14 eventually such hyperinflation in America.
15 Let us not forget that two of the notable run-away
16 inflations — of course, notable not in the sense of good ~
17 two of the notable run-away inflations in the 20th Century
18 had disastrous political consequences; the German inflation
19 of 192 3 destroyed the middle class and paved the way for
20 Hitler; and, the Chinese inflation of the 1940's was
21 instrumental in the loss of China to the Communists.
22 is also unassailably true that the Western
It
23
World
enjoyed far greater stability under the gold standard
24
25

than we have had since.
If we take the period since the founding of the

165
1 American Republic, prices were far more stable than they have
2 been since we were taken off gold in 1933.
3 This is still more true if we extract from that
4 period two of the major inflationary episodes which occurred
5 when the government issued fiant money, in other words, the
6 fiant dollars were inconvertible into gold; namely, the
7 War of 1812 when we did that for the first time and the
8 Civl War, North and South alike issued irredeemable green
9 backs.
10 The situation improved still more, from my point
11 of view, in this comparison, if we take the pre-Federal
12 Reserve era before 1913, compare it with later periods.
13 'An unmanaged gold standard which is free or
14 semi-free banking worked much better and more stably than
15 a gold standard managed and therefore distorted and crippled
16 by a central bank such as the Federal Reserve.
17 It is possible, though not easy, to write off, and
18 it has been done before this Commission, to write off this
19 historical record of the virtues of gold and the vices of
20 fiant paper by attributing it to various coincidence and
i/

21 various special features of the past.
22 But if we understand that the government as a
23 legalized monopoly counterfeiter is inherently inflationary,
24 then we will see that the historical record is not a problem
25 or a puzzle, but simply confirms and illustrates this basic

166
1 insight.
2 If we must denationalize gold, then we must also
3 at the same time denationalize the dollar, taking the issuance
4 of dollars out of the hands of the government or the central
5 bank.
6 To eliminate and exorcise the spectre of inflation,
7 we must see to it that the gold, dollar and money are in the
8 hands of the people or the free market rather than in the
9 central bank.
10 How can this be done? How can we establish free11 dom and private property and money while denationalizing
12 gold and the dollar? Only by restoring the concept of the
13 "dollar" not as an independent entity with a price, but what
14 it was, and what it was supposed to be before 19 33, simply
15 a unit of weight of gold. That is what a "gold standard"
16 means.
17 But in order for the dollar to truely be a certain
18 weight of gold, it must be redeemable on demand at that
19 weight. Only if the average person can redeem his dollars
20 at a fixed weight of gold coin can a true gold standard
21 exist and perform its important functions.
22 And this means nothing less will do. A return to
23 something lite the Britain Wood where the dollar was supposedly
24 fixed in terns of gold, but where only central foreign banks
25
could redeem in gold, would only be a sham and would only

167
1 enter the same sort of disaster that Britain was in 1971.
2 The dollar must be redeemable in gold hot just'
3 to foreign governments, but everyone, Americans and foreign
4 citizens alike.
5 Only in this way can the dollar be tied firmly
6 to the stable level of gold. Also it is important that gold
7 be redeemable in coin and not merely bullion. Redeemability
8 in bullion, such as existed in England during the 1920's and
9 the United States from 19 33 to 1971 might benefit wealthy
10 businessmen and international operators, but deprives the
11 average person of the right to keep his property in gold
12 rather than paper or to deposit dollars.
13 It is furthermore, it seems to me, important
14 not to introduce escape clauses into the gold standard or
15 to provide for changes in the definition of gold weight.
16 The gold standard with an escape clause is useless
17 for it simply signals everyone that we don't really mean
18 it. The gold discipline to guard us from inflation won't
19 really be enforced.
20 Simlarly, with changes in definition. Gold
21 standards, unfortunately,are commonly talked of "fixing the
22 price of gold." The gold standard, however, does not fix
23 the price of gold in terms of dollars, rather it defines the
24 dollar in terms of the weight of gold.
25 Changing that definition makes as little sense

168
1 and is even more pernicious than changing the definition
2 of a .pound from 16 to 14 ounces.
3 Just as an ounce or a pound is each a unit of
4 weight, and, therefore, fixed in relation to each other, just
5 as we don't say, by the way, that we fixed the price of
6 ounces in terms of pounds, so should the dollar and the
7 weight of gold.
8 Just as pounds and ounces are initially arbitrary
9 definitions and once chonse, remain fixed, so the initial
10 definition of a dollar, in terms of gold, is also arbitrary.
11 No one takes seriously the current statutory
12 definition of the dollar as approximately $4 2.00 an ounce,
13 because there's no real way in which the dollar and gold are
14 related. We should, therefore, pick the most convenient
15 initial definition and stick to it from then on.
16 I suggest that the most convenient definition would
17 _ be one that would truely embody the dollar as a unit of
18 weight of gold. One hundred percent of the reserve of the
19 gold stock to the dollar is paper money and demand deposits
20 outstanding.
21 This would be approximately, and I think the
22 Commission should study this — it's something like $1600
23 an ounce. This high price, or rather low weight of gold,
24 would not be inflationary. If it'should be done, reserve
25 requirements are 100 percent from that point on.

169
1 In no case should higher value of the gold stock
2 be used to pyramid more inflationary dollars on top of
3

gold.

4 Furthermore, this sort of 100 percent gold dollar
5 would enable the rapid liquidation of the Federal Reserve
6 system, the establishment of sound, uninflated free banking.
7 There are several common criticisms of the idea
8 of the return to the gold standard. One is that we would
9 be relying on the fluctuations of the supply of gold
10 production on the market.
11 If fortunate, however, the gold is such a durable
12 commodity that annual production can only be a small proportiofi
13 of the total stock. It would, therefore, have little impact
14 on crisis.
15 This is in contrast to paper money which can be
16 increased at will and nearly costlessly by the central
17 government.
18 No one says that gold is an abstractly perfect
19 money, whatever that might be. It's far more trustworthy,
20 however, than government.
21 Secondly, gold has often been blamed for the
22 severity and extent of the Great Depression of 19 29 and 19 30's
23 we should turn that charge around and point out that the New
24 Deal could not get us out of the Depression despite taking
25 us off the gold standard in 19 33.

170
1 3ut more important, the crash of 1929 was caused
2 not by the gold standard, but by the unsound management of
5 that standard by the Federal Reserve system.
4 Throughout the 1920*s, the Fed unwisely kept
5 pumping inflationary money and credit into the economy
6 in order to help Great Britain to try to get out of a
7 severe economic problem that it had gotten itself into in
8 the 1920»s.
9 As Professor Kenan just mentioned, Britain went
10 back to gold and overvalued the pound in the 1920's and the
11 rest of the economic system — the world economic system of
12 the 20's was essentially manipulation by Britain to try to
13 get itself out of this mess, inducing us to inflat as a
14 result.
15 Then at the onset of the crash, President Hooaver,
16 later followed by President Roosevelt, prolonged the
17 Depression indefinitely by a host of "New Deal" measures,
18 inducing businesses to keep wage rates at pre-1929 boom
19
levels
while prices were falling, vast loans to near bankrupt
20
businesses,
public works expenditures, foreign price
21

supports, budget deficits, and the rest of by now familiar

22 apperatus of New Deal measures.
23

Another criticism of gold is that the two countries

most benefiting from the gold standard would be particularly

unpalitable politically, South Africa and the Soviet Union,

171
1 two leading gold producing countries. But we have never
2 balked, after all, from purchasing oil, minerals or other
5

important goods from politically repellent nations. Why

4 stop at gold.
5 Furthermore, if the United States becomes healthier
6 economically and defeats inflation by adopting a gold
7 standard, this would help us far more than we would be hurt
8 from Russia's economic gain from the higher price of gold.
9 The fourth complaint is that while international
10 gold standards might be acceptable, the United States could
11 never succesfully go back to gold on its own.
12 Lengthy international negotiations and numerous
13 conferences would need to be held before the gold standard
14 could return. But I see no reason why the United States could
15 not return to gold immediatley on its own, resulting in
16 stability and an end to inflation. It would set a perfect
17 example for foreign nations.
18 I'm sure that such hard money countries such
19 as Switzerland, France and West Germany, would be delighted
20 to embrace the gold standard should the U.S., now the leading
21 fiant money country, take the lead.
22 But even if they do not, there's no harm done if
23 the gold dollar, would, like the paper dollar, be truely
24 fluctuating in relation to other fiant paper currencies.
25
A gold standard in the U.S. alone need provide

172
1 no international monetary shock to other nations.
2 In addition, it has often been said that we cannot
5 go back to gold unless we first adopt monetary and physical
4 stability. But if we can do that, why bother about gold in
5 the first place.
6 The answer is that governments need a leash, a
7 tigh rein in order to cease their counterfeiting and
8 inflationary activities.
9 The same argument after all, the same argument
10 against gold, could be used against the Bill of Rights,
11 the Constitution, or any other restraint on government.
12 The point is we always need a check rein on
13 government in all areas. In the monetary area, the best
14 check rein is one wielded not by government itself, but by
15 the people themselves in being able to redeem their dollars
16 whenever they wish in gold coin.
17 This does not mean, I would include by adding,
18 that gold is a panacea for all of our ills. We must avoid
19 the danger of overselling gold and thereby raising false
20 hopes that would soon be dashed.
21 Gold would not be an instant cure, a quick fix
22 for recessions, sluggish growth or high interest rates. It
23 is indispensible for checking inflation. But the Fed could
24
still
inflate or mismanage in the short run even under the
25
gold
standard if it is determined to do so.

173
1
2

But not for long, because it would subject to

gold discipline which it would have to heed.

^ Eventually, as I have noted, we should consider
4
liquidating
the Federal Reserve system and returning to the
5

world unmanaged, free banking of the gold standard. Short of

that I would like to see an addition to the gold standard,

a law preventing the Fed from purchasing any further assets

8 that are not gold and thereby stopping the continual creation
9 of new reserves at the commercial banks.
10 I would urge that if the gold standard is
But
H adopted, it be a genuine gold standard, one where the public
12 can redeem their dollars at will at a fixed weight in gold.
13 Even such a gold standard would not be a panacea,
14 it is indispensible for ending inflation and returning to
15 sound money. Anything else would merely be a sham and only
16 wrap the prestige of gold around a program of permanent
17 inflation.
18 Such a hoax is bound to fail. It would be worse
19 than nothing, because the gold standard would be unfairly
20 discredited along with the ever shrinking dollar. The
21 American public deserves a gold standard in reality and not
^ just in name.
23 Thank you very much.
24 SECRETARY REGVT: Thank you, Dr. Rothbard.
25 Dr. Solomon?

STATEMENT OF DR. SOLOMON

I74

DR. SOLOMON: Thank you, Mr. Chairman.
1
In this abbreviated version of my statement, I
2
shall identify what I regard as the major issues raised by
5
the Committee's assignment and present some observations on
4
5 these issues.
The broadest issue is what would the United States
and the rest of the world gain from giving gold a more
o important official role up to and including a form of the
g gold standard.
Of course, the end of inflation, once and for
10
TI all, is the promised .goal of most advocates of linking the
•IP dollar to gold, and there can be no quarrel with this
^j objective.
•j_4 What is open to question is whether linking the
-, g dollar and other currencies to gold will achieve that
•^ objective.
27 The most straightforward suggestion is to
18

restore a gold certificate reserve to the Federal Reserve

system. The purpose is to impose a monetary rule that would

2Q limit growth of the money supply. This is the monetarist
2i approach to the gold standard and you've had a presentation
22

of Lt

The

objection to that in my view is that it would

24 deprive the Federal Reserve of all discration in its operator
25 including counter-cyclical policy adaptation.

175
Some advocates of a return to gold reject
monetarism as well as cangianism (phonetic). They believe
that the traditional process by which the Federal Reserve
tries to regulate the volume of bank reserves and therefore
the monetary agregate is doomed to failure.
What they propose instead is a mechanism by which
the supply of money is determined by the demand for money.
I have references here to those who made these proposals,
one of whom happens to be a member of the Commission.
These proponents believe that if the Federal
Reserve"is required to supply neither nor more less cash
balances than are demanded, inflation will be banished
and they would bring this about by making the dollar
convertible into gold, or at least for American citizens.
The flaw in this type of proposal in my view is
that it fails to distinguish between the textbooks call
"money to hold" and "money to use."
Those members of the public who want more money
in order to spend it on goods and services will be
exercising "a demand for money" indistinguishable from the
demand of those who wish to increase their cash balances
held on deposit or in the form of currency.
Therefore, letting the demand for money determine
the supply will not assure a non-inflationary economy. In
fact, it could have just the opposite effect.

176
1 In none of the proposals that I have seen is the
2 inflation process addressed in a fundamental way, none of
3 the gold standard proposals that is. In my view, inflation
4 involves a complex interaction of wages and prices and
5 occasional external shocks such as large increases in
6 oil prices.
7 How a linkage between the dollar and gold would
8 cope with these aspects of inflation is, again, in my view
9 a question that the commission should expect the gold
10 proponents to answer.
11 More generally, the believe that there is a simple
12 solution to the solution to the inflation problem, though
13 seductive, is in my view misleading.
14 The worsening inflation in the 1970's can in no
15 way be attributed to the breaking of the ling between the
16 dollar and gold on August 15th, 1971. That interpretation
17 is, I think, a gross distortion of history.
18 It is easy to show that for many years before
19 1971, gold had little if any influence on U.S. monetary
20
policy,
just as there is no simple explanation for the
21 acceleration of inflation, there is no simple way to bring
22 inflation back down.
23

We do not have a magic monetary wand to wave and

24
thereby
do away with inflation. Apart from ending inflation
I25am aware Of no other benefits that are supposed to result

177
1 from returning to a gold standard, and I find it significant,
2

Mr. Chairman, that most foreign officials and bankers abroad — •

most foreign officials and bankers show no interest in a

4 return to gold.
5 The second issue is — refers to the exchange
6 rate system. What changes if any would be made in the
7 exchange rate system under which the world is now operating
8 if we were to return to some form of gold standard. The
9 present exchange rate regime is a harbored one in which
10 countries have freedom of choice among free-floating, pegging
11 to another currency or a basket of currency or establishing
12 a regional system of par values as in the European monetary
13 system where the regional block flows.
14 In practice a substantial portion of world trade,
15 well over half, is conducted under floating exchange rates.
16 Whatever judgments the Commission arrives at
17 regarding the role of gold, it is important I believe to
18 avoid pushing the world back to the straightjacket of fixed
19 exchange rates. Ample evidence is available to support the
20 proposition that the dollar and other major currencies, such
21 as the Yen or currency areas such as the EMS needs scope for
22 variation as is possible at present.
23 The present system is far from perfect, but an
24 attempt to restore fixed exchange rates would surely fail.
25 I shall assume for brevity, Mr. Chairman, that

178
1

the question of domestic convertibility is not a major issue

if gold were to be given a —

if we were to move back to a

3 gold standard. I take it for granted that American citizens
4 would have the right to convert dollars into gold and I'll
5 discuss that issue together with the question of the price
of
6 gold at which a gold standard might be re-established.
7Is it envisaged that the price of gold would be
8fixed in terms of dollars. Now we've been told just a moment
9ago by Professor Rothbard that, no, it would be fixed in
terms of a fixed weight of gold.
10
But as Dr. Schwartz has pointed out to the
11
Commission in the parts of the transcripts I had a chance
12
to read, if one fixes the dollar in terms of a certain
13
__. weight of gold, one is, in effect, fixing a dollar price of
14
gold.
15
16

The question is how would the price be chosen and

equally important, how would it be maintained in the face

of the sorts of political shocks that have sent the gold

price through such wide gyrations in recent years. And what

are the implications of all this for monetary policy.

Most proposals for a return to gold that I have

seen are rather vague on the price at which the dollar would

be made interconvertible with gold. Yet, it is clear that

the events of recent years — from the events of recent

years that the market price of gold can change drastically

179
in response to events that have little to do with the
monetary system.
3 One response to these problems — I should say
4 just to carry that a little bit further — if the market —
5 if we had a fixed — if we did fix a price and the market
6

price were to rise relative to the official price, gold would

7 be bought from the monetary authorities and sold in the
3 market.
9 If the market price were to fall, the opposite
2o would happen.
H In either case, the impact on gold reserves and
22 therefore on monetary policy could be destabilizing. One
>

23 response to these problems would be an attempt to peg the
24 market price of gold.
25 Quite apart from the feasibility of such an
2Q effort, as was demonstrated when the gold pool was abandoned
27 in 196 8, it would effect monetary policy in an undesirable
18

Y•

2g Imagine a political disturbance inthe Middle
2o East and a sharp run-up in the market price of gold, Not
22 difficult to imagine.
22

Sales of gold by monetary authorities designed to

peg the price would, under gold standard rules, require a

contraction of bank reserves and a general tightening of

monetary policy, even though that might not be appropriate

180
1 at all to the conditions of the economies of the world.
2 Another option would be to let the official price
3 move with the market price. While this option might be
4 technically workable, I believe it would not satisfy those
5 who are seeking to restore the discipline of gold.
6 If the official price moved with the market price,
7 gold buyers and sellers would be indifferent as between the
8 market and undertaking transaction with the monetary
9 authority.
10 Thus, changes in the quantity of gold reserves
11 would be arbitrary and haphazard. They would not provide the
12 set of guidance to monetary policy that is being sought by
13 gold advocates.
14 It seems to me that gold advocates face a dilemma
15 regarding the offical price of gold. If they use the
16 market price, the discipline of gold disappears, but it is
17 not realistic to select inofficial prices that can be
18 maintained indefinitely.
19 I <?o on now to the question of international
20 convertibility, Mr. Chairman.
21 What sort of international convertibility would be
22 established. What are the implications for U.S. monetary
23 policy and for the operation of the international monetary
24 system of the restoration of international convertibility.
25 If official convertibility between dollars and

181
gold were established at home it would be almost impossible
to deny it to foreign holders of dollars, as Professor
T

<enan has pointed out. And as he has also pointed out,

foreigners, both official and private hold substantial
amounts of dollars.
Banks located in the United States have more than
$200 billion of liabilities to foreigners. Branches of
8 American banks abroad have dollar liabilities to foreigners
of $275 billion, and non-American banks also have very large
10 dollar deposits.
11 Potential claims on the U.S. gold stock which is
12 worth about $110 billion at the price of $425 an ounce, these
13 potential claims are huge and these claims could be
14 exercised along with purchases by Americans if an official
15 gold price were established and the market price rose above
16 it.
17 Finally, let me address the question which
18 Professor Kenan also addressed, what is the significance
19 of the fact that the U.S. Treasury holds more than 260
20 million ounces of gold. Does this require, as some have
21 suggested, that a choice has to be made between remonetizing
22 gold and selling it off.
23 In my view this is not a pressing problem. The
24 U.S. gold stock should be regarded as part of the national
25 oatrimoney worth a $110 billion at the current market price.

182
1 There is no reason to dispose of it just because
2 it does not play an important monetary role. And there is
3 no reason to try to invent a monetary role just because we
4 hold the assets.
5 The U. S. government owns many non-monetary assets.
6 They have different uses. There may be occasions when, as
7 in the past, it will support U.S. objectives to sell gold on
8 the market or to buy it on the market. But until then
9 gold does not have to burn a hole in our pockets.
10 We are not forced to decide to do something with
11 our gold assets just because they exist.
12 Thank you, Mr. Chairman.
13
14
15
16
17
18
19
20
21
22
23
24
25

183
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SECRETARY REGAN:

W e w i l l p r o c e e d now w i t h o u t

ques-

tioning in view of the time frame. We'll try to restrict it
to the usual five minutes even though there are fewer of us
questioning this afternoon. And if there is any time left,
we'll go on from there.
M r . C o s t a m a g n a , w o u l d y o u start off the q u e s t i o n i n g ,

8
please.
10

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MR. C O S T A M A G N A :

Thank y o u , M r . Secretary.

I just have one question addressed to all of you,

possibly each of you can answer in order.

Many years ago I had a experienced professor who

was one of the Oxford scholars, and he — of the question that

Shakespeare founded "to be or not to be.." had confused scholars

for many, many years, and no one was really sure what he meant.

I had at the same time another professor who said

what Shakespeare really meant was whether to be good or not to

be good. That is the question.

After sitting here all day, I begin to wonder about

both of my professors. I think the question beyond the gold

standard or not to be on the gold standard, is the question.

And, let's see, all of you gentlemen here, I find

one group saying strictly on the gold standard, and another

group saying we should not. And giving very good reason to

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1
2
3

both positions.
I would like to ask all of you the same question.

And that is, let's assume that an international gold system,

convertibility in the true sense of the word, is not possibl

But that we are faced with the situation where both sides mu

6
7
8
9
10
11
12
13
14
15
16
17
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give a little to save a lot.
What would you propose if you had to develop an

idea for strictly a domestic gold system, shedding any thoug
you might have had to the contrary.
How is the effect of a system possible domestically
without an international convertibility?
Is anyone willing to start?
Dr. Kothbard.
DR. ROTHBARD: Yes, as I indicated it in my remarks,

we are now, more or less, quoting change rate systems in the
qualifications. We went back to gold and whatever weight,

the price that we want, we'd still be — the gold dollar woul
still be in a quoting change rate on the other currency. I

19 don't see any real problem with it.
20
21
22
23
24

So, it seems to me to be done fairly easily.
MR. COSTAMAGNA: Dr. Solomon?
DR. SOLOMON: If the domestic gold system that
you're inquiring about, Mr. Costamagna, we're to include

domestic convertibility. Convertibility for American citizen

25 into gold, then you run into the problems that Peter Kenen
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185
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raised earlier.

You'd have to have some very, very strict

control to try to keep foreigners from purchasing American

gold. And I think these controls would be completely inconsistent with our system and our tradition. It probably would

5
6

With that — I was just going to say, you can

imagine going back to some form of gold system which could

not involve domestic convertibility. You wouldn't run into

those problems, but then I don't want to take too much time.

One has to raise other questions about what would be gained

by somehow or another, introducing gold without domestic con-

vertibility.

That's a partial answer to your question. I'm

going to take more time if it's available.

MR. COSTAMAGNA: Would that be true if the — I

think the elements Dr. Kenen raised was the fact that foreign-

ers would — could possibly end up with all the gold. Would

that be subterfuge or otherwise? Would that be true

Would that be true if they — that other countries

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24
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be unworkable as well.

likewise have the similar domestic problem, why would they want
to convert into our American gold if the major countries had
a similar domestic convertibility?
DR. SOLOMON: Well, it depends upon the domestic
price and the foreign price. We're listing all sorts of
assumptions here.

186
Like, assuming the fixed price domestically, if

cs-5
2

you are then if you're obviously —

MR. COSTAMAGNA: No, I'm —

DR. SOLOMON: — it depends if it's advantageous to

sell abroad, legally or otherwise.

MR. COSTAMAGNA: Talking of a market price.

DR. SOLOMON: Talking of a market price —

MR. COSTAMAGNA: Yes.

DR. SOLOMON: Then the question is what you gain

and what's gained by somehow leaking the dollar to a floating

gold price.

MR. BERNSTEIN:

MR. COSTAMAGNA:

MR. BERNSTEIN:

You have that
Yes.
But what is it suggesting that would

be different? The Treasury would then be a major part of the

market abroad, you're saying?

MR. COSTAMAGNA: Well, the thought is — I appre-

ciate what you're saying, Mr. Bernstein, but we cannot buy,

one, American gold, and by buying foreign gold we are exporting

more dollars, and making our balance of payments more difficult

Eight billion dollars in the last four* years, for a total of

eighteen million troy ounces were imported.

So, I think there might be a difference.

But, that's getting away from my question. My

question was, if you had come up with a solution between the

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187
cs-5

—

what appears to me to be two extremes, and limiting it to

a domestic gold system, what would you suggest?
MR. BOSTIAN: Well, I attempted to address that
question, you know, in my favor. And I can think of a lot
of possibilities, but I think attempting to see what the free
market would do, as I suggested, with a gold backed government
issue. I mean, you know, would the interest rate be two or
8

three percent versus twelve or fourteen percent, would be one
way to see what reality has to say about a lot of theori es

10
11

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without exposing one to a great deal of risk.
And, going back to your concept of Shakespeare,

if the meaning of "to be" is "to be good," I think in the

current environment my definition of good is to move very

prudently and cautiously.

DR. KENEN: Or if not, I think it's what you want

to accomplish. If you want to control the monetary system by

use of gold, domestic monetary system, then I think you have

to go all the way to a sort of program which I described as

radical before, and I would have to say that Mr. Rothbard's

program is radical enough. It does precisely the sorts of

things I was describing.

It, by the way, completely transforms the whole

domestic banking system. Banks no longer hold anything but

bank notes. They're service institutions. They charge you

for checking accounts. And they're simply service transaction

188
cs-6

institutions. The entire role of financial System changes
2

on such a system.

I don't see how you can hope to accomplish the
domestic objectives of the gold standard advocates, the strong
gold standard advocates, without doing something like that.

Now, if you say, "look, why shouldn't Americans

be allowed to buy up some of the American gold stock?" Why

is it we have to abroad to buy gold? Why is it that the goverii
ment's sitting on all this gold? Can't we do something about |

DRS, Inc.

that problem?

Until fairly recently the U.S. Treasury was indeed

auctioning gold at — periodically. Small parts of the U.S.

gold stock. And various bidders came in and bought some gold

from the U.S. Treasury.

But, I think upon reflection this was a device

partly for implementing an earlier — an earlier objective

which actually was to eliminate the monetary use of gold. It

wasn't to make the use of gold broader or wider. It was to

remove gold from monetary systems. And, to essentially put

out gold where our mouth was, and say that we were not inter-

ested in holding gold as a monetary asset.

If you think that it's the right of the American

citizen to have a crack at that gold, then I would simply

resume the Treasury gold auctions. Indeed, there's really no

other way in which the Treasury could sell gold at a floating

189
cs-7
price, the market price, except by auctioning it. Because if
it actually went in and said I'm going to — this is the market
price and I'm going to sell it at this market price, then the
moment after the Treasury announced that the market price
changed, I'd be in a position to abertrage against the Treasury
and the market. And the Treasury would be the loser.
The auction device is the only thing if you wanted
8

to go some distance toward Americans being permitted to hold
gold.

DRS, Inc.

I do say, however, that whether that's in having

context, or in the different context of the true gold standard,

that --as Rothbard has advocated, you do need the sort of

embargo I'm talking about. Both going both ways.

Then for in sales of gold in the United States,

which could flood us and increase our money supply, monetizing

their goal in effect, and also prevent large gold range.

Otherwise the system may be harmfully unstable.

And I find it frankly.ironic that people, who in

general, advocate a reduced role to the government in our day

to day economic life, would propose a system under which cus-

toms officers would have to search my pockets every time I left

the country to make sure I wasn't holding gold coins. That's

what it amounts to.

It's the sort of thing foreigners have had to sub-

mit to for years because of currency restrictions, we would

190
have to submit to them.

cs-8

I can think of various ways, I said, about making
this connection. I can't think of making a serious connection
4

wiithout very drastic domestic financial reforms.

In any case, I don't think you could do it in iso-

lation without the embargo, unless you went to the point of

an agreed international price. In all government it's going

on, the gold standard together at a consistent set of prices.
And that was not the premise of your original question.

MR. BENKO: Mr. Costamagna, I'm not really here

speaking for myself. As an attorney, I'm just bringing up

the authorities who built this country originally. And I

just want to bring out Madison's ideas on this subject, which

are once again drawn from his essay entitled "Money." Some-

thing which I would be pleased to give the Commissioner a

copy of if they don't have one in the record already.

He believed very strongly that the world was the

only closed economy. And you can't draw arbitrary lines say-

ing they are different from us. It would sort of be like

organizing the United States, breaking it up and Texas has

one autonomist unit, and New York is another.

It seems from Madison's theories, which I guess

have recently come forth in another — a new spokesman,

Mundell — I don't want to misrepresent him, but it seems

that he accepts this concept too, that if you wish the

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*

191
cs-9

efficiencies of the market, then you want to do everything
you can to encourage a world market to discourage restraints
in trade on an international basis, as well as on domestic
basis.
One of the reasons that America has been so economically powerful is because the Commerce Clause of the Constitution forbides any restraints on interstate commerce, thereby
8

permitting vast efficiencies that were denied to Europe.
So, I know this begs your question, what you're

saying, "if you really had to make this decision, what would

you do?" All I'm doing is, rather than boring you, not to

raise that as a live option because I see no good coming from

them. Coming from that as a premise.

MR. BERNSTEIN: I'd like to add a point to this.

If you going to have a floating price of gold

domestically, but the Treasury is going to — and any American

wants to buy gold, now you have a market in which the price

would be up, unless the Treasury should -<•- to go into the

market, but any American can buy gold at the floating price

20
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without the pressure, then I can't quite see what you have in
mind for the Treasury in a system in which the price of gold
is floating, and if the Treasury doesn't care about what the
price is, I mean, or simply cares what the price is and
(INAUDIBLE) into it?
MR. COSTAMAGNA: I don't have anything in mind for

192
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the Treasury. I have in mind for the American people. If

they know that their dollars are represented by gold, and if

they wish to convert it to American gold, they can. But they

don't have to.

MR. BERNSTEIN: Well, if it's a floating price —

MR. COSTAMAGNA: Yes.

MR. BERNSTEIN: If it's a floating price, and

everyone's saying what the difference is between American gold

and other gold is — I've always thought of gold as a —

10 MR. COSTAMAGNA: Well —
11 MR. BERNSTEIN: — as an element. They're all the
12 same.
13 MR. COSTAMAGNA: That's true.
14 MR. BERNSTEIN: Or what the Treasury sometimes
15 will identify as Russian gold and other gold by the color.
16 If you know, it is a little redder.
17 We could identify gold from other places by a
18 little test for elements. But what is the difference if
19 American buys gold?
20 If it's floating you can get New York market. You
21 buy some gold at the New York market, and if the Treasury
22 decides it doesn't like what the price is, we never can get
23 to the gold and the Treasury doesn't enter into the market.
24 What are you proposing to the Treasury there?
25 MR. COSTAMAGNA: I say I'm not proposing anything.

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193
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MR. BERNSTEIN:

But are you proposing that it

should enter into the market, or not enter the market, hold
the price up, hold it down?
4

MR. COSTAMAGNA: No, no, just make it available.

MR. ROTHBARD: It's now available.
MR. BERNSTEIN: I'm not quite — see, that's what
I don't understand. How does the Treasury make it available

if you accept by first making the decision —•
MR. COSTAMAGNA: Well —

MR. BERNSTEIN: — if the price is too high?

MR. COSTAMAGNA: Well, it would have to coin --by

coins.

MR. BERNSTEIN: Yeah.

MR. COSTAMAGNA: Coinage is what I'm talking about.

MR. BERNSTEIN: That's right. And that would offer

the coins for sale, but it wouldn't offer it for sale unless

the thought — they thought the price was too high. Anyone

else could buy coins there already in; the market.

There's in here a decision called "The Treasury

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to Make," that wants to bring the price down from what it is
in the market, if it's going to sell gold out of its own
holdings. Otherwise, anybody can buy gold right there without
the Treasury.
SECRETARY REGAN: Thank you, gentlemen.
Dr. Jordan?

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DR. JORDAN:

Thank you.

194
I want to ask some ques-

tions of Professor Rothbard.

Your proposal is the only thing that we have heard

so far that comes close to approaching a true gold standard.

Now, I want to ask some questions to make sure it's

quite clear what is-involved.

Currently currency issued by — er, coin purse

by the Treasury, it would be appropriate under your proposal

that the Treasury still holds some gold to back this — coins

issued by the Treasury.

The federal reserve notes as currency, as long as

there is a federal reserve, it would be appropriate that the

federal reserve hold as an asset physical gold in order to

back the currency.

If we abolish the federal reserve as you propose,

then would the federal reserve notes then become a Treasury

note, in which case Treasury holds gold to back it? Or would

that become a bank liability, a bank note?

DR. ROTHBARD: Well, I think the basic — my basic

view here is the gold version of the Frank Knight plan, so to

speak. The reserve plan, where you — you make the gold price

of a weight of gold high enough so that you can have 100 per-

cent reserve the bank -- bank demand upon.

Then, liquidating the federal reserve, giving the

banks a gift — a capital gift, the new gold reserves. At

195

cs-13
that point the banks would be —
DR. JORDAN:

would be 100 percent

—

Would there still be federal reserve

notes in your system?
DR. ROTHBARD:

Yeah, I didn't mention that.

personally am in favor of bank notes.
DR. JORDAN: Commercial bank notes. Okay.
DR. ROTHBARD: Right.
8

DR. JORDAN: If the note — if you abolish the
federal reserve note —

DR. ROTHBARD: That's another step, obviously.

Going back to the commercial — the piece of award commercial

bank notes is something —

13 J DR. JORDAN: So all money is either paper notes

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issued by the banks that is backed by gold, or transaction

liabilities, demand deposits issued by banks.

So, when you arrive at your price, and you say

demand deposits, you include such things as the new interest

bearing transaction liabilities, like now accounts, and share

draft credit unions, and savings and loans?

DR. ROTHBARD: Well, that's something to really be

studied. I think that's — I would like to see the Commission

really study that. Because I was just looking at — roughly

at M-1B basically. I'm open to suggestions on that.

DR. JORDAN: Well, the M-1B does include these

interest bearing transaction liabilities, so that I would

196
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1
2

think, would be influenced of what price you would want to
accept at
Now , we heard some testimony this morning from

3
4

Mr. Holtzer, and then I think the testimony of Mr. Banko would

be supportive in your early remarks in your statement, that

the problem is that the actions of government in the past, or

the potential actions of government in the future with regard

to this exchange rate between something called dollars, or

eagles, or whatever name you want to give to it, money, and

gold.

Doesn't this true gold standard involve physically

taking the gold out of the Treasury and giving it to the banks

and then the banks hold the gold as an asset —

DR. ROTHBARD: Right.

DR. JORDAN: — physically?

DR. ROTHBARD: Right.

DR. JORDAN: And that the U.S. Treasury — the only

gold held by the government at all would be to b?»ck either

currency issued by the government, or Treasury of federal

reserve notes?

DR. ROTHBARD: Right.

DR. JORDAN: Do you do away with that?

DR. ROTHBARD: Right.

DR. JORDAN: And all the gold is held in private

hands physically?

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DR. ROTHBARD: Exactly.
DR. JORDAN: Okay. Now, what do you do though
about dollar liabilities of foreign banks in the United States?
Foreign branches — branches of foreign banks in the United
States? Would they be a part of this system too?
Would they also get some of the Treasury's gold?
DR. ROTHBARD: You mean, in holding their own
8

liabilities?
DR. JORDAN: Yes.

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DR. ROTHBARD: Yes, I would think so.

DR. JORDAN: What about branches of U.S. banks

abroad — U.S. banks abroad that are denominated in dollars?

Would you back dollar liabilities of U.S. foreign

branches, would they be backed by gold?

DR. ROTHBARD: I understand that you told me Euro

dollars? I understand that those are not really demand upon.

DR. JORDAN: Yes, they are demand —

DR. ROTHBARD: They are?

DR. JORDAN: Yes.

MR. BERNSTEIN: About 30 or 40 percent .

DR. ROTHBARD: So that the 30 or 40 percent

literally would be, yes.

DR. JORDAN: Okay. And what about the dollar

liability, aside from all of the Euro dollar liabilities, the

dollar holdings of foreign government to foreign central banks

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Would they be convertible into gold by the U.S.
Treasury?
DR. ROTHBARD:
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DR. JORDAN:

Yes
Would the Treasury have to hold enough

gold to be able to convert those dollar liabilities?

DR. ROTHBARD: Yes.

MR. SOLOMON: May I pursue — may I?

DR. JORDAN: Sure.

MR. SOLOMON: There are foreign banks that have

, on commercial banks dollar liabilities.

DR. JORDAN: We mentioned that.

MR. SOLOMON: Did you?

DR. JORDAN: Foreign banks that have dollar lia-

bilities both in the U.S. and outside the United States. So-

called Euro dollars, which is roughly a trillion dollars in

today's. -- without consolidating the banking system.

MR. SOLOMON: I guess I didn't hear that. But,

do you give out gold to them too?

DR. JORDAN: No, I wouldn't say give our gold. I

wouldn't look at it that way. I look at gold as being a world

market money. I think — in my way, I do not agree with Mr.

Kanen. My proposal involves checking and rewrite the custom.

I think every person, foreigner or American citizen

be able to redeem dollars in gold.

MR. BERNSTEIN: Mr. Secretary, (INAUDIBLE).

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SECRETARY REGAN:

I can't hear you, Mr. Bernstein.

MR. BERNSTEIN: There's a very serious error dipping
into this — into this discussion about the liability of the
United States on deposits held by banks abroad.
The banks hold — have these liabilities. But they
also have assets. There's no reason on earth why the United
States should give them the gold, gold dollars, unless they got
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— the United States got something back. The Treasury has
been giving gold to people without getting something back from

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them.
DR. JORDAN:

That's true of the U.S. commercial

banks that also have assets equal to their liability.

That's

true of the elementary bookkeeping system. And some of those

assets are liabilities of the U.S. —

The main question I'm trying to get at is if you

take all of the gold out of the hands of the Treasury except

for what's necessary to back true Treasury money, and you put

it into the hands of private banks, then domestic production,

or mining of gold, exportation of gold, and I'm sure you

wouldn't oppose exporting and —

DR. ROTHBARD: No.

DR. JORDAN: — deny the freedom of gold, importing

of gold, or industrial usage of gold, or artistic use of gold,

would determine the quantity of money.

DR. ROTHBARD: That's right.

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DR. JORDAN: Okay. Thank you.
DR. ROTHBARD: By the way, I would appreciate —
3

just repeat that — it seems to me that many economists, but

not most, concede pure gold standards, such as I'm advocating,

is better than the mixed gold standards.
Since you have permission, we're studying that,
what would happen under this kind of pure gold standard?

MR. BERNSTEIN: I am very confused, Mr. Secretary,
by the proposal that was generated.

I can understand that the Treasury or federal

reserve turns over to anybody who holds an instrument issued

by the Treasury or the federal reserve, equivalent in gold

at $1,600 an ounce. I understand that.

Now, I don't understand how the Treasury gives to

a bank of gold, or the deposits it holds, unless the bank

gives the Treasury something.

But, I can understand that the Treasury could go

out and buy the Treasury secured sale by bank, or liability.

There's a big gap that this gentleman isn't handling.

And I have the question, why should the Treasury

give anybody who holds — any bank that holds dollar deposits,

gold, unless that bank adhere to the privilege. Something —

that's something that has to be — Treasury bills or some

equivalent.

I have another question though on this. I am much

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confused by this suggestion.
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$1,600 an ounch, which is all done by arithmetic,
it's equal to all the deposits, plus the currency and circulation that by depositing a number of ounces of gold in the
Treasury. Now, if this price is that high, I understand that
anybody on earth can come into the United States and sell the
Treasury new gold and say, "here, would you mind giving us

$1,600 for this?" Is that correct?

DR. ROTHBARD: That's right.

MR. BERNSTEIN: Well, I want to tell you something.

You are going to have such a inflation, you've never seen

anything like it in your lifetime.

DR. ROTHBARD: Not 100 percent reserve, sir.

MR. BERNSTEIN: I'm sorry. These people could —

when they get sick they get $1,600 for the ounces of gold they

can sell
A) They could buy any goods they wanted in the

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United States.
B) They could buy any securities they wanted in

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C) The dollars aren't going to disappear.

going to be in there one way or another. They're going to get

into the hands of people who sell assets for this or goods for

this.

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the United States.

DR. JORDAN:

If I may interrupt

They're

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MR . BERNSTEIN:
DR. JORDAN:

I can't understand this at all.

Mr. Bernstein, your analysis is correct

I think Professor Rothbard's answer was not correct.

The individual could not — a foreign individual

could not come and sell gold to the U.S. Treasury because the

Treasury cannot issue a dollar or something else in exchange

for gold. The Treasury would not be allowed to to buy gold.

So we get rid of the gold, all of it, and it's not going to

be able to issue it except for a bank — a Treasury note or

a Treasury coin to backhold. But it cannot otherwise buy

gold. That's in the true gold standard system.

And so you don't have that possibility in a true

gold standard system. The answer is not correct.

DR. ROTHBARD: All right. I stand corrected.

MR. BERNSTEIN: I have another question then.

Are you proposing to freeze the amount of currency

deposits, or are you going to allow — you can find gold you

brought to the Treasury or the federal reserve and say, "here.

Please issue me some notes here on this."

DR. JORDAN: Professor Rothbard's answer to

that should be, "no, you cannot." In new government money —

there is no government money in that system.

I'd like to be permitted to comment on that. It

would be coinage, presumably gold bunion people could point

it — of course, it would be even more radical, and so far

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under our present —

under our system we've had the Treasury,

you know, a monopoly of both coins in this case.
Before 1930 something, 1934, '5, something like
that, we — we mostly used foreign coins. Austrian, Spanish,
English, etc. So I don't see how we can't have private gold
minting. I see no reason why the private minting business
should be .a:government monopoly.
8

Therefore, to complete the capstone of this system
here, I would allow —• I would permit private coining, either

abroad or in the United States, but forever the minters are

better.

MR. BERNSTEIN: But that's why $1,600 asset —

SECRETARY REGAN: I hate to break this up, gentle-

men, but Congressman Paul has been waiting patiently over

here. It's his change to ask a question or two, so could you

proceed.

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MR. PAUL:

Thank you.

I'd like to first ask Mr

Benko a question regarding the power to admit bills of credit

What authority can we do that now?

And also, would you advocate an appeal of legal

tender, and if so, do you see this as a helpful thing and a

constitutionally proper thing?

MR. BENKO: The full address of — the full testi-

mony that was submitted to the record goes into the entire

history of how we got from there to here.

Or how we got

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from a gold standard to a judiciary standard.

And, I don't want to go into much about, but there

was a series of disruptions in our economy. The most important

one was the Civil War. And at that time there was a debate

in Congress as to whether to stay on gold tender or whether

to paper money.

MR. PAUL:

into a long answer.

Let me quote on this so you don't get

Is it constitutionally correct that we admit bills

10 as credit as we're doing today? I wanted you to emphasize
11

that.
MR. BENKO:

DRS, Inc.

Sir, that's not for me to say. That's

for the governmental authorities to say.

My reading of the

constitution says that this is an unconstitutional act. How-

ever, it has been approved by the Supreme Court. I analyzed

their reasoning in the full paper, and I believe it's a

fact that I believe the Supreme Court, if they were to address

this question today, it might change their mind as they have

changed it before, because their first decision said that

paper money was unconstitutional.

Congress has put us in that direction, and the

President — a chain of presidents have put us in that direc-

tion.

Up until the Republican platform, in the last

election, where as I understand one of the complaints Preside*

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Reagan went in on was to rule this Board A, standard value
in our currency
There did not appear to be any possibility that we
would go back and adhere to what I feel was the original constitutional mandate to both standards.
MR. PAUL: On the legal tender, would you advocate
for the legal tender?
8

MR. BENKO: I'm sorry, sir?
MR. PAUL:

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Advocate the repeal of legal tender in

office?
It says in your paper, you indicate that they came

about in contrast to what the founding fathers intended.

MR. BENKO: I would like to say — I have no objec-

tion a fractional reserve system, and I don't believe that

would be contrary to the intent of the founders.

From your testimony, the transcripts which1I read

earlier, I think it's your"position that you would like to have

100 percent gold reserves.

I don't know that that is constitutionally required

I think that there's enough room in the constitution to have

a fractional reserve as long —• as long as it's accompanied

by convertibility.

MR. PAUL: Okay. Dr. Rothbard I'd like to ask a

few questions.

It's been frequently said in our meetings and even

^Ub

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today in our hearing that the panics and crash while we're on
a so-called gold standard, indicates, and it's proof positive,
that gold misperformed.
I would like to ask you of your comments on that.

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Also your opinion on the advocacy of voalition of bonds precluding a gold standard, as has been indicated on several
testimonies today.
DR. ROTHBARD:

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Well, as I —

mony, the first panic, which I'm —

catch it in my testi-

the world's foremost be-

cause I'm the only expert, the panic of 1819, was caused by

the fact that the government had gotten off the gold standard,

a compliant standard during the War of 1812.

only by making a deal with the inflated banks to create a

simple bank to validate the inflation.
Then the simple bank perpetuated the boom from 1818

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until the crash.

a very big one.

By the way

half, and so on.
The other panics were mostly due to the same sort

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of thing.

a war over that, so that —

much of a turning back to gold from the previous prior stan-

dards.

DRS, Inc.

Those were the first big panics.

Lost of unemployment, ghost towns, prices fell in

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Went back to it

Of course, the 1830's there was a state's crisis,
and the 1873 as it was not so

What we really have is a —

the panics and crashes

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cs-25

are due to mismanaged gold.

dard altogether, or mismanaged gold standard by a simple

Either going off the gold stan-

bank.
Another problem, and regarding the 19th century,

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5

was from 1814 on every panic that occured, the government,

federal, and state, permitted the bank to suspend

payments indefinitely. In other words, to stop -- they

wouldn't have to pay their debts. They would require the

payment of debts from there from their debtors.

That, of course, violates the whole free banking

system or any property rights. The combination of that and

the

United States, in every kind of prices, and the simple bank,

I would say caused all these panics.

What was the second question?

MR. PAUL: The other one was regarding the advisa-

bility of having gold backed bonds, excluding — in other

words, separate from the gold standard.

DR. ROTHBARD: I think that" would be fine. That's

obviously not the gold standard, but at least — the beginning

of a gold — introducing gold to the system. And buy bonds

—

not going to be wiped out.

until and including the present.

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payments which came on as a tradition in the

a certain amount —

a certain amount of —• assured it's
Bond gold isn't wiped out.

I think that would be good steps

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MR. BENKO:

Congressman, I just had a note yesterday

quite properly pointing out that mv answer to the previous

question was somewhat inresponsive.
In regard to whether federal reserve notes can be
made legal tender as opposed to the question of fractional
full reserves, I would say that it is constitutionally clear
they may not be made legal tender.
MR. PAUL: Thank you.
SECRETARY REGAN: Thank you.

Congressman Wylie, would you like to ask some

questions?
MR. WYLIE:

Thank you, Mr. Chairman.

I'm sorry I

was a little late in getting back.

the corner. I thought we might have another vote.

I did not have a change to read your statement.

I read some of the witnesses that are here this morning. But,

I will read them.

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.There was an accident on

Did any of you suggest a reprint of the gold
standard?
You did?

Did anybody on this panel?

MR. BENKO: No.
MR. WYLIE: Nobody.

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MR. BENKO: Sir, I indicated — I spoke the con-

stitutionality of it. I believe my full address will answer

your questions about that.

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MR. WYLIE:

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I assume then, if you tested, Dr.

Rothbard, that you return to the gold standard or go to a
gold s-tandard of some sort, that you indicated how you would
fix the price of gold?
DR. ROTHBARD:
MR. WYLIE:

And what was your suggestion?

DR. ROTHBARD:
8

of the demand —

Yes.

My suggestion was place 100 percent

federal reserve notes to demahd_of deposits.

Possibly $1,60 0 an ounce or whatever.
10

MR. WYLIE:

DR. ROTHBARD:

approximately to cover 100 percent.

the federal reserve notes.

Approximately, right.

It should be

The demand deposits and

I must say, I think there's incumbent, unless they

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15

—

some kind of a plan how to fix weight or price, whatever you

want to call it.

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$1,600?

my fellow gold standard advocates come upon —

MR. WYLIE:
kind of plan?

come upon

Why do we have to come up with some

That was suggested to me this morning that we

need to do something with the gold we have, that it's asset
was not earning, and that's a little bit bothersome to me.
Why do you find necessity for coming up with something better
than what we're doing?
DR. ROTHBARD:

That was really my whole testimony,

but the basic — the two basic things.

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One is, I think —

one is the federal government

stole a heap of gold in 1933 and it's still buried in Fort

Knox.

of property rights.

It's not been returned to them.

This is the money —

It's a clear invasion

the best trust —

the market

or the people rather than the government, both on money, and
it falls on every other aspect of the economy.
8

Especially

money, because the government is apparently inflationary.
The government having the power to counter that we

use it.

favorite economic groups.

Use it to finance deficits.

It becomes very important to take that power away.

Give the money power back to the people.

extend the concept of a free market.

other aspects of the economy, or most people,'I think, more

or less agree, it's the economist that should be done.

MR. WYLIE:

In other words,

If the money's lost,

I did get your testimony the other

time, Dr. Solomon.

idea that we do not necessarily have to do something with all

this because it's an inactive asset that may even be better

to allow it to stay where it is for the moment in case the

rainy day gets a little rainier.

And you're basically agreeing with the

Is that basically your bottom line?

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Use it to subsidize

DR. SOLOMON:
my opinion.

Yes, sir, on that subject, that's

I said it doesn't have to burn a hole in our

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pockets.
MR. WYLIE:

Mr. Chairman, I have a feeling that

most of the questions that I have —

are going to ask, are

probably in the record, but if they aren't, why, I'll submit
them for the record a little later on
SECRETARY REGAN:

All right. Fine.

MR. WYLIE: I don't mean to take the time of the

commission. I'll submit those a little later today.

SECRETARY REGAN: All right.

Dr. Schwartz?

DR. SCHWARTZ: Mr. Rothbard, I think you could have

a bit — if you describe your plan,.. I think the price of

gold is $1,60 0 an ounce, does that amount match — finds the

Treasury gold holdings the present outstanding value of M-1B?

All M-1B would be retired.

We'd start out with a new money system in which

the banks would have 100 percent gold reserve requirements

provided to them by the repriced gold Treasury now (INAUDIBLE)

And essentially, the — they would then be empowered to issue

a new form of currency or book credit against which they would

then be buying loans from the public. Is that --

DR. ROTHBARD: Well, I'm not sure. I think Dr.

Jordan put it very well of the -- banks would essentially be

issued — the banks would have the gold.

DR. SCHWARTZ: And they'd be separate institutions

212
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then doing the —

the lending business.

How is the lending business going to be —
DR. ROTHBARD: Well, the lending would be — it

could either be separate. I mean, it's like asking whether

a firm should be integrated or not. It's really up to the

market to decide.

It could have a lending department in the old,

you know, (INAUDIBLE).

DR. SCHWARTZ: Yes.

DR. ROTHBARD: Or the banks would lend savings.

By the way, I think the current — the recent developments,

the certificate of deposits, the rates step in that direction.

The certificates are obviously — and these are three months,

or six months, or whatever; in a loan of the bank it's not

part of the money supply, and a reloan, everybody knows that.

That would be the sort of thing it would advocate.

DR. SCHWARTZ: And the other question that was

raised — all right. This is what happens to the existing

Treasury gold stock. The rest of the world still holds gold.

May it come to the United States and say, "this

very attractive price that you're offering — you're willing

to buy gold," to whom will they be selling their gold?

DR. ROTHBARD: Well, as Dr. Jordan corrected me,

anybody, but there's only a minthum — if the Treasury is to

be at a minthul, then I guess they could be minthimum. What-

213

cs-31
1

ever senior is priced or (INAUDIBLE) is priced to charge

2
3

panding

4
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So that gold could still be ex-

DR. ROTHBARD:

Right.

—

DR. SCHWARTZ: — the money system in the United
States?

DR. ROTHBARD:

That's right.

DR. SCHWARTZ: And why do you say that increasing

the money stock at this 100 percent reserve requirements

would not produce inflation, that's the point I didn't really

catch.

DRS, Inc.

DR. SCHWARTZ:

DR. ROTHBARD:

There could be no bank credit ex-

pansion from then on.

DR. SCHWARTZ: The only thing would be the ac-

quisition of new —

DR. ROTHBARD: Right.

DR. SCHWARTZ: — gold?

DR. ROTHBARD: Right.

DR. SCHWARTZ: I mean, what's to prevent the ac-

quisition of that gold from having an inflationary effect?

»+That's the point I don't

DR. ROTHBARD: Well, I think if foreigners use the

gold in Europe, it will not be inflationary in the United

States. And there would be a certain amount of increase in

whole dollars, but it would leave a sort of one shot com-

The only

—

214

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position.

It w o u l d n ' t be the s o r t o f t h i n g w h e r e everybody

2
3

T h a t w o u l d b e c o n t i n u i n g o u t o f i n f l a t ion.

knows in their heart that inflation would be 10 percent next
year, or 12, or whatever. At worst, it would be a one shot

proposition.

DR. SCHWARTZ: Why wouldn't it be a gold avalanche?

The term that's been applied to what happened in this country

after we raised the price.

DR. ROTHBARD: Well, for one thing, I really think

that the other nations will start following suit. They don't

want to lose all their gold either. They'd go back to the

gold standard.

And so that's one practical reason I don't think

there's going to be a gold avalanche.
Secondly, from my gold m i n i n g —

DRS, Inc.

friends in the

gold mining business, it appears that gold was so situated

that you can't have an unlimited —> a very large expansion

of gold even at a very high price. So that the way it's

situated on the rocks or whatever. I'm not an expert on

that.

DR. SCHWARTZ: So, essentially then, you're saying

we're going to have this fixed money stock, never worry, nevei

mind, there may be some inflows because the price is attrac-

tive, from here on we'll be living with the size of M-1B as

that exists today?

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DR. ROTHBARD: No, no, I'm saying there probably

will be an increase for those reasons you mentioned. I just

think it's better to do that than trust the federal reserve.

Just trust paper.

DR. SCHWARTZ: And it doesn't worry you then that

the money stock may not grow at the same rate —•

DR. ROTHBARD: I'm in favor of zero growth, frankly

I had my brothers at zero growth.

But, by the way, I understand that gold does in-

crease — the supply of gold does increase by approximately

three percent.

DR. SCHWARTZ: Oh, it certainly hasn't in the decad^

since the 1970.'s. I don't know what the price — what with

$1,600, wonderful things might happen.

DR. ROTHBARD: At any rate, if I had my brothers,

I would have a fixed money stock period.

DR. SCHWARTZ: Okay. That's —

DR. ROTHBARD: That's the falling price.

MR. WYLIE: Chairman, could I have just one more

question?

SECRETARY REGAN:

MR. WYLIE:

Go ahead,

Would Treasury have the option to buy

or sell that $1,600 now? Because if somebody proffered gold

in the Treasury at $1,600, do we say we don't want it from

the Treasury?

216
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DR. ROTHBARD:

If somebody gave the dollars

—

$1,600 and asked for gold, the Treasury would have to give it.

On the other way around, Dr. Jordan corrected me

that the Treasury is not in the business of minting. They

wouldn't do it. They're still.'in business. They would have

to mint the gold coins.

MR. WYLIE: I can understand why you still might

want to sell some at $1,600 at today's market, but on the

other hand, we might want to be able to buy it at $44.20 an

ounce. Would we be required —• I mean, we're not required

to buy and sell, there is an option, but I don't see how it

would work.

DR. ROTHBARD: What do you mean, won't work?

MR. WYLIE: Well, we'd have to have a price in the

international market, wouldn't we, in order for the con-

vertibility to go from —

DR. ROTHBARD: Well, we were talking about —

before you came up, about purely domestic, going back domes-

tically in gold standards, all the other nations remain by

that standard.

In that situation they'd be fluctuating exchange

rates between the gold dollar and the other currency. If

everybody goes back on an international agreement or some-

thing or simply by following our example, that would be even

better. I mean, if a world gold standard goes up —

217
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But, if the Treasury continues to issue — continue*

the monopoly to issue cash or —

MR. WYLIE: I just assume that it was within the

realm of feasibility to get everybody in the world to agree

that the gold they bought and sold at $1,600 an ounce. Do

you think that would be in the realm of feasibility?

DR. ROTHBARD: We wouldn't have to do that since

we control dollars. So we have to just go back and whatever

dollar price we want.

The French go back to franc prices or whatever.

In other words, we're not —• other countries have nothing

to do -- no control of the dollar prices, the dollar issue

on that.

Thank you.

MR. BERNSTEIN: Mr. Secretary?

SECRETARY REGAN: Yes, sir.

MR. BERNSTEIN: If we follow his plan, I want to

know

the United States has because you certainly aren't going to

give them gO Id for nothing.

gold put to all their liability, you have to learn all the

answers.

you will promise all the assets in all the banks that

And if they're going to get

SECRETARY REGAN:

DR. ROTHBARD: Can I just — could I just comment

DRS, Inc.

MR. WYLIE:

on that, because this

—

Thank you, Mr. Bernstein.

218
SECRETARY REGAN:

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DR. ROTHBARD: Okay. I'm sorry. Because this is
— there's an old controversy. This is not the first .time I
see something forgotten.

In the late 1930's, it had nothing to do with gold.

It was a controversy of how you get back 100 percent, paper

7
8

money.
I heard different plans. Irving Fisher's plan was

the Treasury, or whatever, should buy the assets.

The Frank Knight plan I think was much better.

Make a gift to the bank. I don't like a gift to the bank.

I mean, think of the situation.

SECRETARY REGAN: Thank you. Well, thank you

again, gentlemen, for your attendance this afternoon, and

for your papers. They will become part of the record, as

will your answers. We appreciate it, and we admire your

steadfastness in being able to sit there and answer all these

questions. Thank you.

(Whereupon, the hearing was adjourned at 4:10 o'clock p.m.,

to be reconvened at 9:30 o'clock a.m., the following day at

the same location.)

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This will be our final comment.

MEETING OF THE GOLD COMMISSION
The Gold Commission met on Thursday, November 12 and Friday,
November 13, 19 81, in the Cash Room of the Main TreasuryBuilding, Washington, D.C. The meetings, open to the
public and chaired by Treasury Secretary Donald T. Regan,
ran approximately five hours each day. Twenty-three witnesses
testified before the Commission on these two days. Attached
is the unofficial, uncleared and uncorrected transcript of
the Gold Commission Meeting.

UNITED STATES DEPARTMENT OF THE TREASURY

MEETING OF THE GOLD COMMISSION

U.S. Department of the Treasurv
15th and Pennsylvania Avenue
Cash Room
Washington, D.C.
Friday, November 13, 1981

The meeting in the above-entitled matter.convened
at 10:00 o'clock, a.m.

Diversified Reporting Services, Inc.
P.O. B O X 23582
W A S H I N G T O N , D.C. 20024
(202) 667-6633

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Commission Members:

Secretary Regan

Chairman Weidenbaum
Mr. Coyn
Senator Dodd
Congressman Neal

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Governor Partee
Congressman Paul
Congressman Reuss
Governor Rice
Senator Schmidt
Governor Wallich
Congressman Wylie
Mr. Costamagna
Senator Jepson
Mr. Jordan
Mr. Lehrman
Mr. McCracken
INDEX
Presentation by:
Dr. Alan Greenspan
President
Townsend-Greenspan, Inc.
New York, New York

Page
221

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Dr. William Fellner
Resident Scholar
American Enterprise Institute
Washington, D.C.

227

Dr. Roy Jastram
School of Business Administration
University of California, Berkeley
Berkeley, California

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Dr. Marc Miles
Associate Professor
Department of Economics
Rutgers University, New Brunswick
New Brunswick, New Jersey

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I N D E X

(Continued)

Dr. Earl A. Thompson
Professor of Economics
University of California, Los Angeles
Los Angeles, California

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Dr. John Williamson
Senior Fellow
Institute for International Economics
Washington, D.C.

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Dr. Richard Cooper
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Maurits Boas Professor of International Economics
Harvard University
Cambridge, Massachusetts

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Mr. Richard Davies
Managing Director
The Gold Institute
Washington, D.C.

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Dr. Rudiger Dornbusch
Department of Economics
Massachussets Institute of Technology
Cambridge, Massachusetts

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Ms. Helen Junz
Vice President
International Economics
Townsend-Greenspan, Inc.
New York, New York

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Mr. Alan Reynolds
Vice President and Chief Economist
Polyconomics
Morristown, New Jersey

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Dr. Hans F. Sennholz
Chairman, Cepartment of Economics
Grove City College
Grove City, Pennsylvania

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P R O C E E D I N G S

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(9:30 a.m.)
SECRETARY REGAN:

Good morning, ladies and gentle-

men. I want to welcome the panelists to this public meeting

of the Gold Commission and tell them in advance that I appre-

ciate their willingness to testify and to give us the benefits

that they are thinking.

The formula that we will follow this morning will

be, more or less, the same formula that we used yesterday.

I will allow each of you, our panelists, to make an opening

statement. Hopefully, for about ten minutes duration.

And then we'll proceed alphabetically to ask ques-

tions of the panel allowing approximately five minutes to

each of the members of the Commission for questioning. And

time permitting, we'll have a second round of questions.

So, with that — well, I'm not sure that our —

somebody can't spell apparently, because I see that Dr. Green-

span is ahead of Dr. Fellner. In my alphabet that ain't so.

However, if G can go before F temporarily, Alan,

would you start the opening statement, please.

STATEMENT BY ALAN GREENSPAN

DR. GREENSPAN: No, we don't care, Your Honor.

In years past, the desire to return to a monetary

system based on gold, was perceived as nostalgia for a bygone

era when times were simpler and less complex and the world not

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threatened with nuclear annialation.
After a decade of stabilizing inflation and economic

stagnation. The restoration of gold standard has become an

issue that's clearly rising in the economic policies.

Increasingly numerous performance of a gold stan-

dard persuasively argue that large budget deficits and large

federal borrowing departments will be difficult to finance

under such standard.

Every claim against paper dollars currently cause

few technical problems, for the Treasury can legally borrow

as many dollars as the Congress offers.

But, with unlimited dollar conversion into gold,

the ability to issue dollar claims would be severely limited.

Obviously, if you cannot finance federal deficits, you cannot

create them. Taxes would then either have to be raised or

expenditures lowered.

Restrictions of gold conversions, therefore, pro-

foundly alter the politics of the fiscal policy that have pre-

vailed for a half century.

Even some of those who conclude a return to gold

is infeasible remain deeply disturbed by the current alterna-

tives. And yet, even those of us who are attracted to the

prospect of gold convertibility, are confronted with a seem-

ingly impossible obstacle, the latent claims to gold repre-

sented by the huge world overhang of fired currency, namely

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dollars.
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The immediate problem of restoring the gold standard is fixing a gold price that is consistent with market
forces. Obviously, the offering price by the Treasury — ob-

viously if the offering price of the Treasury is too low, or

subsequently proves to be too low, heavy demand at the offering

price could quickly deplete the total government stocks of

gold, as well as any gold borrowed to thwart the sold.

At that point, with no additional gold available,

the U.S. would be off the gold standard and likely to remain

off for decades.

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too high, or subsequently becomes too high, the Treasury would

be inundated with gold offerings. Payments for gold drawn on

the Treasury account, the Federal Reserve would add substan-

tially to commercial bank reserve, and probably act, at least

temporarily, to expand the money supply with all the inflation-

ary implications there are on that.

Monetary offsets to neutralize or earmark gold are,

of course, possible in the short run. But as the west German

monetary authorities soon learn from their past endeavors to

support the dollar, there are limits to monetary counter

measures.

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Alternatively, if the bid price is initially set

The only seeming solution is for the United States
to create a fiscal and monetary environment, which in effect,

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makes the dollar as good as gold.

That is, stabilizes the

general price level, and by inference, the gold — the dollar

price of gold bullion itself.

Then a modest reserve of bullion could reduce the

remaining narrow gold price fluctations effectively to zero

allowing any changes in gold supply and demand could be ab-

sorbed in fluctuations in the Treasury's inventory.

What the above suggests is that a necessary con-

dition returning to a gold standard is the financial environ-

ment, which the gold standard itself is presumed to create.

But, if we restore financial stability, what pur-

pose is then served by a return to gold standard. Certainly

a gold based monetary system will not necessarily prevent

fiscal improvements, as 20th century history clearly demon-

strates .

Nonetheless, once achieved, the discipline of the

gold standard would surely reinforce empty inflation policies

and make it far more difficult to resume financial profligacy.

The redemption of dollars for gold in response to

excess federal government induced credit creation would be a

strong political signal. Even after inflation is brought

under control, the extraordinary current political sensitivity

to inflation would surely remain.

Concrete actions to install a gold standard are

premature. Nonetheless, there are certain preparatory policy

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actions that could test the eventual feasibility of returning

to the gold standard that would have positive short term anti-

inflation benefits and little cost if they fail.
The major roadblock to restoring the gold standard
is the problem of reentry. With the vast quantity of dollars

worldwide laying claim to the U.S. Treasury's 264,000,000

ounces of gold, an overnight transition to gold convertibility

would create a major discontinuity for the United States'
financial system.

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But there is no need for the whole block of current

dollar obligations, with it come an immediate claim. Con-

vertibility can be instituted gradually by, in effect, creating

a duel currency with a limited issue of dollars convertible

into gold.

Initially there could be deferred claims to gold.

For e x a m p l e , the five year Treasury notes with interest and

principle payable in grams or ounces.

With the passage of time, and several issues of

these notes, we would soon have a series of near monies on

terms of gold, and eventually demand claims on gold.

The degree of success in restoring long term fiscal

confidence would show up clearly in the yield spreads between

gold and fired dollar obligations of the same maturities.

Full convertibility would require that the yield

spreads for all maturities virtually disappear. If they do

226
not, convertibility will be very difficult, probably impossibl,
2

to implement.

A second advantage of gold notes is that they are
likely to reduce the current budget deficit. Treasury gold
notes, in today's market, could be sold at interest rates of
— approximating two percent or less. In fact, from today's
markets, one can construct the equivalent of a 21 month Treasury
gold note yielding less than one percent by arbitraging regular Treasury note yields for August 1983 maturities; that is

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percent annual rate, inferrred from August 1983 futures con-

tracts.

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13.2 percent, and the forward delivery premiums of gold, 15

Presumably, five year note issues reflect a similar

relationship.

of course, is the same as that associated with our foreign

currency Treasury note series. The U.S. Treasury has over

the years, sold significant quantities of both marc ancKSwiss

franc denominated issues and both made and lost money in terms

of dollars as exchange rates have fluctuated.

And, indeed, there is a risk of exhchange loss

with gold notes. However, unless the price of gold rises

84 percent within a five year period, 13 percent compounded

annually, interest payments on gold notes in terms of dollars

will be less than conventional financing requirements.

The run up to $875 per ounce in early 1980 was

The exchange risk of the Treasury gold notes

227

surely an operation reflecting special circumstances in the

Middle East which are unlikely to be repeated in the near fu-

ture.

Hence, anything close to a near doubling of a gold

prices in the next five years appears improbable. On the
other hand, if gold prices remain stable or rise moderately,
savings could be large. Each 10 billion and equivalent gold
notes outstanding would under stable gold prices, save one and
a quarter billion per year in interest outlays.

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A possible side benefit of the existence of gold

notes is that they could set a standard in terms of prices

in interest rates that could put additional political pressur^

on the Administration and to Congress, to move expeditiously

towards noninflationary policies.

Gold notes could be a case of reversing Gressian's

Law. Good money would drive out bad.

Those who advocate a return to a gold standard

should be aware that returning our monetary system to gold

convertibility is no mere technical financial restructuring.

It is a profoundly basic change in our economic processes.

However, considering where the policies of the last

50 years eventually led us, perhaps there are lessons to learn

from our more existent gold standard past.

SECRETARY REGAN: Thank you, Dr. Greenspan.

Dr. Fellner?
STATEMENT BY DR. WILLIAM FELLNER

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Mr. Secretary, have you thought with

summarizing (INAUDIBLE) from considerations which I have sub-

mitted.

First, when specific conditions are satisfied, the

gold tenders can function efficiently and with its major

advantages over the available alternative.

Second, in what I regard as not the foreseeable

future, these conditions will not be satisfied, and there is

no doubt in my mind the systems, the longing in the gold stan-

dard category, would that for malfunction, there's very damag-

ing consequences.

However, the more distant future is unpredictable

in this regard, and partly because of this reason, as yield

proposed, to have' resumption of gold sales by the Treasury.

Last weekend we should not experiment on anything

that would give the superficial appearance of restoring a

system •— the longing in the gold standard category, ,that

would input it into an element alien to the basic conception

of trying the gold standard.

Such construct carries the identical of political

arbitrariness which you must learn to overcome in our present

monetary system, and by covering up the essence because the

matter — such construct would reduce the likelihood that we

should deal with this successfully.

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DR. FELLNER:

Now, the justification of this conducent, when

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specific conditions are satisfied, the gold standard as the

significant advantage that in these circumstances gold serves

with reasonable efficiency is a proxy for good in general.

And, by the simple and incredible technique of

stabilizing the plans for gold with reliance on this, the
authorities can in those circumstances can reasonably close
and stabilizing at the same time the general price level.

Investors and consumers can adhere that expectation, such a
behavior of the price level, and the highly damaging uncer-

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tainties of earlier inflationary periods and of the recent

era, avoid them.

The essential conditions that need to be satisfied

for gold to serve as an acceptable proxy for goods in general,

is that the real price of gold — we find this relative price

in relation to goods in general, to remain reasonably stable.

That is the real price reflecting market preferences and show

no disturbingly steep and unpredictable trend.

This is what is needed for assuring that an in-

stitutionally fixed nominal price of gold would be associated

with a reasonable approximation to the stability of the gen-

eralized level.

To what extent and with what qualifications is this

condition tended to be satisfied during the aiming of the gold

standard, and what could have been done in those days to avoid

the occurrence of some disturbed interference. A question of

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considerable complexity,
But on the whole —

in a past era, conditions re-

quired the efficient functioning of the gold standard where,

in my appraisal, well enough satisfied to have made the
beneficient monetary system, one that was to be superior to
the available alternative.
I also believe that it would be wrong to take it

for granted that in the future — that in no future era will
the essential conditions of the efficient functioning of the

gold standard, again be satisfied.

In some future period these conditions might again

be met. However, it seems quite clear to me that these con-

ditions are not met in the present circumstances, nor will the^

be satisfied in any future period near and forseeable enough

to serve as the basis for present policy planning.

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Even if by an international agreement all major

gold holding official agencies of the world decided to return

to gold, and if •— to which we will return later, the real

price of gold — its price relative to goods in general, would

not remain unchanged.

This implies that the fixed current dollar price of

gold will not be associated with a reasonably stable general

price level.

The reason they said in the present circumstances

the gold articles are not responsive to a rising real price

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of gold, and since there is no positive outward response that

would the event arise in the real price of gold from becoming

large, and from accumulating, even with significant price

fluctuations, at present the real price of gold in the United

States is structurally past times for the possible ten years

ago, but the non-Communist world has declined from about 40

to about 30 million ounces a year.

And there occurred also a significant decline in

the world of including allowances for the output of too large

communist countries. There's a very large increase in the

real price of gold, and what happened was not an increase in

the world, but a decline in the world of the substantial one

over the last ten years.

This is obviously not a proxy for goods in general

should behave. It may, of course, the objectives of even in

the past, outward responses often came with the substantial

lag. But so far there is no sign suggesting that such an

outward response will be occurring in the forseeable future.

The sometimes argued that the size of the gold

output does not meet the •— because due to the practical

existence of practical depreciation. The size of the stock

is so large in relation to the current output, that the stock

is all that matters.

According to this argument, the present stock woul

be adequately large enough to prevent any upward trend of

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And thereby made the holding of gold unattractive by private
owners.

This argument considered erroneous.

approximately 1.7 billion ounces of gold seem to be held by

private owners. Much the greater part in jewelry and art

objects. Unless the official agencies purchase this gold

with severely inflationary results, the privately owned gold

would remain where it is, and the only conflict then which

the escalated unattractiveness of gold to private owners

would have, would be a temporary reduction in the gold price

to a level at which the holdings of the stock would again be-

come attractive.

However, the amount of gold the public would want

to hold, let's assume, low price, would thereafter be rising,

along with the size of the world population and its standard

of living.

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the real price of gold besides to try our currency to gold.

At present,

If the gold art would remain insufficient to

accomodate the increasing amount, the real price of gold would

be rising from its initial level, and it would be rising at

the hard to predict and presumably irregular rate.

With the nominal price of gold at constants, this

would express itself in substantial entities serving defla-

tionary pressures on the general class level. Unless the

nominal price were raised excessively, our central banks and

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unloading gold from their stock.

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to happen. But to be an alleged gold standard system, on
political decisions concerning increases of the current dollar

price of gold, or to base such a system on gold sales of the

official agency for the sake of keeping the price of gold from

rising, would introduce into the management of such a system

the same kind of political leeway, the misuse of which we must

try to overcome, the management of our inconvertible paper

money

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One or both of these two things would be very likely

I have so far been concerned with the problem that

should arise, the present circumstances if all countries

through official agencies who own major amounts of gold, all

attempted to cooperate in this during the gold standard.

If the other countries did not participate in such

an effort, then for us there would arise the additional dif-

ficulty of becoming exposed to large inflationary gold in-

flows or deflationary gold art flows, cause bad political

decisions abroad. Sell to us or to buy from us gold at a

fixed price we would be spending.

The suspensed purchases of sales of gold at the

officially set price would be even more alien to the principles;

underlying the gold standard than would be the adjustment of

the official price. But essentially the same basic witticism

needs to be made of both these techniques.

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Both would require coping with the sameness of
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political arbitrariness and irresponsibility with which Con-

gress will have to cope successfully under inconvertible paper

if they are to restore earthy productivity and employment

trends.
In these remarks, there deliberately did not touch
on the tradition —

initially correct price of gold.

If the difficulties might also be potential,

transition difficulties are unavoidable in any effort to

eliminate our inflationary disturbances.

In the present circumstances, and in those not

forseeable, the difficulties tending in the way of the turning

to the gold standard, are far deeper than simply the conditions;

that you made.

However, I will end by referring back to our four

conclusions expressed at the beginning of this paper, and will

in particular will repeat that that considered the more dis-

tant future, unpredictable in this regard, and that that will

oppose the resumption of gold sales at the Treasury.

Thank you, Mr. Secretary.

SECRETARY REGAN: Thank you, Dr. Fellner, for that

very interesting paper.

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transition difficulties, feeling out the

Dr. Jastian?
STATEMENT BY DR. ROY JASTRAM

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I'm before this Commission today to

give information I consider pertinent to the objectives of

your study, to answer any questions you might care to ask.

I feel it might be useful — useful to you in

evaluating my testimony to know that my interest in the re-

lationship of gold to prices began at Stanford University back

in 1936. And I was a very young instructor. But I'm not

going to sit here and tell you everything that happened since

1936

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DR. JASTRAM:

My interest did intensify in 1968 with the conjunc-

tion of rising gold prices and soaring inflation, and inten-

sified to the point where I even wrote a book on the subject.

I asked myself at that point, I still do, if some-

thing might be learned from the behavior of prices over the

centuries under a precious metals discipline that would help

solve some of the problems inherent in our crumbling monetary

and fiscal system of recent years.

I'm here today as an analyst, not as an advocate

of a single point of view. Also, I consider myself a precious

metals economist and not a monetary theateratician. We've

already questioned some of the invests in the country on the

latter score.

I do not believe that a return to a gold standard

will be a magic cure for all the economic ills, all of us

are repeating that. Nor do I take the opposite extreme of

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blaming on the gold standard that when they have it, blaming

upon it every economic ill that humanity was at err to during

this — its tenure.

Instead, I'd like to take the time to sum up very

briefly the conclusions I have reached based upon years of

research, leading to two books by now, on gold and silver.

Precious metals are so closely interrelated in their economic

effect, consequences, and utilization.

I trust that you, members of the Commission, have

had an opportunity to read by booklet issued by the Joint

Economic Committee, this little thing titled "The Gold Stan-

dard," its history and record against inflation, which was

distributed by Senator Jefferson back in October.

I do not intend to repeat the material in my

study, but I will draw upon it as I go along, and then pre-

pare to answer any questions you may have about its contents.

Unfortunate — feel fortunate that through the

good offices of Senator Jefferson, you have the Jacobson

booklet, for that will allow me to take a much broader cut

at the primary issue before this Commission rather than get-

ting bogged down in detail.

Let me first state my position on monetary reform.

It seems simplistic but I consider it basic.

One, there must be a discipline over the money

supplies. With respect to that, nearly everyone agrees with

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this in the abstract.

Disagreement arises with the question of

at what levels of the money supply, and how to exercise the
discipline.
Point two, attempts of monetary discipline, when

managed by men, have not worked. And here I'm not referring

solely to the history of the United States. The same obser-

vation can be made for England, Germany, France, Italy, Japan.

Other countries. The only exceptions were draconian measures

ending brief periods of price needs.

Some of these have been man managed, and very well.

Major point three, I there believe there must be

management by law, by law, not by man. Now, an example of

— well, it's not the only one — an example of what I mean

by law is the currency must be convertible into precious

metal at a price fixed by law with a legal reserve in place

to guarantee conversion.

One example of managerial judgment by men is when

a governing board selects target interest rates, or target

growth rates and selected definitions of money supply, and

makes continuing judgements to appropriate open market opera-

tions to try to hit those targets.

Now, here I'm certainly not singling out our present

Federal Reserve Board. I believe that they have the best

record of restraint on this in this country in modern times.

But point four, those monetary laws work best

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precious metals. That comes from my historical studies. i»u

repeat it for emphasis though it's simple enough.

Those monetary laws work best throughout history

have been based upon the discipline of the precious metals.

Now, notice here that I'm not saying — I'm not

so foolish to say that whenever the system was based on

precious metals, it was stable. I am saying that when in

history we find long run stability of prices, we find precious

metals are behind that stability.

Point five, the precious metal that has been most

successful — has had the most successful experience in

stabilizing price levels was gold.

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throughout history, have been based upon the discipline of

Based upon everything I said up to now, my conclu-

sion is, in the public and the world at large would be well

served by a monetary reform that would include a) some form

of gold standard, a discipline based on law, b) arrived at

and consultation of our trading partners, c) accompanied by

extensive fiscal reforms, including budgetary policies to

preclude overspending.

The first of the five points — I went back to the

need for discipline. I think we can take this widely accepted.

So I'd like to discuss the other four a little more fully.

I want to give you evidence in history that the

rule of law is better than the rule of man. And the ability

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of the monetary system to stablize prices.

I will draw from

England. The Commission has largely been discussing and properly so, the United States. Let me draw from England.
Please look at the chart which I believe is in

place for each of you. The chart entitled "The English

Experience." Is that available to you?

The fold out chart. All right.

Chart number one, The English Experience. This

illustrates the interesting transition from the rule of law

to the rule of man and back again. The concompetent results

are pictured statistically.

CP stands for the commodity price index in England

over those years. EPG in the label, on the chart, stands

for the purchasing power of gold over commodities generally.

Gold is line •— in gold on your chart stands for the price

of the metal, all on an index basis in 1930, it was 100.

Now, in one form or another, England was on a

gold standard from 1717 to 1931. Except for the Napolean

wars, when she was off between 1797 and 1821, you'll see at

a glance what happened with wholesale commodities prices off

the gold standard in 1797 and 1821.

In 1717 until 1797 currency convertibility was

gold at a steady price of three pounds 17 shillings, 10 1/2

pence. The supply of money adjusted accordingly, and whole-

sale prices moved along on a level plane. You'll see on the

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charts so vividly.
It was a rule that law in monetary affairs.
Then in 1797 England went off the gold standard,
largely to the wartime events and the Napoleanic wars. The

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official money supply was then solely the responsibility of
the Board of Directors of the Bank of England. Was a rule
of man.
Notice the sharp rise in the wholesale price level,

the CP line, at 50 percent.

This so-called bullion committee was formed by the

Parliament to investigate this unprecidented inflation that

you see there. Nothing remotely like that had happened in

the past 150 years. The bullion committee concluded that the

central cause was the overissue of Bank of England notes. It

did not accuse the Directors of malfeasance, however. The

bullion committee had simply in very generous language, simply

regarded the Directors as men who had a greater responsibility

thrust upon them than anyone could be expected to bear.

As the Directors themselves later publicly stated,

the Bank of England did not force its notes on the public.

No, it merely supplied the public demand. How, therefore,

could the Directors be accused of issuing too much paper.

So much for the rule of man.

In 1821 England returned to the rule of law of the

old convertibility rate, the historic figure, of 317,10 1/2/

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In 1931 the rule of law was recinded, and the rule

of men returned. The catastrophic result can be seen in the

last inch and a half of chart one. That's real impuricism.

The last inch and a half there.

To bring it up to date — that chart comes from

one of my books. I haven't revised it. To bring that chart

up to date, it might interest you, you can write in the

figure to the far right. It's about where January 1981 would

be, right in the figure called CP. The wholesale commodity

price level in England, 2,235.2, if you will. Two thousand —

on an index basis of 1930 equals 100, January 1981 would be

2,235.2.

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and long run stability returned to the commodity price level.

A century later the German inflation illustrates

the same thing.

You see these lessons are not easily learned,

An observation, much closer performed, illustrates

.5 about gold as the stabilizer.

In the charts of Dr. Schwartz, has prepared you,

you see that during the gold standard years of 1834 to 1861,

and 1880 to 1914, wholesale prices moved along on a horizontal

plane, rising and falling with changes that finally average

out to approximately to zero.

In contrast to this stability, our present infla-

tion has lasted almost 50 years at one rate or another.

The monetary history of England, which I've already

242
used to underline 24, the rule of law versus man can be used

also to prove point five. The price stability disappeared

when the gold standard was removed and returned when it was
reinstated.

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aspect of the gold controversy that really concerns me as

deeply as anything else.

The national controversy over the gold question

has come on so rapidly that the ordinary media for exchange

of argument, evidence, change of opinion, has been too slow.

For the scholar, these would have been the academic

journals in which it now takes up to two years for a manuscript

to be published. Instead, in this extremely important matter,

instead the written controversy appeared in signed articles

and a few major newspapers and magazines and newsletters from

consulting firms, where the lead time was much shorter.

By the nature of these publications, editors are

not likely to find space for reasoned reputation, serious or

faulted positions to which their readers are exposed weeks

earlier. Thus, errs and falicies of fact and reason may go

unchallenged. And being unchallenged, accepted forever.

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Now, I'd like to turn to an entirely different

I have seven of these fallicies in the printed
paper before you. But I'm not going to trouble you with
reading through them now. They're there available for you to
see. At least seven examples of what I consider a very

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deliterious public treatment of the matter.
But let me return — let me point out on the last
page. And I would like to conclude this testimony on a more
positive note than the one I have just sounded.
This Commission was certainly aware by now, if it

wasn't before, of a tremendous coneern in this country of a

return of a trustworthy currency. The outpouring of material

you have received, collectibly and incursibly, the continuous

itteration by the media, all make that point. And lead me

to believe that a way will be found.

It's my personal opinion that gold will play an

important part in the solution.

SECRETARY REGAN: Thank you very much, Dr. Jastian,

Dr. Miles?

STATEMENT BY DR. MARC MILES

DR. MILES:

the reason for supporting a price rule such as the gold stan-

dard.

Now, I would submit that the reason for supporting

that is that it's the most efficient way, and perhaps the only

way, to get us out of the current inflationary mess that we

are in.

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I'd like to stary by saying, what is

We all now how President Reagan has spent a lot of

trouble trying to get us 2 3 percent tax cut for years, but

while on the one hand the legislation is reducing tax rates,

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on the other hand inflation is increasing.

In a calculation that was done last summer by H. c.

Wainwright, economist in Boston, showed that over the four
year period, using the OMB projections of inflation, with the

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7 1/2 percent. And if, instead, you use the projections of

inflation that exist in the financial market, it turns out

that tax rates at the end of President Reagan's term are likeljr

to be higher than at the beginning.

So, that by the time we index in 1985, we'll be

indexing higher tax rates.

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meaning in taxpayer, tax rates were only likely to fall in tha

And, in recent weeks the Reagan Administration has

flirted with the concept of shifting the emphasis of policy

to balancing the budget.

Again, the problems of budget deficit is a symptom

of inflation. It's not a cause.

High interest rates reflect inflationary expecta-

tions, and the high interest rates, of course, are creating

increasing expenditures. The budget deficit — debt servicing

has risen from 7 percent of the budget in fiscal '76, to almost

10 percent of the budget in fiscal '82. And high inflation

rates were also retarding the growth of the economy which

leads to slower growth in tax revenue, and slower growth in

jobs, and therefore, faster growth in unemployment and other

transfer payments.

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So, clearly, no matter which way the Administration
turns, it runs into the same barrier for success. And that's
inflation. And I would submit that today inflation is the
problem.

Well, lis-

tening to the various proposals for gold standards, you

quickly realize that there are many ideas parading around as

the gold standard. Yesterday Weintraub presented to you a

proposal for a gold standard. And I would argue that his

proposal is simply a sheet in wolves clothing. It's just

aaother monetary proposal for limiting the growth rate in

supply of money that's dressed up to look like a gold stan-

dard.

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Now, how do we get rid of inflation?

And I would say that proposals like that only

opt to scate the issue.

real debate is over which two approaches will be used to

tackle the problem of inflation. Are we going to tackle

inflation with the quantity rule. Or are we going to tackle

inflation with a price rule.

The adherence of the quantity rule suggests that

the source of inflation is a rapid growth in the supply of

money. And their proposals here is to give the Federal

Reserve more power an incentive to tinker with the money

supply. The adherence of the price rule say that it's the

value of money that keeps depreciating because the government

The issue is not gold per se.

The

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refuses to anchor the price of money.

Current inflation reflects current depreciation,

the dollar in terms of good —goods, and high interest rates

reflect expectations of future depreciation.

And the cure of the problem, according to the price
rule advocates, is to have the government intervene, stabilize

the price of money, now and in the future.

Well, it's very interesting to look at the U.S.
government policy in the last 20 years and to notice how it's

been a steady drift on a price rule policy to a quantity rule

policy.

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And it's also revealing to observe that this period

is also coincided with a steady and dramatic rise, both in

the levels of inflation, and the levels of interest. But

20 years ago we were under the Brentwood system, which was

a price ruling. The dollar was — the price of the dollar

was increased in terms of gold at $35 per ounce. Then other

countries had their priced fixed in terms of the dollars.

If you look between 1937 and 1964, you have the

general inflation record using the wholesale price index,

where it's less than 1 1/2 percent. In terms of those bills,

you have about 2 percent on average.

For a serious break in this price rule was in 1955

with gold over behind the Federal Reserve deposits is removed,

The U.S. no longer agreed to fix the price of Federal Reserve

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deposits in terms of gold.

And in the following two years in-

terest reates jumped up to an average of almost 20 percent,
inflation rose to about two percent.
Then in 1968, convertibility of Federal Reserve
notes was eliminated though we still had convertibility of

foreign dollars, or Central Bank dollars. And with this further

reduction in the committment of the fixed value of money,

in flation

Treasury bills rose up to an average yield of almost six per-

cent.

Then in 19 71 even convertibility of dollars that

were held by foreign banks was eliminated, and inflation in

the next year and a half averaged about 6 1/2 percent. And

— while the dollar was no longer fixed in terms of gold,

at least we did have one other price rule at this time.

The Smithsonian Agreement still fixed the value

of the dollar in terms of other currencies. But that was

eliminated in February 1973. You all remember 1973. It was

a year of dramatic price rises. That was the year of the

Russian wheat deal, the year of the Arab oil embargo. And

in the intervening four years, inflation jumped up to an

average of about 9 percent and Treasury bills yielded on

average over 6 percent.

But there still was one other price rule that

lasted. And that was the Federal Reserve — was attempting

rose to 3 1/2 percent in the next four years, and

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to target at interest rates, which at least targets the value

of money today relative to the value of money in the future.

But even that was eliminated in October '79, and

following that elimination we had record interest rates

of inflation.

Now, this adverse impact of a move towards a

quantity rule is not at all surprising. The emminent economis

Robert Mundell, last week made another of his very perceptive

comments. He said, "the trouble with the argument about

10 monetary aggrigates is that too much of the discussion has
11 been spent on which monetary aggrigate to control, rather
12 than on the direct argument which is whether we should control
13 monetary aggrigates or have a price rule."
14 And said, "if we were a small country the choice
15 would be quite obvious. A small country knows it can't
16 control the relevant money aggrigates. It knows that it has
17 to control its exchange rate. We, however, continue to dilute
18 ourselves into believing that we can control the quantity of
19 money."
20 Controlling the quantity of money is a very indirec:
21 and inprecise tool for achieving the desired policy.
22 The policy objective is not the quantity of money.
23 Most of us don't care how fast the quantity of money is growinf
24 What we care about is how fast the dollars in our pockets or
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our portfolios are depreciating. And even the advocates of
*

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the quantity rule would have to admit that in order to control
inflation, you have to control the quantity of money relative
to the demand for money. And that immediately creates several
problems.

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ability to acurately forecast the demand for money is ex-

tremely limited. There have been a number of articles de-

tailing how the demand for money in the last ten years has

shifted around not only in the United States, but throughout

the world.

Second, even if we could control or we could

estimate the demand for money, we still have problems es-

timating what the money supply is. Figures have to be collected

from a number of banks and they past through several hands.

Then we have to figure out how to direct them for seasonability

and trading day variations. And there's tremendous possibili-

ties of substantial error, how, as witnessed a couple of

years ago, as well all know one person in one bank in New

York went on a vacation and there was a severe -- errors in

the money supply statistics for a couple of weeks.

Third, even if we could estimate the supply of

money, economists don't even agree on what the correct measure

of the money supply is, much less if the Federal Reserve

controls it.

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First of all, most economists would agree that our

There's a growing consensus, however, that these

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narrow definitions of money on which policy positions are

focused, represent only a small fraction to what constitutes

money.

The analogy I'd like to use is that the world

money markets are like the world's oceans.

money market is like the Atlantic Ocean. Very sizeable, but

it's only one of many sources of liquidity in the world.

I'm talking about the Federal Reserve lowering the

And the dollar

quantity of M-1B is like talking about the Federal Reserve
10

lowering the level of water in the Atlantic Ocean. There

are several problems.

Well, imagine that the Federal Reserve construct

a depressor large enough to cover the Atlantic Ocean and they

tried to lower the level of water. The changes are it would

not be able to construct it finally enough as to exactly fit

the coastline. And the water would seep around the edges and

quickly move up above the depressor.

And the same thing happens with the quantity of

money. Any standard monetary textbook will tell you that

there are a number of ways, even within the closed economy

perspective, for the market to get around the Federal Reserve'

actions, it's standard procedure to talk about how the privat

sector — changing the quantity of currency to deposits or

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the composition of deposits, how to get around the Federal
Reserve's actions.

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But let's assume that the water level could be
2
lowered. There's still two other problems. As the water
3
level in the Atlantic Ocean's lowered, large tankers that used
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to go in the Atlantic Ocean for commerce, find that they can
5
no longer use the Atlantic Ocean and start using other water6
ways
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And that water that was in the Atlantic Ocean would
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start spilling into other bodies of water around the world.
And the same thing happens with money. In order to control
the quantity of dollars, the Federal Reserve institutes a
number of restrictions which makes financial intermediation
in dollars expensive, enhance commerce and financial transations which took place in dollars, now move to other areas.
Other currencies. And the demand for money now shifts into
money substitutes and into other banking systems, such as
the Euro currency system.
In short, the money aggrigates that have become
subject to so much Federal Reserve policy debate are only a
small part of the relevant world money market. And money

markets have a will of their own, and they develop numerous

successful methods of circumventing the Fed's desire to control

one small sector.

So, the obsession with having the Federal Reserve

control monetary target is a search for mythical formula which

is bound to fail. But even worse, it flies in the face of

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the logic that why we have the monetary system in a central

bank to begin with.

The goal of an effective monetary system should be

to make money useful, not to restrict its use. And the

monetarists quantity rule has simply turned the logic of

essential banking on its head.

The key to making money useful is to stabilize

the value of money now and in the future. The way to do that

is through a price rule. And when the value of money is

stabilized, the demand for money will rise.

And that's •— will lead to an increase in the

supply of money. We saw this in the case of a Swiss franc

in the first quarter of 1978, when the turbulence in dollar

market sent — sent financial markets scurrying into Swiss

francs, the Swiss franc money supply expanded tremendously,

but the Swiss didn't experience inflation. Prices continued

to fall throughout most of 1978. Whereas, in the United

States inflation was running at 9 percent.

Well, suppose we did go back to a price rule. What

price rule would we use? There are several possibilities, but

they're not equally desirable. As I've said, we could go to

a price rule of controlling interest rates, which ties the

value of money now to money in the future.

However, this anchors neither the spot price or

future price to anything and there's very little to control

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inflation.
A second alternative would be for the Fed to re-

establish control over exchange rates.

smooth out inflation rates across country, but per se, does

not anchor down the monetary system.

The third alternative which is preferable, is to

reestablish control over commodity prices by establishing gold

or other commodity based system. By far, this is the superior

system. It does what none of the other alternatives do. It

stabilizes the spot rate of inflation.

Well, if we were to go to a quantity based system,

what should be the — er, the commodity basis, what should

be the commodity behind it.

Theoretically, one might argue that we should

stabilize in terms of vase commodities. Plus lower the broad

spectrum of goods.

However, the problem with such an index is that

it's of human construct and therefore, is subject to political

whims, and also to political pressures as we've seen in effort^

to change consumer price index in the past and in the present.

So, probably one commodity would be preferable to

a basket of commodities. Which commodity? A priority, there'

no one way to say. There's no — on theoretical grounds there

no reason in that gold is preferable to oil.

But, we have to notice that the world is coming

Exchange rates would

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back to commodities such as gold. Now, maybe that there are

certain properties of gold which just make gold conducive to

being used as a basis of a commodity standard.

Whatever reasons, I think the boot's on the other

foot. Those who oppose gold have to show why it should not

be gold.

But even if we do go to a gold standard, going to

a gold standard is not enough.

not as important as the mechanism. Backing gold — backing

dollars to a 40 percent Reserve cover will not lead to an

end to inflation. What stabilizes the value of dollars is

the government intervening and creating expectations in the

value of money in the future will be as stable as in the

present.

So, the intervention mechanism is probably more

important than what is behind the dollar.

Thank you.

SECRETARY REGAN: Thank you very much, Dr. Miles.

Dr. Thompson?

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The source of the system is

STATEMENT BY DR. EARL THOMPSON
DR. THOMPSON: I found myself agreeing quite a bit
with Dr. Fellner and Dr. Miles.
Gold has become much more unstable in its real
value than it has or was in the last couple or three centuries.
And the problem is that gold, oil, collectibles, all those

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assets that are relatively inelastic in supply in the world

are being pressed in the — have been pressed in the 1970's

and are probably going to be more pressed as population and

world income grows. Because they are an inelastic supply.

So, what's happening in the world in the '70's, and

it's probably going to continue happening, is that the value

of assets in fixed supply to the world are going to become

more and more unstable, highly — more and more highly in-

variable as oil prices, as antique prices, silver, gold,

diamond prices, all that, what that tells you is that maybe

the gold standard worked fairly well 100 years ago, 200 years

ago, during peacetime because there — there was not great

pressure on the fixed supplies of that asset to give you a

lot of price variability, but we've entered an era, and it's

going to afford us in the forseeable future a very high

variability of that kind of asset. Which means that if we

went back to the gold standard or anything like that, now

we 'd be in for gigantic —

Gigantic business cycles

I'll say that again

My estimate in one of the little hand-outs I'd had

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I'm sorry.

summar izes paper, is that we had gone back on the gold stan-

dard in —

1971, convertibility at $35 an ounce -- and said that's what

we're going to do instead of going off it, right now the

price level would be approximately 1/20 of what it is today.

if Nixon had gone back on the gold standard in

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are you complaining about buying

a pair of shoes for $50 now that cost you $20 then, it would

cost you $1 now.

of course, sell for 1/20 of its value.

depression that we've ever observed, and it would destroy our

economy, probably our political system.

The labor required to make that shoe would,
That's the biggest

So, we're not talking details here. We're not

talking fine tuning here when we're talking about going back

to a gold standard in the modern world.

system in the modern world.

The —

It's a very dangerous

and not only that, but even going to a

system of convertibility into a market basket of goods, which

is what has been long proposed by people saying that the price

of gold is too variable, even that in our world would be

extremely cycle inducing.

The reason is, just take the '70's.

shots have reduced for periods of time, reduced real wages

15 percent. Okay.

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That means like —

Now, over short periods of time —

The oil price

now, if that

would have —

Price level stability in that period, what we'd end up with

is 15 percent lower money wages.

wage offers.

Well, knowing labors, knowing labored contracts,

knowing unions, 15 percent'lower wages would have created a

if we'd of had price level stability, right?

Fifteen percent lower money

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When contracts are geared to 5

percent increases like they were in the late '60's, and you

offer 15 percent less instead of 5 percent more, that's like

a 20 percent wage reduction. That's going to give you depres-

sion conditions, just with price level stability in this coun-

try,

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depression in this country.

One of the best things we've had in this country

in the last ten years is inflation, is price level increase.

We wouldn't have had that, wages would have fallen substan-

tially because of the oil price increase, and we'd of had a

good depression. There's something on the order of magnitude

of the Great Depression.

So, we shouldn't be so quick to criticize our exist-)-

ing system. There's no system that I heard yet from anyone

that I consider superior to our existing managed paper money

supply system.

However, there is a system that is superior to all

financial — all our current financial system, and all systems

that I've ever heard of, and I would like to propose that, and

let me say what it is.

It's a system of convertibility of money into gold

at a variable rate where you get variable amounts of gold, in

particular an amount of gold that will enable you to supply

a fixed quantity of U.S. labor. Like five minutes of U.S.

labor for your dollar.

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So that means if the price of gold increases in the

market, you get for your dollar less gold because it's going

to require less gold to buy human labor.
So the system then would not be dependent on the in-

stability in the price of gold. Price fluctuations in gold

would have absolutely no effect on the wage level in that

economy. In fact, nothing effects the money wage level — the

money wage level would achieve perfect stability. And it's

the fluctuation of the money wage level that's responsible for

all economic welfare analyses of business cycles that I'm

aware of. It's that fluctuation of the money wage level that';:

given us our unemployment cycle.

Okay? Stabilize the money wage level and you —

and you've killed the business cycle. Put the money wage

level on a gradually increasing trend and you'll create a

little bit of wage creep, which people consider fairly healthy

I don't know. And price stability.

Stabilize the wage level of values, we get a little

bit of price level decrease. People have praised that.

Anything in that range between wage level stability

and price level stability is just fine. The system, however,

is not convertibility of the dollar into a basket of goods.

It's convertibility of a dollar into gold at a variable rate,

at a rate that will enable you to buy a fixed quantity of

labor. And that this quantity of labor can take constant

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overtime, which would give you wage level stability and gra-

dual price decrease. Or it can be at a gradually decreasing

quantity of labor and, therefore, approximate price level

stability and a wage level creep, but at a fixed rate.

The point is, that if it's at a fixed known rate

so labor would not make the mistakes that they make now, any-

time the wage level drops of thinking there's a better deal,

or else leaving their employment for a better occupation or
for back to school, or for unemployment insurance, or whatever

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it is, or even leisure in the case of fixed contracts, that

causes our business cycle.

So the point is that if we stabilized our money

wage, if we made the dollar convertible into gold ar a variably

rate so as to fix our money wage level, which is extremely

easy to do, I've gone through the details of that system in

the handout in Title 3, "Banking Under a Labor Standard," and

it's an extremely system to administer. If we did that, one,

we would kill the business cycle. Okay.

Two, we would end inflation at our will. Okay.

One day we just end inflation. Of course, contracts are now

set for inflation, so I recommend a gradual decrease over a

ten year period in the amount of gold — amount of the labor

you can get for your dollar, which would create a gradual

decrease in the inflation rate.

So, anyway, after a few years of adjustment you'd

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business cycle. And not only that, but since you have done

those things, you no longer need any monetary management at

all. We could go back to free banking institutions, and let the

free market supply money under this convertibility system

with absolutely no money management at all.

So we're getting free banking — the dramatic

efficiency of free banking, the absence of money management

through a rule, no business cycle, no inflation, okay, we're

making some use of our — just our gold stock is just sitting

around there. And we're ending the government monopoly on

the creation of money.

This is everything that — this is almost the

ideal system in terms of the notes that I've read of your

first meeting. Those notes I decided those were the ideals

that you had, those were exactly the ideals that I had in

making up the system. And I think it would have been adopted

long ago if economists would have thought of it. Or the

economists would have had — the old economists would have

had the benefit of the modern theory of unemployment, which

tells them that the thing you want to do is subsidize — is

stabilize money wage. Okay? Not the price level, but money

wages. Stabilizing the price level doesn't do you that much

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have knocked out inflation gradually. You'd have killed the

good, it does not destroy business cycles because they're
variations in productivity that are substantial at times.

261
And they will create business cycles.
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In addition, during a war, we go off the gold standard and we have gone off our previous standard. I will also
recommend going off the labor standard for wartime financing.

But going back on the labor standard would not create the

dislocations that going back on a gold standard creates.
Going back on a gold standard creates a gradually
increasing demand for gold for a gradually decreasing price
level. It happens every single time we've gone back on to a

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gold standard after suspension during a war. Every single

time. There's no problem in looking at that history. You

can see it in the numbers.

We go on a war, we go off the gold standard, we have

our war inflation, which is very good. You got to have that

inflationary financed during a war to support emergency mea-

sure, emergency expenditures. We got to go off the gold

standard during a war.

But we go back on, convertibility and because of

the gradually increasing demand for gold in order to finance

the standards, we've always had gradually increasing real

price of gold, which is identical to, which means gradually

decreasing price levels which is always produced in depressions

Every time. It will happen again and again. It's the same

process. It's theorectially inevitable.

Now, under a wage standard it would never happen.

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Under a labor standard where —

war is nothing gradual at all. You say we're going back to

pre-war wage convertibility. We're going back to the pre-war

wage level. And you say, "okay." You now can get, not like

during the war, you now can get —right at the end of the war,

even make it part of the law, you now can get less — I'm sorr

labor
More for your dollar than you did during the war. Okay?

More labor for your dollar than you did during the war. You

specify the amount.

We're going back, for example, to the pre-war

quantity of labor. What immediately happens is the price

level -- wage level jumps down to the pre-war level. There's

no gradual deflation. There's no unemployment. There's no

post-war depression. Okay?
So. you save the post-war depression problem.

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All right?
So what I'm saying then is, within all economic

theories with which I'm aware, what we have is an ideal

economic system, okay? And I challenge you to find out what's

tell me what's wrong with it.

There's a — let me just say that there is a his-

tory of these kinds of standards, the idea of a variable

gold standard was invented by an American economist, Simon

Newcomb, in 17 - rm

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what you do at the end of a

sorry/ 18

_„

the late 1870.s,

when they

were considering going back to the gold standard.

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for the dollar a variable amount of gold. An amount that would
enable you to buy a fixed commodity basket of goods, the price
index. And his student, who was Irving Fisher, picked up the
same idea in the 1920's and suggested that we do exactly the

same thing. Let's go back to the variable gold standard.

They didn't have the wage rate, so they had really the kind of

the wrong thing to peg to. They didn't have the advantage of

our 30 million firm BLS wage index. But it's okay. They were

talking about price level stability.

And those systems — going to those systems at that

time would have prevented the post-war price decrease that

we saw. The post-Civil War price decreases, and would have

prevented the Great Depression. Because we would have had

stable prices.

But those proposals were ignored, and I think they

were ignored because people were too lazy to think of seriousl^

of a better economic system. Okay?

Now, I'm challenging you, I don't want you all to

be too lazy. I don't want to be ignored. I'm challenging you

to tell me what's wrong with these systems. We would not have

had the depression if we had paid attention to Irving Fisher

seriously,

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He suggested inadvisely that we — that we give

We would not have had that bout in the 18 —

the

late 19th century if they had just paid attention to Simon

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Okay.

These are American systems.

These are not

British systems. Okay.

Maybe we don't have the confidence

to listen to Americans.

We didn't then.

confidence now.

full employment by every economic measure that we know. As

We should have the

We can have wage level stability.

That means

much prive level stability as we want, no monetary management,

completely competitive money supply creation.

thing you want very easily.

SECRETARY REGAN:

Dr. Williamson?

Exactly every-

Thank you very much, Dr. Thompson

STATEMENT BY DR. JOHN WILLIAMSON

DR. WILLIAMSON:

After that exortation to listen to American econo-

Thank you, Mr. Secretary.

mists, you have as your next guest a Britisher.

I can contribute something to the deliberations of this

Commission, although I would say that at this point in in-

tellectual history, American economists have been making a

lot of the running, and I don't think there's much danger

that you'll be here relying too much on British spirits.

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Newcomb.

Now, what I do —

I hope that

in the first of my testimony, is

to examine six of the leading proposals that were on the
table, as I understand it at this Commission before this
morning, there's been a couple more this morning, I examined
six of the proposals to see whether they could be expected

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to enhance or to threaten monetary stability.
Let me just say that I do agree with Dr. Thompson
that when we talk of threatening monetary stability, we are
also to include the threat of depression and not just the

threat of inflation. Naturally, that's the one that's been

dominant in people's minds because that has been the dominant

problem in recent years.

But it surely true that if this country had been

on a commodity standard or gold standard in the early '70's

and had abided by the discipline of that standard which I

admit I don't think is very probable, but had that occured

the cost would have been a major depression. Where there

was a point, of course, where more discipline could have been

done within the system, and that was the late '60's and early

'70's when the inflation was getting underway.

But to say that once that happened, it simply —

taking to gold could have been expected to event that infla-

tion without major costs in terms of monetary disruption,

seems to me to be totally unrealistic.

The first system that I examine is the classical

gold standard, and I argue that there are two fundamental

problems with that system.

One is that it rules out the possibility of using

exchange rate adjustment as a part of the adjustment process,

and that is something that's costly to a large country with

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Especiall

given the absence of downward price flexibility, which I think

we have to take as a fact of life.

The second objection is that it's impossible to

maintain a money supply that is 100 percent gold or gold

facts, because there are commercial incentives to substitute

cheap credit money for cost commodity money, and as long as

the gold value becomes — it looks secure, that' s something

which is in the interest of the public to do, but then, of

course, once the gold value falls under suspicion one gets

of an out of currency into gold, and that can produce banking

crises, monetary contraction, and problems which were indeed

familiar in the days of the classical gold standard.

Then I consider the possibility of restoring the

Bettenwood system. Now, there was an extensive literature on

the relative merits of that solution. As against the possibil

ity of moving forward to a managed international paper currencjf

in the course of the debate in the 1960's, on international

monetary reform. And I produced in an annex to my paper,

what I wrote trying to summarize the outcome of that debate,

and the book was published four years ago.

It seems to me that there are a whole series of

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a relatively closed economy like the United States.

reasons for arguing that the inclusion of gold would not, in
fact, evade monetary stability.
We had a perfect example — came up in the course

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of evidence this morning, the supply of gold can't be managed.
It is subject to a whole series of capricious influences.
Suppose that the world had been on the Bettenwood
system with an atempt to depend a fixed price of gold during

the course of the Middle East conflicts last year when the

price of gold went up to $800 an ounce.

The consequence of that would instead to have been

to produce various severe deflation throughout the world

under a restored Bettenwood system.

On the other hand, if in the process of introducing

this system, one devalued gold to a level which eliminated

that threat of mainly running out of gold. Then, of course,

the consequence would be an initial inflation of the impetus

of quite major proportions.

So my own judgment was, and it remains, that various

considerations that were introduced in the debate add up to a

conclusive case of believing that giving a monetary world to

gold would simply have prejudiced monetary stability.

I then consider the Weintraub proposal, but I think

20 ' that was adequately dealt with yesterday. So let me go on

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to the possibility of making the dollar convertible to gold

at a fixed price while maintaining a floating exchange rate

between the dollar and the currencies of the other major

industrial countries.

This proposal would introduce new sources of

268
1

variability into the foreign exchange value of the dollar, an^

the size of the U.S. money supply.

For example, suppose that people currently holding

marcs wanted to convert it to gold. Under the present system

the bulk of the portfolio ties adjustment which is necessary

to accomodate such a shift occurs in the dollar price of gold.

But if one once linked dollar price — dollar price
with that of gold, then that source of adjustment would be
eliminated and the consequence would be to increase yet more

the variability of the dollar marc, which certainly some of

us believe is already excessive.

Or else, suppose the foreign dollar profiters want

to shift into gold. Then that also would have effects on the

U.S. monetary base, and under gold standards goes the money

supply.

So that one would again, aggravate the monetary

stability by attempting to give a monetary —

Then I discussed briefly with Mr. Costamagna's

proposal for minting U.S. gold coins and selling them to U.S.

citizens at the market price of gold, and I argued that given

the past variability in the price of gold, it really would not

be attractive to use such gold coins as a medium of exchange

and, therefore, that is not a monetarily relevent proposal.

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to gold.

On the other hand, I do think that it's harmless.

.a
There's a sixth possibility, and that is restoring the usabili

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of U.S. gold reserves for transactions with foreign central
banks, the international level, and that would seem to require
agreement among the leading central banks to accept gold for

market related prices. -

Such an agreement might or might not be accompanied

by an attempt to stabilize the gold price by intervention.

But in either case it seems to me it's more likely to increase

than to decrease monetary stability.

Without price stabilization, you would have the

effect that I referred to before that rising in the market

price of gold, leading to a surge in the value of international

reserves with potentially — potential inflationary implications

With price stabilization exactly the same event would have

deflation implications.

But in either event, one would have a source of

instability.

Furthermore, the introduction of an agreement of

this sort would surely be inflationary. Something like at

the present time, gold in international reserves is really not

a liquid asset. It's quite difficult to the central banks

to use it on any extensive scale, given that they don't like

to press in the market price of gold between the market price

of gold. And given that gold is not a liquid asset, but of

course, it would again become one under such an agreement.

Now, when one reflects that the Administration has

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been resisting the creation of something like 40 billion a

year of SDR's because of the potential inflationary implica-

tions, to suddenly think of creating another 400 billion

dollars of effective international liquidity 100 times as

much, really does seem to me to smack at the irresponsible.

The general conclusion that I draw is that re-

establishment of the monetary world to gold would be at best

irrelevant, and at worse, dangerous threat to monetary sta-

bility

To say that is not to endorse past or present

monetary arrangments or policies, but it is to recommend

that the Commission condemn the intellectual escapism of

searching for simple solutions which claim to offer painless

cures to having magical effects on expectations. Let me add,

after listening to Dr. Greenspan, through having a profound

influence on the politics of the ifiscal process, seems to me

that such a condemnation would clear the way for resumption

of serious debate on the establishment of guides to economic

policy that would be capable of assuring more stable policies

in the future. Let's not imagine that we're ever going to

get the perfect stability.

If the Commission does recommend the rejection of

any future monetary goal for gold, then of course, we need

to decide what to do with respect to the stock of monetarily

redundant gold.

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One possibility would be the Treasury —

not the Federal Reserve, to maintain the gold in its portfolio

and even to use it in transactions of the official level when

this was judged likely to be advantageous.

I'm not personally not much enthused by this solu-

tion because it's not technically necessary. There is not

a shortage of liquidity in the world at the present time, and

there are plenty of ways of creating more should that be

necessary

Moreover, this would tend to retain the stock of

gold in the hands of the monetary authorities, rather than

making constructive use of it. Of course, there are many

constructive uses of gold. Gold is not a negligably important

commodity.

The alternative would be to cease any further gold

transactions with foreign monetary authorities, which seems

to me to be the logical compliment to a recommendation against

any future monetary gold.

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excuse me,

One would then presumably want to use a part of

the gold to place it in a strategic stock pile. I argue that

there may also be a moral case to using a pot to supplement

IMF gold, another revived trust fund, and the remainder would

be sold to the public at a rate calculated to maximize them

at present values to U.S. taxpayers.

There is one other question that I would like to

272
touch on, and that's the question of disposal of the rest of
the IMF stock.
I would like to ask the Commission to ponder very
carefully whether it would be proper for the United States
to pesfer so-called restitution of IMF gold to man the countries, or as it's been phrased I think, for the U.S. to get
7

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back its gold from the IMF.

It's surely relevant to recall that in the 1960's

U.S. leaders gave repeated and bipartisian assurance that the

determination of the United States to maintain the convertibilt

of the dollar into gold at $35 an ounce for foreign and

official holdings.

Acting at least in part on the supposition that

such committments could be trusted, many government, including

most of those poorest countries on earth, headed the pleas

of U.S. officials to avoid exposing the Bettenwood system

to additional strains by exercising a legal right to convert

dollars into gold.

The unilateral renunciation of the gold converti-

bility of the dollar by the United* States in 1971, coupled

with the subsequent acquisiation in the market value of gold,

have exposed those countries, which acted as loyal and prac-

ticing friends of the United States, to very large losses in

comparison with financial position that they would have en-

joyed if they demanded gold.

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It's been calculated that if the non-oil developing

countries had converted all their foreign exchange reserves

which were mostly dollars, into gold at the end of 1969, they

would have been some 90 billion dollars better off at the end

of 1979, then they actually were.

Since the price of gold is again at roughly the

same level, that gives a measure of the extent which coun-

tries marketly poured in the United States, suffered for

actions which would were influenced by the belief that the

U.S. committments could be trusted.

It seems to me that it would be ignoble to me

to make no move towards compensating those countries who

lost out beyond the 4.6 billion dollars that has already been

realized through the sale of 1/6 of the IMF's gold and paid

into the trust fund.

The obvious mechanism to do that would be to use

more of the IMF's gold in the same way. In a more generous

world than ours, one might have hoped that the major western

powers that have made financial gains through the rise in

the price of gold might have been prepared to go further than

this and make additional donations to the trust fund, with

a view to going some way to measuring -- to writing the

injustice that has been done. Clearly, there would be no

perfect writing of such injustices.

But to go in the opposite direction,-to demand

SECRETARY REGAVI:

Thank you, Dr. Williamson.

2 Thank all of vou for your opening statements. We now will
3 begin with the questioning. But, before we actually begin,
4

may I ask the panel, if at all possible, and I understand

5 asking a group of distinguished economists such as this, to
g do this may be asking almost the impossible, but I think
r, it can b-3 achieved — it something that you might require
g of your students in an earlier oeriod — would you please
o give short and pointed answers so that we can ask more
2_Q questions.
2_-]_ Remember, you're in the process of educating us or
-,2 the Commission, and it's through your answers that we'll
-,3 learn an awful lot, but the longer the answer, the fewer the
questions.
That is an old game that's played, but I sure
14
as
15 heck would like to avoid it here if it at all possible.
And
16 in our questioning we'll go around the panel
-,„ in alphabetical order, so we'll start with you, Mr. Costamag
1Q

MR. COSTAMAGNA: Thank you, Mr. Secretary.

My first question is of Dr. Greensnan. Sir,
19
you ->oint out that the problem of re-entry or fixing the
20
price is a considerable one in terms of establishing
21
Treasury gold notes. Is it possible to do the same type of
22
financing with a non-fixed gold price, reflecting, say, the
23
market price?
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3R- GREENSPAN:

Well, it doesn't strike me that

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further restitution, would, it seems to me, to be dishonorable
SECRETARY REGAN: Thank you, Dr. Williamson.

2 75

working with the market price is in the sense really different
from what we're doing now. There's nothing to prevent the
Treasury from buying gold at varying prices or holding gold
at various prices.
The whole purpose of the exercise is to substitute
something which works towards the stabilization the dollar and
gold. To merely specificy that we're financing in current
8 prices is not to actually change any of the relationships in
9 the system.
10

MR. C0STV4AGNA: Thank you.

11 I have a couple of questions for Dr. Jastram, if I
may. Dr. Jastram, concerning the supply of gold from South
13 Africa that we have received, and I think you're aware of the
14 problems that are created by the fact that South Africa does
15 produce substantial percentages of the world's gold, do you
16 consider that the South African Government can be trusted not
17 to interfere with any system that we might create if we were
18 to have a convertible currency?
19 DR. JASTRAM: Well, you're certainly correct. That's
20 a very important question. South Africa, in 19 80, I think,
21 produced 72 percent of the free world's gold supply. What
22 they do is of paramount importance and what they might not do
23 truly is — I would turn to an historical precedent on that
24 and give you at least a partial answer.
25 In — that requires a bit of history, Mr. Chairman,

276

may I?
The gold pool — the Lond Gold Pool, so-called,
was founded in 1961, a consortium made by eight of the most
oowerful central banks which had as its guiding purpose to
maintain the buying and selling at the rate of $35.0 0 an
ounc^ for gold.
In 196 8, unable to withstand the demand pressures,
8 the London Gold Pool, in March of that year, disbanded. At
that time, the South African authorities, the Reserve Bank,
10 I think it was, entered into an agreement with, the IMF,
11 thereafter, to sell at a constant price of $35.00, which had
12 been the Gold Pool's purpose to maintain, thereafter,
13 collapsed the Gold Pool, to continue to sell to South Africa
14 at $35.10 an ounce all of the gold that the IMF requested.
15 And that was in a two-tier market. The upper
16 tier, which was the free market, was moving along — later
17 almost soaring away on the $35.00 figure, and, yet, South
18 Africa fulfilled all of those commitments at a very considerably
19 opportunity cost to itself.
20 That's an historic preoe^n4: thit I woul* go on.
21 The other part of my attempted answer to your
22 significant question is that South Africa has a perennial
23 balance of trade problem, which is well-oublicizad, well24 known. They have many resources, but in the main, they can't
25 eat them, they're gold, of course, other strategic metals and

277

so on.
The one thing that they have to do and are constantly
in a pinch and a bind to do is to settle — control that
balance of trade problem. So, look at the two alternatives.
One is that — well, first of all, we have to ask the question
why would they want to destroy the world gold standard.
And that's not just a rhetorical question. We would
have to satisfy ourselves that they would have a motive for
such an attempt.
All right, granted that, and looking to their own
self-interests, for one thing they have to export, because
of this balance of trade problem. Gold is one of their —
patrimony is the term that was used yesterday — one of their
resources for doing this.
The other alternative is to withhold gold out of
spite or out of an attempt to wreck the world economy. But
this, of course, would be cutting their own throats in a
colloquial sense, because this would exacerbate their balance
of trade problems.
So, as I see it, both on historical precedent and —
on the historical precedent, I think, perhaos, Mr. Volcker
could reaffirm what I have just said — but both on the grounds
of historical precedent and on the grounds of, in a sense,
economic self-survival. I do think that they can be
depended upon as a source of supply for the whole world.

278

MR. COSTAMAGNA: I have another question of Dr. Jastram.

2 Your excellent oresentation in this pamphlet spurred me to
reading your book.
DR. JASTRAM: That's even better.
5 MR. COSTAMAGNA: The question that I found quite
6 interesting in your description of 1717 and the development
of what aoneared to be a de facto gold system in England, and
8 as I understand the history, it was — it developed because of
an importation of gold coins and replacing silver coinage that
10 existed at the time rather than a paper currency that we have.
11 Is there any analogy or similarity to what we may
12 be seeing happening in the United States currently where we
13 are having an influx of gold coin and the possibility -— and
14 that's only been four years — and according to your history
15 here, it evolved over a period of about 70 years -- but in
16 the last four years we have seen an influx of gold coins -17 and Drojecting ahead for many more years is it a nossibility
18 that we are establishing a de facto gold system or gold
19 standard that we may not even be aware of?
20 DR. JASTRAM: Surreptitiously -- not surreptitiously,
21 but gradually coming up on us without public notice?
22

MR.

COSTAMAGNA: Yes, as it appears to have occurred ^t

23 that period of time in England.
24 DR. JASTRAM: Well, that's an interesting thought.
25 Let me walk along with you on that. True, in England, at that

279

time, French coins, Belgian coins, Dutch and others, Spanish,
circulated freely in England, so you had a mixed coinage by
nationality.
The — first of all — and I think what you say,
my immediate reaction is is that it is theoretically possible,
but there would be a good deal of friction before it could take
place.
8 First of all, those foreign coins, the krugeran
9 and maple leaf and then the Mexican coins, which are now coming
10 out in smaller and smaller denominations, would have to get
11 down to a gold content where the ordinary trade of the day
12 could be handled by them, down to a gold content representing
13 a dollar or two dollars or something of that kind.
14 I always have a prototype on a question of this
15 kind or discussion of this sort of my local Safeway and what
16 would happen there, because you're talking about a public
17 acceptance of this, the one thing — if you did get down to
18 the denomination of — in gold — where it was a coin of the
19 day, you'd have something like a $5.00 gold content, then
20 that Safeway is going to have to have sufficient change to
21 give you $4.00 back and you're not going to take paper dollars
22 if you're that framn of mind, to give you $4.00 gold dollars
23
back for the $5.00 with which you buy a $1.00 can of corn.
24
So, that's going to be a point of friction and
25

equilibrium adjustment.

280

The Safeway — well, I could go on.

You see the

fact of the difficulties. The Safeway clerks have to be taught
how to recognize these coins and so on.
But, certainly, it's possible and something like that
did happen in England with very nretentious consequences, but
ultimately England went on the gold standard through that kind that was ancillary to it, but that kind of activity of exchange.
8 MR. COSTAMAGNA: Is my time up, Sir?
SECRETARY REGAN: It's up for now. We'll try to
10 return to you if at all possible. Dr. Jordan?

i
11

DR. JORDAN:

Thank you, Mr. Secretary.

12 "ly first question is for Professor Jastram also.
13 You emphasized rules versus — rule of law versus rule of man —•
14 and I have tended to view the problem that way also, but we've
15 heard some very interesting testimony that to say it's a rule
16 involvas a statement that the government is still going to be
17 involved in monetary affairs, and whether it's a rule involving
18 fixing the price of gold, exchange rate between dollars in
19 gold, or any other kind of rules, rules can be changed.
20 Professor Holzer, yesterday, pointed out that until
21 you get government out of the business of fixing rules in
22 monetary affairs involving the quantity of money, you don't
23 have a true gold standard. And Professor Rothbard presented
24 a proposal that I consider to be approaching a true gold
25 standard, where the government neither owns gold, it does not

281

buy or sell gold, it has no monetary liabilities

—

2 DR. JASTRAM: I'm sorry, did you say appropriate to?
I just missed your word, that you consider appropriate to a
gold standard?
DR. JORDAN: It's a true gold standard.
DR. JASTRAM: Yes.
DR. JORDAN: The gold is held in the private sector
8 by individuals or by banks, and the monetary liabilities of
those insititutions, whether it's bank notes or transaction
10 deposits, or backed by gold or equivilent to gold, and in a
11 true gold standard system there are no monetary rules. Is
12 that correct?
13 DR. JASTRAM: Well, first of all, I do believe that
14 various forms of gold standard can exist under operation by
15 government and by implication, I do not agree with what was
16 said by the gentleman to whom you refer, yesterday.
17 There is something, though, that I think is very
18 much worth considering. I'm reading a manuscript right now
19 that I'll be commenting upon at a forthcoming meeting, by an
20 eminent economist, I'm not free to disclose his name because
21 the paper isn't out yet, in which there would be a free
22 banking system in which each bank would held convertible for
23 specie, so that the government would have nothing to do about
24 it.
25

I've not yet made up ray mind, as a reader of this

282
manuscript, how I will comment upon this.

But these proposals

are coming out.
But to get back to what I take to be your original
4

question, do I think that we could have a gold standard and

tolerate government intervention, yes, I think that we can.

DR. JORDAN: Then the problem becomes one, if it's

a rule involving a gold exchange standard internationally or

domestic price of gold, it is a rule that possibly can be

changed, and the question becomes one of finding a rule that

is most reliable and credible and will be adhered to.

DR. JASTRAM: Right.

DR. JORDAN: O.k. Professor Thompson, I don't know

if I understand your proposal or not. I think you understand

it very clearly, and I'm still struggling to see if I under-

stand it, let me try. What you're proposing is that we have a

rule that says the government fixes wages, some unit per time,

in terms of dollars.

MR. THOMPSON: In effect, what you're doing is

converting dollars into gold or actually — gold or —

DR. JORDAN: It doesn't matter whether the money

is dollars, gold, eagles or pounds. I'm saying that money

per unit is equal to wages per unit of time and it's fixed

by law.

24
25

. THOMPSON:
that, though.

That will be its effect.

It's like a gold standard.

It's not

Money is going to

283

be convertible into gold or an asset the government finds even
more convenient to deliver. So, whatever is most convenient
5

for the government to deliver, that's what it would deliver.

4 i DR. JORDAN: That's a wage control.
MR. THOMPSON: It's not a wage control at all.
DR. JORDAN: It's a fixed exchange rate between
the —
8 MR. THOMPSON: There is no market control on any —
in any — there is no labor market that is being intervened
10 in whatsoever.
11 All you're doing is telling people what you'll
12 convert their gold into. You're computing a price and wage
13 index from last month, and that's going to be your basis for
14 making your gold payment.
15 You're going to give them an amount of gol'l th?t
16
Jill
ona-'jli tham to buy a unit o" labor by looking at the
17 market price of gold and the wage index and you'll be able to
18 calculate how much gold to give the person who wants to make
19 a conversion.
20 will know that his dollar is always worth the unit
He
21 of labor.
22 DI

*« JORDAN: Have you looked at our measures of

23 wage cost, employment cost, hourly wages other than — and
24 thought about which one you would want to use?
25
<1R. THOMPSON: Yes, I'd use the BLS survey of

284

firms.
As I said, there are 30 million firms that are
being surveyed every month and we're not doing anything with
that data that's useful, and I'm saying there's a tremendously
socially valuable use of that number --of those numbers, if
we will.
DR. JORDAN: I want to ask a question to each panel
8 member, but since I was only supposed to have five minutes and
there's six of you and I've used three of them already, these
10 answers have to be very short •— whether or not you think it's
11 desirable and irrespective of the time span of achieving it
12 or method of achieving it, would it be possible for the U.S.
13 maintain a fixed dollar price of gold unilaterally without
14 an international agreement? In other words, if we have
15 floating exchange rates.
16 DR. GREENSPAN: That's not an economic question, it's
17 a political question, and I would say that probably not as
18 you raised originally, Gerry, the question of the government
19 holding or having some form of rule.
20 I might add that there is a role for government in
21 the judicial sense in the clean gold standard in that somebody
22 must define what the concept of the dollar means.
23 In other words, the private sector can have a gold
24 standard providing there is a judicial statement of what the
25 definition of the dollar unit is.

285

In a technical sense, is it possible to have a
2 domestic gold standard without an international agreement, yes,
5 of course it is. Is it politically feasible, well, if it's
4 politically feasible to do it domestically, it probably is
5 internationally. There are huge problems of which I am certain
you are aware of more than I.
MR. FELLNER: If I understand your question correctly,
8 I think it's feasible. It would be exceedingly damaging with
very bad consequences. One would be exposed to political
10 decisions of the other gold authorities outside the United
11 States all the time. This might lead to inflationary and
12 deflationary consequences, on a very major scale.
13 If I understand your question correctly, which means
14 we fix the dollar price of gold, the others do not.
15 DR. JORDAN: That's correct.
16 MR. FELLNER: That have a very large amount of gold
17 in their — their monetary authorities own a very large amount
18 of gold, about three-quarters of the officially held gold.
19 This I think, in principle, possible. It would be an exceedingly
20 bad idea.
21 DR. JASTRAM: As a practical matter, no.
22 MR. MILES: I think we have evidence of other
23 countries such as Switzerland and Germany, which have tended
24 stabilize the value of their money during the last 10 years
to
25
much
more than the remaining countries. And the result has

28f

been that there's been a growth in the proportion of Swiss
francs and Deutchmarks that are used in international markets
compared to, say, the dollar.
And I think if we were to stabilize the value of
the dollar in terms of gold, that would reverse the trend,
increase the demand for the dollar and I don't see that the
pressures building on the U.S. gold supply, therefore, to
create these problems.
MR. THOMPSON: Yes, you've got to wait a few years
for some kind of gold rush on the U.S. Mint and then it would
be the moment of truth. We would have to deflate like mad.
We would have to tighten banking systems down to where we were
back down to this gigantic depression that I talked about.
We could do it, but as the gentleman has been
saying, it's very impractical. It's unpolitical. It's
damaging, unwise, what else can you say.
MR. WILLIAMSON: Well, I agree that it would be
possible in principle. In order to maintain a fixed price of
gold, one ultimately has to be prepared to allow monetary
policy to be guided by that end, and that does mean that if
there were a move out of dollars into gold, one has to be
prepared to deflate the money supply by whatever extent is
necessary to curtail, to stop that movement and there are
circumstances in which I think that would clearly be undesirable
SECRETARY REGAN: Thank you. Governor Partee?

287!

GOVERNOR PARTEE: Well, I must say we have a
vary wide diversity of view on our panel this morning that's —
I congratulate you, Gerry, for thinking of a question you
could address to everyone.
I was thinking of addressing the question — although
I — Dr. Thompson gives me a little trouble — I was going to
address the question of whether, in very summary form, each
8 panel member would speak to whether they 'oelieve that the
objective of any mechanism we have should be to stabilize
10 prices as the only and principal -- as the principal and far
11 most important objective of running the system and whether in
12 view of that, if that is the obejctive, whether they think
13 that the relationship of gold, other commodities and other
14 components as such, that gold could be a transmission
15 mechanism for effectively doing that.
16 I guess it's really the subject of the Commission
17 and I would like a very brief answer from each of you on that
18 question.
19 DR. GREENSPAN: Essentially, I think the answer is,
20 yes. And the reason the answer is, yes, is that the purpose of
21 the monetary system is to essentially remove the uncertanties
22 of business decision-making and other actions on the part of
23 economic actors which are affected by changing expectations
24 of the price level.
25
To the extent that one can remove the uncertainties

2%'Q

attendant upon expectations of price fluctuation, you lower
the risk premium in the system and essentially lower the
o

hurdle rates of return and in a sense, the real interest rate
I think that is as much as a monetary system can do considering

that what its basic purpose is after it creates a division of

labor is to
remove tne
the risK,
risk, essentially,
essentially, rrom
from price
price i
fluctuation
:o remove
n

The question is does gold do it.

I think any

broadly held or desired luxury good which has many of the

standard old classical characteristics of the medium of

exchange would do it, gold being probably the most likely.

The problem of actual nrice stabilization which is

what Willy Fellner was referring to with respect to the

supply is not actually necessary in the sense that so long as

the price level doesn't, for example, decline more than the

real interest rate, it should not affect the underlying

investment decision-making process.

So, I would basically say, yes, at root, the basic

purpose of the monetary system, after enabling the division

of labor, is to try to remove the risk premium from unantici-

pated price fluctuations.

MR. FELLNER:

I agree with what Alan Greenspan just

said.

monetary authority to create a reasonable degree of

predictability concerning the price level.

I believe that it should be the objective of the

Not

, that implies, I think, that changes in the

289

price level should be very gradual and broadly foreseeable.
Complete price stability, constancy of the general price
level we never have had, and that would be, of course, very
ambitious objective and I don't see any reason why we should
strive for that.
But changes in the general price level have to be
very moderate and gradual and broadly predictable to remove
that uncertainty which has developed very largely because these
inflationary processes which we have created here have a
tendency steepen and if this steepening were a continuously
accommodated, this would get out of hand very quickly.
Consequently, occasionally, we have to clamp down
on this, at unpredictable times in unpredictable intervals —
and are creating an enormous amount of uncertainty. With an
inflationary process that is steepening, occasionally we
discontinue the accommodation of that and we have, in the
past 15 years, then started again to accommodate at still very
high inflation rates and rising inflation rates.
That is the kind of uncertainty, I think, which we
really have to eliminate. Now, that doesn't mean literal
constancy, but it does mean a broadly predictable miled price
trend which is the best we can hope for in this regard and it
would, I think, condition market expectations, influence
market expectations in such a way that cost trends — no it.
trends -rould adjust to this and consequently chare would be

290

no long-run, alv^rs^ consoquancies because both trends would

2 adjust to a foresseable price development of this sort.
Now, as for the output limitations, which are really
a new — I wouldn't say, historically, entirely new, but to
this extent a new phenomenon, that we have a steep increase
in the real price of gold over a period of 10 years
And the reaction to that is substantial decline in
8 the world output of gold. If that kind of thing were to continue,
then I think the difficulty would not be simply that that the
10 price of gold would not stay constant — I agree that that is
11 not necessarily a requirement of a healthy system -- the
12 consequence of this would be that price, if you keep the
13 nominal price of gold constant, that the price level would be
14 moving to a very substantial extent and the trend would be
15 quite steep and very unpredictable.
16 So, that is the reason why I think that output
17 limitations do play a role. Not because they mean that there
18 would be some change in the general price of gold, but I think
19 there could be a steep decline unless you start doctoring the
20 gold price, and then you get all the political arbitrariness
21 back into the system which we really try to eliminate.
22 GOVERNOR PARTEE: If I might just interrupt. It's
23 the mechanism that bothers me, Willy. Just the point you were
24 making that the behavior of the gold price in the last decade
25 suggests to me that as a linkage mechanism, it is not very

291

good in terms of trying to achieve the general price stability

2 if you agree that the general price stability is the basic
5 objective here.
4 MR. FELLNER: Yes, precisely. I think that the
expression that was used in this discussion that we need price
rule, well, the question is which price. I mean, you wouldn't
pick for that a price that moves significantly relative to
8 prices in general all the time, because that means you have a
price rule which doesn't perform the function which a price
10 rule should.
11 Price rules should relate to the general price
12 level to things people need not to a specific commodity except
13 if that specific commodity turns out to be a reasonably good
14 | proxy for goods in general, which I think, with some qualifica15 tions it was in a certain era and it might become in the
16 future.
17 But that does, I think, involve output responsiveness
18 to the relative price. It might again get to be that. I
19 don't think it has been that over the past period which we are
20 now surveying and I don't think that now there is any sense
21 of its becoming that, because-there are no sense of the output
responding
22
to this general — authorizing the specific price
of
23 gold.
24 the future might — these output lags were
But
25
substantial
even during the period in which the gold standard

292

1 functioned reasonably well. There were lags. These lags were
2 sometimes quite substantial. The reaction of output to the
3 relative prices vary as to new technological innovations and
4 new finds.
5 But it might happen in the future and that's x>rhy
6 I would not start liquidating our gold stock. But I don't
7 see any sense of it in the now foreseeable future.
8 GOVERNOR PARTEE: I do need to emphasize brevity
9 in the answer, because the Chairman is looking crossly at
10 roe.
11 DR. JASTRAM: Well, for brevity's sake, let me
12 agree with Dr. Greenspan for the same reasons that he gave and
13 without repeating them.
14 MR. MILES: Well, I agree with Dr. Greenspan
15 that price is certainly an objective, but I would say that the
16 objective is to stabilize the price of money and it's the
17 uncertainty of the value of money that we want to minimize and
18 reduce. And if we can eliminate that, reduce that uncertainty,
19 we reduce the cost of business which would make the economy
20 work better.
21 GOVERNOR PARTEE: You mean the value of money, I
22 take it, Dr. Miles?
23 MR. MILES: Yes, the value of money.
24 GOVERNOR PARTEE: Not the price, but the money?
25 MR. MILES: Yes. But whether we continue to have a

293

terms of trade problem, the price of one good in terms of
another continues to change over time. That's indicative of
a dynamic economy. And, so, we're going to have this problem
no matter what standard we choose.
No particular standard is perfect. I mean, if there
were a perfect standard that we could all agree upon, there
wouldn't be any need for this Commission.
8

And one thing we've learned in the last 10 years is
that simply changing the unit of count in the monetary

standard, doesn't influence the terms of trade. So, it isn't

stabilizing the unit of count that's going to affect the terms

of trade, these are natural forces in the market place.

So, which of the many commodities should we use to

14 | stabilize money, I would say that, again remined you, the
15

market keeps coming back to gold, and I certainly wouldn't

want to pretend to be more knowledgeable than the market.

MR. THOMPSON: You thought you'd have a little

trouble with me —

GOVERNOR PARTEE: Well, I'm willing to accept

stabilization of wages as an equivilent of stabilization of

prices.

MR. THOMPSON:

But it's not.

The stabilization of

wages, I think, is what we've missed in the past as the goal

we should be looking for, and if we would have been pushing for

it, I think it would have flown very well.

294

I don't think it's wise to stabilize prices, because
wages — real wage does vary quite a bit over important
episodes of our history.
And if you could stabilize wage rates, money wage
rates, if you could get a variable amount of gold so it
stablized the money wage rate, you could go to free banking and
that's the main advantage.
8 If you go to free banking, you don't have business —
9 it's a perfect system you're thinking of. You're very close to
10 a perfect system. One that will really sell.
11 So, I'm extremely for what you've said. I've
12 estimated that increase in the real wealth of our country at
13 around 20 percent from a policy of that kind.
14 GOVERNOR PARTEE: But is gold a good linkage
15 mechanism for getting what you want?
16 MR. THOMPSON: Sure. Gold is fine. Gold is —
17 it's got very nice —
18 GOVERNOR PARTEE: At a variable price?
19 MR. THOMPSON: Sure. At a variable price. You
20 could use bonds as far as that goes, but gold is a convenient
21 asset. People like to exchange money for gold. It's not
22 necessary.
23 MR. WILLIAMSON: Well, I agree that minimizing
24 inflation and especially the availability of inflation is an
25 important objective. I don't think it's the only important

295

objective and neither do I believe that one has to be a
inflationist in the crude 1960's sense of somebody who thinks
you buy more unemployment permanently by having — less
unemployment permanently by having more inflation in order to
recognize that the cost of reducing inflation can be very high
in terms of unemployment for substantial periods, and that
introduces a second set of considerations which should be
8 important in the formulation of monetary policy.
On the question of whether gold would be a good
10 link if one thought that inflation were the only objective, I
H share the view that it's too narrow to be a particularly
12 efficient link. But if one were trying to stabilize the price
13 level directly through a monetary mechanism then one ought
14 to be operating on a broad basket of commodities, and —
15 but even that there is an objection to it insofar as the
16 problem is not simply the minimizing of inflation, but insofar
17 as one also believes that the other objectives relating to
18 employment and output in the shorter run are important.
3_9 GOVERNOR PARTEE: Thank you very much.
20 SECRETARY REGAN: Thank you, Governor. Congressman
2i Paul?
22

- PAUL: Thank you, Mr. Chairman.

23 I would like to direct my first question to
24 Dr. Jastram and follow up on Dr. Jordan's question in dealing
25 with the rule of law versus the rule of man.

296

Before I state my question, I would like to
comment on what happens in the free market when we have a real
gold standard, when we do not have a government gold standard.
Under these conditions we still would have a rule of
law and government would play an important part in that system
because the rules against fraud, the rules against counterfeit, the rules against theft would apply and I think they
8 would be more easily achieveable under those conditions than
they are under the system that we've had in the past whether
_Q it's a government gold standard or a government paper standard.
H For instance, we've been able to apply the rules of
12 fraud more easily against -- for insurance companies, say,
than Social Security.
13

e have been able to be more fraudulent

and
14 abusive of that system than we permit in insurance
co~paiii^s
to lefraud the people with their system.
15
So,
16 the government would play an important part.
It
17 would be there to prevent the fraud and the theft that
goes
on. Since 19 39, I understand, there's been $3.3 trillion
18
transfer
in wealth. So, one group lost a lot and another
19
group
gained a lot in inflation.
20
So,
21 this is a moral battle that's going on and
having
to do with honesty and dishonesty, but to be specific
22
on
23 my question on the rule of lav; versus the rule of man,
24

assuming that we will have a gold standard probably with the

government involved one day and that assuming that they do

297

not accept my views on the Gold Commission that we will have a
true gold standard, we would have a rule of law that would tel]
the authorities what to do with the monetary system — how
4 is this superior to the rule that might be written as a
5 monetarist rule? Why is the rule dealing with the metal
is

6 superior? And according to the evidence that you present,
which, by the way, I think was outstanding. I can't quite
8 understand how anybody could look at what you've done and
do anything but accept a gold standard.
10 But why would one rule be superior over the other
11 rule?
12 DR. JASTRAM: Well, I'm not necessarily of that
13 opinion, that one is necessarily better than the other. The —
14 I'm arguing, first of all, in a generic sense, as you grant,
15 for a rule of law, than I am addressing the Gold Commission.
16 I'm talking about the rules that have existed with reference
17 to precious metals, and specifically gold.
18 But there's a monetary rule. I can't really argue
19 the merits, but I would admit it to my category of rule by
20 law. Dr. Schwartz knows this better than I do and perhaps he
2i can remind me, but I think that Milton Friedman at one time
22 proposed a Constitutional Amendment for a 3 percent increase
23 in the monetary supply.
24 °R« SCHWARTZ: I can't hear you. Would you speak
25 into your —

298
1

DR. JASTRAM:

Well, it's my recollection that

Milton Friedman once proposed a 3 percent -

as a Constitutional Amendment to the monetary supply.

Well, whether or not —

a law of 3 percent

I'm sorry about the digres-

sion —

monetary supply,

yield predictability and dependability and credibility.

And I just don't find that in the affairs of man conducted by

man.

a rule could be applied to other parameters of the
what I'm looking for is a rule which will

This will vary from group to group, it's quite

true, but I want to have a built-in, certified, dependable

credibility, and that rule can take various forms.

13
14

MR. PAUL:

Would that include the use of metals in

the monetary system?

DR. JASTRAM:

MR. PAUL:

Yes, very much so.

And you would consider that superior over

one that did not include the metals?

DR. JASTRAM: I would.

MR. PAUL:

I want to thank Dr. Thompson, particularly,

for coming today-, because, you know, for so long the debate

has been between discretion and monetarism, and those who

advocated gold were always the ones seen out on the fringes.

And I would say today with your proposal it makes

gold very acceptable, a very reasonable compromise between

yours and paper.

So, I think you make gold look good.

29«

I would like to ask Dr. Jastram another question
relating somewhat to the wages that Dr. Thompson alluded to .
It is my understanding and the statistics show that
in the last 10 years that the real wage under this paper
5 standard that we have has gone down 10 percent, and it's
6 been very, very distructive to the working man.
What type of statistics do we have and what evidence
8 do we have to show whether or not the working man benefits
9 under a gold standard? Should our goal be a stable wage or
10 is it possible that under a gold standard the real wage might
11 even go up?
12 DR. JASTRAM: Well, that's a new one on me, as most
13 questions in this world are. But I've not studied that. The
14 i only thing I can say historically is that between 1700 and
15 19 30 real wages in England went up by some 700 percent as
16 I recall.
17 Now, there were many, many other reasons, of course,
18 for this, but in effect, you're asking does gold standard put
19 a lid upon real wages. Not at all. Not at all, historically.
20 MR. PAUL: Have you ever known the real wage to
21 go down under a gold standard?
22 DR. JASTRAM: I can't cite a case, but I don't deny
23 it. I just don't know the record.
24 MR. PAUL: I'd like to ask Dr. Greenspan if he's
25 familiar at with the experience — I believe it was in the

300

50's or the 60's that they sold bonds —

gold backed bonds

are you familiar with that and could tell us whether or not
that was successful or how that would coincide with your
proposal.
DR. GREENSPAN: Are you talking about French sales
of gold bonds?
MR. PAUL: Gold bonds, right.
DR. GREENSPAN: I assume you mean the French
experience, not the United States.
MR. PAUL: Yes, the French experience.
DR. GREENSPAN: Well, I think the French experience
is terribly interesting in the sense that they, as I recall,
bonds which yielded remarkably high interest rates, which
another way of saying that the holders of the bonds didn't
real trust that, in fact, at some point the promise to pay in
gold would, in fact, be unassailed.
The experience that the French have had has been,
insofar as financial is concerned, very substantial. I don't
think that is a terribly relevant consideration. I mean,
that's basically an issue of you sell bonds not for the purpose
of making or losing money, I think you do, at least in my
proposal for the notes, to set up a mechanism for re-entry.
And I would scarcely recommend huge sales merely for the sake
of putting them on the books, because it's quite conceivable
if we continue the type of monetary and fiscal policies which

301

we have over the last few generations, I will guarantee we wilJ
lose a lot of money on gold notes. I don't think that it is
a — there's nothing which specifies that you either lose or
gain without reference to what type of policies exist at the
time.
Those note are in — are outstanding.
MR. PAUL: If we said five year Treasury bonds
8 backed by gold — and if we had a rapid increase in the price
of gold; that is, say, there was a time when gold was $50
10 an ounce and some who were very concerned about the affairs of
H state here in Washington that gold would one day go to $500,
12 and they were ridiculed and laughed at — there are some who
13 say today that at the rate we're going that gold will soon be
14 $5,000 an ounce.
15 If this be the case, and in five years it were
16 $5,000 an ounce, is there any possibility that our government
17 would do exactly as they did once before and renege on their
18 promises and not produce the gold?
19

- GREENSPAN: Well, that's certainly a possibility.

20 I assume you're referring to the Thomas Amendment in 1933 when
2i we outlawed the gold clause.
22 * think there's a very good chance of that and
23 that's the reason why I would suspect that as soon as any
24 evidence of that possibility arose, that the yield on gold on
25 such notes would go above the absolute minimal of two or three

302

percent for the same reason that it rose in France.
MR. PAUL: I believe my five minutes is up.
SECRETARY REGAN: Thank you, Congressman. Governor
Rice?
GOVERNOR RICE: Thank you.
Dr. Greenspan, I was not quite sure where you came
out with respect to the gold standard. On the one hand, you
said that it was probably premature to move to a gold standard,
but then you outlined certain tests that could be undertaken
which would test the feasibility of going on the gold standard.
Now, would I be right in assuming that those feasibility tests that you outline are policy recommendations for
the present situation and would you look forward then to
moving toward the godl standard?
DR. GREENSPAN: I have always favored a gold
standard as an ideal monetary system. I think that a lot of
the analyses of the past about its particular problems, I
think, are more problems of a particular period in history
than the fact that the gold standard extant.
In other words, I know •—• we look at a great deal
of price volatility during the gold standard period and, yet,
what we were looking at were largely agricultural economies
in which we were dealing with tremendous price fluctuations
which still occur, of course, in the agricultural area, but
it is a very significantly smaller part of our economy.

303

And during most of the gold standard period, much
of industrial price were things like cotton textiles, which
obviously also moved very closely to the agricultural system.
I would be disinclined to presume that were we
able to institute a gold standard in the latter part of the
20th Century that much of the problems which existed then would
continue to exist.
8 Now, having said that, it's one thing to look at
a system in the abstract relative to all others, and T do in
10 that sense consider th« gold standard c.ppropri-ta and a
11 superior system to anything that we've been able to find.
12 But I think it is inconsistent with our political
13 and social system that now exists, and the transition is
14 j something which I'm concerned will occur or somebody will
15 endeavor to impose a gold standard on a system whose social
16 and political institutions are inconsistent with it.
17 And what my proposal basically is is to specify
18 a set of criteria which are required to be met before you go
19 to convertibility, because if you try convertibility, in my
20 judgment, without those — something relevant to those spreads
21 between fiat instruments and gold-based instruments converging
22 to zero, you're going to run into a massive financial problem.
23 So, in summary, I would say that in the abstract,
24 looking at various different types of monetary systems I would
25 much prefer a gold system to what we have today.

304

1
2

I do not, however, think it is appropriate merely
to assume we can reverse cause and effect and by imposing a
gold standard create the type of non-inflationary environment
which has existed under the system in the past.
GOVERNOR RICE: Thank you. Professor Fellner, in
your statement, you said that there were certain conditions
that had to be satisfied before it would be feasible, practical

to go to a gold standard.
And the main one you discussed was the necessity

for the real price of gold to remain reasonably stable.

MR. FELLNER: Yes.

GOVERNOR RICE: Are there any other conditions that

need to be satisfied in addition to that initial one?

MR. FELLNER: Well, now, quite aside from this

transition problem that raises, of course, a number of

questions that we have not discussed, but leaving that aside

for a moment, I think that the international character of the

system needs to be emphasized.

There needs to be participation in this effort by

all major •— all countries which the official agent of which

hold large amounts of gold. Well, we hold the larger propor-

tion, but nevertheless, no more than I think than 25 percent or

a little less than 25 percent. Dr. Schwartz, am I right in

that. Of the officially held gold — the monetary institutions

hold — I think that's right.

305

I think we have about 265 million ounces, I think.
And I think the monetary institutions of the world hold somewhere between 1.1 and 1.2 billion ounces.
So, obviously, there is an important implication
as to the behavior of the others and that is another condition
I would emphasize.
Now, it is possible to say that if works out well,
8 if the basic conditions are satisfied, maybe one could get
some agreement along those lines. And then there is the
10 old transition problem and the problem, of course, also of
11 how one gets back to a reasonable degree of price stability
12 and if one tries to do that all of a sudden, in one step,
13 which would raise a number of complicated problems, perhaps
14 not insoluable ones, but problems which might not be met if
15 one does this gradually.
16 And the re-entry problem of technical — technical
17 re-entry problem for gold has to do with that and with other
18 complications.
19 But I would say that aside from the transitional
20 problems, the main problem is the responsiveness of the gold
21 output and the participation of the other major gold holding
22 countries.
23 Then it would have the advantage of concentrating on
24 a proxy for goods in general, which is always an easier thing
25 than to deal with goods in general. But that requires that

306
1 the real price of gold should be reasonably stable.
2 GOVERNOR RICE: Thank you. You also, in your
3 statement, warned us against experimenting with schemes which
4 give the superficial appearance of being —
5 MR. FELLNER: Yes, I did.
6 GOVERNOR RICE: — in the gold standard category.
7 But in some ways, including elements which were really foreign
8 or alien to the gold standard system —
9 MR. FELLNER: Yes.
10 GOVERNOR RICE: I was wondering if you were familiar
11 with the proposal that was presented to the Commission
12 yesterday by Mr. Weintraub?
13 MR. FELLNER: I think I know the outline of that,
14 j yes.
15 GOVERNOR RICE: In which he proposed a gold cover
16 for currency?
17 MR. FELLNER: Yes.
18 GOVERNOR RICE: Would you consider that proposal to
19 fall in the category of being really foreign to the gold
20 standard category?
21 MR. FELLNER: Well, frankly, I would, yes. I'm
22 a little bit afraid of the following kind of consequences might
23 have and similar plans, perhaps, which have, for different
24 reasons; namely, that whether that rate of increase in the
25 price of gold, which is envisaged, I think, in Dr. Weintraub's

307

plan, is :•: percent or two X percent, it still will give the
impression that the country has a tie to gold. But the
consequences should be entirely different depending on whether
that rate of increase in that price is X percent or two X
percent.
And somehow it focusses on the fact that there is
some sort of tie to gold, but that tie would in essence become
8 very different if thoso numbers were changed and it would
mislead, it would tend to mislead this superficial observer
10 and the public at large to believing that there is there a tie
11 to gold, whereas of the whole content of the defense on those
12 X percent by which the price of gold would be raised.
13 Now, I think there is little to be said for
14 j pretending that — this system of the gold standard would be
15 introduced by having the gold stock play this variable role
16 and giving the impression that regardless of how you handle
17 that variable role, perhaps the way in which Dr. Weintraub
18 would like to have it handled, perhaps, for political reasons
19 very differently, regardless of how you handle it, we are
20 somehow tied to gold, whereas everything depends on how you
2i handle that.
22 GOVERNOR RICE: All right, thank you.
23 Mr. Chairman, I just have one more question which I think
24 could be answered quickly.
25 SECRETARY REGAN: Go ahead.

308

GOVERNOR RICE:

I think I know where Dr. Jastram,

and Dr. Miles, and Dr. Thompson stand. I would like to
a ask Professor Fellner and Dr. Williamson and Dr. Greenspan, if
4 he feels that he's not made his position clear enough, first,
5 whether you believe a rule is necessary to be adopted in the
6 management of the monetary system; and, if so, should it be
a quantity rule or a price rule?
8 DR. GREENSPAN: Any rule that's adopted is subject
to change and I think that's one of the major problems, and
10 that's the reason why I have great sympathy towards the
11 issue that if you go to a gold convertibility standard or a
12 full or pure gold standard, that, in fact, it becomes a private
13 institution in that the — aside from the legal elements
14 ; involved in defining the law of contracts and defining the
15 nature of what constitutes the appropriate relationship between
16 the dollar and gold bullion in contract, I would say that I
17 would think the only way to restore gold convertibility in any
18 real and meaningful sense is probably to go to a private
19 system.
20 So, in that sense, I — on the issue of gold
21 convertibility, if I gather your question, I'm not in favor
22 of rules. I think the problem I have with rules is that as
23 soon as they become politically unsatisfactory, they get
24 changed which negates their purpose in the first place .
25 GOVERNOR RICE: Thank you.

309

MR. FELLNER:

Well, I think I would be in favor of

the rule. Now, obviously, no rules'are here forever. But I
would, I think, be strongly in favor of some rules to which
expectations can adjust.
And at the present moment, I don't see any price
rule that would be — that would perform its function properly,
and what I would try to do work the monetary policy tools in
8 such a way that they should lead to nominal demand creation
at a non-inflationary rate.
10 I would still favor gradualism with, what I call,
11 perceptible speed, and not dramatic, one-step, big measures.
12 I might change my mind on that if gradualism doesn't work.
13 But I would favor gradualism with perceptible
14 j speed and I would work towards the money creation that is
15 compatible with non-inflationary nominal demands over the
16 cycle.
17 I would favor, therefore, monetary interest and
18 would be aware of the fact of occasionally this money progress
19 needs to be redefined and monetary interest may have to be
20 redefined.
21 B^t I would, indeed, be in favor of a rule in the
22 given circumstances, in the present circumstances, that is
23 expressed in terms of money growth targets.
24 GOVERNOR RICE: Thank you.
25 MR. WILLIAMSON: Well, I feel that I — I'm a hopelesn

310

middle-of-the-roader, because when it comes both of these two
issues, rules versus discretion, or quantity versus price,
I want to pick an answer in between.
In the case of rules versus discretion, it seems to
5

me that what one really wants to establish are presumptions.

One does, indeed, want to give some guidance of what can be

expected.

On the other hand there are shops that count the

-T.ticipat"-1. i:*:'3 "hich the system which policy ccn react to in

a way which is going to be helpful to the private sector and

not to mislead it, and I think one does want to leave suffi-

cient discretion to permit that to occur.

So, I would try to establish something called

!| presumptions rather than binding rules, which, of course, have

to be changed from time to time as those who have argued for

rules have, indeed, conceded.

In the question of quantity versus price rules, I

think ideally, I would like a combination of the two. I would

like an exchange rate target which is a price rule, not a

rigidly fixed exchange rate, but an exchange rate which can be

changed for adequate reasons by a process which I've called

over the years the crawling peg, and accompanying that, I

would have a set of quantitative guidelines for monetary

agrigates, but not specifically in the form of national money

supply targets, but rather in the form of the level of credit

311

creations within each country, which would then add up, in the
world as a whole,'to something that was consistent with some3 thing as a shorthand we can call non-inflationary full
4 employment, although there are times when one is not going to
be completely without inflation or completely at full employment.
But the object would be to create that adequate
8 level — appropriate level of monetary growth for the world as
a whole, but not necessarily to rigidly spell out in what
10 countries it's to occur, because one does in this day and
11 age have vast shifts of funds between countries. And if
12 one doesn't have a system which can absorb that, then the
13 consequence can be to increase the rate of growth of the money
14 , supply for the world as a whole in a way which may not make
15 any sense.
16 Well, these are, perhaps, ideas that aren't too
17 familiar to everyone present, but I feel I really can't go
18 into to much more detail at this stage.
19 On the general question, it's a combination of the
20 two that I would look for.
21 GOVERNOR RICE: Thank you. Thank you, Mr. Chairman.
22 SECRETARY REGAN: Thank you. Governor Wallich?
23 GOVERNOR WALLICH: I'd like to direct a question,
24 first, to Mr. Greenspan. These gold notes would be payable
25 in gold, not in indexed dollars? Do I understand that's

312

correct?

If so, would you think they'd —

their issuance would

affect the world price of gold the way, say, the sale of gold
would?
DR. GREENSPAN: No, because what they are, essentiallj
are gold borrowings, in the sense that the Treasury would
borrow gold, effectively. That's, in fact, what the notes are.
Now, true enough, it would proceed then to sell the
gold if you were, in fact, trying to meet dollar obligations,
but there is no basic net change in the supply and demand for
gold under those conditions unless the U.S. Treasury starts
to increase its gold stock which it could choose to do with or
without those notes.
GOVERNOR WALLICH: Well, on maturity and also while
interest is being paid, wouldn't there then be an increase in
the non-U.S. world gold stock?
DR. GREENSPAN: Not necessarily. It depends on what
the Treasury does with the proceeds of the gold involved.
Remember, I'm not talking about anything other than what the
nature of the transaction is.
It doesn't specify whether anybody, U.S. or others,
changes their net demand for gold holdings in the asset or
storage sense.
GOVERNOR WALLICH: Well, if the U.S. pays out our
gold for interest and later on maturity and doesn't change its
stock, do you contemplate that the U.S. would buy gold in the

313

market to replenish its stock?
DR. GREENSPAN: It might. What I'm saying that the
amounts of money or amount of gold involved, if we're assuming
that the gold interest rate is approximately 2 percent, which
at the moment is above where the 18 month or 21 month
Arbitron shows, I mean, obviously in that sense there would be
to the extent that interest — gold interest is involved —
there would be a net depletion of gold in the U.S. Treasury
stocks.
My suspicion is that the amounts involved are —
considering the volumes I would contemplate in this sort of
series of notes is really of a nominal nature and I cannot
conceive of it having any material effect on the world gold
price.
GOVERNOR WALLICH: Do you see the low price —
interest rate on these gold notes, which presumably reflect the
expected appreciation of gold, affect the interest rates in
general on non-gold instruments?
DR. GREENSPAN: It shouldn't. It doesn't now.
GOVERNOR WALLICH: Could I ask a question of
Dr. Fellner. You said at one point that the gold standard
not accompanied worldwide going back to gold would be very
difficult to implement.
MR. FELLNER: Yes.
GOVERNOR WALLICH: Now, you also have in your

314

document a reference to private gold holdings, if I read it
correctly, about 5 0 percent larger in the official holdings;
1.7 billion —
MR. FELLNER: That's my understanding, yes.
GOVERNOR WALLICH: Well, wouldn't one have to
suppose with such very large private holdings, even though
some of it is in form jewelry, that even if you had all
official gold stocks tied down somehow by fixed gold prices
nationally that these_private holdings could generate just the
same disturbances that you see from movements in official
gold?
MR. FELLNER: Well, am I not right in perceiving
of it this way, that this is part of the question whether the
relative price of gold does remain reasonably stable, that is
to say the implication of what I meant to say was that
private gold holders are satisfied with that price which the
official agencies set and are willing to hold this gold at that
price.
That, of course, leads into the re-entry problem.
We would have to feel out that price at which the private
sector is willing to hold this amount of gold, but that was
so also during the era in which the gold standard worked as
well as it did.
It worked, I think, quite well with the exception
of certain sub-oeriods about which we have had a discussion

315

here.

2 It worked reasonably well. And that meant that the
private sector was willing to hold whatever gold it had at a
o
4 price which — at the price set by the official agency.
5

j if that gets to be violated that, I think, is another
•i

6
7

way of saying that the real price then could change.
Am I wrong — am I not answering your question,

8 Governor Wallich?
9

GOVERNOR WALLICH: Well, I'm concerned with the

movement of private gold in the case of a return to a fixed
10
^1 price of gold either by the U.S. alone or the rest of the
2_2 I world.
i

Would you say that a credible fixing of the price

-, * ' of gold would change the demand for gold in the rest of the
^c world in the private sector?
16

MR. FELLNER: Well, say, if we coupled that with

-,rj non-inflationary demand management, then I would say that it's
1Q

a likelihood that the price of gold at which this private

gold stock will further be held by the private sector would

adjust. It probably would decline at first.
20
And,
so, then the relative price of the gold, if
21
it
22 remains constant would induce the private sector to hold
that
same gold at that same price with a general price level
23
reasonably
constant.
24
If
25 the demand of the private sector for gold declines

or increases, given that official nominal price of gold, then
that is another way of saying that the real price is not what
it should be.
In other words, that the real price is unstable.
Tends to be unstable. Because then you have a fixed nominal
price and if given the demand management of these authorities,
the private sector wants to get rid of this gold or wants to
increase its gold then that is another way of saying, I think,
that with the general price level handled in this fashion,
that gold price gets to be too high or gets to be too low.
So, I think we are really talking about the question
whether the real price of gold, the relative price of gold
remains reasonably stable.
It does remain reasonably stable by market criteria
that is another way of saying that you can keep the general
price level reasonably stable, that demand management can keep
the general price level reasonably stable and the gold —
the nominal gold price is reasonably stable and the private
sector will be satisfied with that stock which it holds
actually.
Any violation of that is another way of saying to
my mind that the real price of gold ceases to be the right
real price by the criteria of the market. Then the market wil
either try to get rid of part of its gold or will want to add
a lot of gold.

317

But if the real orice does tend remain relatively
stable, then with the giv??n nominal orice of gold and stable
general price levels, the private sector "ill go on holding
vh„t

it h-.s, or "ill gradually add to that, b.acause it will

5 gradually add to that in a growing economy, that's why you
6 need flexibility of the output.
7 But gradually as the population of the world and
8 the standard of living of the world rises.
9 GOVERNOR WALLICH: Could I ask a question of
10 Dr. Williamson. You probably saw and read and also heard
11 Professor Fellner's statement that he wouldn't dispose of our
12 gold stock even though we don't go back on the gold standard.
13 Now, would you do what you proposed even though
14 ; the rest of the world — that is the official holders — kept
15 their gold?
16 MR. WILLIAMSON: Yes. I don't think I'd be unduly
17 deterred if the rest of the world wanted to lock up its gold.
18 It doesn't seem to me that that should dissuade the United
19 States from doing what it considered to be rational, if that
20 is, indeed, what it considers to be rational.
21 GOVERNOR WALLICH: Well, that's what I'm asking,
22 really. Is it rational under those conditions which are a
23 little different from assuming that all official holders
24 disposed of their gold?
25 MR. WILLIAMSON: Well, I would find it pretty *

318
difficult to visualize an area in which the world returned
to the gold standard without the United States taking part
in it. And, therefore, it seems to me that one needn't be
unduly influenced by a decision of the rest of the world on
that issue.
And, perhaps, just in case that were wrong, there's
still the strategic stockpile which I'm not quite sure, in my
own mind, I must admit, as to what function it would be suppoed
to serve.
But everyone always says one needs to have some
gold for strategic emergencies, so —
GOVERNOR WALLICH: Thank you. Have I used up my
time, Mr. Chairman.
SECRETARY REGAN: Just about. If you have one
more, Governor Wallich —
GOVERNOR WALLICH: I have one —
SECRETARY REGAN: Well, you've got one more question.
GOVERNOR WALLICH: I'd like to ask Dr. Jastram
you've shown us how -— the experience of being off gold
associated with rising prices, inflation and of being on gold
as associated with stability, but I think you haven't told us
much about the transition from one to the other.
Would it have been that countries made these choices
if it hadn't have been under some very strong pressure that
made the maintenance of the gold standard impossible?

319

DR. JASTRAM:

Going off the gold standard?

GOVERNOR WALLICH: Yes.
i

DR. JASTRAM:

They were, except for sporadic and

short-lived periods — Dr. Schwartz has pointed out to you in
a very fine paper she wrote for you — these have been associated
with war time or with such revolutionary changes in the
structure in our economy as, of course, the one in 1933 which
took us off the gold standard all together.
So, I think that, yes, to accommodate the sort of
aberration — that's too soft a word — of a war a release is
quite appropriate.
GOVERNOR WALLICH: 1971?
DR. JASTRAM: I think that we were wrong in 1971
in going off — in closing the gold window. I know that there
are arguments on either side of that, but that is my overall
reaction to that.
GOVERNOR WALLICH: Thank you very much,
Mr. Chairman.
SECRETARY REGAN: Congressman Wylie?
MR. WYLIE: Thank you very much. I want to thank
the distinguished panel for giving of their valuable time to
try to help us with our deliberations on this difficult
question. I know that you're breathing a sigh of relief that
I'm down to the end here and I'll try to be brief.
May I say that the views of this distinguished

320
panel point up a problem to me, vis a vis the views of the
panels we heard yesterday, because the experts are all over the
lot.
I don't pretend to be an expert, but we have a
problem of fixing a price if we go to a gold standard.
Mr. Jordan asked the panel if we could fix the price unilaterally
and I think the witnesses thought that we probably could not.
Although some witnesses we had yesterday thought we could.
One witness suggested that we might fix the price of $4 2.22
an ounce which was the price when we went off the standard,
whatever it was in 1971.
Another witness thought that we should fix the
price at $1600 an ounce. You'll find that in the record too.
So, that's one problem. Another problem for me and -f
is the short-fall of gold, if you please, more gold was
fabricated last year than was mined. So, we would have to use
some of our Treasury holdings if we went to a gold standard,
it seems to me.
That brings me to my question. Mr. Fellner, you
say that you are opposed and Governor Wallich got into this
to the resumption of gold sales by Treasury. Is your
opposition to all gold sales or would it be all right to, say,
sell a small amount up to maybe $4 million an ounce per year?
MR. FELLNER: Well, I don't think I would change that
program, which is after all a very small program. I think

JZ1

we are tallying about this medallion gold.

I would not change

2 that, because that, I think, is some sort of an announcement
effect that I would want to avoid.
MR. WYLIE: That or the possibility of going to
5 a gold coin.
-.,

6 Ma. FELLNER: No. In other words, I would not sell
7 more than is in this program, and this is a very small
8 program and I wouldn't go through with it. I would not really,
9 I think, change — I don't know how much is outstanding there,
10 but I think perhaps, what, three, to four million ounces which
11 are not yet sold in the form of this point — medallions —
12 MR. WYLIE: Thank you. Mr. Chairman —
13 MR. FELLNER: But I would not go beyond that. I
14 , would not change that because that is an announcement. It
15 would be to drive up the price of gold. There's an ulterior
16 motive about that. And credibility is important in these
17 matters.
18 But I would not, in addition to that, sell any,
19 not sell any, not continue that program either beyond the plan
it

20 for which it has been established.
21 And, of course, there might be emergencies in between
22 in which one has to do all sorts of things. No decision is
23 irrevocable in principal, but I would not plan on selling any
24 gold in any predictable future.
25 WYLIE: Thank you. Mr. Chairman, Dr. Greenspan
MR.

~l i. f.

had to leave, and I wanted to ask him a couple of question,
and I wonder if they might be forwarded on to him for the
record. ;
SECRETARY REGAN: Yes, of course, Congressman.
MR. WYLIE: One of them was relating to what some
witnesses said yesterday. Dr. Solomon emphasized this point
that our future is quite uncertain.
Certain nations have sufficiently higher regard for
our goal that we may need our gold at some later date. And |
i

Dr. Solomon says he doesn't see any reason why gold should be
burning a hole in our pocket that we ought to leave it in
stock.
Do you think that we should follow or maintain
policies which would maintain rather substantial gold holdings?
I might ask you that, Dr. Williamson. You touched on that a
little while ago and I want to ask that of Dr. Greenspan.
MR. WILLIAMSON: As to whether it would be appropriate — I mean, the basic question is whether one sees any
future monetary role for gold.
If one answers that question in the negative, then
it seems to me that there's really no case for holding
substantial stocks of gold, and the question is how can it be j
made best use of, and I think that the answer to that is
essentially that one tells the Treasury to sell in a way which
is going to maximize the value to the U.S. taxpayer.

323

GOVERNOR WALLICH:

Are you saying, Dr. Williamson,

that regardless of the effect on the U.S. reserve position,
if the U.S. were to sell gold for dollars and, therefore, have

what it now has in the SDR IMF position and so forth confronting
no matter what contingency?
MR. WILLIAMSON: Well, I must admit that I'm having
difficulty envisaging what contingencies one is thinking of.
Dollars are a pretty acceptable asset to the rest of the world
for most purposes.
GOVERNOR WALLICH: Thank you.
MR. WYLIE: I might also ask Dr. Greenspan — he
said also he might favor some sort of a private system, a
private gold standard system, and I wanted him to explain
that a little bit more in detail for me.
Dr. Miles has mentioned Dr. Weintraub's proposal
as not being workable. Dr. Fellner didn't think it was
workable. It has been given a considerable amount of credibility in that it was printed as a part of a Joint Economic
Committee Report.
I guess, Dr. Williamson, you didn't think it was
workable or feasible.
I was going to ask that also of Dr. Greenspan. He
hadn't commented on Dr. Weintraub's proposal.
MR. WILLIAMSON: No, I'm sorry, my position is not
that Dr. Weintraub's proposal is not feasible, I think it's

324
perfectly feasible, I don't think it adds anything. I think
the — I don't think the gold element adds anything. T think
it's purely cosmetic.
And then one has to ask the question, does one
believe that one can influence expectations through cosmetic
^.a-ices of that sort.
gow, I cannot swear that that never happens, on the
other hand, it's not a position that I would have to care to
defend, that simply by saying that these dollars are backed
by gold that, thereby, all of a sudden the public is going
to say, wow, inflation is over.
MR. WYLIE: Thank you.
Dr. Jastram, you said you didn't know of a case
when real wages declined under a gold standard or under a gold
system. Would that be true of the period between 1929 and
1933?
DR. JASTRAM: I'm sorry. I wasn't denying that it
ever happened, I just said, in my recollection at the moment,
I couldn't come up with such a period. You may very well be
right.
MR. WYLIE: I think I may be right that there was
a period when that did happen.
DR. JASTRAM: Well, I'm not prepared to argue that.
MR. WYLIE: Mr. Thompson, my visceral reaction that
your proposal was a little bit like Dr. Paul's in that you

325
certainly blinded me with footwork with it, I would have to
say that, but the Gold Commission was set up to look at the
role of gold and not the role of labor in our monetary
system. It seems to me as if you have injected a new crosscurrent here.
I think that we may have enough — an insufficient
time with the challenge given us looking at the problems of the
role of gold and that we may not have the time to look at the
problems of labor exchanges or labor bartering or a moneyless
society, vis a vis labor.
Have I interpreted what you're saying correctly?
MR. THOMPSON: No, not at all.
MR. WAYLIE: Not at all.
MR. THOMPSON: That's my fault. No, I'm saying —
it's a gold standard, o.k., it's a flexible gold standard
because you're -MR. WYLIE: You're proposing a gold standard.
MR. THOMPSON: A flexible gold standard where you
vary the amount of gold you give somebody depending on the —
MR. WYLIE: On the amount of labor.
MR. THOMPSON: On the amount labor, yes. So, that
the dollar will always buy a fixed amount of labor, but it's
still a gold standard. There are standard suggestions that
we tie — if we go back to a gold standard that ties the value
of gold to an index of commodities, and I'm arguing that you

326
don't want to tie to it an index of commodities, because
there's a lot of variation of that index of commodities to
labor, like price variations.
So, to get around that objection, which has been
proposed in very subtle forms by Irving, Fisher and Newcomb —
to get around that you — say, all right, we're going to have
a defectless system here, we can really rely on the free
market — just make the convertibility so that gold
convertibility or substitute to gold convertibility so that
you can buy a unit of labor. It's an indexing proposal.
Now, the extreme benefit of this — and that's why
I sound extreme — the extreme benefit of this is that this
is a rule that you don't have to change. It's not like the
panel has been talking that it's a rule that has to be
reviewed, it's going to be strained and all that.
It's not going to be strained. There's no strain
in it, because it doesn't create business-cycle problems or
inflation problems.
The only problems it creates is a war finance
problem and there's no problem with post-war adjustment, so
you just go right back on to it automatically.
It's a system that gets rid of the authorities and
I believe that's why authorities don't like it. I believe
that if you went around and you talked to monetary
authorities around this country, they'd say that's a hair

327-28

brained scheme without thinking about it for ten minutes.
I'll bet —

you know —

MR. WYLIE:

Let me say it's unique and I'll have

to think about it for a little more than 10 minutes.

MR. THOMPSON:

authorities.

It's independent of rule changes and

That's a very important aspect of the system.

MR. WYLIE:

I'll take a look at it.

Dr. Williamson, on Page 6 of your testimony, you

8
9

refer to selling gold to the United States public at a rate

calculated to maximize the next present value to the U.S.

taxpayer.

mind there, please?

13
14 !
15
16
17
18
19
20
21
22
23
24
25

Would you elaborate a little on what you have in

329

Is/1
1

I am not an expert on the gold

market. It does seem to me that if one is thinking of selling

gold, then the appropriate criterion, given that it's publicly

owned gold, is that of the taxpayer.

I mean if one dumped all the gold on the market

immediately, then one would presumably drive down the price

a long way in the short run. The taxpayer wouldn't get very

much.

DRS, Inc.

DR. WILLIAMSON:

On the other hand, if one sells it off at a very,

very slow rate, then, once again, that's not likely to be

optimal. All I'm saying there is that in deciding where,

between those two extremes, would be the appropriate policy,

the criterion that one should attempt, that one should regard

as relevant, is that of how much the taxpayer is going to be

saved rather than trying to play some monetary gimmicks in

the process or rather to hurt gold speculators.

Criterion of that sort seem to me to be

inappropriate.

CONGRESSMAN WYLIE: Thank you. Thank you very

much, Mr. Chairman.

UNDER SECRETARY SPRINKEL: I understand the

questioning has gone completely around. Are there other

questions of the panel? Yes, Congressman Paul?

CONGRESSMAN PAUL: This I want to direct to

Dr. Williamson. It has to do with the IMF gold.

330
You state pretty strongly that this gold should

1
2

remain where it is or we should give it to the Third World

nations.

Of course, I've taken a position contrary to that.
The argument you give is that they've been made

4
5

victims of our inflation.

our inflation.

1969, if the Third World nations, the non-oil developing

countries, had converted all of their foreign exchange

reserves, they could have done a lot better by hanging onto

In some ways, we have exported

There is no doubt about that.

You claim in

them.
One thing that I think has to be made perfectly

11
12

clear is that if not all, most of those dollars, arrived in

those Third World nations through give away foreign aid

programs that we've had.
I think your supposition is based on a cpncern that

15
16

is not justified.

Congressman is the concern for the real victims —

victims.

DRS, Inc.

at $20 an ounce.

bankers.

the dollar.

the Americar

There was gold confiscated from them in the 1930's

19
20

The concern that I have as a U.S.

It ended up in the hands of international

Now we distorted it, grant it, by the inflation of
Some other people suffered some consequences.
The real victim is the American taxpayer.

To me,

you compound this.

I'm just wondering how you can qualify

as a non-American who advocates internationalism, how you can

331
1

DRS, Inc.

in any way represent what is best for the American citizens

and what we should do with American gold.

DR. WILLIAMSON: Well, you had several points.

Let me see. The assertion that's being made is that many

countries did receive quite distinct pledges and also a

certain amount of pressure from the United States in order to

adopt certain policies.

Those policies did in fact prove unwise there.

Now, that's by no means a unique situation. I absolutely take

your point, that one can make the same sort of complaint about

those U.S. citizens whose gold was confiscated in the 1930's.

One can make the same sort of complaint about those

who have lost out in the process of inflation over the years.

One can also say the same thing about other countries who

didn't in fact exercise their legal rights of gold conversion

in the later years at Batten Woods.

I absolutely would not attempt to deny that.

Nevertheless, it does seem to me that when one is discussing

questions of income distribution, the distribution affects

inflation. We do accept a principle at the national level

that those least able to bear the consequences of inflation

in general receive some sort of compensation for the hurt

that they suffer.

At the international level, the consequence is —

the implication is to try and do the same thing. The

332
1

As for pitching to the United States as

to whether that's an appropriate policy or not, I am saying

that I think that there is a case to be made on grounds of

equity for considering that position.

Of course, I am not in a position to say what

should happen at the end of the day. If I sounded as though

I were, I apologized.

CONGRESSMAN PAUL: Is it true that the Third World

nations got a lot of their dollars through foreign aid

programs and give away dollars that came from the American

taxpayer?

DRS, Inc.

mechanism is there.

DR. WILLIAMSON:

It is certainly true that many

Third World nations have received aid over the year. Had they

not received those aid programs from other countries as well

as the United States, then their liquidity position would

probably have been worse in 1969.

Therefore, they would have -- The figures that

come out from this particular type of comparison would not be

as big. Of course, once again there is no perfect rendering

of what is equitable and what isn't.

It seems to me that the fact that there are no

absolute standards here doesn't absolve one from the duty of

asking whether some sort of justice may not be possible.

CONGRESSMAN PAUL: I have a short question for

Dr. Miles, if i

may. In the

system that you propose, I am

333
interested to know whether you mentioned and I missed,
possibly, the subject of monetization of debt. Would you
eliminate that from the system? Will you still consider to
4

allow us to run up deficits and allowing the Federal Reserve
to monetize debt?
Would we have to cancel that out?
DR. MILES: Well, the Federal Reserve would be

DRS, Inc.

allowed to monetize debt to the extent that it would not

distort the price rule.

The price rule governs the monetization of the

debt that the Fed would be able to do. If it overmonetized

the debt the price of the dollar would fall, or the value of

the dollar would fall. Hence, they would be forced to reverse

that operation.

CONGRESSMAN PAUL: Thank you.

UNDER SECRETARY SPRINKEL: Dr. Schwartz, you've

been very patient. I understand you have some questions you

would like to address to the panel?

DR. SCHWARTZ: I'd like to address my question to

Dr. Jastram and at the same time- say something to

Congressman Paul who has asked a question about real wage

rates or real earnings.

What was your question?

CONGRESSMAN PAUL: Real wage.

DR. SCHWARTZ: Real wage.

334

1
2
3

Which has gone down 15 percent

in the last year
DR. SCHWARTZ:

Real wages.

You're basing that

conclusion on what theories?

CONGRESSMAN PAUL: Not on any theories, but a —

DRS, Inc.

CONGRESSMAN PAUL:

DR. SCHWARTZ: Not theories, but what measure?

CONGRESSMAN PAUL: I believe that the chart that

was made up and came from statistics from the U.S. Labor

Department. I believe it included the loss of purchasing

power of inflation plus taxes.

DR. SCHWARTZ: Yes. I would like to call to your

attention before I turn to Professor Jastram. The BLS

acknowledges that that is a defective theory.

It is not based on worker characteristics of a

worker with three dependents. That series is constructed from

an average of weekly earnings of full-time workers and part-

time workers.

The nominal weekly earnings are pooled down by the

averaging in of part-time earnings. From that average weekly

earnings, the BLS then deducts withholding and Social Security

for a worker with three dependents. Then it deflates that

series by the consumer price index.

There are articles in the Monthly Labor Review

which I call to your attention which point out that there is a

very substantial divergence of that series from a real

personal disposal income series.

335
The explanation that BLS

offers is that its own series is defective. It does not
measure what the title of the series purports to tell you it
measures.
I would not conclude, on the basis of that series,
what has happened to real earnings.
CONGRESSMAN PAUL: Just in answer to your criticism
8

of that study, I would first claim I am not an economist.
I would not want to get into an economic debate . I would

certainly need some help to defend this from an economic

analysis viewpoint.

As a member of Congress and one who deals in the

political world, I think you'd have a hard time selling that

story to the American public. Everybody knows their standard

15
16

Their dollar isn't worth much. They can't buy

anything. They can't buy houses. They can't get a car. So,

that chart fits my interpretation of what's happening in this

country today.

20
21
22
23
24
25

DRS, Inc.

of living is going down. The real wage is going down.

I would say that from that viewpoint, I can defend
it very strongly but will work and use those same statistics
and answer back. I would not claim to do that right now.
DR. SCHWARTZ: Well, it's not my purpose to dispute
that there may be a finding that real earnings have declined,
but simply that you cannot base such a conslusion on this
series.

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To turn to the point that Professor Jastram raises
in his prepared statement about some fallicies that have been

propogated in the sessions here.

He challenges my use of real per capita income as

the measure of economic well being over the period from 1870

to date because he feels that it gives a biased view of what

happened under the gold standard. That this measure of

economic well being presents a picture too favorable to the

post-gold standard period.

It was certainly not the objective in presenting

the chart based on this measure. It —

DR. JASTRAM: Of course not. I never meant to

imply its —

DR. SCHWARTZ: I know. I know. That's right.

But I would certainly disagree that preferable to that measure

is manufacturing production.

If there have been structural changes in this

country, it has certainly been that the share of manufacturing

production in total income produced in this country has

declined progressively.

If you wanted to slant the result to favor the gold

standard period, that is precisely the series that you would

choose. As I say, there may be problems with real per capita

income series, but it is not going to be the — those

problems are not going to be solved by substituting for it a

jj /

less desirable measure of economic well being.
2

DR. JASTRAM: May I say there that since you have

read my testimony which I did not vocalize, that I might
point out that I myself made the very same criticism of
manufacturing production.
DR. SCHWARTZ: Yes, I know. It just strikes me
that if you are going to say that this series is not a

perfect measure and then you suggest an alternative which is
also not a perfect measure, then --

10 DR. JASTRAM: Which I said.
11 DR. SCHWARTZ: Yes. Then one has to choose. I 12 DR. JASTRAM: I also said that unfortunately,
13 there is no perfect measure over such a span of time.
14 DR. SCHWARTZ: That's right. For Professor Miles
15 to tell us that there are problems in constructing measures
16 the money stock, you can say that about any economic data
17 that we have.
18 It has to be collected from lots and lots of
19 sources. There are all sorts of possibilities of error. I
20 mean, this is not really a comment that in any way enables
21 one to form a judgment about the usefulness of the measures
22 that we have.
23 DR. MILES: Well, we have problems in collecting
24 quantity data. That is absolutely true.
25 DR. SCHWARTZ: We have what?

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DR. MILES:

Quantity data.

Where we have wealth

formulated financial markets, we have no problem at all in
collecting data on the price of dollars in terms of gold.
That comes across the ticker tape every instant of
the day.

It's a much easier source of data with less chance

of error to use for policy formulations.

All the Central Bank

has to do is look at the price in terms of gold.
It knows that it has intervened enough into the
market as long as that price is stable.

The market knows

whether or not the Central Bank is playing by the rules. All
it has to do is look at that ticker every minute of the day.
DR. SCHWARTZ:
be guided by —

That price index that it's going to

I mean, the argument cuts both ways. It's

going to be collecting prices which are going to guide it.
DR. MILES:

We have well formulated markets for

collecting the price of gold or the price of other commodities
traded in financial markets.
DR. SCHWARTZ: What is your rule?

The price of

gold in the private market or is it the price of commodities?
DR. MILES:

It could be the price of gold. It

could be the price of silver.

It could be the price of wheat

Theoretically, we could use any commodity to back the dollar.
I happen to think that gold is the best commodity
to use.
DR. SCHWARTZ:

I might have missed something in

339
reading your suggestion to how the Federal Reserve was going
to manage this system.
standard?

What is the dollar price of the

Is that the dollar price of gold?

or is that the

commodity price index?
DR. MILES:

The dollar price of gold.

The Fed

would pay the dollar to gold at a specified market price.
DR. SCHWARTZ:

So that for example, until 1968,

when the dollar price was pegged at $35 an ounce, there would
have been nothing for the Federal Reserve to do during that
interval, during the period of —
DR. MILES:
to intervene.

No.

Of course the Federal Reserve has

The Federal Reserve's job is to maintain the

stability of the dollar in terms of gold.
It intervenes when the price of gold rises in
terms of the dollar, that tells us there is an excess supply
of dollars.

Then the Fed intervenes to buy back dollars in

exchange for gold.

Conversely, if the price of dollars

falls.
DR. SCHWARTZ:

How would that have been a guide to

the Federal Reserve up until the closing of the London

gold

market?
DR. MILES:

As long as the price was stable, the

Federal Reserve would have known that it had intervened
correctly.

If the price continues to deviate from the fixed

price, then the Fed knows that it has to intervene more.

340
There is no guess work involved in how much
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intervention.

It knows when to stop.

When the price is back

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to the specified value.
GOVERNOR PARTEE:

We're looking at the free market

4
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price of gold; is that right?
DR. MILES:

That's right.

It's a completely

6
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convertible system.
GOVERNOR PARTEE:

It's not a fixed exchange rate

8
system.

Your objective is to have a constant price without

9
the conventions of the definition of gold or dollars in terms
10
11

of gold and all that?
DR. MILES:

Right.

GOVERNOR PARTEE:

Dr. Schwartz' point was that as

13
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15
16

long as the original price was $35 or whatever, it didn't
differ r r o m that.

the gold pool for quite a few years.
In a free market, if you're looking at the free

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19

market price as your index, why one could look at it as an
index of whether to buy or sell.
DR. MILES:

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The Londong gold pool, as I understand

it, intervened into the free market to keep the price of go
stable.

GOVERNOR PARTEE:

To keep it stable.

DR. MILES:

I'm sorry, perhaps I'm missing

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You were able to keep it there even with

Yes.

where we are differing.

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DR. SCHWARTZ:

I'm missing something, too.

DR. FELLNER: May I ask a question in half a

sentence? I'm assuming that the price of gold will remain

reasonably stable relative to other prices. Would you be

satisfied with the system that stabilizes the price of gold,

but brings about steep changes in the general price level

all of the time? That, I think, is the essence of the matter.

DR. MILES: Okay. The problem is in terms of the

trade problem. The problem isn't the value of the dollar in

terms of gold. We can set up a system which can stabilize

that. That can be done.

The problem is what happens when the price of one

commodity changes in terms of another. You have that problem

irregardless of what system you have.

DR. FELLNER: No, no.

DR. MILES: There is, as I said, no perfect system.

We're talking about which system has fewer defects. I would

say that if we were going to have a quantity system, we can't

even measure the quantity of money. How can we have a

quantity rule?

We can't measure the demand for money. How could

we have a demand rule system? The only thing we can really

measure is what we can pick off the markets, which is the

value of money. That dictates that we have to have a price

rule-

342
UNDER SECRETARY SPRINKEL:

Are there any other

questions:
[No response.]
4

UNDER SECRETARY SPRINKEL:

I apologize for missinq

much of this meeting. Obviously, it was a very interesting

one. If all of the questions are ended, we'll take a break
of about an hour and ten minutes and resume back here at

8
9

(Whereupon, the meeting was recessed at 12:50 p.m.

to reconvene at 2:00 o'clock p.m., at the same location.)

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two p.m. Thank you, very much.

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A F T E R N O O N

S E S S I O N
(2:00 p.m.)

3
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UNDER SECRETARY SPRINKEL:

We have a panel this

afternoon with five gentlemen and a lady. We'll stick to the
same ground rules we've had. Each of the testifiers will have
an opportunity to present their ideas in summary form. Their
total test will be made available in the record of the
Commission. Then we will start the questioning after each
of the six have presented their testimony.

We are going by alphabetical order, as you may

have noticed. Dr. Richard Cooper from Harvard University and

12
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recently of Washington is invited to be the first. Dick?
STATEMENT OF DR. RICHARD COOPER
DR. COOPER: Thank you, Mr. Chairman.

The idealized gold standard as it appears in

textbooks conveys the sense of automaticity and stability.

A self correcting mechanism with minimum human intervention

which assures rough stability in prices and balance in the

international payments.

The actual historical gold standard could hardly

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have been further from this characterization. You must first
appreciate that the major countries of the world were on the
gold standard proper only from the 1870's to 1914 and briefly

during the late 1920's and early 1930's.

The first period went down in history as the

Great Depression until, that is, the second period came along

344
1 to exceed it in depth and severity. In hindsight, the period
of
2 the late 19th Century actually looks somewhat better than
3 it did to contemporaries of the period.
The
4 last third of the 19th Century was a period of
5 unprecedented controversy over the monetary standard in the
6 United States. First, over the resumption of gold converti7 bility at a fixed price for the greenbacks issued during the
8 Civil War. Then over the monetary role of silver.
9 Legislation was almost constantly before Congress
10 to change monetary relationships. The year 1896 saw the only
11 U.S. Presidential campaign devoted to the issue of the mone12 tary standard.
13 We know in the light of history that most of the
14 attempts to alter monetary relationships and to dislodge the
15 U.S. from a gold standard failed.
16 The point I am trying to make is that the issue
17 was a source of continual turmoil and uncertainty, not serene
stability.
18
Moreover, even with the gold standard functioning
19 the United States after 1879, price stability was not
in
20 assured.
21

Price movements, as recorded by the Warren and

22
Pearson Index, were substantial during this period. If we
23
take a longer period, we can show price stability in the
24
sense of a return to earlier levels of prices. I've
25
circulated a table called Table 2 which shows price movements

345
in four countries — the United States, Britain, Germany and
France — during the century 1814 to 1913.
What Table 2 shows is that cumulative price
movements from peak to trough and from trough to peak,
including the U.S. Civil War, led to first a roughly 50
percent decline in prices from the highs of the post-Napoleoni<|:
period to 1849, then a rise of about 50 percent again as a
result of the gold discoveries of the -- around 1850.
Then the price declined again, roughly 50 percent,
until the mid-1890*s and then rose sharply again in the two
decades before World War I.
This is hardly a pattern of stability — even long
term stability. Although there were long periods of substantial price declines as well as large increases, the swings are
so long in duration that they can hardly have offered much
comfort for any but the longest term financial contracts,
and then only because of the accidents of war or discovery.
These variations in prices were partly due to
swings in new gold supplies. They were also due to changes in
the relationship between money and economic activity. Most
importantly, they were due to variations in non-metallic
sources of money, especially bank deposits which grew enormously in the United States, over 1200 percent, between 1879
and 1913.
The phenomenon was not limited to the United States

346
Table 3 shows — which should also be before you — shows the
growth in various forms of money in the major industrial
countries. The three countries are Britain, the U.S. and
France and then 11 countries which include all of the
industrial countries between 1885 and 1913.
1885 was the first year for which comprehensive
data are available. Monetary gold during this period grew
120 percent. Demand deposits, in contrast, grew 400 percent
and rose from 39 percent of the money supply at the beginning
of the period to 6 3 percent at the end.
Private banks thus responded to the need for
additional means of payment. Let me turn from this very
brief historical sketch to the contemporary setting where I
think there are, broadly speaking, three kinds of roles that
gold might play in the U.S. monetary system.
First, it could be required as backing for some
portion of domestic monetary liabilities. For example,
currency or currency plus bank deposits with the Federal
Reserve Banks as was the case up until 1969.
Second, it could be fully convertible at a known
price into dollars for foreign monetary authorities. This
was the regime that prevailed from 1935 to 1971. Third,
it could be fully convertible into currency or other acceptable
means of payment at a fixed price determined by the U.S.
government as during the period I was just talking about, 1879

347
to 1933.

The government would buy the gold offered to it and

sell the gold asked of it against acceptable means of payment.
In the late 2 0th Century, the rationales for these
alternative monetary roles for gold are very different.
Unfortunately, they are in conflict.
The first role, some kind of gold backing for the
money, would serve the dual purpose of giving part of the
8

public confidence in the currency that they know lack and to
exercise restraint on the growth of the money supply or at

least that portion of it that is linked to gold.

11 'To serve this objective requires a binding link to
12

gold and a steady, predictable accretion of monetary gold to

permit secular growth in the supply of money.

Such growth would presumably best be provided by

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purchases would evidently have to be at fluctuating market

prices for gold, thus creating a problem for the valuation of

the existing and steadily rising gold stocks.

It would be possible, although somewhat cumbersome

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purchases of new gold by the monetary authorities. Such

and artificial, to create a buffer account between the
periodic purchases of gold and the formal monetarization of
gold in order to insulate the latter from erratic market
price fluctuations.
A link to market gold, in short on this use of
gold, would have to be attenuated in some way in order to

348
provide the steady monetary discipline that provides the
rationale for gold backing.
Moreover, unless the link to markets is completely
severed, as it is at present, revaluation of monetary gold
could bring it into closer adjustment with market prices and
would greatly expand the value of monetary gold which unless
carefully and persuasively handled, could provide so much
room for monetary maneuver that the desired discipline would
be entirely lost.
The second kind of role for gold, convertibility
into dollars held by foreign monetary authorities, operates
on a quite different principle.
Monetary discipline would be imposed in the United
States through its balance of payments and the willingness of
foreign central banks to accumulate dollars.
If in their judgment foreign authorities had
accumulated excessive dollar holdings, they would convert the
excess into gold. The U.S. would have to take whatever steps
were necessary to reduce the rate of accumulation to acceptable
levels or alternatively, suspend convertibility, as it did
in 1971.
The difficulty with this commitment for the
United States is at the end of 1980, there were already
around $250 billion in the hands of foreign monetary authorities. An additional $790 billi6n, give or take several tens

349
of billions, in dollar deposits outside the United States.
if present U.S. gold reserves were valued at current market
prices, they would come to $110 billion, a sum that might be
deemed adequate to cover possible gold conversions from
existing official dollar holdings but would be totally
inadequate to cover conversions of dollars held outside the
United States that might end up in the hands of foreign
monetary authorities as a result either of their own policies
or other events external to the United States.
For example, a decision by OPEC to invoice oil
in currencies other than the U.S. dollar. This contingency
could of course be handled by placing a much higher value on
the monetary gold held by the United States.
If it were to do so, the United States would have
to decide whether it was willing to buy gold from other
monetary authorities at the much higher price. Also, whether
monetary authorities — in this instance — would include
those of the major gold producing countries.
If the gold were valued at a price high enough to
cover the contingency of massive conversions into dollars,
it would be so abundant as to fail to provide any monetary
discipline at all.
Moreover, a much higher than market price would
require close policing to prevent nonmonetary gold from
entering the monetary system or, alternatively, nonmonetary

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gold would be taken in in such abundance as to undermine

monetary discipline.

The same problems as arise in the second role for

gold arise with even greater force in the third type of role

for gold. That is convertibility into dollars at a fixed

price for all parties, private as well as official.

In periods of political and economic calm around

the world, the conveniences of paper money and deposits

wouId dominate behavior.

political turmoil, many would convert to gold at the expense

of official gold holdings an incredible re-establishment of

gold in the monetary role — in this monetary role.

It would therefore require ample gold reserves to

cover the contingency of large scale conversion. But, as

before, gold reserves valued at a price high enough to

provide this assurance would by the same token exercise no

effective restraint on monetary policy in the short and

medium run.

Monetary policy, to be disciplined, would have to

be discretionary as it is today. There is another disadvan-

tage with reinstituting gold in a monetary role that is in

any way linked to the market for gold directly or indirectly.

The principal producers of gold in the world,

together accounting for nearly 8 0 percent of world production

are the Soviet Union and the Union of South Africa. Both

In periods of uncertainty and

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countries exercise considerable discretion in the amount of

gold they actually put onto the market rather than allowing

competitive market incentives to prevail.

Both are, although to be sure in very different

ways, at political odds with other members of the community

of nations. To restore an important monetary role for gold

in any form with links to the gold market, it would simultan-

eously provide a windfall of considerable magnitude to those

two countries.

Every $100 per ounce of the price is worth about

$1.2 billion to the Soviet Union and $2.2 billion to South

Africa on current output.

Equally important or perhaps more important would

also place the monetary system of "the United States and the

West at large hostage to political decisions in one or both

of these countries.

For the reasons given above, a credible regime of

gold convertibility would require a substantial increase in

price above the current level.

In sum, the choice of a price of gold plays a

central role in the viability of any restoration of gold to

the monetary role. Yet the choice of a price, while crucial,

is arbitrary and is known to be arbitrary.

So long as this is so, a rule based on the

supposedly fixed price of gold cannot be a credible rule by

352
1 virtue of the link to gold. The situation gets economically
2 or politically difficult. The price can be changed. That
3 is widely known. Indeed, it is intrinsic in the process of
setting the price of gold in the first place.
5 In this respect, the situation now is fundamentally
different from what it was in the 19th and early 20th
6
Centuries. Then, the dollar price of gold was a historic
8 given and not generally open to question except for minor
adjustments on several occasions to preserve a relationship
10 to silver
n

The price was not conceived as a policy variable.

12 Now, it is a policy variable and indeed has to be.
13 monetary role for gold loses its disciplinary function if its
14 price can be varied.
15 So long as the price of gold is a policy variable,
16

the

gold standard cannot be a credible disciplinarian. It

17 provides no escape, therefore, from human management.
18 Thank you, Mr. Chairman.
19 SECRETARY REGAN: Thank you, Doctor. Mr. Davies?
STATEMENT OF MR. RICHARD DAVIES
MR
20
- DAVIES: Secretary and Members of the
21

Commission, the subject of my presentation is Facilitating

the Options of Using Gold as an Auxilliary Currency.

The Gold Institute, 1'Institut de l'Or, is the

developmental, technical and. industrial information arm of

leading producers of gold and gold products in 15 countries,

353
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2

own entirely separate gold activities.

We provide precise and timely statistics on the

production and flow of gold, and extend the beneficial uses

of gold by technical assistance to the many industries which

advantageously use it and to central banks, ministries of

finance and mints in their issuance of gold coinage.

Last year, 57 governments issued some gold coins

as detailed in our annual publication, "Modern Gold Coinage".

I would like to add my great appreciation for the devotion

shown by the members of this Commission to the important

problem before the country and before the world.

I am sure that your colleagues and your families

often inquire, "Have you made progress?" I can give you an

answer that you can say, "Yes, we have."

In fact, you can illustrate it by the story of the

two hunters who went to the remote lake in Canada reachable

by a small airplane. When they got there, they told the pilot

to come back in three days after their hunting.

So, he did. Meanwhile, they had shot a moose.

So, they said to the pilot, "Help us get the moose into the

small airplane." He said, "No way. I can take you or I can

take the moose, but there's no room in this small airplane

for both."

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outside of South Africa and the Soviet Union which have their

The hunters said, "Well, the pilot we had last

354

|year was willing to take us and the moose." So the new pilot
said, "Well, if he was, I'll try."
So, they got into the airplane, including the
moose.

The pilot took off, bumped along, cleared the low

underbrush and got as far as the tops of the pine trees at
which point, the small airplane stalled.

All tumbled to the

ground among the trees.
One of the hunters, dazed, said, "Do you know
where we are?"

The other hunter said, "I think we're about

250 yards farther than the pilot got us last year."
[Laughter]
MR. DAVIES:
you can report on.

So that progress is something that

It seems to me that in the monetary

situation, we have to begin with where we are, which is in
the middle of the woods.
My very dear friend, Dewie Dane, who was Henry
Wallich's predecessor in a key point of the Board of the
Federal Reserve, has explained to me the errors that could
have been avoided and the situation that could be better now
if they had, 14 years ago, done it differently.
We've heard in this room not one bat many
descriptions of the errors that have been made in the past.
Nevertheless, we must start where we are and get out of the
woods.

The excellent historic summaries of previous

monetary systems which have been researched and presented by

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are of great value in developing recommendations for what

should be done now with respect to gold, beginning with the

situation as we find it today.

For this, I suggest that we must recognize that

each nation of the world has sovereign responsibility for its

own economic and governmental activities, for issuing its own

currency and for determining the characteristics of that

currency.

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Dr. Schwartz and by the Secretariat of this Gold Commission

Trade and financial relationships between the

nations require exchange rates between the various currencies

At present, these exchange rates are generally of a floating

nature with only modest and temporary interventions to

interfere with their free movement.

It is recognized that sometimes economic and

governmental policies of one nation result in a currency

becoming nearly constant in its purchasing power; whereas,

another nation, either contually or temporarily, follows

economic and governmental policies which result in its

currency having a steadily declining purchasing power.

In such cases, the value of this second currency

must decrease in relation to that of the first. Also, in

relation to gold as an independent currency.

The real change in these relative values is

inexorable. If a government or even a whole group of

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governments attempts to deny this change by regulations or
legislation to set up an arbitrary value for the depreciating

currency, the real exchange rates insist on expressing

themselves even if through black markets inside a country of

the more rapidly depreciating currency or through free

markets in other countries.

Some nations, such as Switzerland and the United

States, have had considerable time periods of economic and

governmental activities which have resulted in steady levels

of purchasing power of their currencies whereas others have

had economic and governmental activities resulting in

continually depreciating currencies.

An example of this latter is Brazil, the largest

country in Latin America. An example of this in Brazil,

which is our friend and almost as large as some of the

nations that we're dealing with in Europe.

For half a century, the purchasing power of the

Brazil units of currency has been continually decreasing by

20 percent to more than 50 percent each year. The value

of today's Brazilian cruzeiro expressed in Swiss francs or

dollars or gold is less than one-thousandth of what it was

30 years ago.

Our Brazilian friends tell us that at the present

rate, it will be about one-thousandth of its present value

about 30 years from now.

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with a traditionally depreciating national currency, just as

the United States did survive with a temporarily depreciating

greenback currency from the Civil War years until the

restoration in 1879 of dollars having a relatively steady

purchasing power.

The United States is now in a period in which its

units of currency are depreciating in value. The nation is

indicating its desire to undertake the economic and govern-

mental activities which will result in its currency having a

steady, rather than a declining purchasing power.

However, these measures are, of necessity,

fundamental ones, requiring careful and enormous efforts,

not only by the Federal Reserve System, but by the whole

Executive Branch of the government, the whole Congress, and

the support of the majority of the entire electorate. They

require time to accomplish.

Meanwhile, just as was necessary in the United

States in the years after the Civil War until 1879, and has

continually been necessary in Brazil, some auxiliary currency

is useful

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The Brazilians have survived for many decades

In Brazil, the auxiliary currency for two genera-

tions was the United States dollar, equivalent to one thirty-

fifth ounce of gold. In the United States greenback period

after the Civil War, the auxiliary currency was gold, or

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sometimes the British pound, equivalent to a quarter of an

ounce of gold.

In the United States today, needs for an auxiliary

currency are beginning to be met by the use of metallic gold

in the form of bullion bars, bullion coins, medallions, and

other gold pieces of precisely marked purity and weight.

Just as the overwhelming proportion of transactions

in the United States in the years following the Civil War were

carried out in greenback dollars and in Brazil most trans-

actions have always been in cruzeiros, so in the United

States at present the overwhelming proportion of transactions

are, and will be, carried out in current dollars.

However, while the United States is in this period

of depreciating value of its national currency, gold is

most useful as an auxiliary currency for some governmental

transactions and for some private transactions.

With regard to gold for governmental use, it should

be noted that gold at its present market value represents

well over half the foreign reserves which the governments of

the world hold in readiness for transactions among themselves.

The United States is in the fortunate position of

holding more gold than any other government. Residents of

the United States, recently estimated at eight million

individuals and companies, have large amounts of gold bullion,

coins, medallions and precisely marked pieces in what might

359
be called their private reserves. These are available for
various transactions in which the payer and the receiver
wish to use gold as an auxiliary currency.
An example of the usefulness of an auxiliary
currency earlier was in 1865 when a Pennsylvania company
was able to make a favorable multi-year contract with a
Danish company to import the mineral cryolite from Greenland.
The payments were specified not in United States
greenback dollars nor in Danish kroner, but in British pounds
that is, quarter ounces of gold, the then auxiliary currency
for both the United States and Denmark.
Likewise, in Brazil, as many of us know, there
are many productive operations which have been made possible
by dollar financing with corresponding repayments in dollars.
During the Bretton Woods agreement period in
Brazil, there were times when the annual interest rate for
dollars was six percent, while the annual interest rate for
cruzeiros was 4 0 percent. Today, a typical cruzeiro interest
rate is 6 5 percent per year.
Examples of the use of gold as an auxiliary
currency in the private sector in 1981 include the payment
of dividends in the form of metallic gold by Ranchers
Exploration and Development Corporation, Albuquerque, New
Mexico, RefineMet International Company, Woonsocket, Rhode
Island; and Peregrine Petroleum Limited in Calgara, Canada;

360

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3

and annual interest payable in metallic gold.
This is an issue of the RefineMet Corporation.

These RefineMet bonds are traded now at prices related to

current gold bullion prices with a yield of about 3-1/4

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and a 3-1/4 percent, 15 year bond issue with both principal

percent. The trustee is Continental Illinois National Bank

and Trust Company of Chicago.

The securities firms involved included Drexel

Burnham Lambert, of New York, and Ross and Partners of London

and they are equipped to arrange similar low interest bond

issues payable in gold for others.

For the further convenience of those who wish to

use gold as an auxiliary currency, international bullion

dealers such as J. Aron and Company, Inc., Mocatta Metals

Corporation, Sharps, Pixley Incorporated, Bache Halsey Stuart

Metal Company, Gerald Metals, Samuel Montagu Limited,

Tanaka Kikinzoku Kogyo, will hold gold for a customer in the

form of bullion or coins and transfer it as directed.

An important means of transfer, perhaps of

interest to Secretary Regan and Under Secretary Sprinkel in

their visit tomorrow toward China, is that one of the most

useful means of transfer of gold is the Chinese Gold and

Silver Exchange Society based in Hong Kong, which together

with the European and American gold markets, maintain a 24

hour a day constant market in gold. This Chinese activity is

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one of the most important in the world of gold today.

Also, leading banks provide customers with

certificates of gold deposited with them. Among these are

Citicorp, Rhode Island Hospital Trust National Bank, the Bank

of Novia Scotia and Canadian Imperial Bank of Commerce.

For example, when a customer deposits metallic

gold with Citicorp, he receives a certificate showing the

amount in thousandths of a troy ounce.

If he wishes to pay a specific amount of the gold

to someone else, he so directs on the back of the certificate.

Citicorp issues a new certificate for the amount transferred

to the payee and another new certificate to the original

holder for the remainder.

The United States government has already done much

to restore freedom of gold movement.. In this present

period, it would seem desirable to further facilitate the

options for United States private citizens and corporations

to use gold as an auxiliary currency.

One helpful step to be taken now for this is to

streamline the method by which the current one ounce and half

ounce gold medallions are being made available to United

States citizens and corporations in return for dollars at

prices related to the daily world market exchange rate

between gold and the dollar.

An important supplement to this might be for the

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government to make similarly convenient arrangements to pay

dollars for any of the medallions turned in at prices

related to the dollar versus gold exchange rate on the day

of that transaction.

Some post offices which regularly handle postal

money orders or some Federal Reserve member banks which

regularly handle foreign exchange might most readily provide
either or both of these services.
Special attention should also be given to the

m inting of gold coins, in addition to the medallions already

authorized, as is now being proposed by Senators Symms,

Goldwater, Helms and McClure, and by Congressman Crane, in

bills which are before Congressional Committees represented

in this Gold Commission.

Encouragement could also be given to financing

construction and other productive projects by the use of gold

with its attendant low interest rates, without which the

projects and their resulting contribution to employment and

the strength of the economy, would not occur.

There are examples of the beneficial uses of

auxiliary currency to accomplish this in other countries.

We appreciate the opportunity of presenting

observations, and continue to be at the disposition of the

Gold Commission.

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SECRETARY REGAN: Thank you, Mr. Davies, an

our

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interesting presentation. Dr. Dornbusch.
STATEMENT OF DR. RUDIGER DORNBUSCH
DR. DORNBUSCH: Mr. Secretary. Lack of fiscal
discipline, high real interest rates and persistently high
inflation, all draw attention to disarray in our macroeconomic policies.
The present Enquiry on the Resumption of Specie
Payments is an important opportunity to look for more
coherent policies and for institutions that might protect
this target.
In my remarks, I will argue three points. First,
that the historical experience in no way warrants the belief
that a gold based currency would give us macroeconomic
stability. Second, that if there is no monetary role for
gold, we should denationalize the federal gold stock and use
the proceeds to retire debt.
Thirdly, that it is a good time to adopt a formal
monetary rule which, in conjunction with other measures, can
promote stability.
If I may direct your attention to my statement,
on page 2 I present some evidence on the gold standard. The
common belief, which Dr. Schwartz has already criticized in
her paper is that the 19th Century gold standard was a period
of unrivaled stability.
It is true that inflation averaged in very low
numbers, less than one percent. It is also true that there

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was substantial short run instability.

In my paper, I show

that average growth was less during the gold standard than

in the last 20 years.

More interestingly, unemployment had more than

three times the variability than it has now. Inflation had

higher variability then than it has now. Money growth had

more than three times the variability. The real interest

rate was four times as variable then as it is now.

I'd like in particular to draw your attention to

the real interest rate. On page three in my statement, I show

averages of real interest rates. This is the ten year

average, not short run fluctuations.

The ten year real interest rate in the 1880's was

more than seven percent. We have had seven percent real

interest rates recently and find it unbelievable that it was

the ten year average in the 1880's.

If you will look at page 3(a) in my statement,

I show the series of monthly real interest rates. It is

obvious that they go up and down a lot. If you look at the

scale -- the scale is plus-minus 60 percent.

There was an absolutely extraordinary variability

in real interest rates which, if we had it today, we'd

probably change policy makers.

Ultimately, the belief in the gold standard does

rest on price stability. i

quote

Keynes, who looked back

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over his shoulders in the 1920's to observe that there was
a lot of stability. I think one must have been in the 1920's
to have seen price stability in the 19th Century only by
looking at the German hyperinflation in 1921 with 50 percent
collapse in prices.
On page four(a) in my statement, I show the
wholesale price level in the U.S. from 1879 to 1913. You do
observe a very substantial fluctuation. You will note in the
very year of the resumption of specie payments in 1879,
inflation was in excess of ten percent.
I come back to that point, that prices were
falling until 1895 and they were rising afterwards. There
was certainly accidental price stability, if you look at 30
year periods.
Surely, starting in 1890, you had no right to
believe that South African mines would be discovered or
Canadian gold mines or all of the other things that ultimately
led to the inflation that would get prices back up to where
they had been in 1880.
So, I conclude from the experience of the gold
standard, we really can't believe that it is a good system
even in terms of short run price stability for people that
contract labor for a year and wonder whether prices will be
up or down ten percent or from the perspective of people
that make long-term plans and have to worry whether there

366
will be trouble in Australian gold mines or whether Russia
will or will not sell gold.
There are more arguments against gold that are
important. The first is that there will be a substantial
resource cost. I present calculations in my paper that
argue that the resource cost per year would be of the order
of one-third of one percent of GNP. That currently is $10
billion, so that would be a substantial number.
The second problem to which I don't see any
solution whatsoever is the transition problem of deciding at
what price to resume specie payments. If the price is too
high, we would have an inflation as we had in 18 79.
If the price is too low, the Treasury in this
very Cash Room would be cleaned out by speculators. There is
no simple theoretical answer to that question as research
in the last few years has shown.
Lastly, I think there are important international
complications. If the U.S. alone were to go on a gold
standard and foreign countries wait, then we have to ask
ourselves what price to pick, given the possibility that they
might ultimately join and thereby substantially raise the
world demand for gold.
If they don't join, we'll have an entirely
different price. This is important if you think of 1925 in
Britain, the question of at what price to go back on gold.

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France join or not. The whole discussion of the resumption

price at that period should warn us today.

Lastly, I think all the evidence reflects exchange

rates in the U.S. indicates that we substantially benefited

from that regime. The very last thing we would want to do

at a time of substantial shifts in competitive advantage

is to freeze exchange rates and shift the burdens of adjust-

ment back to commercial policy.

I note, in that context, that the gold standard

was aperiod of very severe tarrifs, of very high protection.

In the U.S., the average tarrif rate was 70 percent during

the gold standard. It wasn't a period of free trade.

If we conclude that gold can play a sensible role

in the monetary system, we'd have to ask what to do with it.

I would suggest that the federal holdings of gold be auctione

off

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They had to ask if the U.S. would stay on gold, or will

If that was decided, it can be shown that the

present value of the proceeds is higher the sooner the sale

takes place. So we should do it fast.

The proceeds would sensibly serve for debt

retirement. At the current gold holdings, that's $100

billion or one-sixth of the federal debt outstanding in the

hands of the public. That would represent a very important

reduction in interest payments and in recorded deficits.

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There is really no reason why we should incur

any real interest costs having debt outstanding simply to

hold gold that we never propose to use.

I would also argue that there is no ceremonial

role for gold that we should perpetuate either in the form of

revaluation of gold certificates in the Federal Reserve as a

disguise for an outright monetary role or as in the form of

getting the government on a bigger scale into coinage, where

coins are issued to particularly eligible groups.

I think one should go beyond these considerations

in looking at monetary and financial institutions. If gold

can serve a purpose, we do have to take seriously the

people that have raised the issue of price stability and

macroeconomic instability.

I think it is widely recognized now that

accomodating monetary policies and independent fiscal policie

over the last ten years have brought us to a point where we

believe that the very accomodating policies we have pursued

may not in fact be worth it anymore.

I think it is a good time to think about explicit

monetary rules that restrict the Federal Reserve to pursuing

a given path of prices, not rate of inflation, with explicit

feedback roles.

What I have in mind is that we take all of the

advantages of the gold standard. One, long-term belief in

369
price stability.

Second, an explicit feedback role that

gears the rate of money creation to deviations from the
target path of prices. At the same time, we have the
advantages of the paper standard that we separate out fewer
gold problems and let them be gold problems by having a paper
standard.
Under the gold standard, trouble in South Africa
becomes a macroeconomic problem.

Under a monetary rule, that

is certainly not the case.
10

I believe it is a good time to have a monetary

rule because it is apparent that we have to think of income

policy as a way to fight inflation and a less costly way that

is totally unacceptable unless there be a monetary rule that

guarantees that we don't make the earlier mistakes of 197 3.

Thank you very much.
SECRETARY REGAN:

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Ms. Junz?
STATEMENT OF HELEN JUNZ
M S . JUNZ: Mr. Secretary, Members of the

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Thank you very much, Doctor,

Commission.

Rather than repeat a lot of what you've heard

over the past several days, I thought I would focus primarily
on the international aspects of some of the gold link
proposals before you.
These can be grouped into three sets in ascending
degrees of convertibility. The first set of proposals calls
for a link between gold and the domestic money supply without

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convertibility of dollar assets into gold.

are least subject to international influences.

Their purpose is to impose a legal constraint

Such arrangements

or specific rule on the expansion of the money supply. The
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imposition of any such objective rule stems from the belief

that the authorities.are too often exposed to political and

social pressures to be able to pursue their stated goals in

a steady fashion.

If this is so, it is hard to understand why they

would be able to keep to the undertaking to remain within the

gold cover constraint when they were before unable to stick

to other promises.

A gold cover commit is no different from a legis-

lative debt ceiling in the fiscal respect. The experience

with the latter has been that whenever the ceiling became a

real constraint, there was a change in the legislation rather

than in the policy.

Thus, before a gold cover commitment could change

market expectations about inflation in the United States,

domestic and foreign holders of dollar assets would have to

be convinced that the imposition of such a requirement

somehow represents a more binding commitment than past

experience indicates.

The second set of proposals attempts to shield a

gold based domestic monetary policy from external influences

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by limiting convertibility to domestic residents.

This

clearly is fraught with practical problems. Limiting

convertibility in this way requires the imposition of exchange

in capital controls.

Enforcements of such controls in a world with

capital markets so meshed as they are today and by a country

that is at the very center of this international financial

network just is not realistically feasible.

The final set of proposals involves world gold

convertibility at a fixed official price. This is what

people usually mean when they talk about the gold standard.

Under ideal circumstances, the gold standard will

indeed work to stabilize the domestic press level. For that

to happen, the supply of gold needs to expand in line with

the growth of the real demand for money.

Past experience has shown that this is not always

so, particulary in the short run. The supply of gold is

governed by rather different factors than is the demand for

money. Primarily, because decisions about new supply are

concentrated among a very small number of gold producers •—

South Africa and the Soviet Union — there can be no

assurance of a continuous smooth flow of new supply.

I imagine that since 1973, '74, we do not need to

be reminded of the consequences of having supply decisions fo]

a core commodity concentrated in the hands of a small number

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of producers.

A more serious problem regarding the operation

of a gold standard system springs from the fact that any

addition to or decrease of the Treasury's gold stock triggers

an offsetting change in the money supply.

Where such an offset is fully appropriate when

the change in gold holdings stems from portfolio decisions by

U.S. residents, this cannot be taken as a given when it

originates abroad.

The essence of the gold rule is that it functions

objectively and does not distinguish among the causes that

trigger monetary action. That, however, means that any

overseas disturbance will immediately reverberate through

the U.S. economy, regardless of the state of the economy

at the time.

U.S. monetary conditions thus would swing with the

rise and fall in world demand for gold. For example, the

Soviet Union covers its foreign currency needs largely through

gold sales into the free market.

A harvest failure in the Soviet Union triggers

gold sales. These, in turn, exert downward pressure on the

world price of gold, making it profitable under a gold

standard to sell gold to the Treasury.

This inflow of gold then would cause an increase

in the money supply and in turn, eventually, in the domestic

price level.

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C o n v e r s e l y , any increase in political

tensions

tends to raise demand for gold and triggers a deflationary
reaction in the United States.
Portfolio decisions by foreign holders of dollar
assets, politically or financially motivated, would affect
U.S. monetary conditions in a parallel manner.
Thus, Colonel Quadafi, for example, could
successfully help destabilize the U.S. economy by demanding
gold for his accumulated stock of dollar assets. Given the
10

relative volatility both economically and politically

appears to be characterizing this d e c a d e , there likely would

b e a significant number of occasions when outside

could effectively destabilize domestic monetary conditions.

influences

A c c o r d i n g l y , pressure would build for discretion-

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ary action to shield the domestic economy from just such

influences.

rule of the gold standard is established, the system is as

vulnerable to the push and pull of domestic political and

social pressures as is the system it is intended to replace.

Once an override mechanism to the objective

These problems are quite fundamental and exist

aside from the thorny question of how to determine

appropriate official price for gold at which re-entry

be affected.

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that

The gold standard, like any other simple

the
could

objective

rule, cannot be an unerringly appropriate guide to policy

374
action in today's complicated world. The discipline it would
exert clearly would be helpful in containing inflationary
tendencies; however, the cost associated with failure could
be tremendous.
Such failure would put in question the political
determination of the authorities to achieve and maintain
financial stability.
What it finally comes down to is that discipline
can be successful only in achieving its goal if the political
will to do so is strong.
In this room dominated by men, perhaps I may tell
you what any woman would know. You cannot, under any
circumstances, fit a size 18 body into a size 8 dress, no
matter what corset you put on.
The basic will to slim down must be there.
Imposition of outside discipline can help an over eater to
shed a few pounds, but without a change in basic attitudes,
this discipline will eventually give way to another eating
binge.
However, one's attitudes have changed and
discipline has become a part of the behavior pattern, outside
constraints appear unnecessary. Thank you.
SECRETARY REGAN: Thank you, Ms. Junz.
Mr. Reynolds?
STATEMENT OF ALAN REYNOLDS
MR. REYNOLDS: For the past ten years, I've been

375
an active publicist of monetarist solutions for inflation.
As recently as 1978, I was openly skeptical of a gold standard
I wajis

wrong.

I appreciate this opportunity to set the record

straight.
My disillusion over the recent years is not
unique to me. For example, Bob Janidsky (phonetic) at Harris
Trust has recently been converted also, and Bob Barro at the
University of Rochester and a number of the younger
monetarists. I think it follows from three basic things.
One is experience. Basically, the tripling of
bond yields over the past ten years. Basically, I think ten
years is enough -- enough trial and error. Secondly,
practical problems in deciding how much of what kinds of money
are appropriate for cyclical, secular or seasonal needs.
The proliferation of money substitutes -- money
market funds, overnight Eurodollars, overnight RPs and so on
ad infinitum and the consequent acceleration of M-l-B
velocity -- that worries us.
Finally, the role of ideas •— I don't think the
gold standard was destroyed by events. It was destroyed
by ideas. The ideas of economists and particularly the
notion that we could, if we would simply end all of these
restraints, we could manage the money by scientific methods
and so manipulate it as to achieve an optimal trade off
between inflation and unemployment. Particularly, that if

376

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we were to let the dollar sink, that would do us all kinds
of good.
For example, it would convince the Arabs to trade

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more oil for less wheat.

by experience once again and yet they are the overriding

ideas that operate monetary policy today.

As I've listened to the objections, and I've been

here since yesterday. The objections to the gold standard

sound very familiar because they are about where I was in

1978
The first is, of course, that any rules may be

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These ideas have been made obsolete

bent.

Therefore, we should skip the rules and proceed

directly to the bending, or simply institutionalize bending.

The other is, of course, that any standard has to be managed.

Therefore, we should not have a standard but just proceed

to pure management.

The third is that we have to get rid of inflation

first before we introduce any mechanism to deal with it.

The fourth is best expressed by Professor Kenen yesterday

when he said, don't just do something, stand there.

That is to say the economic profession is

immobilized. They are telling us that everything is just

fine in monetary policy. There is no need for change. They

are fearful of change.

I think we have leaned too hard on history in this

377
exercise. After all, we are doing better with fiat money
today than we did in the previous two experiments — the
greenback era and the continental dollar. Actually, I'm not
sure if we're doing better than the greenback era, but it's
close.
The relevant comparison, however, is not between
the post-war period in, say, 1879 to 1914. However, most of>
the post-war period was a gold standard. It was Bretton
Woods. The relevant comparison is what's happened after 1968.
The relevant comparison is not between the
actual gold standard and some hypothetical ideal, a system
managed by an omniscient incorruptible elite. The comparison
is between post-1968 and either Bretton Woods or the earlier
gold standard.
When you compare the 1879 to 1914 gold standard
with the CPI, you find that the average inflation rate was
zero and the standard deviation was 2.2. In the post '68
period, the average inflation was seven percent. The
standard deviation was 3.1.
On that measure, we not only achieve less price
stability, we also achieve more volatility of inflation.
You can't really compare wholesale indices for the reason
that Alan Greenspan pointed out. The old indices were
dominated by farm products. The current one is very diversified and it's an unfair comparison.

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Century that need to be brought out.

service sector which is more stable. We have better inven-

tory control systems. We have much better information and

data and communications technology.

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We have, after all, advantages today over the 19th
We have a larger

We have deposit insurance, better regulation of

financial institutions. With all of those advantages, I

should think the comparisons would make us humble and not

smug about how well we're doing.

We have, from the historical records prepared by

Dr. Schwartz, learned that the big contractions in 1921 and

•29 and '30, insofar as the gold standard was involved, it

was due to failure to abide by the gold standard rules and

not the other way around.

Professor Rothbard suggested this was also true

of the earlier episodes. Victor Zarnowitz of the University

of Chicago recently looked at the recessions of the late

19th Century. He reclassified the National Bureau data and

he found that four of those recessions weren't recessions

at all. They were simply pauses in the growth rate.

By the same standard, we've been in a recession

since the first quarter of '79. We don't use that standard

anymore. When you take those out of there, the average

expansion was 37 months. That's about the same as it's been

in the post-war period — not 25 as Ed Bernstein suggested.

379
Another comparison is Art Oaken's discomfort

index. If you look at the past two — where you have the
inflation rate and the unemployment rate. If you look at the
past two administrations, you find that the discomfort index
was around 16 percent.
That is worse than Roosevelt's first term. The
only one that was only worse was Wilson's second in World
8

War I. So I don't think we fair too well historically on
that record.

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with the exception of the Civil War, long-term bonds were in

the range of three to five percent in this country. That

reflected long-term confidence in the purchasing power of

the dollar that we've lost.

We are losing it by leaps and bounds. That is a

very important measure by which to judge our performance.

I have in my paper an extended discussion of an

item of foreign history, France in 1926, which deviates from

that of Tom Sargent. I suggest that it was primarily a

monetary problem.

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Of course, the overriding one -- for 200 years,

There was a proliferating note issue that was
stopped by a gold cover in August '07 and was even better

stopped by convertibility at the end of 1926. The note issue

was 27 percent ending July 26. It went to a seven percent

decline under the cover which was too tight.

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Then they went to convertibility.

The stock

market proceeded to increase twice as rapidly as it did in

the United States, which was a pretty good performance

because we had a boom at that time.

The question of what is a gold standard, you know

the purists say all or nothing. They get nothing. A real

gold standard to me means convertibility at a fixed price.

It means a legal definition of the dollar in terms of the

fixed weight of gold.

A pseudo-gold standard is a cover or backing. A

pseudo-gold standard is also coinage without convertibility.

This is essentially the opposite of Milton Friedman's

definition.

There is no need to have enough gold on hand to

replace every dollar out there, as some people have suggested.

After all, if all of the dollars were to be replaced, that

would imply a massive deflation and the value of those

remainding dollars would approach infinity. So this obviously

isn't going to happen.

Indeed, a large horde is undesirable because it

facilitates procrastination as it did in the Sixties. You

can just run down your inventory. It's much better to run it

on a thin stock, as Britain always did.

Robert Hall suggested zero as an appropriate

inventory. it could indeed be done if you managed your

381
monetary policy very properly. There is no need to eliminate
the fractional reserve system. No need to eliminate the
Federal Reserve. The Federal Reserve's tools remain exactly
the same as they are today, only the targets change. They'd
use a price rule instead of a quantity rule.
If there is an inflow of gold, as there was in
•29 and '30, that tells you you are in an incipient deflation
and that you should, indeed, increase the money supply. If,
on the other hand, there is an outflow as we experienced
from '58 to '68, that tells you you are in incipient
inflation and it's time not to deflate, but to stop inflating.
People always talk as if the alternatives are
inflate or deflate. The alternative is price stability.
The key question is gold a good proxy. Earl Thompson and
others have suggested that after we stopped stabilizing the
gold-dollar ratio, the gold-dollar ratio was unstable as was
the wheat-dollar ratio and the oil-dollar ratio.
This is not a very good argument for not returning
to a stabilizing program. That evidence is irrelevant. A
gold is very good proxy under a gold standard. It's a very
poor proxy under a fiat money standard because it becomes a
hedge, of course.
If you look at five year intervals from 1880 to
1914, you'll find that the relative price of gold vis-a-vis
the wholesale price index — again, a tough test. The

382
wholesale index is volatile.

It never deviated by more than

about two or three percent a year. So, I would conclude that
3

yes, gold is an extremely good proxy. After all, the whole-

sale indices are probably subject to that much error in
those days.
Compare that with the post-1968 paper yardstick
and you'll find that the wholesale price index has doubled

against that kind of a unit of account.
Questions of gold supply — there is no rigid link

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either in theory or fact between the world output or the

Treasury stock and some price level. No such evidence has

been presented. Nor is there any reason to suppose it would

be true unless you had 100 percent reserve and 100 percent

cover, which I suggest to you aren't necessary.

It is true that if you had a large rise in

productivity and production and you had no increase in

velocity and you had no increase in gold output, that you'd

have a mild deflationary trend.

I would suggest this is the least of our worries,

because if you have that large increase in productivity, that

means living standards are going up, not down. A rise in

living standards with falling prices are the least of our

worries.

The slow down in gold production since 1970 is

what one expects from the theory of exhaustible resources.

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Gold in the ground is a hedge against inflation of paper

money. You would expect people to horde more of it, both

buyers and suppliers. The same analysis applies to oil.

People who hold oil in the ground view it as a

hedge against inflation of the dollar. Why trade that oil

for a dollar asset? As soon as you fix commodities in terms

of the dollar, that incentive disappears and production will

resume two or three percent of annual rate.

The worries about •— there is, incidentally, no

evidence that I am aware of that more money means more real

output. All of these worries about whether there would be

enough money, somebody needs to explain what that means .

The worries about Soviet and South African

supplies and all that sort of thing, I think this is mostly

a red herring. The notion that someone could corner either

the gold market or the dollar market, I don't think even the

Huns could pull that one off.

International concerns — there is no reason at

all to impose fixed exchange rates on other countries. If,

after all, managed money is better, and a lot of people tell

us it is, then it would be responsible for them to float

against a gold dollar.

The fact that no one believes that's going to

happen tells you something about what we all really believe

about gold money vis-a-vis inconvertible paper money. In

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other words, those countries would indeed fix to the dollar,
but that's none of our business. If you want to do it on an
IMF system, terrific.
There have been suggestions that any restraint on
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the ability to create money would hamper us in our ability

to offset bad wheat crops or Iran-Iraq wars and that sort of

thing. You can't get more wheat by printing more money.

That is just a silly kind of an argument to me.

There have been suggestions that the monetary

system can somehow be isolated against the rest of the world.

I can't see how that is either possible or desirable. A

dollar is a dollar, regardless of where it is held.

If there was some foreign raid, there is enough

flexibility in my system to offset erratic gold output or

anything of that sort.

My interest in the gold standard is not a matter

of disciplining anybody, either in monetary or fiscal sense.

It is a matter of efficiency in using a price rule rather

than a quantity rule.

It is quite incorrect to translate a price rule

into a quantity rule as a number of people have done. There

is no interest in what the growth of sum "M" is under a

price rule. We're simply trying to stabilize the price.

The growth of money was, in fact, faster from

1879 to 1914 than it was in the post-war period. That was

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was not inflationary because people trusted the money and,
therefore, held more of it.
When inflation is expected, as it is today, the
4

gold standard doesn't make it harder to finance budget

deficits as Alan Greenspan suggested. Indeed, it makes it
much much easier, because what it does is it brings bond rates
down to where they were historically. It allows the government as well as private business to fund long ones again
at a reasonable rate.

It does limit monetarization of the debt, but

there is a very severe question as to whether monetarization

of the debt is in anyone's interest, even the Treasury's.

I harken back to Wessley Claire Mitchell who decided that the

greenback era cost the Treasury money because it raised

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having to borrow the amount of the greenback issue.

The questions of disinflation -- if we're going

to reduce inflation, the alternative system is of course some

quantity system. You basically have two ways of doing it.

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interest rates so much that it nullified the effect of not

If you can figure out what M you're trying to achieve, you
either bring it down gradually — that's a real problem.
That probably takes about ten years and a few
changes of administration, a few changes of Federal Reserve
staff. Therefore, it will not be believed. People will not
change their wage setting behavior, labor contracts, long

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term borrowing costs continue to rise.

In the meantime, you

are trying to squeeze down on final prices and all you get

is a squeeze on profit margins, declining employment — the

British situation.

the policy is going to get reversed.

If you were to have a rapid and sustained

reduction in the supply of M, that might indeed be believed.

If it was believed, we'd have another problem. Then you

have a dramatic decline in interest rates, squeezing out the

inflation premium.

That, in turn, implies a decline in velocity, and

increase in the demand for cash balances. No quantity rule

can cope with that. If you have a fall in velocity, the

quantity rule says you've just got to increase M at a good

fixed rate. You can't cope with it.

Consider the magnitude of the problem or the

potential. Back in '64, a dollar of M-l-B would support

$4 in nominal GNP. Today, it supports about seven. Well, I

don't think we could go back to four, but even if we went

back to six, the potential deflation would be horrendous.

This is not a problem under a gold standard. A

gold standard will supply whatever amount of money is desired

relative to demand. it can easily adapt to the major change

in expected inflation. That is indeed required if we're

ever going to make any progress on this issue.

So, that doesn't work because eventually

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The gold standard supplies the money needed to
match the drop in velocity with no risk of inflation or
deflation. If you risk inflation, people will trade the
dollars for gold. If you risk deflation, this goes the other
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6

for bringing inflation down.

I conclude that a gold standard would stabilize

both output and purchasing power, both in the long run and

short run, better than any observed or hypothetical

alternative.

The supply of long-term financing at low interest

rates — historically, that means five percent long term —

would vastly expand, restoring health to both corporate and

federal budgets without which we cannot get off the ground.

In my judgment, a gold standard is quite

inevitable, because neither the status quo nor any known

alternatives are viable. The only question is whether we will

put it together carefully in a considered manner before we

reach the crisis stage or whether we'll just do the best we

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way around. So you have a very nice clean efficient system

can after even more damaae is done.
Money is, as we all know, a unit of account, a
store of value and a medium of exchange and a source of
anxiety. I suggest that we maximize the last function. We
need to work a little harder on the other three.
Thank you.

388
SECRETARY REGAN: Thank you, Dr. Reynolds.
2 Dr. Sennho

|TATEIIENT

Dp> KANS F.

DR. SENNHOLZ:

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SENNHOLZ
Mr. Secretary, I think by now after

two days of exhausting hearings, you should be very tired and

5probably very confused.
I think it is my function as the last speaker to

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try to wake you up or permit you to wake up.

to read my paper.

I am not going

I just would like to comment on it.

In the first part of my paper, I am making the point

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that actually, the system we are having today is really

appropriate for the economic order and the system of deficit

spending we have today.
In fact, the United States government, given thes

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deficits of some $60 billion a year in regular deficits,

another $30 billion of deficits in off-budget operations;

another $60 billion or $70 billion in credit operations.
There is no way that we can have the gold standard,

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the classical gold standard.

We need today an elastic

currency and we've got it.

made to expand to cover all of these deficits.

An elastic currency that can be

Therefore, I think we have the appropriate

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system we need today to cover these deficits.

Before we

can talk about the gold standard, the classical gold standard,

the federal government has to put its financial house in

order.

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We must balance the budget.

There is no way to

restore the gold standard, no way to return to a fixed

exchange rate between the paper money and gold. Therefore,

I believe that the elastic system of today is the appropriate

system given the deficit spending we have.

However, this raises one question. This is the

question of gold in Fort Knox. What are we going to do with

it? It is my belief that it doesn't make any sense to

impose the gold standard in any form and at the same time

want to hold onto this gold in Fort Knox. I don't think

that is logical.

If gold is useless and barren and whatever you

may call it, then let's use it. Let's employ it. That's

the basic proposition in my paper. Let's employ the gold

in Fort Knox productively.

I fail to comprehend why we should hold onto

this gold in Fort Knox. We know how it got there, but I

think in this age of social need and financial crisis and

economic crisis, it is time to use those assets.

I am making the point here that it is essential

for the federal government to free itself from this idle

horde of gold and put it to productive use. In fact, I am

saying that there can be no better use for this gold than to

use it as a medium of payment for these deficits, these

$95 or $96 billion of deficits we are having.

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In fact, my favor measure of the deficit is the

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growth in the gross debt of the United States. If you look

at the figures, just this week they are mounting to $96

billion over last year.

Instead of financing all of these deficits through

the sale of bills, notes and bonds in the capital markets,

draining and exhausting the capital markets, let's use the

gold. We don't need a national mint, either.

Let's use the gold to cover the deficit. Put

the gold to productive use. I am saying that the idle horde

of Fort Knox gold would be converted to productive capital,

meeting the urgent needs of government.

I am saying that there need not be a federal

mint at all. It would only delay the disposal of the gold.

In the long run, it could prevent it entirely. It's essential

that the payees of this federal gold should have ready

access to a number of private mints, if they so desire, or

to the free gold market.

Surely, the disposal of this gold would somehow

depress the dollar price of gold. Then since the gold is

being used to finance the deficits, I think the sale would

precede all the faster the lower the price of gold would be,

which then would be desirable.

It is my belief that the disposal of the gold in

the federal horde would strengthen the United States dollar

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immeasurably because it would permit the Federal Reserve to

be inactive. It would not have to facilitate the financing
of deficits. Instead, we inject some liquidity. This is
what we are needing right now.
In other words, the inflation discount, which
springs from the present anticipation of higher prices, the
depreciation of the money, would come down. This would give
new purchasing power to the American dollar.
Then I am making the point that the disposal of

the gold in Fort Knox -- the greatest beneficiary would be

the United States government, as it would bring instant

relief to the depressed capital markets and lower interest

rates immediately.

This then would permit the United States government

to refinance some of its bills and longer term obligations

at much lower interest rates. In the long run, there would

be a sizable saving in interest costs as a result of this

capitalization.

I am talking here about a savings of some $50 or

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$6 0 billion as the interest rates would come down. It would
permit the Treasury to facilitate to refund this massive
short-term debt, the short-term bill and note obligations
with long-term bonds.
In other words, it would for the first time
reserve this ominous trend toward short-term financing.

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Finally, I am making the point that the American people would

reap immeasurable benefits from the gold disposal.

In fact, I can think of no other policy and no

other supply side policy as stimulating and energizing as the

disposal of the gold. My belief is that it is difficult to

imagine the impact of rapidly falling interest rates on the
bond market, the stock market, the commodities market and
real estate market and even the labor market.
There would be an explosion of economic activity

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the world may have never seen before as a result of this

disposal of gold and the injection of new liquidity. The gold

would provide instant liquidity and bring welcome relief to

financial institutions.

The savings and loan associations and others, it

would breathe new life. It would breathe new life into the

suffering institutions which would permit them to render the

vital services for which they were meant.

The housing industry may come back to life as a

result of this injection of new liquidity. I am talking

here about the stock market, reviving the real estate market

and stock market and surely for the first time in some 15

years, there might be a recovery there.

Also, I believe that perhaps real income which

has been declining so substantially and consistently over the

Ust few years, may rise again.

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Finally, as I mentioned, the supply side

economists should approve of this, too. Without it, I am

afraid their ship will run aground •— the budget deficit,

most of which were inherited from previous administrations.

The tax cut is designed to release productive

energy is partially negated by massive deficits that consume

productive capital. Moreover, whenever they talk about some

cuts in spending, surely, there are the pressure groups

demanding more spending.

I am afraid that they are discouraged now and may

be discredited before long, because the American economy is

declining. The ship is sinking in a deep recession.

Therefore, I believe that the best policy would

be to put the federal gold to productive use. Surely, no one

today can defend the present state of affairs — rampant

inflation, record interest rates, economic stagnation, rising

unemployment and falling levels of living.

Nevertheless, there may be some objections here

and at the end of my paper, I am dealing with a few objections

which I anticipate. For instance, the first objection here

raised by my friends, the goldphiles.

They would say, "Well, gold will drop in price."

Surely, that's a possibility. I believe, given the gold

supplies, — in fact, I believe that given the gold supplies

with a massive diffusion all over the world. Usually, any

394

quantity of gold can be sold at rather stable prices. That

is the peculiarity of gold. Whether it's a small quanity or

a large quantity, gold can always be sold at free market

prices. Given the supplies of gold diffused all over the

world, one can sell large quantities or smaller quantities.
In fact, the given production and consumption idea
is rather unimportant. It is irrelevant because of those

huge supplies and the cash holdings of hundreds of millions
It is the commodity which has the greatest

of people
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marketability.

Then I am talking of one other objection I

anticipate.

classical gold standard who believe that they need a certain

quantity of gold in order some day to return to the gold

standard.

It is the objection by the advocates of the

My answer is no, that's not necessary.

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That's why it became money in centuries past.

A small

quantity of gold is needed if ever there is a return to the

gold standard. We surely don't need Fort Knox when the

massive supply is amounting to some 20 percent of the world

monetary gold in order some day to redeem the American paper

currency.

These huge stockpiles are not needed. Whatever

is needed at that time can be bought on the open market. We

don't need Fort Knox in order to return to the classical

gold standard.

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Finally, the last argument here I am coping with
and dealing with is the one of those who are concerned about
the national defense. They'd say we need a strategic gold
pile in case of an emergency in order to be able to defend
the United States.
Again, my argument is that we don't need these
huge supplies. After all, the defense of the United States

does not depend on the vaults of Fort Knox. It depends on
the willingness and the ability of the American people for

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self defense, not on the gold of Fort Knox.

At any rate, I think it is time to give thought

to this massive horde of wealth in Fort Knox in this age of

social need and economic crisis and inflation. What are

we going to do with it? It does not make any sense to

denounce gold and at the same time always wanting to defend

it — holding onto it.

In my belief, the sale or the liquidation of gold

would release a vast amount of productive energy at a moment

of time when it is urgently needed. Above all, the gold

disposal would buy the federal government the time needed to

bring its financial house in order.

It is a time that must be used to bring its

financial house in order. If that cannot be done, of course

ultimately, the old evils, the ailments, will continue. We

don't know how the federal government will act in the coming
years.

396
Nevertheless, the benefits, the beneficial effect

of the gold disposal will endure for a long time to come.
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Thank you.

SECRETARY REGAN: Thank you very much, Doctor.

We will now begin our questioning period by members of the

panel. We will observe the usual rules and will start in

alphabetical order. Mr. Costamagna?

MR. COSTAMAGNA: Thank you. I have a question for

both Dr. Cooper and Dr. Dornbusch. It's the same question,

Gentlemen. I believe both of you related the same historical

facts regarding the lack of stability that you saw in the

gold standard in the period of the 19th and early 20th Century

This morning, we had a presentation by Dr. Jastram

who wrote a very interesting book called The Golden Constant.

He presented us with a chart, an extract from that book,

which narrates a history of the English experience with gold

from 1710, primarily, to 1930, although it goes on in this

chart.

Taking that same period of time in England, it

shows a considerable stability versus the history of

instability as you related to us in American experience.

I would like to ask both of you if you could

explain why, in the United States in your interpretation of

the history of the 19th and 20th Century, we had instability

whereas the English experience appeared to have stability.

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DR. COOPER: Maybe I can take that. I think we

have to be somewhat more precise when we use these words.

What did characterize the 19th Century was prolonged periods

of decline in price as well as long periods of rise in price.

That means that by choosing one's period or by

choosing this scale on a graph that's sufficiently small,

you can show a price line that has no trend. That is correct

What I suggested and what Professor Dornbusch also

suggested was that within that no trend price line over the

course of the century, in fact you got not just substantial

short run swings, cyclical swings, but substantial long run

swings

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Either of you can go first.

If you look at Table 2, which you should have

before you, it does give, side by side with the U.S. data,

the British and the German and the French data. It shows

that while the British data were somewhat less pronounced

than the swings in the American data, still you've got in

Britain over the same Century — I didn't take it back to 1715

But over the 19th Century, you've got the same

major swings — down 49 percent in price from 1814 to 1849

with the gold discoveries, up 39 percent in price through

the early '70s when Germany and the other European countries

went on to gold; down 39 percent in the last two decades of

the century and then up 32 percent before World War I.

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Those numbers are somewhat smaller than the

American numbers, but they show basically the same pattern.

The point that I was trying to establish is that it's not

merely the high short-run variability which Professor

Dornbusch emphasized, but even over longer periods of time.

You've got substantial price movements of such a

nature that, since a lot of emphasis has been put on the

consequences for long-term financial markets of inflation,

this casts doubt on the reliability of a piece of paper

denominated in nominal terms over this period of time.

After the fact, we can identify the reasons for

these turning points. Gold discoveries, in some cases; new

countries going onto the gold standard and so forth. Of

course, the bond buyer in any particular year couldn't be

sure what things were going to be like 30 years hence.

DR. DORNBUSCH: I can add some remarks of the same

nature in the table on page two in my paper. I have much

the same evidence Dick has discussed.

In Britain, in the 19th Century from 1870 to 1913,

inflation was nearly twice as variable as it was in the

period, the very disturbed period in Britain since 1960.

I have a chart here published in the paper of

the Federal Reserve Bank of St. Louis looking at the

historical evidence in the 19th Century. The great deflation

from 1870 to 1896, just as in the U.S., then a very sharp

399
increase in prices. Of course, under the gold standard,
everybody was getting the inflation of South African
discoveries.
If you look at what happened after the resumption
of specie payments in 1925, very substantial fall in prices
with very great macroeconomic problems. As you remember the
Great Strike in 1926, there was much more instability by any
means than we have now.
I tried an experiment, because I asked myself —
I used wholesale prices, because I have monthly observations.
What would a businessman do under monetary regime and what
does he or she prefer?
I tried to use forecasting models of prices the
way we use them now. I used the data in the 19th Century
for subperiods to make forecasts five years ahead. I made
six months ahead forecasts.
The forecast errors were five times larger than
for the last 20 years . So, there was a lot of instability,
by all means.
What is being said repeatedly is that in 1800, the
price level was the same as in 1900. In between, it went
up and down in an extremely unpredictable way. Unpredictable
because you wouldn't know which country would go on or off
gold, adding or subtracting from the world monetary demand
for gold.

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You wouldn't know which country would find gold

or whether there was going to be a war in South Africa and

they wouldn't produce for two years or there wouldn't be a

war. That is macroeconomic instability from using gold

rather than controlled paper as the medium.

I think that is the argument against interpreting

the 19th Century as offering evidence for gold serving a good

purpose. If anything, perhaps gold was particularly unstable

then because discovery was there on a vast scale. Discovery

has been going on in Brazil in the last two years. They

found four and a half tons very recently.

So, that certainly is not at an end yet.

MR. COSTAMAGNA: Thank you. I find it contra-

dictory sometimes on what we hear in terms of historical

perspectives. I appreciate your thoughts on that question.

Dr. Sennholz, I'd like to ask you the next

question, if I may, sir.

DR. SENNHOLZ: I'd be delighted. I'm listening

here and I am amazed about this interpretation. You know,

we are talking about the period of the Civil War, rapid

expansion of greenbacks.

We're talking about the Resumption Act of 1875

which was effective 1879, there's going to be a return to

gold payments. We are talking about the Silver Purchase Act,

the Bland Ellison Act of 1878 which forced the United States

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silver certificates.

We are talking about the time of 1890, the

Sherman Silver Purchase Act. One Act after the other of

government intervention in money. Certainly, mentioning the

Civil War and mentioning all of these acts and purchase acts

and expansion, contraction, rejection and greenbacks — that

is not being mentioned.

The fault is laid on the doorsteps of gold. I

am really amazed about this interpretation of history.

DR. COOPER: Excuse me, if I may say so, all of

the examples he's mentioned are from the United States. The

interesting point of this period, while there was all of those

developments in the United States, and I excluded the

Civil War.

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government to buy massive supplies of silver and then print

You see the same pattern of prices.

The numbers

in detail are different.

The same general pattern of prices

exist also for Germany, for France, which did not have the

Bland Ellison Act. They did not have the Civil War. They

had their own problems, but they came at different times --

and for the United Kingdom.

So what I think has to overlay the particular

historical experience of the United States against the

general world wide pattern.

DR. SENNHOLZ: Again, referring to European

402

history, then I am mindful of the French Revolution of 1848

and then the three wars fought in Central Europe, 1864 with

Denmark; 1866, Austria; and Germany 1875-'71, and then

finally 1875, the change of central European currency from

silver to gold which was the decision on the part of

government.

DR. COOPER: That's right.
DR. SENNHOLZ: By that time, central Europe still
had been on the silver standard. Then trying to imitate

Great Britain and France, which were quite advanced

industrially and in trying to imitate Great Britain, Germany

in 1875 decided to turn to the gold standard.

This again was a political act. Such an action,

the dumping of silver and then buying the gold, would have

an impact on the price of gold. It's obvious. But once

again, it's a political decision.

MR. COSTAMAGNA: I have one other question, sir.

SECRETARY REGAN: Go ahead.

MR. COSTAMAGNA:

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Dr. Sennholz, again, if I may

ask you -DR. SENNHOLZ:

Do you like my answers?

MR. COSTAMAGNA: I do. I like them very much, sir.

You see the problem we have in making a decision, when we

get various interpretations of history constantly.

The other question I have of you, Dr. Sennholz, is

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the disposing of our bullion, our gold.

paper in terms of coins. Are you thinking of other means as

well — in just the raw bullion, in bonds, gold backed bonds,

any means available?

DR. SENNHOLZ: Definitely, I am very skeptical

about depending on the national mint, which would be a very

slow and painful process to make coins available.

I don't think a national mint will ever be able

to mint all of the gold in Fort Knox. There has to be

another method of disposal. My proposal was to help the

Secretary of the Treasury to cover those deficits.

Give him the gold. Let him make the payments

with that gold.

MR. COSTAMAGNA: He'd become a national hero.

DR. SENNHOLZ: Not personally, of course.
SECRETARY REGAN:

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You mention in your

That would only last for two

years
DR. SENNHOLZ:

Did I answer your question?

MR. COSTAMAGNA: But besides coinage, just sell --

DR. SENNHOLZ: Just make payments. After all,

he needs about $96 billion right now a year of deficits, off

budget and regular deficits. Instead of going into the

Federal Reserve and always demanding accomodation by the

Federal Reserve which is draining and straining the capital

market, let's help them. Let's help both by using these

404

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MR. COSTAMAGNA: Thank you.

SECRETARY REGAN: Governor Partee?

GOVERNOR PARTEE: Well, Mr. Chairman, the day is

late. The testimony was quite clear. I thought I had just

two questions, but now I have three questions.

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idle hordes in Fort Knox.

The first is that the function of this Commiss ion

is to recommend something as to the role of gold,

since we

have large stocks of it. A number of you could not see any

near term possibilities for the use of gold in the monetary

sense, at least officially.

You did not specify what we ought to do or how

we ought to look at our present gold stock. Professor

Sennholz was quite clear about it and so was Professor

Dornbusch. I guess I would have to say that Mr. Reynolds,

since he wants a convertible gold system, is clear about it,

too. We would hold it and then use it in a monetary sense.

The others of you haven't been clear. Starting

with Dick Cooper, what should we say about the official

stock of gold that we now have?

DR. COOPER: I find myself in considerable sympathy

with the positions that both Dornbusch and Sennholz took,

that it's an asset which we should put to productive uses.

I think the question, therefore, in my mind is

the timing of that. The amount of gold that the U.S. holds

405
is sufficiently large that I don't see a realistic prospect
of, for example, paying off a substantial fraction of the
public debt in short order.
The gold market is thin. If we were to try to sell
it all very quickly, I think that the price would be depressed
albeit perhaps temporarily. So, I — to answer your question,
I think I would resume gold sales, to use it in that
direction. I would pay attention to the elasticity of
demand for gold and not deliberately try to push the price
down in a way that diminished the value of the gold that we
had.
How far one were to continue that process on a
policy of gradual sales is not something that you have to
face right away. I don't accept entirely Sennholz's total
dismissal of the notion of gold as a reserve for emergency
use of some kind.
I think that for those purposes, we hold much
more than is necessary. One could contemplate very
substantial sales spread over a period of time and still
not jeopardize any possible strategic use of gold.
GOVERNOR PARTEE: How would you feel about a
gold coin that is by weight of the kind that Mr. Costamagna
has spoken of? Should we be prepared to mint such a thing?
DR. COOPER: I like to look at cost-benefit
analyses. I don't have any idea how much mint costs are.

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I don't see any special value to doing that.

My first

inclination would be to sell it in the form that it now is,

gold bricks.

GOVERNOR PARTEE: Mr. Davies?

MR. DAVIES: I was greatly impressed by the merit

of Bob Solomon's remarks yesterday. After his 30 years

struggling with this, he considers that gold is an important

part of our patrimony and should not be dumped.

As to the changing of gold into currencies, for

some time now the Gold Institute has been providing a service

to treasurers of multinational corporations and to central

banks which must of necessity hold currencies, many currencies

as well as gold.

For their convenience, we report the value of

the currencies in terms of ounces of gold. In that term,

the countries that are members of the International Monetary

Fund hold, as of July 31, which is the last final figure I

have, 952,000,000 ounces of gold as physical gold.

They also hold other reserves of 754,000,000 or

a total of 1.7 billion ounces of gold equivalent in their

reserves . of those, the United States holds 298, which is

not unusual amount of reserve for the United States to hold.

However, note that whereas the reserves of the

other countries are, as Mr. Partee and Mr. Wallich well

know. The reserves of the other countries are in the form

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of dollars.

The reserves of the United States, in the form

of foreign currencies, amount to only the equivalent of
34,000,000 ounces of gold compared to the 264 ounces of
physical gold.
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To change our 264,000,000 ounces into dollars

would mean, of course, that we would give up our foreign

exchange. Foreign exchange can't be your own currency. To

change it in other currencies might be possible.

My answer to you, Mr. Partee, is that I think that

the United States should hold onto its patrimony of gold, but

there are things to do to make it much more valuable.

The first step is to encourage what is already

going on. That is, making gold a real currency in the world,

an interest bearing currency, a liquid currency, as it is in

the private markets.

It is beginning to be in the private markings.

Then Mr. Greenspan's suggestion this morning that there might

be some bonds, some low interest bonds issued with gold as

a backing also has merit.

My suggestion is that that could best be done a

little later, once the private market, the private sector

market for gold bonds is developed a bit more. Once the

private market for gold bonds, which is now pretty small, is

developed further, then the Treasury could explore using that

market for bonds. The specifics that we had suggested or

408
that I would suggest for that, are that because any
relationships between governments and central banks are best
carried on privately, that specifically the international
divisions of the U.S. Treasury, the Federal Reserve Board
and the Federal Reserve Bank of New York, be asked as of now
to actively explore ways in which the 264 million ounces of
gold now in the hands of the Treasury could best be mobilized.
I have the impression that there are some good
ideas within those three international divisions for things
that could be done now. With regard to the issuance of
coinage, by all means it would help to develop this private
market for gold..
To do as I think Secretary Regan had implied a
few days ago — to streamline the issuance of the medallions,
the current medallions, and perhaps to add this additional
thing to have a redeeming facility for medallions dealing
with a relatively small number of ounces of gold, of course.
Look very carefully and positively at the
proposals that have been made for the issuance of gold
coinage that Mr. Costamagna suggested. That is now — that
are now in bills before the Congress.
Again, this is all leading to a situation in
which, if the Secretary of the Treasury and the Federal
Reserve wish to issue some new bonds at two percent or three
percent, payable in gold, there will be already at least some

409
private market there to begin with.

GOVERNOR PARTEE:
MS. JUNZ:

I see.

Helen?

I wish I could come to some meeting

some time where I could disagree violently with Dick Cooper.
I am in almost complete agreement with what he is sayingI'd like to add a couple of things to that,
7

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though. If we do sell gold, then I do not think any need is

there for coinage, largely because I think the major reason

for coinage would be a balance of payments.

If people in this country wish to buy gold coins,

why should we import them if we are sitting on a large stock

of gold ourselves for which we do not have complete use. I

do also agree with those who have been saying that gold will

remain in the international financial system.

We have not been able to phase it out during the

Seventies. I think the attempts at demonetarization have not

been successful. Most of the other industrial countries and

certainly the developing world do not understand what we mean

by demonetarization and have never really been on board on

that proposal.

So, it is pragmatically, I think, part of the

system. For that reason, we should not get rid of our

entire gold stock. You do need it as part of your reserve

assets. Thank you.

GOVERNOR PARTEE: Do you want to answer that?

410
MR. REYNOLDS: Yes.
GOVERNOR PARTEE:

My second question was for you,

but go ahead.
MR. REYNOLDS:

Okay.

Let me anticipate it because

I don't think I was at all clear about that.

I have no

trouble at all disagreeing with Richard Cooper or with
anybody who says that bond buyers couldn't be sure about
future inflation under a gold standard, but they can today.
I would have the Treasury sell one ounce coins
when the gold price hits, say, $450.

I'd have them buy

bullion when the price hits, say, $400.

Adjust those

ranges a few times by trial and error.
Eventually, set the price and make the convertible.
The coins obviously would facilitate the domestic convertibility in reasonably small amounts, say, $10,000.
As far as the idea of issuing a new gold backed
bond, I think that's a good idea.

I'd also like to make

old bonds gold backed and also old bills and also old notes
and also Federal Reserve notes.

Of course, that's a gold

standard.
GOVERNOR PARTEE:

That is very closely related to

my question to you, Mr. Reynolds.

I had understood that you

wanted a pure, convertible standard.
expressed that.

You just now have

You spoke of a Federal Reserve-central bank

function in connection with a convertible standard - world

411
wide, desirably, but in this country at least where we have
the authority to do so.
It would seem to me that assuming we got through
the re-entry problem, why, if we had a credible price for
gold, that would be the price. Therefore, I assume that you
visualize central bank intervention as being the intervention
that would keep the official domestic stock from varying too
widely or beyond a particular range or something like that.
You would intervene to acquire gold and to take
counterveiling contractive steps when you needed, when the
gold stock was declining and vice versa when it was rising.
Is that your view of how the central bank would
operate?
MR. REYNOLDS: Precisely. You would use a
discount rate, open market operations, reserve acquirements
of your choice to accomplish that result. If you notice a
sustained inflow of gold, that tells you something. If you
notice a sustained outflow of gold, as we certainly did in the
Sixties and chose to ignore it, that tells you something, too.
In retrospect, it's quite clear what those two
episodes in '29 and '30 and the Sixties told us. In '29 and
'30, it told us we were worrying about a stock market boom
when we should have been worried about the stock market
collapse and —
GOVERNOR PARTEE: You would, of course, be subject

412
to shocks. Just to take an example that comes to mind, we
obtained an awful lot of gold in the latter half of the
Thirties. Partly perhaps because the price was too high but
partly because of the fear of war.
I assume in a case like that where gold was flying
under the country, you would want us to inflate domestically
in order to stop it from coming in; is that right?
MR. REYNOLDS: Well, we hiked the price 70 percent
as I recall, the equivalent of raising it to $800 today. If
you do that, that's a deliberately inflationary policy. As
you know, it was and it had deliberately inflationary
consequences, much like the deflations we're talking about.
They were quite deliberate. The post-Civil War
deflation and the retirement of greenbacks was deliberate.
The 1925 British situation was deliberate.
Now, in retrospect we would think that's kind of a
strange thing to do. You let bygones be bygones and you
stabilize. You don't try to deflate, but you stabilize at
the existing level.
So my answer is sure, if you hike the price up to
$800 or $1,000, you would almost be forced with that extreme
of price to inflate. I don't suggest that you set the price
that high, though.
GOVERNOR PARTEE: You would take the view that
you would adjust, regardless of the source of the —

413
MR. REYNOLDS:

Well, if you know that somebody is

playing games with the gold stock — you know, these hypothetical scenarios that keep some people playing. The Soviets
are dumping for the sheer joy of acquiring dollars is something I find strange.
Then you have the power and authority to deal
with that. It's a discretionary system. The only difference
8

is — it's no different than the system we have now. Instead
of chasing elusive quantities of Ms, you chase one very

simple, very quick single and that's the gold window.

GOVERNOR PARTEE: The gold stock, really.

MR. REYNOLDS: The gold stock.

GOVERNOR PARTEE: Dr. Sennholz, in his provocative

way, provoked a third question on my part. That is, in

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speaking of the great benefits as you were of selling the
gold, you seemed to imply that you could have the purchasing
power that had resulted from mobilizing or activating the
gold stock in selling it to private holders.
Also, the same amount of monetary expansion that
was being carried on by the central bank in any event. Don't
you think that the two are substitutes for one another?
That is, wouldn't there need to be a counterveiling Federal
Reserve policy if, in fact, the Treasury was getting this
kind of funding?
DR. SENNHOLZ: Well, in my paper, I state and in

414
^ j.v^« The Federal Reserve at that time has
fact, I refer to this. •>-"*=
to be inactive. It must not permit the financing or the sale
3 of the gold.
4

AS a matter of fact, I didn't call it the sale

of gold at all, because that would assume you take the gold
5
to
6 the gold market. I didn't say that.
I said we should use the gold in lieu of cash
7
and
make payments. This would be an injection of liquidity
8
in
9 a starving, depressed capital market.
GOVERNOR PARTEE: Except that I would think that
10
we
11 were injection, oh what, $110 billion worth of liquidity
at
12 the given current market prices that the central bank
would
not just need to stay inactive. It would need to
13
subtract
from the residual stock by some considerable amount.
14
DR. SENNHOLZ: I would just request an inactivity
15
on the part of the Federal Reserve. I think that would do it,
16
GOVERNOR
PARTEE: Fine. Thank you.
17
SECRETARY
REGAN: Governor Wallich, do you have
18
some
questions?
19
GOVERNOR WALLICH: Thank you, Mr. Chairman. I
20
think
all of the important questions have been raised. We
21
know
where everybody stands anyway. I would like to ask a
22
couple
of very technical ones.
23
Mr.
24 Cooper has changes in the wholesale price
indices for a number of periods. As I look at these, I have

415
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the impression that even though the increases and declines

seem large, on an annual basis they are not very large.

Would you say that we are talking about something

like two or three percent per year in most of these jumps?

I take it you've taken periods that are extremes.

DR. COOPER: The figures that are reported in

Table 2 go from peaks to troughs to peaks to troughs,

excluding the Civil War.

GOVERNOR WALLICH: Yes.

DR. COOPER: That was done deliberately in order to

demonstrate how much cumulative price movement there was over

periods of time and to make the point, which I did make,

that in this period, one cannot count on the long run

stability for any given period.

Within these periods, there were typically ups and

downs. I think, as far as I'm aware, again leaving aside

war time periods, the maximum change over a business cycle

from trough to trough was about six and a half percent per

annum. The maximum annual change.

Of course, if you average the ups and downs within

these periods over the 20 or 30 year periods, you get smaller

annual changes.

GOVERNOR WALLICH: I have a similar question for

Professor Dornbusch. You've got the variability of various

things on page two.

416
It doesn't seem to say anywhere what the period is
over which this variability was measured.

For instance, you

have the rate of inflation, money growth and so forth.

this annually or monthly?
DR. DORNBUSCH:

The first two —

and employment, are monthly data.

the

inflation

Money growth and real

interest rates, which only are there for the U.S., are monthly
data.

The first two, annual and the next two, monthly.
GOVERNOR WALLICH:

I look at the standard deviation

for real interest rates as 14 percent.
DR. DORNBUSCH:

If you have a look at chart 3(a),

you'll see where it comes from, the series of the real
interest rates in the period.

Four to six months commercial

papers -GOVERNOR WALLICH:
rate there.

You've taken a very short term

The bond rate, surely you would have nothing

like this in •—
DR. DORNBUSCH:

We don't know what the real

interest rate on a 20 year bond is.
GOVERNOR WALLICH:

I think this reflects more

the condition of the New York Money Market, which in those
days was indeed a market in which banks evened out their
position.

So you've got very wide fluctuations in rates,

somewhat like the day's federal funds rates.
DR. DORNBUSH:

Is that a question?

417
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GOVERNOR WALLICH:

I just wanted to know how you

specified this. When you take these numbers by themselves,

they look very damaging to people who believed that under the

gold standard, there could be greater stability.

They also look strange in relation to today's

conditions which surely are not very desirable. So, I find

it hard to believe that things under the gold standard in a

meaningful sense were more unstable.

Let me ask Mr. Davies, do you see any significant

evidence of gold contracts being made — that is, contracting

so many ounces of gold instead of so many dollars?

MR. DAVIES: It's just beginning. The fact that

between five and ten million people, individuals and

corporations, and the last estimate is eight million in the

United States, are now holders of gold coins.

The fact that by our monthly records during the

first eight months of this year, 2.5 million ounces of gold

in the form of coins came into the United States, indicates

that there is a growing, a substantial and a growing holding

of gold in the form of an auxiliary currency.

The use of gold as a means of payment has not yet

emerged as much as we think that it is going to emerge in the

next — during the next year. I've mentioned the three

companies that have paid dividends in the form of gold, which

is one form of payment.

418

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I think the most important is this new concept

1
2

new, recently — of the true gold bond. As far as means of

payment, a suggestion has been made that mortgages either as

individual mortgages or as groups of mortgages, could be

handled at a very much lower than the current rate if gold

were involved.

GOVERNOR WALLICH: Could I ask you, would that

assume a fixed price for gold at the time these contracts

were made or would it have to do with a variable price of

gold which may go up or may not go up?

MR. DAVIES: It.would definitely not assume a

fixed price of gold with relation to any currency. It would

continue with the present situation whereby each currency and

gold remain floating with each other.

GOVERNOR WALLICH: Since there are many people,

as you say, who are prepared to own gold, why should on a gold

bond any interest at all be paid, since it would be something

in the nature of a warehouse certificate for gold bullion or

gold coin?

MR. DAVIES: I indicated there are two gold bonds

that are now ~ as the Secretary knows, that are on the

market now and being traded daily.

One is the RefineMet $50 million gold bond which

is being traded at about a three and a quarter percent yield.

The other is the French gold bond which is being traded at

—

419
about a five and a half percent yield.

The latter, the

case of the three and a quarter percent is because RefineMet
even with a good trustee,
a small company.

Continental Illinois Bank, is still

Three and a quarter percent represents

that it's not the telephone company.
In the case of the French, the reason why that's
five and a half instead of the two percent that Alan Greenspan
was saying was probably the right level is that there is
constant talk in the Parliament in Paris that the French
government may abandon its commitment.

Therefore, that is

taken into account.
I think that it isn't at zero percent.
Greenspan was right.

Alan

If you take the international monetary

market quotations on so-called gold futures, which could also
be properly called dollar futures in gold if you're
denominating your money in gold, gold ounces.
As of yesterday, the annual rate at which you can
buy dollar futures with gold is —

for March, 11.4 percent

and then it goes to 12.8 and finally, in December '82, 12.4
percent.
can —

Eleven or 12 percent is what the market says you

It in effect says the difference between that and the

dollar interest rate is how much gold is worth to be lent.
GOVERNOR WALLICH:

That's the same condition as

you have for any currency that the forward rate of the
currency reflects the interest differential on the two.

420
Let me go on, since you mentioned the French

bonds. Do you know what price they will reach?
MR. DAVIES:

In terms of —

I know only in terms

of yield.
GOVERNOR WALLICH:
asking.

The yield is not what I'm

I am asking you or I can tell you, that it rose as

high as 1,000. That is to say, an increase of 1000 percent
8

and they are now selling roughly around 50 0.
MR. DAVIES: Yes.

DRS, Inc.

GOVERNOR WALLICH: I hesitate when I hear a

recommendation that our government issue a gold bond in the

light of the history of these French bonds.

Could I ask Mr. Reynolds a question?

Then I'll

be through, Mr. Chairman. You made a statement about the

failure of gold production to respond to the higher price,

which plays a large role in Professor Fellner's analyses.

You said the reason is that people treat gold as

an inflation hedge. Now, I've been told that the reason why

South African gold isn't expanding is that as soon as the

price rises, they move to lower grades or ore.

That, of course, reflects an expectation precisely

of the opposite kind. Maybe the price will fall again and

all will then be forever unrecoverable, barring new techniques

Do you have a judgment as to between these two?

MR. REYNOLDS: That's a luxury that the current

421
arrangement gives them, of hedging against upward and down-

ward movements in the relative price of gold and dollars.
I am simply suggesting that when you are trading
a tangible asset for a claim against future dollars, the
weakness of that claim which is reflected by the high bond
yield today is a measure of why it's a pretty good idea to
horde gold and also oil.
8

Much for the same reason that Americans and other
people move from financial assets to tangible assets, those

who own those assets have precisely that same incentive. It

is a theoretical statement, but it is the accepted theory of

exhaustible resources, that you manage them in such a way as

to maximize your long run wealth.

Now, you can always argue that they are not subject

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both the South Africans and the Russians have a very high

demand for an exchange in order to purchase wheat and the

like, I suggest that's probably not true.

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to rational calculations of that sort. Since we know that

I really don't think these technical questions
about the depletion of known reserves, which is the same
argument used for oil. Known reserves are irrelevant. What
is relevant is how much exploration occurs and the rate at
which you attempt to exploit your resources.
They don't attempt to exploit them very rapidly.
They go ahead and deplete their weakest, most expensive

422
95

All of these kinds of things

are managerial decisions. The economic incentive would

change if you fixed the price of gold in terms of dollars.

They know, from that point on, at least for the

forseeable future, that they are not going to get more

dollars in the future per ounce of gold. That's all.

GOVERNOR WALLICH: Thank you, Mr. Secretary.

SECRETARY REGAN: Thank you, Governor Wallich.

Dr. Weidenbaum, you have arrived in the nick of time.

Alphabetically, you are next to ask questions, if you so

desire.

DRS, Inc.

resources at the present time.

DR. WEIDENBAUM:

I would like to thank the

witnesses for preparing the papers, which I look forward to

reading carefully on another occasion.

I do want to apologize to the Chair for my late

arrival. I will make amends by keeping my inquiry unusually

short. Thank you, sir.

SECRETARY REGAN: Thank you, Dr. Weidenbaum.

Dr. Schwartz?

DR. SCHWARTZ: I know the hour is late. I shall

limit myself to asking Alan Reynolds two questions.

First, let's grant your assumption that we're

going to go back to a convertible gold standard. We'll do it

alone and never mind the rest of the world.

MR. REYNOLDS: The rest of the world will join us.

423
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1
2

DR. SCHWARTZ:

Okay.

Now, you've acknowledged

that the Federal Reserve made mistakes in 1919, '21, '29, '30,
1958, '65. What's going to be different? How are you going
to be sure that the adjustment will be made that the gold
standard discipline requires?
What in the record gives you that confidence?
MR. REYNOLDS: That's a very good question against
any monetary rule, as much a good question for a quantity
rule obviously, as for a price rule.

DRS, Inc.

What is the effective mechanism by which you are

sure that the rule is obeyed?

DR. SCHWARTZ: Yes.

MR. REYNOLDS: It is also true of the private

money. How can you be sure that they are not going to

nationalize the private money and invalidate gold clause

contracts.

The only answer I can give you is that I don't

think these are men of ill will around the table or women.

DR. SCHWARTZ: No. Whatever they did was never

done with ill will.

MR. REYNOLDS: Sometimes with some very bad advice

from economists. So, I'm suggesting that it times to get

some good advice from a new crop and we'll hope for the best

we can do. Really, you are making without intending to make

it, Anna, an argument in favor of — excuse me, -Dr. Schwartz,

424

for discretion. If you say that any rule is going to break
down, then what is the option except to say well, why even
3 try a rule? Why even try to establish any kind of a rule?
4 DR. SCHWARTZ: You can impose a rule with
sanctions, as somebody offered.
MR. REYNOLDS: I wouldn't mind working with some
sanctions — the same kinds of sanctions one could use on a
quantity rule such as the kind the market committee suggests
could be imposed in this case, too.
I note that at the last meeting of the Shadow
10
Committee, they suggested that in addition to considering
11
convertibility, you do the following things. Well, if you
12
do convertibility, I'll take all of the other things. I am
13
a reasonable man.
14
SECRETARY REGAN: Okay? Well, thank you, ladies
15
and gentlemen. Mr. Costamagna, do you have a final question?
16
MR. COSTAMAGNA: I have a very brief one.
17
18
SECRETARY REGAN: A very brief one? Please proceed,
19
I want the record to be complete.
MR. COSTAMAGNA: Mr. Davies, I would just like to
20
ask you, sir, and I asked the same question this morning of
21
22
others. You narrate various friends of payments in gold,
23
gold dividends. We have gold futures, gold bonds, gold
24
certificates, foreign gold coins.
25
Do you see this as some evidence of a de facto as

425
distinguished from de juris gold standard developing in the
United States right under our noses, so to speak?
MR. DAVIES: I think it is correct that to the
extent that eight million Americans are holding gold and some
of them are using it to make payments. In the minds of the
payer and the payee, gold is a standard in that case.
I think that it will be good and strengthening for
us, as the largest governmental holder of gold in the world,
if we can encourage the use of gold as a means of payment
and an auxiliary currency.
That unsterilizes the 264 million and it makes it
a real asset, a real live asset, to the good of all concerned.
MR. COSTAMAGNA: Thank you.
SECRETARY REGAN: Thank you. Again, I repeat.
I appreciate the panel's appearance here. I* think it's been
a very interesting set of papers that you've given. I enjoy
the differences of opinion.
Please be sure that your answers as well as your
papers will all become part of the record. This has been a
long session. We started at 9:30. It's been a good two days
of hearings.
I appreciate the members of the panel being here
and sharing the interest and I declare the meeting adjourned.
(Whereupon, the meeting was thereby adjourned
at 4:12 o'clock p.m.)

MEETING OF THE GOLD COMMISSION
The Gold Commission met on Friday, December 11, 1981, in the
Cash Room of the Main Treasury building, Washington, D.C.
The meeting,open to the public and chaired by Treasury Secretary
Donald T. Regan, ran approximately four hours. Attached is the
unofficial, uncleared and uncorrected transcript of the Gold
Commission Meeting.

UNITED STATES DEPARTMENT OF THE TREASURY

MEETING OF THE GOLD COMMISSION

U.S. Department of the Treasury
15th and Pennsylvania.
Cash Room
Washington, D.C.
Friday, December 11, 1981

The meeting in the above-entitled matter convened
at 10:15 o'clock, a.m.

Diversified Reporting Services, Inc.
P.O. BOX 23582
WASHINGTON. D.C. 20024
(202) 697-6633

MMISSION MEMBERS

Secretary Donald T. Regan
Congressman Neal
Dr. McCracken
Mr. Jordan
Senator Dodd
Mr. Coyne
Mr. Costamagna
Governor Partee
Congressman Paul
Congressman Reuss
Governor Rice
Senator Schmitt
Governor Wallich
Mr. Weidenbaum
Congressman Wylie
Mr. Lehrman
Senator Jepsen

P R C C E E D I N G S

2
3
4
5

UNDER SECRETARY SPRINKEL:

Why don't we start at

tiie tjp. I know that the first three items have been circulated. If it's agreeable with you, we'll ask Dr. Swartz

to summarize as briefly as possible the major points made

by those that testified November 12 and 13. And insure that

you will not go into all the details because it did go on-^

two days, but you can extract the essence from that testimony

would be very useful.

DR. SCHWARTZ: The tabulous summary that was

circulated with a recommendation of the witnesses that we

proposed in which vie' re dealing is a range according to the

outline of — that Dr. Wallich circulated in October, and

the scope of the change is possible use on gold that the

Commission would publish.

There were:three broad categories. No change in

the role of gold, an increased role of gold, and the decrease

of the role of gold. And that1s the basic change in the

oresent role of cold.

• \

-1-

respect to a possible increase in the role of

-i

gold, it is again a wide variety of dealings of the possible

roles that would increase the — the influence of gold on cur

monetary system.

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(10:15 a.m.)

.c,-

j_%

I list is the cold reserve against

1
2

Weintraub presented to you. Dr. Bernstein and a gold reserve

without convertibility, a recommendation that is like the

Weintraub recommendation, he made this turning over all

reserve assets of the U.S., including gold, foreign currencies

plus gold, would be transferred to a higher amount, and that

reserved asset account will provide for the U.S. domestic

liabilities, like convertibility.

Three witnesses favored the primary issue, either

gold back notes or bonds.

Two witnesses favored restoring the use of gold

into national transaction by raising the official price from

what it is to the market price.

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government reserve notes without convertibility that Dr.

Then there were a number of suggestions with

respect to restoration of a gold bank.

Two witnesses favored a domestic 100 percent gold

coin standard with floating foreign exchange rates.

Four witnesses favored essentially a return to the

type of gold standard that we've had in the past; interna-

tional gold standard, the fractional reserves held, domestic

financial institutions against monetary liability.

With respect to'.the final category, I deeply —

the rclg of gold, leave reviews of those to fisriss anv

rut;gge role of cold in the U.S. monetary system, and there-

arc \;a :.n favor;- of the disposal of the acid reserve.

Three, preferred to do it by auction as was the

practice in the '70's.

One favored sale of the cold as a means of coverin

Treasury expenditures. The Treasury, as long as the gold

reserve at market rates would pay for Treasury expenditures

there would be no borrowing by the Treasury.

And, finally, there vias one recommendation that

the Treasury sell part of its gold stock in the form of

coins at market price.

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11

UI3DER SECRETARY SPRINKEL: Are there any on the
evidence?
Mr. Costamagna?

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MR. COSTAMAGNA: I don't know if this is appropriate

but just to — since we're discussing these 10 things, ana

this is in the form of discussion, I may just ask this question

On the —

UNDER SECRETARY SPRINKEL: If I could just interrupt one

momemt. We now have a form, and the fact that officially

opened the meeting, then I'll call on Mr. Costamagna to

make his comments on the summary.

MR. COSTAMAGNA: On the question of the gold coins,

I'm wondering why that is considered a decrease in the role of

gold. I could understand that label if we take the position

that the Treasury would just be selling coins as medalions.

- could understand that as a decrease in the role of gold.

have coins as money

and the Treasury is buying and selling coins, I don't quite

understand that as a decrease in the role of gold. I just

4
5

question that label. I don't know if that's appropriate to
discuss that this time, but since it's part of this asset —

DR. SCHWARTZ: Well, it is in relation to Mr.

Davies recommendation, I quite agree that if someone opposed

Treasury issue of coins that would be a legal tender, that

could be used in payment in transactions that would be of a

very different — very different item, and would not be

appropriately included in there.

UNDER SECRETARY SPR~-3TL: zihat 'gas the specific reccrmenccti

DR. SCHWARTZ: Essentially that the Treasury would

mint coins and sell them at the market price.

GOVERNOR RICE: Would it be legal tender?

DR. SCHWARTZ:

No, it wasn't proposed that

UI7EER SECRETARY .SPRINKEL: He was 'not proposing the

coins as legal tender.

—

MR. COYNE: I understood him to say that he

endorsed the bill that is in the Senate, which I have a copy

of, the Senate bill 1704, which is the ore-market gold coin

act, and I believe that particular act does provide for

DR. SCHWARTZ: Legal tender?

MR. COYNE: — legal tender.

DRS, Inc.

But if we get into the —

DR. SCHWARTZ: Well, it may be, but I have mis-

classified these views as I read them.

were properly signed.

MR. COSTAMAGNA: That is not really the point.

I still am concerned that in saying that coinage is a reduc-

tion of the role of gold. All right. You understand, that

is to say, Dr. Schwartz, if gold coins were to be legal

tender, then of course, that label would change.

DR. SCHWARTZ: I agree.

9
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MR. COSTAMAGNA:

But —

I believe that they

that answers the question

Thank you.

u::~r.g SECRETARY SPRINKEL:

GCvTr:"CR v7IiICI: I just want to observe that if the

Dr. Wallich?

gold coins are to be legal tender they would have to be

at the fixed price for gold. In the absence of fixed price

the law provide might provide that gold coins as legal tender

at the price of gold of today's, the coin typically sells

at the small premium. It would always be deeper to sell the

coin and get greenbacks and use those for whatever payment

is to be made.

So it's really a mute point under floating rate

or floating price regime

~\—vtr - 1

TIGIL: Are there any other recomrendatior
c
SECRETARY
SP?H

to be made on this first point on the agenda?

Jack? Governor Partee?

GOVERNOR PARTEE: As so far as I can recall,

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in either of the classifications to Dr. Schwartz

observance or the -

which as the occurrence of the — is that each — each witnes;

was not asked to take a position on each of the t^n heading*.

I don't know what the ten headings are here. j

If vou were to write a mutual letter and say, well

these are the ten headings we have and put these under head-

ings, it seems to me conceivable they might indicate that

the

difficulty with a analysis like this

n
9

they also have a feeling for example.

The in-coin of market rates, the very last

column is here, just didn't —-it wasn't a feature of the

discussion, except for Mr. Davies who was talking in terms

of the interest, and the fact that they are putting out

coins.

DRS, Inc.

I do recall, for example, just this given example

of this, that I asked the question in the panel that —

to Dr. Weintraub on whether there was any support for Dr.

Weintraub because no one — no other member of the panel

supported it. But then I wouldn't do that on other days

and other panels, so I don't know whether there was more

support for Weintraub on Weintraub, or not, in the group.

Eut that is one of the problems, and perhaps — I guess

there's no particular reason to think that this is a — an..

especially well established professional group of experts.

But ;g- we

really

wanted to know what these experts, between

1
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them w a s , these ten possibilities, I think we'd almost have
to address the cuestion.

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;—>T-TV

c—.'

.gZTgg^Y SPR.i.I\-\EL: There certainly are other ways of

summarizing the testimony that occurred over the two days.
And one occurs to many of you that you would prefer, we

certainly will be very pleased to hear it, or have it sub-

mitted to the other members of the Commission.

GOVERNOR PARTEE: Now, if I might, just one other

comment on this legal tender thing, and I'm not a lawyer at

ail, but it's my understanding that these gold coins that

are minted abroad do — are declared to be legal tender

in those countries even though they don't have a specific

value in terms of the unit of account of the country unless

done for some reason, having to do with imports and exports,

and that kind of thing. But it does seem to me conceivable

that you could have legal tender coins that don't have a

dollar — a fixed dollar value.

I would agree with Henry that they probably wouidn*

in fact, often circulate because there would be some premium,

but the technical feature of having legal tender, I think,

has some legal attributes that one would want to explore if

one were thinking of proposing that there be a geld weight

coin.

DR. SCHWARTZ: On the subject of legal tender, I

have read that a orivate transactions, legal tender is not

10
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an essen tial feature of the use of such coins in transact!on:

That legal tender properly applies only to government.

government says it's a legal tender to pay taxes, pay customs

pay excises, and certain forms of currency. But that so far

as private transactions are concerned, the private sector can

agree in its own contract about what it accepts within.

The

LITEER £ECRrT7.RY SPRINKEL: Dr. Paul?

8
CCE-IGPTSSiriT PAL"L: Ihank you.
9

the legal tender on coins, I disagree with Dr. Wallich. I

don't think it's a mute point. It's a critical point. And

I also disagree that legal tender is limited to government

—• payment of government bills, in that it's very important

in all private transactions as well, if I understand that

legal tender court rulings during the Civil War period.

But even without the court rulings, I think it's been estab-

lished, and this is reason why we would"like to see if there

is a coin, that it has legal tender status that will never

be challenged, that we can pay a debt privately. But in the

Coinage Act of 1792, it says the money of the care in the

United States shall be expressed in dollars, or units dimes,

or ten cents, or hundreds, and nils of thousands. The dines

being the ten cents, or hundreds and nils of thousands. The

dime being a tenth part of a dollar. A cent, a hundredth part

of a dollar. Everything is dollar.

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i'd just like to point out

And all accounts in the oublic offices and all the

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3
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of these regulations. If you have a court contest and it's
settled, the judge is always going to say, "you don't pay
in ten ounces of gold, you pay in the equivalent amount in
dollars, and that is legal." And that's the legal tender
understanding.
So it's a critical point, and it's one if we

want to allow some little bit of freedom in the money system,

and a little bit of competition, that we must concentrate

and at least permit us the opportunity to be competent we

can pay the debt in gold and not be forced to use a dollar.

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proceedings in the courts shall be kept ahead -- in the form

f— Ti->

C—(—J—-r-*r>v

MR. COSTAMAGNA:

Cpr^ — » - T - T -

Vt v

Costamaqna?

Mr. Sprinkel, this bill 1704

provides in one section here, that the competitive market

price of gold as determined under the section, shall be the

official conversion rate between dollars and gold, and then

goes on to specify how the Secretary of the Treasury set

that price daily.

As I read this bill, that's exactly what is being

provided at the market price. Not at a fixed price.

GOVERNOR PARTEE: Which bill are you speaking of?

MR. COSTAMAGNA: S-1704.

GOVERNOR PARTEE: What is the bill?

MR. COSTAMAGNA: It's the — it's called the

Free Market Gold Coinage Act. That is for the Senate, I

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believe
2

--7.—>i— c-"—:-~T T>y cr>-'~g7XET. •

**r

ovn?'

MR. COYNE: The subject of the definition of
4

the various legal tender is an interesting one which I've
5

been looking at for a number of years, and it's perfectly
6

clear to me that it's perfectly unclear to everybody, and
7

it seems to have no meaning anyplace other than the meaning
8

that whoever chooses to use that phrase, if there are coun9

tries in which there are legal tenders, gold coins, which
10

are not usable by the citizens of that country within the
11

country, and in fact, it is illegal for the citizens of that
12

country to physically hold any of these coins which are,
13

in fact, legal tender coins.

Why are they legal tender coins

Because in one country the central bank said so-

In another

country they passed a law saying that such and such a coin
16

was illegal tender.
17

I haven't found any commonality of meaning what18

sover. The idea that illegal tender coins necessarily
19

implies that it can be used for the payment of debt, for
20

private debts, is simply not internationally so in terms of
21

any of the bullion coins that exist in the world today.
22

If the United States doesn't decide to mint a
23

bullion coin and to make that coin a legal tender coin, it
24

will say what legal tender means. And it should mean lots
25

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and lots cf different thincs.

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It could mean that there is a gold coin containing
one fine ounce of gold with a face value of $200, and that
it should be treated as a circulating coin both for purposes
of sales tax, and for purposes of capital gains tax, or

5
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one fine ounce of gold, which at least one country has done

— two countries, two major gold minting countries have done.

Why is one fine ounce of gold a legitimate designation of

the internal currency of that country? Because they said so,

that's why. And they put it into effect as lav/ in that

country, and therefore, that is it. And then they ship

those coins to other countries because it is a law in the

country in which the coin has been minted. We'll accept

those coins according to the definition of legal tender in

the country to which it has been shipped, so that there aren't

— it seems to us, I should say, that there simply is no

internationally underscored definition of that grade whatso-

ever.

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you could decide that it is a coin with a face value of

And as I said at the beginning of this comment,

the most extraordinary example is a situation in which there

is legal tender coin minted which it is illegal for the

citizens of that country themself to own it.

UrriR SECRE17.RY SPRINKEL: Yes, Dr. Wallich?

GOVERNOR WALLICH: I would just like to point out that

what we've been talking here, I think in the presumption that

14
a gold coin is full bodied, and that its value is at least
that which is represented. Eut a gold coin could be legal
tender for an amount larger than its market value, and that
4

value happens to have risen very substantially.
I'm reminded of a case of some U.S. travelers who
received a gold coin as a souvenir in a country that has
minted such a coin, and when they came back to the U.S.,

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they immediately turned the coin over to the government so

that they wouldn't be receiving a gift. But they said that

as a souvenir, "may we buy it back at the market price?"

It turned out that they couldn't do so because

the coin was legal tender and of a larger amount than the

market price at the time. So there would have been an

advantage to them, but they weren't allowed this to have.

This distinction one has to know.

MR. COYNE: If a legal tender gold coin were

minted, which could not be used for — which could not

necessarily be used for the payment of private debt. I

realize that the comments on all those things would be quite

different, but that should be one of the confusions of using

this term because it means different things to different

persons, but if a government issues a coin with the face

value of $200, containing one fine ounce of gold, then any

rational holder of that coin would be able to sell that coin,

se_J_ it as gold, the coin would be sold for our cold in a

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DBS, Inc.

$400 gold market, and it would be sold for our legal tender
back to the United States government in $190 gold coins.
And the — if the United States government were
to say, to issue a coin for a one ounce — buying it and
certainly not — an important example of saying that if you

issue a gold coin for, let's say, the eagle, and the eagle

definition of this new currence that we've created that the

Congress and the President would create, was one fine ounce

of gold, or its value in other U.S. currency, then that coin

would be interchanged, go into any bank or in any bank and

go back to the Federal Reserve Bank, and exchange eagles,

or whatever the gold dollar price was at the particular

moment of redemption. You can now take a $20 bill and get

ten singles for it at any bank because everybody knows that

ten singles would — 20 singles equals one twenty.

I'm talking in terms of real dollars. The — and

the — and one would take a coin which was denominated, say,

with a name, and redeem it at whatever the daily rate was

between gold and the dollar price. It's certainly not a

suggestion, but then there are just literally dozens and

dozens of possibilities, and it's simply a matter of which,

if any of them, one would want to do.

It seems to me that the key question relating to

a gold legal tender bullion coin is whether the United States

government would wish to mint such a coin and define it as

16
1
2

circulating money as possible, because if you chose to do

such a thing, people could be doing something very, very

significant. I'm not sure exactly how this relates to the

basic question before the Gold Commission, but it would —

it would become extraordinarily popular item of gold invest-

ment because it would not, by definition, of having the

characteristics of circulating money. It would not be

subject to state sales tax. It would not be subject to

capital gains status, and it could be redeemed. That is to

say, it could be totally liquid in one of the objects of the

store value, obviously is the ability to convert that stored

value back into expendable funds in time of need. And I

think I've said enough on that.

"J.1ER SECRETARY SPRINKEL: If the Commission members are

agreeable, I suspect we're not going to settle these nuances

this morning, and I'd like to go on to the points on the

agenda, if that's agreeable with you. But we will take into

consideration whether or not that particular proposal was

misaliocated in our device for summarizing it.

Dr. Paul presented a proposal at the last meeting;

that the U.S. seat to reacquire gold, from the IMF, and papers

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DRS, Inc.

legal tender and give it as many of the characteristics of

were presented on his proposal. And our staff did some
research on what was doable and not doable.
Dr. Paul, if you would like briefly make your

17
1

proposal, and then I will ask Mr. Thomas Leddy to summarize,

if you'd like. The results of our research on this issue.

And we want to move along as quickly as possible

to get down to point number 4 on the agenda, which is the

heart of what we're going to be worrying about between now

and the end of March.

Dr. Paul?

8
9

CONGRESS: 17,g FAIL;

First I would like to ask a little bit about

11
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DRS, Inc.

Thank you, Dr. Sprinkel.

orocedure.
What is the intention of the Commission on how

we deal with subjects like this?

once. We're going to discuss it again. In order to take a

position on this and decide whether or not this will in our

report, are we going to follow with the vote today, or will

we vote on this at a later time to take a position on this?

What is the intention of the Commission?

UIZER SECRETARY SPRZtiKEL: Well, I tculd assume that we woulc.

gote on it at a later time when vie get it into a proposed report

of this Commission, because we'll either sign on or sign

off of the various proposals so there will be ample oppor-

tunity to take such a vote.

This is just information to make sure that we have

the information that the Commission members think they need

We've discussed this subjecij.

18
in

order to respond to that p r o p o s a l at the subsequent time

TGRI'^S:^:: PJ.UL-.
rov'

okay,

i—:i- •{ ~ .

ig-i o

proposal that I have m a d e .

My suggestion is is that, we as a Commission,

,0a

-J- *•*

^^ 1 a ••" * -PT f

J- '^ ^

recommend to the Congress that we take a position and resolve
and recommend to the IMF that this — the amount of gold
7

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that remains in the IMF that is — that the United States has

contributed, and therefore, entitled to, that recommend that

it be returned. And I base this on the public policy that

we have.

In 1976, when we passed the IMF Bill, it was

confirmed at that time that vie would demonitize gold. At

that time there were 150 million ounces of gold in the IMF,

and it was agreed on at that time that 25 million ounces

could be sold at market price. They did this over, I believe

a 4 year period, and these funds w e r e turned over to the thirci

world nation.

were distributed.

Another 25 million were returned to the post

countries at 35 SDR's, or $40.86 per ounce, and at that time

I think we received 5.7 million ounces of gold, were returned

to our Treasury.

And it is my contention that the majority of

people in the government has accepted the position that

internationally cold is no longer money. That it is to be

The fund was set up and the monies accumulated

19
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demonitized, and it just happens that demonitizing gold

internationally — I happen to believe, is a vehicle to

return the money to the people, and if they're allowed to

use it freely in a voluntary way, we can once again monitize

gold in a very orderly convenient slow manner, rather than

trying to mandate it overnight.

I would like to just state points made in the IMF

report that we have in 1976 to support the contention that

gold would no longer be important in the IMF. The report

said, and this is quoting, "in 19 71 the United States

abolished convertibility of the dollar into gold. Since

then it has been the objective of the United States that the

support of this committee to hasten the demonitization of

gold so as to reduce its role in the world monetary system,

it became evidence that given the nature of modern economics

in the evolution of international monetary relations, a

system in which gold is an important reserve note component

in which major countries attempt to preserve the gold con-

vertibility of the currencies at stable par values, is no

longer viable. Such a system under modern conditions would

be erratic, crisis prone, and unmanageable.

The extent that the international monetary system

needs a reserve asset is growth, and management is under

rational control. This Committee feels that SDR offer an

alternative to gold."

20
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That's our official policy.

We followed that UD

with the elimination of one-third of the IMF gold, and I

think and believe sincerely, that consistent policies which

uphold this would be to recommend to the IMP.

Now, I read the opinion given on the return of

gold, and with reading that and it was my understanding, I

believe, a vote of 85% of the IMF, this gold could be
c

returned in exactly the same manner as we have already receive

a portion of the gold. And if you've done this for one-

third of the gold, there's no reason why we can't continue.

So, I believe the burden of proof, and the burden

of defense against this proposal is on the shoulders of those

who disapprove of gold in the monetary system. Gold is not

money, therefore, it is very clear to be — it should be

returned. And I think that it seems so clear to me, I cannot

understand why we have not done this sooner.

the argument is used that we need a reserve asset, well,

if they insist that we have gold, gold must be money.

If they do not — if they just want any reserve

asset, why don't they use pork pellets. Why don't they use

some other. Gold is either money or it isn't money. IMF

either needs it or they don't need it.

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I think if

The official position is that we do not need it
as money, internationally. i happen to agree if a true gold
standard

— you do not need international gold manipulation,

21
and therefore, I think it is very logical to recommena that
2

we proceed along, that our official policy on internationally

held gold in the IMF be that, if we worked for the day that

that gold would be turned to the United States so that it

will be returned to its true owners.

—

American taxpayer in the 1930's at $20 an ounce, and that

gold finally found its way into the IMF, I think, imorally,

and logically, economically in a position that we take today

—

that this gold be returned.

This gold represents

some of the gold that was removed by force from the

indicate very strongly that what we should do is recommend

UNDER SECRETARY SPRTi-uTL: Our research, of course, was not

12
13

designed to answer whether that should be supported or not

supported.

if any, it, in fact, could be achieved.

Leddy to briefly summarize the facts as we see them.

It was to determine under what circumstances,

MR. LEDDY:

And I've asked Tom

Well, this is a memorandum basically

on the legal positions relating to this position of IMF gold

in response to your question you have on part P.

20
21

a legal entitlement to the gold, so that a request for the

gold would have to be operated under the IMF's legal provisions

of the IMF's articles in relating to keeping the position

of IMF gold.

25
Inc.

In one point, first of all, the U.S. does not have

There are essentially two operating divisions.

22
1

There are divisions relating to gold in terms of gold, in

terms of control, for membership, and liquidation. But in

terms of operation, there are two provisions.
One is that the party can sell gold to members

5
6

it can sell gold at the old official price. That is, $35

an ounce to all members in proportion to their quotas in

August 1975, which was when the gold agreement was reached.

That is the provision, I think, Dr. Paul was

talking about. That is a relevant one.

Any decision on disposition of IMF gold does

require an 85% majority vote and the — how much membership.

The U.S. vote at present is about 19.66%, so those are the

basic legal provisions relating to this, and we have not

tried to invest the policy as such.

'CJEER

some point, as I promised, for the members to state their

views as to whether there should be such an attempt. We

should recognize that it can only be done within those

constraints. That is, 85% of the IMF votes.

Dr. Paul.

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at a price based on the market price. And the second is that

SECRETARY SPRTNKEL: 'There will be an opportunity at

^Ct^GPESST'^IT FAIL: There is nothina that vou would see that
V-.1

g constrain us from making a recommendation though, is there?
"DER SECRETARY SPRINKEL:

go.

DIGRESS::AK ?A1L: I mean, there's a technicality, and *e

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deal with these

—

UNDER SECRETARY SPRINKEL: This does not bear on whether or
not the proposal should be adopted by this Commission. It
merely points out the contraints, if they decide to move in

that direction.

Dr. Wallich?

GOVERNOR WALLICH: I would like to point out, Mr.

Chairman, it takes a great deal of difference whether that

proposal, assuming it could be carried out at all, was carrie

out at the old efficient price of $35 per SDR, or at the

market price. The first time the gold was restitited to

members, or was done at $35 SDR, now that means, of course,

that the fund gets back, as it were, to the value that was

put in, but it also suffers to various substantial reductions

in its actual resources, which are based on the value of

gold at the present price.

That would interfere, for instance, in the funds

ability to borrow in the private capital market. It would

then weaken the fund, and would slow down what one surmises

is its long-term — very long-term solution for the bigger

role as the world's central bank.

UNDER SECRETARY SPRINKEL: Are there anymore com-

ments on this subject before we move on?

Governor Partee?

GOVERNOR PARIES: Well, I just wanted to say, Mr.

24
1

Chairman, that I thought was a useful memo.

are some rather obscure points that are hard to find, but

to make use of the memo that I have, this all set out for us,

and I think it would also be useful to the public. Therefore,

oerhaps a matter of an appendix to our report, at least a

I think there

matter of record, an attempt to the public.
UNDER SECRETARY SPRINKEL: Weill certainly take
8

that i.into consideration.
Is there any other comments on this issue?

Yes, sir, Mr. Costamagna?

11 MR. COSTAMAGNA: Secretary Sprinkel, in regards
12 to the IMF, this is a somewhat essential issue, but while
13

we're discussing the IMF, I'd like to bring something to

everyone's attention that I just personally learned, that

through a paper written by a Dr. Heller from San Francisco,

who's an international economist, and who previously worked

for the IMF, he indicates in this paper called, A Flexible

Gold Standard, as follows:

There's a second amendment, the articles of agree-

ment of the international monetary fund explicitly prohibits

the maintenance of the value of the currency in terms of gold,

The United States has ratified these agreements, and is there-

fore bound not to institute a gold standard.

That makes me wonder sometimes, if we have these

agreements, be ir. an exercise of futility —

DRS, Inc.

25
UNDER SECRETARY SPRINKEL;
MR. COSTAMAGNA:

I hooe not.

I would like to ask —

maybe get

a legal opinion of that for future —
UNDER SECRETARY SPRINKEL:

4
5

that
MR. COSTAMAGNA:

I know this is going to keep

your legal staff busy, but I think, as I read that, that would

be very, very important up here.

UNDER SECRETARY SPRINKEL: We would be pleased to

look into that and report it at the next meeting.

MR. COSTAMAGNA: Thank you.

UNDER SECRETARY SPRINKEL: Could we move to a

brief summary of -- by Mr. Coyne of this proposal, and then

invite any comments, particularly of Mr. Wallich — had some

comments
And then finally we want to get to the draft in

16
17

the introductory section so that we can get moving on our

report.

Yes, Mr. Coyne?

MR. COYNE: I have two housekeeping questions to

ask. I'm wondering what the appropriate time during this

meeting would be to refer to that? Now, or a later time?
UNDER SECRETARY SPRINKEL:

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You can certainly do

I'd bring them up now,

but I -•
MR. COYNE:

I can tell you —

I can teli you in

26
one sentence what they are
One is the February meeting of the Gold Commissi on
3

happens to conflict with the international meeting on the

gold, at which I would be a speaker, and I know that there is
at least one other member at this Commission who also will

be a speaker, Governor Wallich and I.
I'm wondering whether we consider, in view#.of the

ultimate nature of that meeting, to consider a alternative?
And the second question, I wish to add during the

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course of this meeting, refers to the letter of — by Senator

Helms to Secretary Regan, dated November 12, which I think

we've all got copies of, which asks, I believe, two very

important questions, especially as he and certain other people

see it. I would be very interested to hear how- that letter

has been ~ has been dealt with? In what way it has been

responded to in order to preserve the sense of fair and

thorough hearing, which we also pretty much wish to accompany.

UNDER SECRETARY SPRINKEL: Would the Commission

members like to consider those two issues at this point, or

would you prefer to delay them until later in the meeting?

MR. COYNE: I would be very happy to delay then.

I only wish to ask when they could be —

UNDER SECRETARY SPRINKEL: Well, they certainly

will be considered, you've raised them. I would like to get

through as much as we can of 4, and if we could agree to bring

27
it up immediately after 4, I would appreciate it.
ME. COYNE: Thank you.
UNDER SECRETARY SPRINKEL: Now, if you will give
us a brief summary of your proposal, werd like to have a little:
discussion on that.

MR. COYNE:

Thank you.

I wish the inclusion of

the work brief had been conveyed to me before now, because I
have — I have slightly more than a brief comment to make,
10

but here I am.

11 I'm very glad to be back here in the Treasury Cash
12 Room with my fellow members of the Gold Commission. I take
13 off my jacket in response to the humidity and the temperature,
14 and not with the intention of fighting.
15 I want to apologize once again for not being with
16 you at our last two sessions due to what, at least for me,
17 were two force majeure circumstances.
18 As you may know, my firms merger discussions
19 reached a cresendo at precisely that moment in time, and I
20 was compelled to divert my attention briefly from the Gold
21
22

ommission to the Goldman/Sacks Commission.

Although not present in our late October meeting,

23 I did send each of you a copy of the speech which I intended
24 to deliver at that time outlining in a preliminary way my
25 response to the orinciple questions, which I felt faced this

3RS, Inc.

28
Gold Commission.
Since then I've received many interesting reaction;
from members of the Gold Commission and from a few economists
to whom I proposed, directly and indirectly, these ideas,
and presented my still unpolished notions. Some of my ideas
are perhaps new and unfamiliar, and not surprisingly, have
stirred a mixture of interests in perceptive questioning and
adverse criticism and other kinds of criticism.
By and large, the comments which I received, even
10

the more critical ones, have seemed well conceived and helpful

to me. I'm trying to take these comments into account in

finding and modifying my initial proposals, and I plan to

present to you as soon as possible a pair of going position

papers in reviewing all of these questions in serious detail.

In the speech which I sent to you outlining my

gold views and suggestions, I began with some rather difficult

and controversial ideas, especially a proposal for gold cover

rule. And an automatic mechanism for triggering government

purchases in the sales of gold.

I then proceeded to other proposals, which were

on more familiar ground, and perhaps more likely to win some

element of general acceptance.

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In my statement today I intend to reverse that
procedure. I'll begin by outlining those ideas and proposals
which may be compatible with the true consensus, or more liKelj

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to be so. And then to proceed with more difficult issues,
which evoke more criticism in this.
I'd like to outline for you a series of statements
and proposals which I believe could become part of a majority

opinion, including the final Gold Commission report. I'd

like to begin with points which seem to be most likely to

win unanimous or at least near unanimous rule, and then I'll

proceed to other statements which, although apt to encounter

dissenting opinion, I think would nevertheless acquire a

majority support after further study, consideration.

Here then is my list of gold use proposal, beginni4g

with those which seem, as I've said, to have the most likely

chance for ready appeal.

One, this is a widely supported proposal though

not a critical policy significance at all. That the U.S.

issue a new rule bullion coin priced near the market value,

offering Americans an alternative for similar coins produced

abroad.

In order for this coin to be successful, it must

be effectively designed and marketed. Each crucial, that like

some foreign competing coins, a new U.S. issue could be

designated as legal tender, whatever that means, and as coin

of the realm bearing the great seas of the United States, and

the motto RIn God We Trust.:'

My second proposal, perhaps not very controversial;

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or highly significant to U.S. economic policy either.

There's a simple businesslike, namely, that the

;.S. utilize its gold stocks, via swaps, leases, or other
u

commercial arrangemnts, and generate a modest revenue flow,

which otherwise would be nonexistence.

Governor Wallich has said that there is no harm

in simple banks making a profit, even though that's not their

primary concern. I think that the same thing is true for the

U.S. government and Treasury with respect to using our gold

stock commerically to generate modest revenues.

My third, perhaps more significant proposal, and

one which I hope most of the Commission members will be able

to endorse, is that the U.S. Treasury should take it on itself

to prevent any appreciable depletion of our gold holdings

on the premise that these gold stocks are an important strategic

and monetary resource. However, it does not make sense to

assume
that
our existing stock level is automatically the

right one, and will continue to be the right one into any

set of future circumstances.

I believe the Commission should set rules or

guidelines where targeting gold stocks relative to the size

of the economy, and its monetary requirements.

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My own specific suggestions, although still
preliminary in this respect, are incorporated in proposals
. . _v O
get-ing
to later in this oacer.
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.My fourth proposal relates also to the management

of our gold stocks. The proceeds from the assumption that

moderate variations in Treasury gold holdings can and should

be permitted, thus allowing scope for use of our gold stocks

as implements of economic policy.
I think that most members of this Commission will
agree that it makes no sense to keep a very large immobile

monetary reserve if this reserve can be employed constructively
to our purposes. I have suggested that within prescribed

limits our gold stocks would be used by the Federal Reserve

11 as an alternative intervention medium to support the value
12 of the dollar at home or abroad, and also that gold purchase
13 and sales might be used as a temporary bridging device to help
14 finance budget or payment deficits, or to offset surpluses,
15 if that day occurs.
16 At some of my friendly — as some of my friendly
17 critics have said, a great deal of technical work may be
18 necessary to determine which of these uses of gold is likely
19 to be sicnificant and effective. And also whether there are
20

alternative uses which may be available also, or to be preferred

I believe that this Commission should recommend

that the Federal Reserve initiate appropriate steps to evaluate

the benefits and costs of employing gold for various policy

24 purposes.
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I always say, as I have said in my original paper,

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the actual implementation of the policy which would use gold

in addition to other instruments of foreign currencies, would

always be intended to be highly discretionary on the thought

of Federal Reserve uses.

My fifth proposal, again, one which I think most

Commission members may endorse, is that the U.S. begins to

value its gold stock at market based prices, rather than at

an outdated fixed price, which is no longer relevant. The

logic of valuing of gold stocks, and those of other countries,

10 and the IMF, as I understood Governor Wallich a few moments
11 ago, it is clear that the only realistic way to value these
12 stocks, it ends the practice of formally valuing of gold
13 reserves at an artifically low price, thus minimizing their
14 true significance. It means that the relative gold asset
15 position and the strength of the United States and other
16 countries will be accurately recognized and presented in
17 official statistics.
18 The counter argument that valuing official gold
19 stock near market levels will greatly expand world liquidity
20 and prove inflationary as has been challenged by IMF specialists
21 and by other respected economists, including Robert Solomon
22 and Richard Aliber.
23 Your two further studies surely would be helpful.
24 I suggest that this Commission recommend that the U.S.
25 Treasury conduct a study of the valuation of the official

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33
gold stocks, and report its findings to the Congress along
2

with any formulas which might be appropriate for valuing gold

at market based prices.

My sixth proposal is valuing gold at the market

will eliminate one arbitrary barrier to use of this monetary •
metal as an acceotad international medium for payment of
finance.

As a further step in this direction, I propose
that the U.S. sponser an agreement with other countries to

define rules governing the use of gold in transactions between

11 simple banks, and otherwise seek to expedite the use of this
12 metal in any government transaction.
13 That market value, as we all know, that gold
14 represents the major share of international money.
15 Seven, I believe that this Commission should also
16 expressly acknowledge and endorse one basic monetary function
17 of gold, namely its usefulness as backing for money.
18 Despite gold demonitization efforts in the recent
19 years, most countries still cling tenatiously to the gold
20 stocks. And that reflects, in part, on an unstated conviction
21 that their gold reserves still measure -- instill a measure
22 of international competence in the value of their monetary
23 unit. I believe that this implicit function of gold as backing
24 for money should be made explicit by establishing the specific
25 gold cover requirement.

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valued at market faced prices of not less than 20% of the

money supply in its widely used M-1B definition.

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However, it's entirely possible that an alternative
monetary aggregate could and should be used. And then a
different gold cover percentage ratio would be appropriate.
That is the purpose of my example that 20%
4:0% measured against M-1B is intended to be indicative of
in
the sort of thing I had in mind and clearly not the result of
a — the type of study that was required before actually

put inflation — particular figures as used in such a particulc,
monetary aggregate is into implementation.
^he core of my proposal is to move toward a
loose link between gold and money, recognizing that further

study is necessary to evaluate alternatives and their

ramifications, and to establish the precise perameter.

17
18
19

However, I do not think that this gold cover issue
should be connected as it is under the Weintraub proposal to
a separate major question outside the scope of this Commission

The desire ability of legislating restrictions on the annual

growth of the money supply.

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I suggest that the U.S. maintain gold stocks

Eighth, as my previous written position paper
indicates, I believe that it might be useful to make this
gold cover requirement a symetrical one. That is, to set
forth both maximum and a minimum level of gold stock holdings

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either deplete our gold stocks, or build them beyond seme

plausible target.

There are two principle reasons why this symetrical

gold cover requirement might be advantageous.

First, it provides a rule of rationally managing

the size of our gold stock rather than yearly fixing an

arbitrary level of gold holdings.

Second, establishing minimum and maximum gold

stocks, also tends to create a mechanism by which the govern-

ment can purchase gold when its price drops to very low levels

and to sell gold when this metal's prices rises to extraordinary

heights.

The result, although I emphasize indirect, a

tendency toward gold stabilization would I think also con-

tribute to a somewhat more stable climate upon exhange

markets. It would expedite the use of gold as an international

settlements payment medium, and in general, by assigning gold

from a more clear cut position. It would give greater

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relative to money supply because it does not make sense to

recognition to gold significance and usefulness in international monetary systems.
One of our goals should be to define a more useful
role for gold in the monetary system today, even if we are
not sure just how that monetary status will evolve in future
years. That further evolution will certainly depend more on

36
the success of our nation's anti-inflation efforts than on
2

any recommendations of this gold position.

I might observe that if increases in the price

of gold tend to parallel increases in the money supply, then

the value of the gold stock will tend to rise in a similar
fashion to the increase in the mcney supply. And the gold
cover ratio would remain in the required range, or tend to

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remain within the required range without necessarily any

government gold purchases or sales. Thus, the required money

gold bank would to some significant extent tend to be main-

tained by gold value changes, as opposed to quantity changes.

Ninth, and I'm sure you'll be glad it's the last,

is that the Gold Commission acknowledge that many of the issues

that we are exploring here have not been fully resolved by

this group and are not likely to be. And that further serious

study is required.

Accordingly, this Commission should recommend,

I suppose, that gold's monetary role be given further con-

sideration by a reconstituted U.S. Gold Commission, perhaps

now, perhaps a few years from now, and perhaps also there shou..c

be instituted an international Gold Commission established,

say, under the egis of the IMF.

I believe this brings me to the end of my reordere|

list of gold proposals, based mostly on my own thoughts, but

also including a sprinkling of other people's views. I have

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tried to present these ideas in a positive fashion, emphasizing
the quest for areas of agreement, possible agreement, or
conclusions which a majority of the members of this Gold
Commission may be able to endorse.
I'd like to point out that as I see it, one
reason for criticisms of the gold money link proposal is that
it does not create a mechanism which fully controls the monetary expansion and contraction. It does not constitute, or

propose to constitute an automatic answer to the problems of

inflation as one might attempt to achieve with even a rule

limiting the rate of money growth, overrule the fixing of

the price of gold.

My gold link proposal is a loose link and far

more modest in character and intent. It is to establish

within our monetary system flexible gold boundaries which

provide warning signals which indicate the need for policy

review, and even for corrective action.

It is intended to create a flashing light to

policy makers, and to the public, and not to provide an

ultimate answer as to how to control inflation.

Finally, I'd like to express my appreciation for

both the friendly response and criticism which I've received

from any of you on this Commission. Several people have told

me they welcome my proposal because they introduce a new

ranee of cold ideas, and to some extent help avoid polarizing

38
the discussion between the advocates of managed paper money,
2

and the gold standard.

I also particularly want to thank Governor Wallich

for including along with his criticisms, a cordial acknowledgement that my proposals present a consistent and technical:
viable concept which has aided the process of our deliberations.

8
9

directed above all to developing significant economic use of

our most important monetary reserve assets. I hope that we

shall agree that all of this country's gold should not merely

be buried, but should be employed for useful economic purposes.

Accordingly, according to an old maximum, people

are often so busy doing what's urgent that they don't have

time to do what's important. Perhaps this Commission cannot

solve or even invest the urgent question, such as meeting

inflation.

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May I say in conclusion that my proposals are

However, it can, and I telieve it should helo to

resolve the important question involved in using gold as a

property value monetary asset instrument of economic policy.

In so doing, I believe that this Commission will provide the

administration of the Congress with a new gold policy frame-

work which enables this metal to be actively and effectively

employed as a servant of public policy, and as one implement

in the nation's battle against chronic inflation.

39
Thank you.
2

UNDER-SECRETARY SPRINKEL: Thank you, Mr. Coyne.

Are there any comments on Mr. Coyne's observations? I know -yes. Then we will have an opportunity to react before it
goes into the Commission report, but Chairman Weidenbaum would
like to say something at the moment.

7 MR. WEIDENBAUM: Thank you, Mr. Chairman.
8 I did read, and I also reread Mr. Coyne's submission for the previous meetings of the Gold Commission.
10 I want to compliment him on one of the most thoughtful presen11 tations that I have seen on this subject in some time.
12 Without indicating — novi, I'll do that on the
13 subsequent occasion, that my own views on this subject, I
14 thought that some of Mr. Coyne's brief completions was one
15 that we might very well follow in writing our Commission
16 report. It had so little of the ideological horentory, etc.,
17 etc., so much of the weighing carefully of questions underlined
18 from minuses on both sides, or on various sides of the question:
19 I think there's a good deal we can learn just in terms of open20 nindedness, attitude, from Mr. Coyne's statement in this, and
21 Harold, I certainly thank you for it.
22

UNDER SECRETARY SPRINKEL:

Thank you, Chairman

23 Weidenbaum.

Inc.

Yes, Governor Partee?

GOVERNOR PARTEE: Well, I agree with that. It's a

40
•
improvement in the paper. And furthermore, it does
very nice improvement
^ a t - a way on which the Commission might
suggest to me tnat
a
*
.^nificant — we prefer the way you have
see. I guess I see significant
v
•4-^n in the paper today, to the way we have put
put the proposition in the pape
T 4-v,ink as we view the bank in terms of
it before, because I thm.< as v,e
Possible recommendations, which we constantly begin to have,

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5
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7

that's it best to start in areas that where we might have

considerable agreement that perhaps aren't earthshaking or

fundamental to the system, that we'll proceed sort of in a

simple, but becoming more and more difficult now.
I don't know that I can proceed all the way along !

12 your list with you, but I do think that the idea of a list
13 of propositions that the Commission could react to is a very
14

good way of organizing our work.
SECRETARY REGAN:

Anyone else with to comment.on

16 Mr. Coyne's statement?
MR. COSTAMAGNA:

17
18

Mr. Secretary, I too would like

to extend congratulations to Mr. Coyne in presenting some very

19 challenging ideas.
Oee of the suggestions that he has made, I think,

20
21

clarifies something that troubled me a bit several meetings

ago.

suggested with some controvesy about limiting it to J.&«

citizens, and his idea of constantly

In the discussion of minting coins, the idea that

replenishing the go

25 store would solve that problem in my own mind.

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Ihe rea=

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my for original thought were that I felt that over the years
we had seen our gold storage depleted to other than Americans.
And that — I would hope that there would be a way, if we did
have the minting of coins, somehow give Americans the first
crack at them, so to speak. But Mr. Coyne's proposal to

replenish that supply, I do believe, solves the problem

that IMF 'created. I want to thank you for adding considerable

thought to that idea.
SECRETARY REGAN: Yes?

GOVERNOR RICE: I wonder if I could ask a question

SECRETARY REGAN: Certainly.

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GOVERNOR RICE:

The question is why do you consider

it crucial?
MR. COYNE:

Well, I probably could write and

probably will write a 30 or 40 page paper on this subject,

so I — there are a terrific number of — it seems to me as

a technician — technical question, but in a-nutshell, it

would — I think a couple of the key points, are one, that

nobody's going to buy them if they're not legal tender. And

that seems to be a pretty good reason all by itself, but if,

in fact, they were made legal tender and we defined legal

tender to mean that it would have the status of circulating

American currencies for tax purposes, vis a vis state sales

tax and capital gain and incime tax purposes, then the market

for these coins would be my professional opinion simply saw

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out of all proportion to the level of imports of foreign

coins to date, and would probably replace the imports of

foreign coins almost entirely and almost immediately.because

the competitive advantage would simply be so overwhelmingly

enormous.

SECRETARY REGAN: Congressman Paul?

CONGRESSMAN PAUL: Thank you, Mr. Chaiman.

I have one question. Mr. Coyne, on page 5 in

your item £4, you state that our stocks be used by the Federal

Reserve as an alternative invention medium to support the

values of the dollar.

I have a little trouble with that, and I was

wondering if — how you could distinguish that from the buying

and selling of gold for the manipulation of the price of

gold, turning it around. You know, we more or less did this

in 1945 to '71, we sold gold and we handed out gold in order

to maintain an artificial level. So to me it seems like

it might be opening up the door to something that we might

not want.

MR. COYNE: I must start by saying that txhis

simply is not — I wish I could, but I can't present to you

a proposal or serious proposal which, in fact, has dealt

with such possible ramifications of that. That is why I

urge further serious economic study.

On the other hand, I would still like to respond

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to your question

2
3
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particular proposal is that in some future — at some future
time, in some future administration, the Treasury, the
Federal Reserve will — whatever the right combination of
elements would be involved in such a decision, that such a
loophole would allow the'completion of the government's gold

stock, and if there were even the possibility that the final

language was written in such a way that that loophole remained

open, then everything else I say should certainly not be

accepted, because it would — because the overriding considera-

tion is that we should not allow the definition of our gold

— of our gold stocks in any serious way, because even though

we may be able to finance budget deficits over the relative

year term, it will have nothing to do with the problem of

combating inflation, and we will wind up without any reserves

whatsoever.

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The greatest danger to the proposals to that

The way I've tried to deal with this is by

suggesting that as an indicative example, that we establish

a gold cover basis whereby, say, using the monetary at root

for M-1B, that a minimum of 20% backing in gold, and maximum

of 40% backing in gold, and at 20% — 40% against the M-1B

is not correct. Perhaps it could be 5 0% of the monetary base

and 100% of the monetary base for whatever a serious economic

study would show it to be if, in fact, it showed it to be

44
valid at all.
In other words, by having, say, such a thing as
a minimum of 20% gold cover against M-1B, such a thing as
4

you suggest, except in a very temporary and not significant

way, could not by definition of the gold cover rule exist.

SECRETARY REGAN: Governor Wallich, would you

like to say anything at this point regarding the Coyne paper?

GOVERNOR WALLICH: Mr. Chairman, I have put down

my thoughts about Mr. Coyne's find in a letter. He correctly

cited me. I think we've — he's put forward a sensible

proposal.

I've asked for the letter to be circulated, and

I think it was so that there is reason for me to repeat

the points.

15
16

now, I would like to note two things.

One, I agree with Part B, who says this is a

category workable as a list, and in an ascending order of

acceptability, is a feasible technique.

And I agree with Chairman Weidenbaum that we

have a goal here of an conciliatory and thoughtful tone, which

would very well become a final report.

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Following the presentation by Mr. Coyne right

As for the particular proposals that haven't
^

een made before, Mr. Coyne's plan.

First I would say that

I very much welcome the idea of not depletinc our gold stock

45
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because I see this as a kind of a possible reserve for the

future.-

state the world might find itself in someday, and it would

certainly be better for the United States to confront whatever

conditions might arise with gold, and without a gold stock.

Beside — from that I would not that inadvertent!^

when you add up all the proposals, with the exception of one

or two, they all lead to an increase in the demands for gold,

which in the ling run I think would have the effect of raising

the price. Whether or not this has inflationary effects is

something we could debate, but I think is a practical matter,

having a — avoiding depletion of the gold stock. Having a

minimum relationship of gold to money supply, which necessarily

with the growth of the economy, would grow over time, and

encouraging other uses, such as the minting of coins, all

add up to increases in the aggregate demand for gold, and

therefore, probably the price, unless something happens to

discourage private holdings as a result of the reduction in

inflation. That's not the first part of the — what we're

able to deal with, and with agreeing with that is really

the main oroblem we face, but that's net the problem of this

22
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For the future one doesn't know what may happen, what

Commission.
Thank you, Mr. Chairman.
i

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SECRETARY REGAN:

Thank you, Governor.

Are there anything else on this particular point?'

Well, then why don't we move on to item 4, which
2

is the review of the draft introductory section of the

Commissioner report posing discussion of possible recommenda-

4
5

tion.
Dr. Schwartz, would you take us through that?
DR. SCHWARTZ: Yes. Ycu have all seen this

7
8

report, and my proposed conclusion of four chapters following

the introduction, which would reflect the issues that are

being discussed in the meetings of the Commission.

I can read the draft introduction, and you will

see it stops at the point where the report would be presenting

your recommendation. And that, of course, is the big

stumbling block in presenting you even a draft that will have

to be subsequently revised because the Commission has not

really dealt with the subject that was accepted as the out-

line for the main chapter of the report, with possible

18
19

recommendation with regard to gold. And if we could, after
I present this draft introduction, we go around the table,

even though the full membership isn't here, and get some

sense of what your views will be on these questions. No

change in the role of gold, increase the role of gold, reduce

the role of gold.

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draft of what I regard as the introduction for the Commission

Now, Mr. Coyne has certainly presented us with
a very full menu of possible ways of increasinc that role of

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even — we don't know which of these specific recommendations
will ultimately be presented as the votes by the Commission.
But the rest is just this very uncertain stand of the
Commission on the questions of what have to be decided before

the report can be prepared.

Okay. Let me just read this. The first paragrap

talks about the establishment of a Commission. We, the

members of the Gold Commission were appointed by Secretary

of the Treasury, Donald T. Regan, on June 21, 1981. Pursuant

to Section 10(b) Public Law 96380, to conduct a study to

address and make recommendations with regard to the policy of

the U.S. government concerning the role of gold in domestic

and international monetary — domestic and international

monetary systems.

The Commission has directed to transmit its

report to Congress no later than October 7, 1981, one year

after the date of enactment.

Due to the change in administration, and the

delay in appointment of members, it was not until July 16,

1981 that we met for the first time. We were in general

agreement that a satisfactory report could not be prepared by

the October 7 date.

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gold, so I presume-we have some sense where he is having

icccrdingly, we requested an extension of the
Commission's life.

Legislation to that end were introduced

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in the Congress in September 19 81, and enacted on —

really know the date.

MR. WEIDENBAUM: Is there someone here who could

I don't

supply that vital information?
DR. SCHWARTZ: The date for the report of the
Commission was thereby arranged March 31, 198
Hearings on the role of gold.
8

We held nine

meetings. That's an assumed number now, based on the number
that we've already — the Commission has already met, the

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prospective meetings. And two of which we heard testimony

concerning gold from 23 witnesses.

They commented on the use and effectiveness

of gold, and passed domestic and international monetary

systems, and offered variant proposals for a restored role

for gold, or favored the continuation of the present system

with no role for gold.

Ie addition to arranging the hearings, the

Treasury Department invited written statements on the role of

gold from organizations and individuals. In ah appendix to

the report the testimony we heard, and statements submitted

to us, are introduced.

GOVERNOR RICE: How substantial is this?

DR. SCHWARTZ: I don't know. I think that is a

question that the Commission should confront. There is an

enormous transcript that you all have seen, and an enormous

additional body of written statements that were submitted.

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MR. WEIDENBAUM:

Can we comment on that at this

point?
Unless, and I'm not suggesting it, in view of the

effort that might be involved, unless that transcript is editep.

having attempted to read part of it, I don't see the value of

introducing, that is, publishing it in its present form.

Perhaps copies should be just available in the

file to anyone who inquires. I think that upon our merits

in publishing the written carefully prepared statements, than

the transcript in its present condition.

SECRETARY REGAN: Well, first of ail, I'm going

to ask Congressman Paul because he, as I recall, I had some

suggestions on this earlier about the — what the record

should contain.

CONGRESSMAN PAUL: I certainly would think that

the written statements which are the prepared statements,

should be part of the record. I really haven't given too

much thought about the transcript, and this is the discussion

period that we had.

DR. SCHWARTZ: Well, actually each witness read

a good part of the witness statement, and then was subject

to questions.

CONGRESSMAN PAUL: My initial reaction is not

to be adversely opposed to limiting it to the written state-

1
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now, if somebody so desires.

DR. SCHWARTZ: In which case the Treasury really

should ask the witnesses to edit the transcript.

SECRETARY REGAN: Do we have a --

All right. I'm inclined to think that the pur-

poses of having any impact on what we have to say, that the

repo rts are the most important thing and the record itself

you know, is more or less secondary, that students or others

can go into the record for back-up material. I think the

report itself is not as important as the documents.

At this particular point I'd just as soon make

that available in detail here at Treasury and include excerpts

from the most pertinent excerpts, asking the witnesses

themselves, or the writers of the paper, to try to cut down

the size of their paper and give us just a general outline

of it, and include that along with our report.

CONGRESSMAN PAUL: It is my understanding that

you agree with what Dr. Weidenbaum said?

SECRETARY REGAN: No, I think vie' re on the sane

wavelength here.

CONGRESSMAN PAUL: If the printed material that

they gave in with their official report would be a part of

the report.

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ments, and making all these other statements available, you

SECRETARY REGAN: You mean not part of the record

1
2
3
4
5

No, I would —

what I'm

suggesting, and this is merely a suggestion, at this point,
that — let's suppose that a witness came in with 20 pages.
That we'd asked him to boil that down to two, have a two page
report, the gist of what he said, but have the 20 pages

available as the complete record here at Treasury, sufficient

amounts that anyone who wanted to come in could actually read

the 20 pages. That's what I'm suggesting.

MR. WEIDENBAUM: If I can elaborate, Mr. Chairman

I suggest that we publish our reports as the report. A

separate appendix could have the abstract of those statements

as determined — suggests, with the notes, of course, that

the full paper is available for inspection in the office.

SECRETARY REGAN: Now Governor Rice.

GOVERNOR RICE: I agree with (INAUDIBLE), but

in case you do decide to publish the abstracts from the report

you might consider separating the appendix from the main body

of the report. In other v/ords, two bodies. One volume of

the report, and an additional thick volume of excerpts from

this.

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CONGRESSMAN PAUL:

SECRETARY REGAN:

May I ask somewhat facetiously

also, I think that there's somewhat a forecasting mold.

Suppose that we have three or more reports to

issue. You would make them ail, I assume, part of Volume I,

and then Volume II would be the back-up material for any or

ail of those?
GOVERNOR RICE:

That's right.

And I would make

that suggestion because most people wouldn't be interested
in the appendix for the first thing. And you wouldn't need
5

to print it in view of that — the main report. There's

no reason to clutter that or make it different by including

the appendix.

SECRETARY REGAN:

First, Governor Partee, and

then I'll come to you.
10

GOVERNOR PARTEE: Well, I am getting a little

confused here in reference to the material on oral reports

and the back-up material.

I interrupted because I'm not sure it's with

respect to the very simple sentence in the forward here that

says, "we have written statements on the role of gold from

organizations and individuals, as well as the testimony that

was provided." My thought was this might run into 1,000

pages, and if we really want to publish 1,00 0 pages. I

19
20

was that — instead' of publishing, stand and ready to publish

any amount, we would ask for some material that had been

given. Now, this is the material that might be accepted by

you now.

24
25

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thought that the way the discussion was on, Mr. Secretary,

SECRETARY REGAN: Well, I tell you, what I was
rorecastmc was referring to what Governor Rice had said,

53
that he thought the first volume should be the conclusion,
2
3

allow the report itseif. And then the second volume and
appendix, giving this record boiling of 1,000 pages down to
more. And I said that I was saying somewhat facetiously,

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but in sort of a forecasting mold, that we probably would have

more than one report eminating from this Committee suggesting

maybe a majority report or minority report, or maybe two

minority reports. And I just wanted to make sure that we

published ail of that volume I, all of these reports, and

then Voluem II would be the appendix, which would be the

1,000 pages boiled down.

GOVERNOR PARTEE: Well, I view the report of

hers being more than a recommendation. We'll get to that.

But we have staff material that is unprepared. There's other

material that I think might well appear in the appendix of

the report, such as the account of our — that we had this

morning of our account of our position, using the IMF control.

There's another excellent report that has --

that you received that isn't on the agenda this morning on

the audit of the gold standard.

There might be some things like that even in

the first volume.

DR. SCHWARTZ: Yes, because •— all these papers

of the Treasury as prepared, are really germaine to what the

body of that report is, and I agree with you — the first

volume, and see that there's going to be a second volume.
The second volume of what outside witnesses and outside
contributors.
SECRETARY REGAN: Now, Mr. Coyne.
MR. COYNE: Mr. Secretary, I am concerned not with
6

the question of whether there is a hearing, which I am con-

vinced there is, but rather with perception that this is the

case. And I sense that there is — that there is a very keen
interest in understanding the different nuances as used, and

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suggestions, and that the House is not — that that is not

somehow or other stacked in one direction or another. Aid

one — I don't wish to bring this up prematurely, but we seeir.

to have got into part of the subject that I mentioned earlier,

and that is the letter from Senator Helms which refers to the

importance of publishing the full hearing transcripts and

documents.

It would seem to me that we could consider this

view, and whether we are satisfying it, or choosing not to,

and if this theory is a — if there is a serious body of

opinion that would be valuable to have this as part of the

— I don't know what the right word is, but it would be

equivalent of legislative history. I don't even know why IT

using such a word - creates directly the — so that one can

have - can demonstrate the fact that these hearings, in fact,

cic consider an p^n^nneiu ..JJ - „*

an e..o..,ousg/ wide range of use, and they are en
\

55
1
the record, and that they have been made available in a
2
prompt and timely way to encourage and permit — permit and
3
encourage, I guess, appropriate responses. If this is, in
4
fact, a serious legitimate view, should we not concur on the
5
side of being responsive to it.
6
SECRETARY REGAN: Well, I have the same adverse
7
response to that very quickly, that our funds of Treasury
8
are limited and they're being even more limited as we go
9
through the current budget process. And I'm wondering about
10
the commercial viability of publishing all of this, and how
11
many sets we would sell of these to be our costs. So that
12

from that point of view as to having the record here available

13
and summaries of what was said, actually published, we're
14
going to have to weigh that quite carefully. Unless, of
15
16

course, a member of Congress wishes to publish the whole
thing on the record, which they are free to do. But we are

17
not.
18

MR. WEIDENBAUM:

19
20

SECRETARY REGAN: Thank you. Well, vie will
keep that in consideration.

21
22
23

DR. SCHWARTZ:

any material I submit will be clean type script which is
—

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There's also a technical problem.

here. I assume that this is not going to be printed, that

24
25

You just make the point.

havinc readv, is that richt?

photographed and bound?

That it would just be

I'm not so sure that the condition

56
1

of the witness statements that the witnesses prepared, that

they're really camera ready topics. And who is going to

get that material in shape to be included in the volume.
That's a big undertaking.
SECRETARY REGAN: First, Mr. Coyne and then Mr.

6
7
8

Costamagna
MR. COYNE:

With respect, I must say that I

cannot deal with the question of whether w e can afford to do
it, for the moment can't afford to do it, then we won't do it.

But it seems to me that just, for instance, the

summary of recommendations of witnesses table, to me, as I

read it, is not necessarily a fair and descriptive expression

of what really happens, and I'm not "looking for trouble."

And not to make the underlying documentation available, and

to draw and to give statistical expression, if that's the

right word, it does not, perhaps in the eyes of reasonable

people, reflect the underlying substance of the presentation

18
19

themselves. I believe maybe when we're all finished, seeing
it as the wrong thing to have done. I think that perhaps you

should separate the issue of whether we can afford it to

whether it must — whether it ought to be done, and to have

to deal with them as separate issues.

GOVERNOR PARTEE: I think you're overlooking
am%\

24
25

the proposal that there be a summary of each presentation.
That is, within some kind of a reasonable length. That would,

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\

57
1

in fact, be a document readily available — would be put in

cameradic copy, and would be Volume II of this material.

Now, anyone who would like to look back further

of the full statement that was given, or the full amount.of

material that was given, can get it from the Treasury. They

can either come in and read it, or they can get it under the

Freedom of Information Act for so much a page. And I think

that's what the proposal is, if I understand it.

DR. SCHWARTZ: I didn't prepare the tabular

summary with the thought that that was going to replace the

witnesses statements. I thought that this was merely a

convenience for the members of the Commission, who had

presumably read the testimony of the witnesses.

SECRETARY REGAN: Okay. Any other comments?

MR. COSTAMAGNA: Just to dramatize a bit, we

— this is just the result of the last two days meeting.

Those are the papers and minutes and other discussions, and

not included in there are all of the other written papers

that were submitted at the last — subsequent to the last

two day meeting.

I would have to agree that expenses should not

only be considered, but by the time we're through I would hav<j>

to go back and beg, and publish that as part of the report,

would possibly detract from anyone wanting to ever read the

report. And I would certainly agree with the expressions tha-:

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53
1
2

SECRETARY REGAN: I think what we'll probably

do is recontacting the witnesses and ask them if they would

like to submit a brief summary of what they have already said,

assuring them that they have full and complete statements

to be available in the record already.

CONGRESSMAN PAUL: I would just add one comment.

I don't have a strong objection to what you say, but I think

Mr. Coyne makes a good case when I think about the many sub-

committee hearings I've sat on over the years, some are very,

very esoteric subjects, and all this material gets printed

up. It seems like a field hearing on political activities,

have court reporters and things get printed up. It to me,

more or less, is a revalation on our priorities and our values

when we see the billions and billions being spent frequently

not even in our own country, and on projects that seem to

have, to me at least, have no redeeming value whatsoever at

the thousands of dollars that this probably involves. I would

say this demonstrates, you know, a relative perspective that

we put on this, but I'm also very sympathetic to the immediate

concern and the massive volume, and I don't think this is |

something that I feel like getting on a soapbox for, but I

23
24
25

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it be an appendix supplement there for availability.

do think in comparison that we have printed an awful lot of ,

nonsense out of Washington, and since this subject - I happen

to reel is rather important, I think that we are relegating

(

59
1
this to a lesser of — lesser importance, and this just may
2

be the way it is.

3
SECRETARY REGAN: Well, I am not going to go
4
through a discussion at this point of the nonsense that's
5
6
7
8
9
10
11

printed in Washington although I happen to agree with you on
that. But unfortunately the Congress didn't appropriate
any money for this. It has to come out of the Treasury budget
You know and I know that we're under pretty strict strictures
here as far as what we can or cannot do with monies. We'll
go as far as we can in getting the record, and I think that's
— we'll just have to have the remainder of the record here

for those who wish to come in to get it.

All right. Dr. Schwartz. Would you proceed.

14
15
16

RS, Inc.

DR. SCHWARTZ:

Let me go on to the contents of

the report.
The body of our report reflects range of issues

we discussed during our deliberation.

Chapter 1 surveys economic developments of receni

years that were the background of the establishment of the

Gold Commission. The forthcomings of economic performance sirjce

the the mid-1960's occasined the move by the Congress to

provide for a study of the possible link between that outcome

and the diminished role of gold of similar date in the domestic

and international monetary system.

Let me finish readinc throuch and then if you

60
1

will have comments or objections or suggestions about what
2

I outlined here, we can go on to that.
3

Chapter 2 examines the historical evidence on
4

the experience of the United States with gold.

In 18 34 the

legally on the bi-metallic standards, the factor the United
6

States adopted a gold standard.

A chapter deals with success!

changes since then in the character of our country's monetary
8

system down to the most recent decade of inconvertible paper
9

money, and attempts to account for the changes.
10

In Chapter 3 we explore the strengths and weak11

nesses of alternative monetary standards, including different
12

versions of a gold standard, commodity standard other than
13

gold, and the present inconvertible

paper system, and I will

definitely include suggestions that Congressman Paul made
15

about competitive private money issue system, and a gold

standard system in which links the coins which we believe
17

the unit of circulation.
18

International aspects of the alternative
19

standards receive attention.
20

It's Chapter 4 that's going to

be the hard one.

In Chapter 4 we considered eight possible
22

recommendations regarding the role of cold in our country's
23

monetary system.

The first one would make no essential change

in the present role of geld, but would provide for adminis25

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trative matters such as validating the public accounting for

61
1
2
3
4
5

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the gold stock, explaining the relationship between cold
certificates held as an asset at the Federal Reserve system,
and the gold held by the Treasury. And include in the program
of Treasury medallion sales.
The recommendation would be consistent with the

belief that an incrase in the monetary role of gold is not

now timely. That the stock should be held as a reserve of

possible future use. Should they restore gold for gold?

That appears feasible. Or against other contingencies.

The second recommendation would reduce the role

of cold. An example of the reduction would be a procram of

sales of official stock, either now holed by the Treasury, or

restore to it a part of a general distribution of gold to

members of the international monetary system.

Sales would be in the form of bullion directed

to the market as in the case of the Treasury's auction sales

in 1975, in 1977, '79, or in the form of coin sales at

variable market prices .-•

This gets back again to the initial rate

before, in relation to the — where coin sales at variable

market prices are an induction in the role of gold, or increas

in t^e role of cold.

The criterion I used in this case was that any-

thing that reduced stock held by the Treasury is a reduction.

Now, that may not be what you would like the role.

62
1
2

with this presentation.

The third possible recommendation would be an

increase in the role of gold. Much an increase might take

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We can talk about it when I've gotten through

different forms.

One would be the restoration of a gold reserve

requirement without convertibility, to limit Federal Reserve

issue of notes or bank reserves.

Another form would be the restoration of a gold

cover requirement with convertibility. In both forms, a

foreign exchange value of the dollar would float, determined

by the demands for and supply of dollars to settle interna-

tional payment•payments and balances.

The final form which vie consider would be the

establishment of a possible gold standard.

In a possible gold standard the government would

be committed to purchase gold from the public on demand at

a fixed price and convert it to gold coins. Similarly, the

government would be committed to sell gold to the public at

a fixed price, and buying and selling prices to bring on a

cost — cost certifying the minting of coins.

The United States could establish a new parody

for the dollar in terms of gold in U.S. monetary liabilities

which would link the changes in the U.S. gold over produced

by domestic and international factors.

Each

—

63
in the role of cold describes the main elements in thfe

recommendation, transitional problems, if anv, potential
legal and international imolications and assess the advantages
or disadvantages. But each form providing for a gold
reserve, with or without the convertibility feature, the
6 pries of gold at which the value of the reserve would need
to be determined.
8 The section concludes with a discussion of the
9 problems raised and the choice of a nrice of gold.
10

-^Y recommendation of an increase in the' roia of

11
gold
must take account of the element of the free market of
12 gold that has existed since 1963.
13

In an appendix to Chapter 4,-we discuss several

aspects of the demand for and supply of gold in the current

15 market. In addition, the appanlix provides a retrospective
16 view on the record of gold production over-past centuries,
its
17 relation to trend movements and commodity prices and
18

the allocation of the stock of gold between monetary and

non-monetary uses.

20 You also got this morning a copy of a statistical
21 appendix that I've Proposed to include with a list of the
22 32ries that I suggest for inclusion and again, would like
23 your suggestions for change, improvement, anything.
24 And then the finally part of this draft says
25 "Majority and Minority Recommendations." Given the size of

64
tho Commission that Congras3 mandated and the diversity of
2

our views, it became apparent to us during our deliberations

that we would not be able to4 achieve a unanimous set of
recommendations„
It was gratifying, however, that common ground

existed for a majority of us. We first set out a recommenda-

tion of those of us who formed the majority and then of the

minority.
The sense in the body of the report reflects the

divisions among those.

That sentence alludes to the privi-

lege each member will have in reviewing the body of the

report to dissent from any statement that is included in it

13 by a footnote at the bottom of the page where a statement is
14 made saying whoever disagrees with this — my preferred versior
15 would be something like that.
16

With the final paragraph, even with respect to the

17 majority, not every member, if he had been reporting singly,
18 would have expressed himself in precisely the way the
19 recommendations are presented.
20

Differences and wording, emphasis and perceptions

21 would have been evident. For the sake of the representation
22 of the presentation of a collective view,
23

24
25

those of us forming

the majority have muted our personal preferences.
^nd as I say, the report —
introduction —

this draft of the

should then go on with what the recommendations

65
are and that's obvious that this is the part that I
cannot complete until we really have some votes.
So, one possibility would be to vote on the
4

outline that you accepted at the October 26th meeting.

Obviously, also, the array of ways of increasing the role

of gold that I Present here does not include the detailed
recommendation that Mr. Coyne has presented this morning

since I drafted this before Mr. Coyne's initial paper reached

me.

10
11

And I will certainly expand that paragraph to
give full representation to the proposals that he has made.

12
13
14

SECRETARY REGAN:
outline?

Any comments on Dr. Schwartz'

Yes, Congressman Paul?
DR. PAUL:

Dr. Schwartz, on the last page you say

we first set out the recommendations of those of the majority

and then of the minority.

impression on you that you will write the majority report

and you will write the minority report?

Does this reflect your — an

DR. SCHWARTZ: My assumption is that I will draft

something and it will be submitted to each of you and you

have a perfect privilege to change everything, to disagree

with the way I put it.

I think I can understand what a majority

recommendation will be when it is made and I think I can

put it in English that will fairly represent their views.

66
But if it doesn't meet the views of the minority,
or if anything report will contain doesn't satisfy you as
a fair statement of what you want included in the reoort,
needless to say, the report will be changed.
My role here is not to represent myself, it's to
6 represent you, each of you.
DR. PAUL:
8

Then it is your idea to have a majority

report, a minority report and then, in addition, there will

be dissents from that.
10

DR. SCHWARTZ:

Right.

That's exactly the way

11 I think this thing would work.
12

DR. PAUL:

himself, be writing a dissent?

14
15

And who would —

DR. SCHWARTZ:

Exactly.

would the individual,

Each of you will

have --

DR. PAUL:

But not a minority report.

DR. SCHWARTZ:

And you will say, I do not agree

with this statement on such and such a page, and that

dissent would appear at the foot of the oage.

20
21
22

Apart from what you want to do with this
introductory chapter and the -MR. WEIDENBAUM:

Can I follow-up, Dr. Schwartz,

with a question?

Not knowing whether I will be with the

majority or minority, let me ask, both —

to b« -» majority in one or more minority reports, will

if there is, «•'»
sa-.

67
staff assistants be available to all of us or will it just
be with the majority?
DR. SCX7ARTZ: I think I can understand what a
majority recommendation will be and I think I can understand
what a minority recommendation will be and it will be my
6 intention to present, in English, what those recommendations
7 are in a way that is faithful to what those views are, not
8 in any way to — I don't know.
You're quite at liberty to draft these yourselves
10 and I will incorporate them if I haven't done it to suit
11 you.
12

MR. WEIDENBAUM: Fine.

DR.
13 PAUL: Well, I'm still hoping that I'm in the
14 majority, but just in case —
15

(Laughter)

Just
in case I'm not in the majority, and I
16
happen
to be rather expert in writing minority reports —
17
18 I've written a few of those.
19 (Laughter)
But, I guess I, you know, have a habit of
20
writing these for myself.
21
DR. SCHWARTZ: Well, you're at liberty to do so.
22
DR. PAUL: This happens all the time on the
23
Committees that we work on.
24
DR. SCHWARTZ: It's quite conceivable to me that
25

63
I will draft a report that will be very substantially alterad
as a result of your examination of what I presented to you.
And I'm not going to object.
4

no right to change it.

I'm not going to say you have

It's your report.

So, again, I say, if you would prefer to draft
a minority view assuming there would be a case where you
would be in a minority and wanted to make a statement

yourself, there would be no reason why you couldn't do it.

9
10

There would be no reason why each of you couldn't
draft one of these chapters yourselves and hand it to me.

11
12

DR. SPRINKLE: We do have to have a report
finished by the end of March.

DR. SCHWARTZ: Right.

DR. SPRINKLE:

GOVERNOR WALLICH:

Governor Wallich?
I have two questions, one on

the substance of your outline.

DR. SCHWARTZ: Yes.

GOVERNOR WALLICH:

At the point where you say

the three possible ways to go, no change, decrease-increase,

and at the end of the section on the increase, I think

it's —• looks like page 4

DR. SCHWARTZ: Yes.

GOVERNOR WALLICH:

You say, any recommendation of

an increase must be based upon the elements of the free

market.

Eefore that you say, for each form of an increase

69
in the role of gold, we describe the main elements of the
DR. SCHWARTZ:

—

Yes, I said that.

GOVERNOR WALLICH:

Don't you think that applies

to some extent also to the other two types of recommendations.
There are pros and cons, there are technical aspects you
might want to extend that idea to these other two possibilities.
8
9
10

DR. SCHWARTZ:

I would be delighted if each of

you returned to me a copy of this introductory statement
with any revisions that you would suggest, any improvements

GOVERNOR WALLICH:

DR. SCHWARTZ:

You mean of the outline?

Of this —

yeah.

Needless to say,

I already am balked on the preparation of this report, but

if I know in advance what I should not do, what you

particularly want me to do, there'll be a lot of wasted

effort that will be avoided.

GOVERNOR WALLICH:

Well, this is just a minor

organizational point, but it will add a little to the

amount that you'd have to be writing and going over the

technicalities involved and no change —

doesn't necessarily mean no action of any sort.

DR. SCHWARTZ:

because that

Incidentally, in relation to

that first option with respect to recommendations that the

material the Treasury has circulated will become part of the

record for the first part of the report.

70
I presume I will have in parentheses, see
Treasury statement on the gold audit as a statement to ask
of the — directing the reader to — in this first point,
such as validating the public accounting for the gold
stock.
6 And then I would presumably have some parenthetical
7 statement that the Treasury statement about audit is
8 available in — I don't know, but there are going to be an
9 awful lot of appendices the way this is at present
10 constituted — but that's my present —
11 GOVERNOR WALLICH: I have one other — the
12 dissents. Do you visualize these in the form of dissenting
13 statements printed at the end as is customary in
14 Congressional hearing reports or in the form of footnotes
15 in the text as there is a difference of substance, because
16 the footnotes necessarily "have to be quite short not to
17
disrupt
the text and the dissenting opinions sometimes run
18
19
20
21

rather long?
And I would like to know how far one could let
oneself go then.
DR. SCHWARTZ:

I would say there are two aspects

to this thing.

If a dissent is a challenge to what I've

wri-cten in terns of accuracy, comprehension, I presumably

would make a change in the text myself and the dissent would

not become necessary.

Tharc could b- a casa where there's somo dispute

2 about tho way ths point is made, but the point would bo
3
acceptable,
but somebody on tli-3 Commission would word it
4
rather
differently and I would then leave that as a dis5
senting
statement at the foot of the — everything that
6 will be submitted to you will be subject to your approval.
7 If the initial presentation doesn't meet with
8 what you expect the report to be like, well it will have to
9 be changed. That's all.
10
GOVERNOR
WALLICH: Do you envisage a sort of a
11
session
of going through the document word-by-word and —
12 SCHWARTZ: Well, no, I would hope that each
DR.
13 you will do that privately before we meet, that you —
of
I14don't really know, I haven't thought this through —
15 usually when you send out a paper for comment, you get back
16 comments from people who have taken the trouble to read
17 them, and you take them into account in your revision.
18 Maybe that would be the way to deal with it.
19
There
may be some broader questions that would have to be
20 brought up at a meeting where everybody is present.
21 I would' hope that at the January 8th meeting that
22 I will have or submit to you at least the first two
23 chapters, possibly a third one as well, so that you could
24 get going on this, that there won't be this terrible pile-up
25 at the very end when I'll be frantic and you won't have the

72
time to devote to making sure that the report is just what
you want it to be.
So, as I say, I would prefer to be able to feed
4 this to you as we go along, to have maybe one-half of the
body of the report in your hands by the January 8th meeting,
6 and by the February meeting, have the balance of the two
chapters, and the — as I say, to me the .culmination is
8 really going to be chapter 4 on the possible role of the
9 gold.
10 And that must be the one that you've got to
11 examine with — I'm sure, here, and the feeling that I
12 properly executed the assignment.
13 SECRETARY REGAN: Mr. Coyne.
14 MR. COYNE: Mr. Secretary, may I ask Dr. Schwartz -15 or, in fact, really, the members of the Commission, on the
16 most primitive basis, I say, I don't have any sense whatso17 ever as to what the process is going to be for you to
18 express what the majority and minority and intermediary
19 and the —• what the opinions are.
20 I've been sitting around this table on a number of
21 occasions and I've read a lot of documentation. I don't have
22 any idea what the majority opinion is. I don't know even
23 whether we have agreed to specify what the issues are.
24 We're — my fear is to have — fear isn't the
25 right word, my anxiety is that there will be sprung, fully

clothed from —

is the ear of Athena —

o f Zeuss, rather,

that the — a document that will set things out like or
like that and we'll be voting for or against the wrong two
different things.
I don't —
6 DR. SCHWARTZ: Well, as I understand what the
Commission's decision was, it was the outline that was
8 presented at the October 26th meeting that was to form the
9 basis of the members' recommendations.
10 Those three alternatives — no change in the role
11 of gold, increase the role of gold and/or reduce the role
12 of gold.
13 And it seems to me — you have to express your
14 views. This is the outline you adopted. You have to
15 express your views on this question, and make me understand
16 what your views are.
17 If there is a majority, we'll be able to see
18 from a vote on the question.
19 MR. COYNE: I don't — I can't my head to think
20 of that as the question, increase the role of gold or
21 not change the role of gold or decrease the role of gold.
What I care — I ask myself, naively —
22
DR. SCHWARTZ: But that was the outline that was
23
24
25

accepted.
MR. COYNE:

B u t one of the funny things that

happens is that one begins to deal with a group of very

2 smart and thoughtful people and one's views chang3 over a
3 period of time.
4 I'm just saying that as it seems to me now, as I
5 see it, that doesn't seem to be the question to me. Maybe
6 it is, but it doesn't seem to be,
7 It seems to be, what should we do, not whether to
8 increase or decrease —
9 DR. SCHWARTZ: Well, yes, but then each of these
10 broad categories — there are specific sorts of recommenda11 tions.
12 MR. COYNE: Well, I probably am not seeing it
13 right, so I'll shut up for a while.
14 SECRETARY REGAN?' Congressman Paul, then
15 Dr. Jordan, then Governor Partee, then Congressman Wylie.
16 DR. PAUL: I, too, am somewhat confused on
17 exactly how this is going to evolve, but let's make it a
18 concrete question. We've had a Weintraub proposal and we've
19 had a Coyne proposal.
20 -^t the very moment you don't know what to write.
21 How are we going to arrive at the point — let us say those
22 are the only two proposals.
23 DR. SCHWARTZ: Okay.
24 DR. PAUL: Do you foresee that in January we will
25 have the meeting and then we're going to have a vote.

75
DR. SCHWARTZ:
today.

I would be happy if you had a vote

There just aren't enough people hare for us to have

a — wa have a quorum -DR. PAUL:
question is how to —
6

And I think that's the key to the
and there aren't only two, there might

be five concrete proposals.
DR. SCHWARTZ:

DR. PAUL:

That's right.

And we have to —

it seems to me that

we have to make a real effort to get as many people here as

possible and to resolve this so that the direction is more

definite.

Again, I have to decide whether I'm in the

majority or minority, and if I'm in the minority, I have to

start thinking about what I'm going to do.

15
16

So, I see that as a problem. It seems like that's
a very important thing that we have to decide today.

But another minor point here, in Chapter 1, you

state —

shortcomings of the past economic performance of the Mid-

60's up til now.

important point to make and it was that subject that prompted

me to write that one paper 10 years —• now, do you intend,

maybe, to incorporate that into a chapter and mention those

points?

the emphasis on Chapter 1 will be emphasizing the

And I certainly think that's a very

DR. SCHWARTZ:

I will certainly

—

MR. W Y L I E :
2

Will the gentleman yield on that?

DR. SCHWARTZ: Excuse me, Mr. Congressman?

3 MR. WYLIE: Will the gentleman yield on that
4 point?
5 DR. PAUL: Yes, I would be glad to
6

MR. WYLIE: You sent these — this outline around

7 and you said you hoped we would take the trouble to read it
8 which I did last night. And I would vehemently object to
9 putting that particular sentence in there
I
10 don't think that how we got here or why we
11 got here, shortcomings of economic performance in the Mid12 60's occasions moves by Congress. That's not what
13 occasioned the move by Congress at all.
14 What occasioned the move by Congress was that,
15 with due respect to the gentleman, he has taken the position
16 with reference to gold and convertibility to gold on
17 several occasions.
18 The International Development Association bill
19 was on the Floor in the House and in an effort to get your
vote
and the vote of Congressman Crane and some others, it
20
was
21 agreed that there would be no objection to offering an
22 amendment to establish this Gold Commission.
23 So, I don't think that this shortcomings of —
24 DR. PAUL: Well, you never got my vote.
25 (Laughter.)

77
MR. WYLIE:

Well, we got Phil Crane's.

(Laughter.)
MR. WYLIE: So, I would think that that sentence
there, myself, should read something like, Congress provided
for a study of a possible role for gold in the domestic
6 and international monetary system, and not attempt to
indicate how we got here. Just state the plain fact that
8 that's what we did.
DR. SCHWARTZ: Except that the Congressional
10 Record suggests that the — those who proposed the bill
11 did make — this was the basis for my description.
12 MR. WYLIE: Those are just statements from members.
13 Those are just opinions from members, but that isn't what
14 the report says.
15 MR. WEIDENBAUM: I don't see what we lose by
16 adopting Congressman Wylie's point.
17 SECRETARY REGAN: I didn't hear that.
18 MR. WEIDENBAUM: I don't see what we lose by
19 adopting Congressman Wylie's point other than some verbiage
20 and maybe that's a benefit.
21 DR. SCHWARTZ: What you would say surveys —
22 economic developments of recent years was the background for
23 the establishment of the Gold Commission, period.
24 Cut out —
25 MR. WYLIE: Well, then, if you want to put something.

78
1

else i n , I have —

Congress p r o v i d e d for a study o f a

2 possible role for gold in the domestic and international
monetary system, which we did.
DR. PAUL:

May I reclaim m y time?

If we're

going to follow those rules —
6 (Laughter.)
DR. PAUL:

I w o u l d suggest t h a t if it was not

8 the shortcomings of the economic performance since at least
'68 o n , I think the alternative is to p u t in that the
10 Commission was set up to buy a few votes. And I don't think
11 that would sound very good in the report.
12 (Laughter.)
13 DR. PAUL: So, I think that you have one choice
14 or the other. It's really that the system isn't working well.
15 It's the reason that we really have been able to achieve
16

this discussion.

17 So, I thin]-; we'd have difficulty denying these
18

economic realities.

19 SCHWARTZ: Well, if each of you, as I indicated
DR.
20
before,
would write me a line about how you would like any
21
detail
in this introductory draft changed, that will help
22 me.
23

And it isn't necessary for y o u to do it on the
spot h e r e , but if y o u let m e know w h a t y o u don't like in th

way I've presented initial draft, I'll fix it.

79
1

SECRETARY REGAN:

MR. JORDAN:

Thank you.

Jerry?

I agree with what concerns

Mr. Coyne has raised and some of the earlier statements by

Mr. Costamagna.

about —

sprung on us on October 26th is irrelevant.

And I find the whole —

the more I thought

the so-called alternative draft outline that was

It does not provide a useful framework for
8

discussing the issues. We heard testimony from 23 people

and I was actually here and heard almost all that testimony.

And I don't think it was done in this frame-

work.

the Treasury either selling all of the gold or giving it

away as a way to establish a real gold standard and return

to a gold standard.

I think that there were some people that talked about

And the idea that selling gold coin, gold bullion

or doing anything else is a demonitization of gold that's

contrary to the testimony we heard.

And I do agree that the basic objective — the

sentiment behind setting up the Commission, the interest

that it has received, the public attention to it, is based

on the dissatisfaction with the past and with inflation.

SECRETARY REGAN:

Next, Governor Partee.

GOVERNOR PARTEE: Well, I have one substantive

24 comment on the outline.
25

On oage —

the top

of page 4, it seems to me that

80
1

a discussion of a gold cover implies a fixed price for the

2 gold and I think that isn't necessarily true, because we've
3 just had a presentation by Mr. Coyne that it doesn't involve
4

a fixed price for gold on the cover and that needs to be —

it's those first four or five lines on page 4 that seem to
6 be — it's not quite right.
DR. SCHWARTZ:

I drafted this before

—

8 GOVERNOR PARTEE: I realize that. It does add
9

another dimension that we didn't —• this whole question of

1°

gold cover that we haven't had before and I think it needs

11 to be in there.
12

I would agree with Congressman Wylie, by the way,

13 that the word occasioned is incorrect, although I have no
14

difficulty with starting off the discussion with short-

comings in economic performance.

DR. SCHWARTZ:

Well, this is going to be a neutral

17
chapter.
Nobody's going to be blamed. It's going to be
18

letting out what happened.

GOVERNOR PARTEE:

you know, I don't think we want to —

the Breton Woods system.

of central —

That's all.
When we write such a chapter,
we have to consider

But I don't think that should be

a central feature, because I can't believe it

23 a central feature in the experience of the decade. And
was
24

in this respect, I think, we differ.

25 I think also one ought to point out the
And

31
shortcomings in terms of structural i m b a l a n c e , unemployment,
shortfall in economic output as well as price, as you
discuss in the thing, but I have no problem with that.
My broader organizational question —• I didn't
really understand what the Secretary was talking about
6

b e f o r e , b u t now I d o .

It seems to m e that the concept of

a m a j o r i t y and a minority report almost maximizes the
8

devisiveness that o n e can come o u t w i t h in this thing.

In f a c t , there m a y not be a majority report,

w h i c h is y o u r p o i n t .

If one conceives o f a majority and a

11 minority report, one has to have a general sense of the
12

construct in w h i c h w e ' r e working and I think the outline w a s

13 useful for that purpose.
14

B u t it m a y well be that w e could get a good deal

15 more agreement by having a series of propositions . And
16
17

that's w h a t I found useful about M r . Coyne's p a p e r today.
N o w , y o u k n o w , one proposition would be in

18 general, do you think the role of gold is about right or
19

should b e increased o r decreased, b u t I mean m u c h m o r e

20 specific propositions.
21
22

DR. S C H W A R T Z :

W e l l , y e s , there is no reason why

each of these broad —

GOVERNOR P A R T E E :

DR. SCHWARTZ:

GOVERNOR P A R T E E :

Couldn't have propositions

—

Yeah.
W e l l , I'm just n o t sure w h e t h e r

82
1

that comes to a majority or minority report.

You may have

2 13 propositions on which the majority of the Commission can
3 agree and then another 15 on which there is not a majority
4 view. And getting down to the point where the Congressman
is the only supporter of a proposition.
You could have a list like that, you see.
SECRETARY REGAN: Congressman Wylie, would you like
8 your regular turn here?
9 MR. WYLIE: Yes,' I would, please. Thank you.
10 Thank you, Mr. Chairman, I want to revisit this
11 for just a minute and then I want to get on to something else.
12 But I don't think that the shortcomings of
13 economic performance since the Mid-1930's occasioned the
14 move by Congress or got us here today. I don't think it
15 would have mattered if it had been shortcomings or long16 comings.
17 The people who are for convertibility or some
18 role for gold would have found a way to get into a
19 discussion like this, I think.
20 You say this outline should at least be factual
21 and I don't think it's factual if it has that particular
22 language in it.
23
Having
said that I would like to submit, if I may,
24paper, and I think you've already suggested this — I
a
25
stated
my visceral basic feeling about the role of gold and

83
my position at the first meeting.
it hasn't changed.

And I might say that

If anything, during the course of the

hearings, it has been re-affirmed.
And while I was thinking through my position, I
was jotting down some notes and making an outline and I
6

have written a brief in support of my position.

And I'd like

to submit that to you,maybe next week, along with a couple
8

of issue briefs which you may or may not have, which were
prepared by the Library of Congress, which I found very

10
11

helpeful.
One of them is an economic brief which had

already been prepared but was updated based on what we have

done here at this Gold Commission.

The other is a political brief, and I haven't

had any witness talk about the politics of the situation with

reference to gold and I think it's very well done.

It's an objective and balanced review of some of

the political considerations which I would submit to you and

they can be incorporated in the record or they can just be

referenced by you, or however you see fit to use them.

But as I say, in this memorandum, I asked the

question about the possible consequences, and one of those,

it seems to m e , would be a considerable amount of loss of

flexibility by our political leaders in times of international

stress or crisis if we went to a gold standard and that's

84
1

expanded on in this b r i e f .

S o , if there's no objection I

2 will submit that to you next week.
SECRETARY REGAN:

I'd e n c o u r a g e y o u to do that,

as a matter of fact, Congressman W y l i e .
MR. W Y L I E :
6

Thank y o u , M r . C h a i r m a n .

SECRETARY REGAN:

N o w , D r . J o r d a n , you next and

then Congressman Paul.
8

M R . JORDAN:

As a w a y to p r o c e e d , I would suggest

that you take M r . Coyne's approach and y o u extend it as
1°

necessary to cover the range o f d i f f e r e n t capsulized positions

or views and to circulate that to all m e m b e r s o f the

Commission including the seven w h o a r e n ' t today, and ask

that each of us either indicate o u r a g r e e m e n t , o u r lack of

disagreement o r comment, m o d i f i c a t i o n o n i t , and you may

find out that there are certain p r o p o s i t i o n s o r proposals

that you can get a majority a g r e e m e n t o n such as issuing

gold coins o r maybe a majority w o u l d agree y o u can't

immediately re-fix the dollar p r i c e o f gold o r something and

you have can have a majority o r m i n o r i t y o n specific

propositions, b u t I really doubt that y o u can p u t together

a comprehensive, integrated statement if you get a majority

agreement.

23
24
25

And that that m i g h t b e the m o s t efficient to
proceed at this p o i n t .
DR. SCHWARTZ:

if that w e r e the c a s e , that on

85
particular propositions you would have a floating majority,
would you then indicated in parentheses the names of the
members who adopted a favorable view on some proposition and
4

another proposition —

give another list of members.

I just don't visualize how this is going to be
6

presented.

If there isn't a majority view that agrees on

a given set of propositions, and then a minority view that
8

agrees on another set of propositions, what —
each proposition there will be one —

that for

you see what I've

indicated?
MR. JORDAN:

I would list who agrees and who

disagrees.

is an input to Congress for them -- to.serve as a background

to them —

and hold Congressional hearings or whatever on some of these

issues.

And, remember, that the purpose of this report

and whether we recommend that they then proceed

The only thing that comes out of this is advice

to Congress on our views and the views that we have heard.

And I think that would be —

DR. SCHWARTZ:

That's what my directions are.

SECRETARY REGAN:

DR. PAUL:

Okay, Congressman Paul.

I tend to agree with Dr. Jordan that

this would be a way to proceed, that if we did that and

indicated it —

approved or disapproved by as many —

and you even could have the final version
but we could still

8
arrive at a report by taking these individualized votes on
2

each item.

And I think the earlier point you made, Dr. Jordan,

4 on the outline versus what you had heard at the hearings, I
5 think, is well taken, because, for instance, Dr. Senholtz
6 (phonetic) was our last individual to testify and I happen to
7 know that he's a very strong gold standard person.
8 But his presentation that day did lead one to
9 believe that — well, I could see why one would be led to
10 believe that he would be opposed to gold, because he was
11 advocating some gold sales, but that didn't put him in the
12 category.
13 Now, he's put in the category of decreasing the
14 role of gold, and, yet, I don't think he fits that and this
15 doesn't adequately reflect those intricacies.
The
16 other quick point I would like to make is that
17 wondering about how we will come to arrive at that, whether
18 we do anything today, or at the next meeting, or through the
mail,
19
it is my understanding that with a quorum present, you
20 do have the right to take votes, but I think it would be a
21 much better report if everybody participated in it.
22 SECRETARY REGAN: Mr. Coyne.
23
MR. COYNE: Mr. Secretary, we — the thing I'm
24
concerned about, and the reason I ask about the process, is
25
to create an environment in which it is possible for poeole

87
to accept —

for us to accept the best of all possible worlds

rather than what we would wish to have in abstract.
And, therefore, to pidgeon-hole us, each of us,
too soon, will preclude a useful result to this Commission's
deliberations.
6

And, just curiously, we —
looked like —

this meeting —

just to see what it

I was not even intending to bring this up at
we made up, actually, a survey, just to see

what it would look like.
10

A proposed survey of Gold Commission members, which

I would like to read —

I mean, I would like to read only the

first paragraph, just to indicate what we had in mind:

(Reading)

"With regard to the establishment of a new gold

dollar link, please indicate your response to the following

alternatives:

17
18
19
20

for, against, neutral.
No gold dollar link, the continuation of

a managed paper money standard:
B.

fory against, neutral.

Gradually increase gold cover requirement

combined with a rule restricting money growth

—"

That's the Weintraub proposal.

" —

for, against, neutral.

A gold cover requirement as a confidence

measure without restricting money growth:

neutral.

for, against,

88
D.

A minimum-maximum limit on gold stocks tied

1
growth of the money supply —"

That's kind of what I talked about this
3
4

morning.
" —

for, against, neutral.

E. Establishment of a broad, official stabili6
zation range for gold prices: for, against, neutral.
7
F. The restoration of a fixed price for gold
8
and a form of gold standard: for, against, neutral."
9
I also, that is to say, in addition to the question
10
of the establishment of the gold dollar link, the question
11
could be asked, should our gold stocks be used as a
12
bridging device to help finance budget deficits or help
13
reduce the cost of that financing operation by one of the
14
following measures -- and there were five or six alternatives
15
to that.
16
And there are, let me see, on this particular
17
list that we made up, we have a total of nine questions. It
18
19

was -- we were not intending to use it, only trying to see

what we can do to start the process.

I
21 am thinking, would, let's say —• excuse me,
Congressman
Paul, if I use you as an example, would your
22
vote
on the question of the establishment of a gold dollar
23
link,
for example, be — I'm asking this question rhetorically
24
not
25 for an answer — would your vote be influenced by what

39
the composition of the rest of this Commission was regarding
the various.eight choices that I gave, or perhaps it should
be ten choices that you would reformulate —

once we saw

where we stood in terms of the eight or nine or ten alternative answers to each of the key questions, could we not then
6

reformulate those questions in terms of what's practical.

I recall in —

in gest —

I recall what

Congressman Reuss once said at one of these meetings —

gest —

that he would —

when we were talking about how

long these Commissions should continue to deliberate —

one suggested still another long period of time in addition

to the other longer period of time, and he said, "Of course,

I would agree to that addition, because I would never

object to dividing the opposition."

some-

I'm saying that if we understood what the main

thrusts were, could you, I ask rhetorically, could you not

associated yourself with something in a final proposal which

might in fact be different than you would propose as your

first desired proposal yourself.
If we could understand, if we could clarify what

20
21

the key issues are and then to stipulate what the five or

ten —

are to each of those issues, and we could then understand

where our people are on each of those various nuances, would

we not at least have a chance of understanding that on this

if those are the right numbers —

major alternatives

kind of issue, we really could reach a solution.

And this kind of issue we really can't, there is

no consensus, and, in fact, it's not even a matter of there

being a majority or minority.

There's a great diversity of

views.
6

And we can express, in fact, a meaninful final
understanding of what —

in conclusion — o f what this

Commission's mission is.
By the way, if anybody would be interested in

seeing this very rough draft of that survey

SECRETARY REGAN:

DR. SCHWARTZ:

SECRETARY REGAN: Governor Rice?

GOVERNOR RICE:

—

I think Dr. Schwartz would.

Yes.

Well, Mr. Chairman, I would

simply like to support Dr. Schwartz' outline, proposed out-

line and the general logical framework which she offers.
It seems to me that you have to have some kind of

17
18

organizing principle, and I can't think of anything worse

than a report which consists of a list of propositions on

which people, are classified as to whether they agree or

disagree.

Not only would it make for very boring reading

it would, I think, confuse the readers and give them very

little with which to interpret the difficult issues that

we're looking at.

91
1

I think we have to have an organizing principle and

I 2think the one we have before us is as good as any. If
3
there
are others that members would like to suggest, I would
4
certainly
be very happy to look at them and compare.
5
In the absence of a better, organizing framework, I
6 think this is a good one.
I think almost all views will end up classifiable
8 into whether it would result in an increase, decrease or
9

maintenance — no change in the role of gold.

10 I think the proposition could very well be
And
11
introduced
within the framework of these different categories.
12 And I would support maintaining the outline as proposed by
13 Dr. Schwartz.
14

SECRETARY REGAN: Thank you. Mr. Costamagna.

15 MR. COSTAMAGNA: Mr. Chairman, just as a matter of
form
16
rather than substance, and maybe Dr. Schwartz anticipated
17 doing this or inviting in the opening chapter, it seems to
18 me that there were many areas of agreement that we had in
I9 many of our discussions.
20 I can recall, for example, Dr. Paul and Governor
21 Wallich both talking about the need for honest money. It
22 would set a favorable tone in my mind if we could have, maybe,
23 a preamble of areas where we all stem from a common agreement,
24 and included in that area some definitions of the terms we
25 used.

For example, when one of us says inflation, in the
u A„ «i<5« it may have a different definition.
mind of somebody else, ^ m*j
The same would go for the words of gold standard and convertibility and similar words.

I find us using them differently.

that if we could set out some definitions,

hopefully we could agree on the definitions.
DR. PAUL: Would the gentleman yield on that

for a moment?

MR. COSTAMAGNA: Yes.

DR. PAUL:

I would like to know if you would

agree that we also tried to define the dollar while we're

at it?

MR. COSTAMAGNA:

Mr. Kline, this morning —

The dollar and legal tender as
and similar terms.

Possibly this could be part of a preamble. The

areas of agreement, first, as I say, form rather than

substance, but it was just a thought.

18
19
20

SECRETARY REGAN:
comment at this point?

Does somebody else wish to

Governor Wallich?

GOVERNOR WALLICH:

I would like to support

Governor Rice in going with the original outline. I '-0 se2

the attractiveness of an outline along the lines of

Mr. Coyne, but I'd like to renin* this group, a Oistinguis

American economist won a Nobel Prize, he had shown that tha

procedure adopted by Mr. Coyne, to decide issue-by-issue,

- 1

93
1

rather than as a majority, you can arrive at the situation

of there's a majority preferring Issue B over Issue A and

C over B and A over C.

And we might find ourselves with a majority for
every tiling, but they might be inconsistent.

(Laughter.)

MR. COYNE:

I understand what Governor Wallich

says and I was really giving Governor Wallich and — is

a Yale man, from the Economics Department, I was also at

Yale, but I studied music and I wanted to make it perfectly

clear that everything I say is my musical opinion.

(Laughter.)

MR. COYNE:

I really was thinking not in terms

of formulating a final report, but in terms of having a

basis of understanding of what our ideas are so that perhaps

there could be what amounts to a discussion of the entire

overall issue in terms of having some idea as to how each

of the other of us feel about each of the crucial issues,

rather than, of course, the —

report itself.

DR. SCHWARTZ:

as a basis for the final

Well, there's nothing incompatible

between outlining different propositions under the heading

of increase, decrease or unchanged.

24
25

I don't see any conflict at all in that respect.
And I

—

I'm not quite sure why you object to that overall

division.

I say, you can flush o u t w h a t the possible

alternatives are within each subhead and —
SECRETARY REGAN: Governor Partee, you had your
4 hand up next.
5 GOVERNOR PARTEE: Well, I was going to — it's
6 a hard question. There has to be an organizing principle.
I think we all would agree with that.
8 The trouble is we don't really know where the
9 Committee stands — the members of the Commission stand on
10 almost any subject.
11 The — but if you were to do as Dr. Schwartz
12 proposes, it seems to me that just the very fact that you
13 have item under increase, decrease or leave unchanged is
14 going to bias the results, because there's somebody who is
15 going to be so distrustful of the general category increase
say,
they're going to be inclined to vote against whatever
16
17
18

the proposition is .
It really is a question o f finding o u t where the

19
Commission
members stand before you, then, within an
20 organizing principle, frame the thrust of the report.
21 It's work really that we should have done
22
already, but we haven't, and we haven't done it because we
23
haven't had very good attendance, we've had infrequent
24 meetings, and we've had some difficulty even communicating,
I think, at these meetings.

95
1

DR. SCHWARTZ:

I certainly think that the

survey that Mr. Coyne proposes is an excellent idea and

I hope we can get that circulated after I've had a chance to

look over what Mr. Coyne has already done and get some

expression of views from the members before the next

meeting.

SECRETARY REGAN:

MR. WYLIE:

Congressman Wylie, you*re next.

I was just going to say, I read the

outline last night and I liked it the way it is, and would

associate

Wallich except for the exception I've noted.

myself with the remarks of Governors Rice and

But it seems to me as if our Committee might be

divided almost along the same lines as my constituents.

wanted a little help on this, or at least I thought I did,

so I put on my recent questionnaire, should U.S. dollars

be converted to gold.

I've now gotten over 16,000 responses back and

31 percent says, yes, 33 percent said, no, and 31 percent

were undecided, so —

(Laughter.)

MR. WYLIE:

(Laughter.)

SECRETARY REGAN:

DR. PAUL:

I guess I'm on my own again.

Congressman Paul?

Thank you.

I'm sure —

clearer in my mind what we're doing yet.

that it's any

96
If we follow your outline and we have several
2 proposals again, like the Coyne proposal versus the
3 Weintraub proposal, what is your understanding? Would both
of these be written up —•
DR. SCHWARTZ: Oh, yes.
6 DR. PAUL: Or would there have to be —
DR. SCHWARTZ: The point would be, in Chapter 4,
8 each one would be explained, it's advantages and disadvantages
as I said, described, and that would be the reference in the
10 introductory chapter to support whatever recommendation —
11 DR. PAUL: Okay, this is before. I'm talking
12 about the recommendation part. How are you going to
13 arrive at the recommendation?
14 Let's say those are the only two choices, Coyne
15 versus Weintraub, how would you arrive at the point — how
16 do you foresee this?
17 DR. SCHWARTZ: There would be a vote by the
18
Commission
— there will be a vote by the Commission on
19
any- proposal — any recommendation.
20
DR. PAUL: Was the consensus that this would
21
occur through the mail or would it be —
22
DR. SCHWARTZ: Well, this survey, it seems tome,
23
like an excellent idea. The only trouble is, of course, it
24
cannot be anonymous. You will have to let us know who's
25

voting for what.

9
1
2

MR. COYNE: What's wrong — why wouldn't we all
be happy to do that?
DR. SCHWARTZ:

Well, I —

just sitting here and

observing what's been going on, I have the impression that
people have been holding back, people have not been willing
to6 express views and possibly they're not well-developed
enough for the people to be able to express them.
We8 have one sterling exception — if sterling
is the right word.
10
SECRETARY
REGAN: Well, we're getting close to
11 o'clock. I think, maybe, I'll sum this up as to where
1:00
12 we stand at this moment, discuss a little bit what we should
13 do when we return from luncheon and see where we stand on
14 the matter of adjournment.
15 From the point of view of what we're going to
have
16
to do — we have only two more meetings before we look
17 at the final report on March 31st, so time is starting to
18 close in on us.
19

We're all going to be scattered for the Holidays

20 and our next meeting is tentatively scheduled for January
21 3th. That means that we're going to have to do some rather
22 quick work.
23 And the time is now coming when each of us has
24 got to fish or cut bait. We have to start making up our
25 minds on these various items and we have to start being

forthcoming with those so that we can start to draw up the

2 reports for you.
3 The — so, I would suggest that we reach some
4 conclusion when we return with instructions to Dr. Schwartz
5 to start trying to formulate opinions or at least setting
6 the stage for opinion voting sessions on January 3th.
7 Then the February meeting,whatever its date might
8 be, and I hope it would be early in February, we would then
9 come back and sort of take, what would you call it, semi10 final votes, if I could use that expression, on most of
11 the major issues involved in the role of gold in the United
12 States' monetary policies.
13 And then as a result of those, Dr. Schwartz would
14 draw up the final report, and we would then vote on the
15 final report and submit it in March.
16 That's the schedule that I see us being on
17 over the next three months. It's going to be a tight
18 schedule, but it is going to require that we now start
19 actually concentrating on what are the main issues here,
and
20 having heard from all our witnesses, having looked at
21
the records, read papers and things of that nature, we
22
should be able at this point — I'm talking here now,
23
January the 8th, to be able to vote on the majority of the
24
opinions of issues, so that Dr. Schwartz can start getting
25 into some type of order.

99
MR. WYLIE:

Mr. Chairman?

SECRETARY REGAN: Yes?
3 MR. WYLIE: Could I submit just one more thought.
4 Mr. Coyne objects to the outline that Ms. Schwartz gave us
5 because it isn't detailed enough.
6 In her summary of recommendations of witnesses of
Gold Committee meetings, she has a three-stage outline:
8 one, no change in the role of .gold, increase the role of
gold, decrease the role of gold.
10 under the increase in the role of gold, you
But
11 have one, two, three, four, five — six different positions.
12 Now, it seems to me as if that's specific enough
13 that almost any member of the Commission could make a
14 determination along those lines, whether they support the
15 testimony given by Aliber, for instance, or Holtzer, or
16 Meltzer (phonetic) , and may I suggest that you might want
17 to incorporate something like that in your outline which
18 would get more specific along the lines that Mr. Kline has
19 suggested.
2o SECRETARY REGAN: All right, well, why don't we
21 adjourn now and return at 2:00 o'clock or shortly thereafter.
22 I shall try to be prompt, but we have another meeting and —
23 I have another luncheon meeting — and then we'll discuss
24 this final draft.
25 (The hearing recessed for lunch at 1:00 o'clock.)

100

(2:08 p0m0)

SECRETARY REGAN; If we could get started. We
do not have a quorum currently, but I am assured — the
Chair is always assured, if nothing else, that we can
6 proceed because we are merely adjourning the morning session,
at which we did have a quorum.
8 Accordingly, we can proceei with our discussions,
9

however, I am sure that we want to cone to much of a vote

10
on any particular matters until such time as at least another
11
couple of members show up.
12
I suppose if we could take a vote, we could settle
13
14

the whole issue here and now
GOVERNOR PARTEE: Mr. Chairman, we could take a
vote as to whether the members not present should be

—

16
SECRETARY
REGAN: Eligible to vote.
17
GOVERNOR PARTEE: Yeah, or eliminated from the
18

Commission.

SECRETARY REGAN: When we did adjourn our morning
20
session, we were at the point where we were giving some
21
advice — and I'm not sure how much consent — to Dr. Schwartz
22
about her report, her draft report and what we should be
23
doing for the January meeting.
24
And if i recall what we have more or less agreed
25
on and I'll spf * ^ ,,~
seL U

•
P this way —
J.I.

and if that's not the

understanding, then we'll come back to it —

101
that under the

broad headings that she established earlier of her three
main points, we would have sub-points below that.
4

These would be circulated to the members as quickly

as possible and they asked to indicate their opinion on these

subjects and they would also be urged as Congressman Wylie

has suggested he's going to do, that they put in writing

their general opinions on these subjects so at least we saa

where we're going.

And, then, Dr. Schwartz could report the results

of all of this to us on a non-binding sort of way in

January and that would, at least, give people an indication

of which way this Commission is apt to head.

And then they could start firming up their final

opinions on some of the oustanding issues which she would

then indicate are the ones that we should concentrate on

for settling by the February meeting, and then we could

start writing the report.

Welcome, back, gentlemen. That makes a quorum.

Now, does anybody have any additional thoughts

that they would like to express or questions they would like

to ask since we adjourned?

Yes, Mr. Costamagna?

MR. COSTAMAGNA: Mr. Secretary, the question of this

tabulation of the speakers who presented papers, there were

102
papers that were presented by non-speakers as well.

And I

was of the impression, originally, when we entertained the
idea of having speakers that the effect of those who were
not able to speak would be considered as equals even though
they did not speak, but did present — although, once they
did present papers, we would consider those papers as well.
And the second thought is — and I know we must
have all received similar letters from the general public —
and I was curious to ask to what extent will our report
reflect the opinions that we have received from the general
public.
Those are two bodies of information that I do
not believe we should neglect.
DR. SCHWARTZ: Well, the draft that I prepared
of the introduction to the report indicates that the statements that non-witnesses submitted would be reproduced.
Now, if we're going to request witnesses to
reduce the size of their submissions, I don't know.
Are we also going to ask those who responded to
the call for statements to reduce the size of their
statements?
MR. WEIDENBAUM: Can I comment?
SECRETARY REGAN: Yes, go ahead.
MR. WEIDENBAUM: On this discussion, in my mind,
I make a distinction between the report of this Commission,

10
which is what I presume the Congress intended when it
established this Commission, and the serious manner in which
3

each of the Commissioners —• and I say this from personal

observation —

the serious manner which each of the

Commissioners in our own separate ways are undergoing a
very intensive course of reading on the economics and
financial aspects of gold.
8

And I think, frankly, all we need -- although
maybe it's a good idea to put it in —

is a statement

reporting to the public that we have done just this, that

this literal mountain of material that has been submitted

to each of us has been considered in the appropriate form —

that is, by each individual Commissioner, so that it

influences to the extent that it does, our views and our

views are incorporated into the report.

And, therefore, acknowledgement that the

Secretariate has been very careful to distribute to each

member of the Commission this wide array of materials, in

addition to which many people have taken liberty of —

why not —

and

to submit materials directly to each of us.
And, frankly, I don't think it's appropriate to

burden the record —

certainly not our report or even the

appendix of the report —

material, but to indicate that it was submitted to and drawn

by each of the Commissioners in their work on the Commission.

to this very substantial array of

104

DR. SCHWARTZ: We can certainly list the names of
2 everybody who submitted —
3 MR. WEIDENBAUM: I really — I would let it go
at that. I guess, if you push me real hard, I feel very
strongly — I'm on this Commission to present my views, and
6 if it was intended that some other person be on the
Commission, that would have been dona.
8 And, therefore, the views of 'the people on the
Commission are important as they affect our views. But this
10 is going to be our report.
11 SECRETARY REGAN: Congressman Wylie?
12 MR. WYLIE: I want to associate myself with the
13 remarks of Mr. Weidenbaum. I think, too, if we make a

14 listing of people who submitted material, it may be just o

15 sentence of the position they took or something like that,
16 that that's more than adequate.
17 I don't think we should burden the record with
18 all these reports. I've gotten, myself, from all over the
19 United States and abroad — there's no possible way that
20 we could afford to have a report that voluminous, so I

21 would go along with the Chairman of the Economic Advisors.
22

- SCHWARTZ: The question is what did the

23 Treasury to the people who submitted these statements when
24 the Treasury invited them?
25 SECRETARY REGAN: There are a lot of unsolicited

105
statements that each of us has gotten, mounds of correspond-

ence. we'll check that.

DR. SCHWARTZ: In answer to Mr. Costamagna's
second point about privately received proposals, I have kept
a file of any proposal with respect to the role of gold,
6

and I could summarize those.
SECRETARY REGAN:

Other comments?

We're checking the record to see exactly what we
promised to people who wrote to us as a Commission — we would

do with their testimony.

MR. WYLIE:

But there is a distinction between

invited witnesses, though, and those who voluntarily sub-

mitted statements.

14
15

SECRETARY REGAN:

Yes. When I say testimony --

both written and oral.

Yes, Mr. Costamagna?

MR. COSTAMAGNA:

The reason for bringing this up

is if the tabulated result of the 23 who did speak becomes

19 part of the record —
20

DR. SCHWARTZ:

MR. COSTAMAGNA:

You did not intend that to be,

okay.

to become part of the record, I think it might be a neglect

not to reflect that there were other sources of input.

But as I —

No, I'did not —

I was of the impression that if that was

I«m not in favor of making a voluminous report,

106
because the more v o l u m i n o u s , the less possibility o f anyone
ever reviewing it.
SECRETARY REGAN:

Any o t h e r comments on this?

(No response.)
SECRETARY REGAN:

W e l l , why d o n ' t w e , in the

meantime, while they're searching the record to find out

exactly w h a t w e did —

Item 5 which are the dates o f o u r n e x t m e e t i n g s .

9
10

let's see if w e can focus in on

N o w , tentatively, w e have set January 8th and
February 5th

—

DR. SCHWARTZ:

SECRETARY REGAN:

February 5th is apparently —•
But I understand that someone

has trouble with February 5.

I think that it's —

we —

I was going to make

a smart crack, b u t with two Congressmen p r e s e n t , I better

not —

January 8th, nevertheless, I think w e should b e , at least

right around that date, because w e h a v e to have a meeting

early on in January and early o n in February, if we're

ever going to make the record, and m a k e o u r deadline.

even though Congress w i l l n o t b e in session on

So, w e would hope that if the Congressmen could

21
22

make it here, they would.

make their views known to us in w r i t i n g o n some of these

issues.

- WYLIE:

If n o t , that they would at least

Are any o f the m e m b e r s o f the Commissic

involved in the European Parliament meeting.

107
That happens

to occur on that date.
SECRETARY REGAN: On the 8th?
MR. WYLIE: Yes, sir.
SECRETARY REGAN: January 8th — I am not. Any
6 of the other of you in the European Parliamentary Session?
MR. WYLIE: I think Henry Reuss might be and I'm
8 thinking of going as a delegate.
SECRETARY REGAN: Congress gets back on the
10 25th of January and that's much too late, much too late,
11 so I would rather hold earlier on rather than later so that
12 we could then gather up whatever material we have and
13 submit it and then ask everybody to please try to make the
14 February date, whatever that might be.
15 Now, who's having trouble with February 5?
16 Henry? You are?
17 DR. SCHWARTZ: Mr. Coyne.
18 SECRETARY REGAN: Mr. Costamagna. And
19 Mr. Coyne also?
2o What other date early on in February is suitable
21 to you?
22 GOVERNOR WALLICH: Wednesday, the 3rd and then
23 beginning Wednesday, the 10th again.
24
25

SECRETARY REGAN:

May I ask the Congressman, when

A
ao
you go ou t for the traditional Lincoln's Day

—

1
Washington's Birthday Recess?

Do y o u have that in any of

your papers that you have w i t h you?

Do any o f y o u r aides

have it?
I know there's a date in that p e r i o d , there, the
middle of February w h e n traditionally Congress goes o u t for
6

a week or ten d a y s .
M R . WYLIE:

Washington's Birthday and right after Lincoln's n o w .

SECRETARY REGAN:

the 8th?

you?

12
13

W h a t about the 8th, Monday,

How does that strike —

GOVERNOR WALLICH:

Henry, how does that hit

T h a t is the day I am supposed

to abroad o n .

14
15

It's usually just in advance o f

SECRETARY REGAN:

M r . C o s t a m a g n a , how does that

hit you?

16 MR. COSTAMAGNA: That weekend, the 5th, 6th, 7th
17

and 8th, is a bad o n e .

I could b e here the 5th, if need

b e , but I'd be very pressed o n

—

19
SECRETARY
REGAN: We understand Mr. Coyne also
20

has a problem with that date, February 5th.

to settle on a date for February.

Is.the 12th a Holiday, Jerry?

MR. COYNE:

SECRETARY REGAN:

We're trying

The 14th m i g h t imply a m a s s a c r e .
How about February 12th, then?

Assuming that it's not a legal holiday and assuming that the

10S
Congress is in session.
2

(No objections.)

SECRETARY REGAN:

MR. WYLIE:

SECRETARY REGAN:

MR. WYLIE:

February 12th it is.

January 8th is —
January 3th is fixed.

Is there a March date?

SECRETARY REGAN:

It's toward the end of March

that we're talking about now, because that's our final for

the report ifself.

MR. WYLIE:

The 26th, I'm in New York.

SECRETARY REGAN:

MR. WYLIE: Of March.

SECRETARY REGAN: While we're checking on the

The 26th of what?

12th —

it looks like the 12th will probably be all right —

one other item here that we-haven't disposed of, perhaps to

Mr. Coyne's satisfication and it is something that we should

at least answer, Senator Helms has written to us protesting

our selection of witnesses c.s being a stacked deck «— or words

to that effect —

MR. WYLIE:

Which way?

SECRETARY REGAN:

I think he thought it was anti-

gold, and that being the case, we tried to carefully point

out to him, in a follow-up letter, as we have to others,

that we went to all of you as members and asked for

suggestions.

11
You came up with some 4 0-odd names. We contacted
all of those names. We got an original list of witnesses,
then some had to drop out, and we finally came up with some
23 — was it — witnesses.
And we thought that we had a fairly careful blend
6

of points of view, and we went with that list and we spent

two days on it.

Now, you can see the difficulty that we're having
with getting dates for this Commission to meet, and time is

growing short —

yours secondly.

I'll give you my opinion first and seek

My opinion —• we have covered the waterfront

very well on getting a spectrum of points of view, but is

there a need in the opinion of the majority of those present

here today that we should have additional days of open

hearings and seek additional public witnesses?

Murray?

MR. WEIDENBAUM:

I share the Chair's view that

the witness list was extremely —

generously representative

of the widest array of serious writings on this subject of

every shape, size and variety, and I would suggest having

come to know the members of the Commission, we're all fairly

independent, tough minded thinkers and the exact number of

witnesses representing a particular viewpoint I don't think

is going to be a significant factor in the deliberations

Ill
of the Commission.
And the Senator's genuine concern that we be
apprised of the variety of important views on this subject —•
I think that concern has been fully met.
SECRETARY REGAN:

Mr. Coyne, do you want to speak

on this?
MR. WEIDENBAUM:
8

I see no additional need for

hearings.

MR. COYNE:

Sir, I simply was referring to the

letter itself rather than to my independent —

independent opinion I have as to the issue itself.

to any

I am deeply concerned by the proposition that

"these hearings invite the perception of there having been

stacked" and the statement "I do believe that the Commission

has a responsibility to give a full and fair hearing to the

issue."

And I am — my question was simply, how have we

answered this very relevant letter?

the issue of perception is important if, in fact, the final

conclusions of this Commission would be expected to be

meaningful in a future action.

It would seem to me that

It must be seen as having been fair and open and

if we're being told that it does not seem as such, I am

simply asking for discussion among tnis Commission as to

whether this, in fact, is valid or not.

112

SECRETARY REGAN:

Wall, I would •—• in answer to

2 your anxiety on this, I would point out that in addition, we
3 received 39 written communications which we sought, so that
4 anyone who wished to communicate with the Commission
5 certainly has had ample opportunity to communicate.
6

The 2 3 who were actual oral submissions got a full

and fair hearing, I think. We tried to be as generous with
8

our time as we possibly could.

We could point to

Dr. Schwartz' analysis of what was said there that could
10 indicate the wide variety of views, and that certainly we
11
12

tried to be as fair as we could in seeking witnesses.
And I would reply to the Senator, if it is

indeed the sense of this Commission, in this meeting, that

they have had in their collective judgment enough of a

judgment to arrive at their own thinking.

16 MR. COYNE: Mr. Secretary, inasmuch as statistical
17

inferences are being drawn from the suggestions of the

witnesses such as the table prepared in Dr. Schwartz'

material, the question of perception of stacking becomes

especially relevant.

And
21 I notice in Senator Helms' letter that he
22
23
24
25

says, "I proposed the names of 4 0 individuals with

113
substantial reputations in economics."
Now, I don't know who of the witnesses on
Dr. Schwartz — who appeared and, therefore, are on the
tabular matrix that has been prepared or economists who have
been suggested in this particular instance by Senator
6 Helms, but only saying — but I presume that if they all had
been asked and they all accepted, that the tabular
8 deductions would have been different.
I don't know how to answer the question, because
10 I don't know who was asked and who wasn't asked, and who
11 agreed to come and who didn't agree to come. I'm only
12 asking for a sense of this commission as to whether we
13 have, in fact, offered a fair and reasonable opportunity
14 for the diversity of" views to be expressed that are
15 appropriate and, if anything, have erred on the side of a
16 little bit more rather than a little bit less.
17 And if the sense of this Committee — I don't
18 know enough about it to have an opinion of my own. I'm
19 only concerned about the fact that there is a letter
20 dated November 12th, and I was concerned about whether that
21 letter has been satisfactorily responded to — that is to
22 say, has been responded to in such a way to satisfy
23 Senator Helms' anxiety.
24 SECRETARY REGAN: Mr. Jordan?
25 MR. JORDAN: I wouldn't give too much weight

114
to the people w h o came to give o r a l testimony as representative of the input we have had to consider.
We have all the written testimony of those who
were invited, a tremendous amount of other materials sent
to us. I probably have a two-foot high stack of material
6 related to this, including entire books, and most of the
material that we have received, especially -- almost all
8 of the unsolicited material has been in favor of some
return to a gold standard and linkage to gold.
10 And it's a enormous amount of material and I don't
11 think we're lacking from input, especially if you consider
12 that the representation of some of the members of the
13 Commission are here to hear oral testimony.
14 is suggested that they are more exposed to
It
15 pro-gold material if they're doing their reading than the
16 contrary.
17 SECRETARY REGAN: Congressman Wylie?
18 MR

« WYLIE: I think we've more than covered the

19
waterfront
and I would associate with that observation that
20 not only did we have 23 witnesses, but we have this
21 voluminous material and anybody who wants to read it can.
I22don't see how we can get any other position by
23 additional hearings. Frankly, I think every position has
24 been very well presented.
25
^nd while I'm soeakinc:, *<?& •vis*- -^arvaj v:^ *-ha

115
House Republicgn Clcr.krgeg. zr.A thg*r i v •* ^ e r * * ~ ~ •-«•>-•--. -•? ••-.
2

ache:.uiwd recess for February 10th through February 17th,

which involves the 12th of course.
SECRETARY REGAN:
in just a moment.

Do you want to talk on this date?

^ . PAUL:

No .

SECRETARY REGAN:
8

Congressman Paul, I'll come back

If it's not on the date, let's

interrupt here for a moment and go back to the dates and
settle those.

My own calender is clear, so I'm good for

February 12th.

and perhaps would it change the minds of the Senators were

they here as to their availability on February 12th?

Does this change the mind of the Congressman,

MR. WYLIE:

I can —

I'll fly in for the meeting.

I'm close enough, though, so that it wouldn't be an in-

convenience.

SECRETARY REGAN:

Well, I'd just as soon fix on

that date, if it's all the same to you, because I think no

matter what date we select, at least one, if not two, among

us is going to be not available.

past experience.

22
23
24
25

I've found that from

When you get a large group like this, there's no
way you're going to find a date that everybody can be there.
MR. WYLIE:

You had asked if Congress was going to

be in recess during that period and I just wanted to let you

116
know.
SECRETARY REGAN: I appreciate that, but I think
3 we'll just go with it any way, February 12th.
4 All right, now, one other point of business and
then to you, Mr. Costamagna, we told people submitting things
6 to this Commission, under date of October 2nd, 1981, at which
we said we would hold public hearings and invite written
8 views.
9 The public is invited to submit written statements
10 on matters being considered by the Commission, and we told
11 them who to address it to.
12 And we said, 20 copies should be provided for
13 circulation.
And
14 then, this is the key sentence, "such submissions
may be included in the Commission's report or
15
other
publications relating to the Commission's work."
16
We
17 did not promise they would be, we did not say
18
they
would not be. We said they may be included.
19
Congressman
Paul.
20 PAUL: Just out of curiosity, how many did we
DR.
receive
outside our 23 that attended. How many other ones?
21
22
SECRETARY
REGAN: Thirty-nine.
23
DR...
PAUL:- 39 others. Okay, all I can do is recall
24 request made, by, I believe, Mr. Lehrman, at the time
the
25
that
we would have a precise date and that thev would be —

117
and they would receive equal weight, whether they came in
2

and gave their report or whether they submitted in writing.

And to me the consensus was, as I recall, was that

it would receive equal weight and that to me would mean that
if we do combine these into a book, even if in a summary

form, they would be included as well?
SECRETARY REGAN: Yes.

8
9

And we gave them until November 30th to submit
and that's what we have received.

DR.. PAUL:

One more question, did all of us

receive all 39 of those copies?

some that I thought I should and I'm just curious if they've

all been sent out.

SECRETARY REGAN:

I don't recall receiving

They've all been circulated.

Do you want to ask one of your staff to check with cur

people on the files to make sure you have each and every

copy.

And the same thing goes for each of you, if you

want to go through a check of your own files to find out

if you have all 39, we'd be more than happy to submit

21 additional copies to you of any that are missing.
22
23

SECRETARY REGAN:

Okay, that's all the housekeeping,

Now, Mr. Costamagna, we're back to you on this question of

24 Senator Helms and the witnesses.
25 MR. COSTAMAGNA: Well, I think that was the

118
1

question that I asked w h e n w e d i d n ' t h a v e a quorum, a few

minutes a g o , w h e t h e r the tabular s u r v e y t h a t w a s taken of the

23 would give equal w e i g h t to the 39 w h o submitted papers,
and that could possibly b e the a n s w e r to Senator Helms.
And I see w e have this l i s t o f w r i t t e n submissions

of the 39 p a p e r s , this list that w e received from you,
Dr. Schwartz •—•

DR. SCHWARTZ:

As I indicated b e f o r e w h e n I

prepared the tabular summary for the w i t n e s s e s , it was not
10

my intention that this w o u l d b e p a r t o f the record.

simply w h a t I hoped to b e o f b e n e f i t to y o u .

12
13

It was

You may not have heard all these witnesses and
may not have had an opportunity to read the transcript.

But there's no reason w h y I c o u l d n ' t prepare a

summary for the 39 and maybe revise the summary for the

2 3 , and not distinguish the non-witnesses from the

witnesses, just maybe have an alphabetical listing that

would

—
MR. JORDAN:

M r . C h a i r m a n , I d i d n ' t find the

tabular summary at all interesting so I think it'd be no

harm at all to add the o t h e r 39 to i t .

22
23

(Laughter.)
MR

- COSTAMAGNA:

I do recall the original letter

that w e received from Senator H e l m s .

A n d i t had attached to

it a list of many names that he suggested —

excuse me

—

119
b-^.N-j.^.^ R^G.^,:
2
3

x can enlighten you a little

bit on til at.
He suggested the names.

Than, we as a Commission,

decided that the way to select the witnesses was for each of

the Commission members to submit names rather than just pile

up lists from interested parties
As it turned out, without having the precise
figures here, four or five, or ten percent of the names that
were on Senator Helms' list actually did appear.

10
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12
13
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So, I do think that there was adequate representation from among his.
MR. COSTAMAGNA:

I would presume that some of

the others are on this list.
SECRETARY REGAN:

It's possible that they're in

the 39. We haven't done "that, but we can do that, to check

to see how ~

heard from.

from among the 62, how many of his 4 0 we've

MR. COSTAMAGNA:

SECRETARY REGAN:

Thank you.
Okay, what else do we have then?

We've settled on dates. We've settled on how to reply to

Senator Helms. We've made many suggestions to

Dr. Schwartz as to how she should communicate with us

between now and the 3th.

24
25

We know that we're meeting on the 8th, and
we know that we're meeting on February 12th.

120
DR. SCHWARTZ: Just one final — excuse me,
2

Congressman Paul — I — what was circulated this morning

was an appendix — a proposed appendix of statistical

material for the report with a table of contents and a
5

sample series.

6 And I would appreciate hearing from you if there
are additional series that you believe that should be
8

included in this compendium, if there are some that you

think I should omit

10
If there's anything about the presentation that
11
bothers you or that you like, and if you'll let me know,
12
that'll also be of help to me in preparing this part of the
13
report
14

The idea is that this report should enable the

15 reader to be able to beco'me familiar with a very comprehensive
16 body of material relating to gold, historical, analytical
17 current, and so on.
18
SECRETARY
REGAN: Thank you. Congressman Paul?
19
DR. PAUL: Mr. Secretary, I have no desire to bring
20
these subjects up, but I'm a little bit interested in why —
21
one time I saw on an agenda the possible discussion of the
22
gold audit and the Olympic gold coins, but I see they're not
23
24
25

on the agenda now
Was there a specific reason why they were once on
and then off again?

121
SECRETARY REGAN:

I think that's my fault.

We got caught up in the Congressional process here, and the
currant status of the Olympic coins is that the Senate has
passed a bill, yesterday, or the day before, calling for some
25 gold coins to be struck by the Mint honoring the Olympics.
These are to be coins of the realm.

These are to

be of such quality not designed generally for circulation,

but mainly for collectors.
The proceeds of this to go to the —

over and

above the Mint's costs —

to go to the Los Angeles Olympic

Committee and any proceeds or any profits that they make to

be passed on to the United States Olympic Commission.
The Treasury objected to the amount of the designs

13
14

of that saying that 25 different designs of coins was, we

thought, a bit much to out it mildly.

And, we, instead, suggested 17. We understand

the House now will hold hearings on that in January, and

they will come to grips with the subject.
So, since this was going through the Congressional

19
20

process, we decided we wouldn't bring up the subject here.

But for your information, the —

wishes to appear as a witness before the House might be

I know that any one who

23 welcome.
24
25

But the —

as far as gold coins are concerned, they

called in the Senate Bill for four $50 and four $100 gold

122
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oi-ces of separate design.
*" x. A will have a bill that will
The House we understand will hav.
, two S50 and two $100 gold coins, each of separate
call for two sou <"iu.
^n also calls for some eight $10
design. And the House bill also
silver nieces and one $1 silver piece.
i -n r*lls for 16 $10 coins, silver
The Senate bill calls ror
• rH^r-nce between the two. And
coins. That's the m a m difference
* ^^dincr procedures and the like.
then there's some type of bidding pro
Yes?
MR. COYNE: Mr. Secretary, without wishing to ask

10
What

will certainly sound like an absurd question, but

11
• ciw sav. and technically, will these coins
12 just for curiosity saK.e, anu
J i-i^^ £*r& values become part OJ. tne
13 which will have dollar -ace r a u ,
14monetary aggregate?
15SECRETARY REGAN: Thev will h^.ve to be. They're
16coins here, and if a collector ware to braak up his
17

collection and circulate these, certainly.

MR. COYNE: And, therefore, the United States

Government is, in affect, putting in a bid for gold based

on $103 an ounce.

SECRETARY REGAN: They have to take gold out of

the gold stock and actually strike these coins if the

Congress goes this way and the President signs that bill.

MR. COYNE: Right. And ~

SECRETARY REGAN: This would call for the —

123
1

I think tha issuance of these coins, one set early on in

'33 and another late in '33 and another early on in '84.

MR. COYNE:

I see.

Technically, just for

curiosity and humor's sake, in affect, therefore, to the

extent that a $100 gold coin containing once ounce of gold —

I don't even know whether that's the case — would be in
circulation.

8
9

And to that extent, the Government would become
a buyer of gold at $100 an ounce?

To the extent that

any one chose to —

SECRETARY REGAN:

We're issuing at that.

not sure we'll buy it at that.

secondary market will exist —

MR. COYNE:

I'm

I'm not sure where the

But buy it in the sense that it is

legal tender — whatever that means —

ounce gold coin with a face value of $100 an ounce —

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20

SECRETARY REGAN:

Could get $100 in greenbacks,

yes.
MR. COYNE:

Even if the price of gold at the time

were $30 an ounce?

SECRETARY REGAN:

MR. COYNE:

a holder of a one

Or $600.

Well, yes, but in that case you

wouldn't exercise the option.

SECRETARY REGAN: Perhaps.

GOVERNOR PARTEE:

I have a description of this in

124
my material and I have the impression that it will be the

2 opposite, that is, the coin — you'll pay about $800 for
$400 worth of gold.
SECRETARY REGAN: Well, by the time the market —
5 I'm just answering your specific question.
6 What the marketing people who market this — and
this will not be the Treasury of the United States that will
8 be marketing these — it'll be a private organization, after
competitive bids, who will be marketing these — what they
10 will charge for these —
11 MR. COYNE: Only on the fact that, in fact, there
12 is an obligation as legal tender to take back the coin
13 for U. S. currency at a fixed relationship between the dollar
14 and the coin.
15 And even though it would seem unlikely that the
16 price of gold — you say $100 an ounce — all of our lives
17 have been filled with unlikely events in recent decades.
18 SECRETARY REGAN: We don't know the content of
19 the gold coin yet, though.
20 If the content were l/10th of an ounce, it would
21 be something else again.
22 MR. COYNE: All right. I'm not suggesting the
23 likelihood of gold going to $100 an ounce, I was only asking
24 the question for intellectual curiosity and humor.
25 SECRETARY REGAN: Congressman Paul, does that

125
^ g. --L ^

R. °AUL:

\'as, I t'-ink that gg-l^: - • - - - ^

subject came up and wh" it was removed. I didn't r*»?ll«'
egpect to get into a discussion —
SECRETARY REGAN: I d-n.' t think th~t this is th«
proper *orum to discuss that when the Congress was holdinghearings on the subject.
8 DR. RAUL: And on the gold audit, I believe, one
ti^e vas on the agenda, too.
10 SECRETARY REGAN: "ell, a oaoer describing that
11 gold audit was circulated and we heard nothing from any of
12 the Commission members asking that it put on for discussion,
13 they accepted the report as issued.
14 r-Te could out it on for discussion if you so
15 desire.
16 DR. PAUL: I thin!: it would be worthwhile.
17 SECRETARY REGAN: Okay? Anything else?
18 (No response.)
19 Well, then, since we do have a quorum I'll ento.1-20 tain a motion to adjourn.
21 MR. WEIDEMRAUM: "Tell, Mr. Chairman?
22 SECRETARY REGAN: Yes?
23 *Tn. WEIDE'T33iT*M: Is there something the staff
24 could do to insure the nromot attendance of a quorum 't fn^.
25 start of the next meeting —

SECRETARY REGAN:

Absolutely nothing.

We have very independent Commission members.
And short of dragooning them — and heavens, I would never
think of dragooning a member of the Federal Reserve or
otherwise.
6 (Laughter.)
SECRETARY REGAN: The meeting is adjourned.
8

Thank you very much, gentlemen.

(The meeting was adjourned at 2:50 p.m.)

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TO/las
U N I T E D STATES D E P A R T M E N T OF T H E TREASURY

- - - - - - - _ _ _ ,
Seventh Meetincr
of the
GOLD COMMISSION

x- - - - - -

- - -x

M o n d a y , March 8, 1982
Dept. of Treasury
Cash Room
15th and Pennsylvania A v e
Washington, D . C.
The m e e t i n g in the above-entitled m a t t e r
w a s convened at 1 0 : 0 0 a.m.

Diversified Reporting Services, Inc.
P.O. S O X 23982
W A S H I N G T O N . D.C 20024
(202) 867-6638

Commission Members:

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Secretary Regan
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Congressman Neal
Dr. McCracken
Mr. Lehrman
Dr. Jordan
Senator Jepsen
Senator Dodd
Mr. Coyne
Mr. Costamagna
Governor Partee
Congressman Paul
Congressman Reuss
Governor Rice
Senator Schmitt
Governor Wallich
Chairman Weidenbaum
Congressman Wylie

P R O C E E D I N G S
2

SECRETARY REGAN: I am assured a quorum is present,

so I want to welcome everybody to the Seventh Meeting of this

Gold Commission. I thought we made very good progress at our

last meeting, with an agreement on quite a set of
recommendations.
Today, we have three items to consider. First of

all, Congressman Paul's proposed recommendations regarding
emergency powers with respect to private gold holding,'which

10 we agreed at the last meeting we would discuss today. You have
11 a Treasury Legal Memoranda on this.
12 Secondly, a draft of our report — we know have a
13 complete draft including revisions to all chapters except
14 Chapter 4; and then, how to proceed after this meeting.
15 We'11 need to decide whether a further meeting will
16 be needed to approve final changes; and, in any case, we'll
17 need to have a definite schedule for the final revisions and
18 approval.
19
20 month.

As you know, our report is due on the 31st of the
We have to be certain to get it there on time, which

21 would mean that sometime around the 26th or so would be
22 probably the final sign-off date in order to have it printed
23 and to the Congress on the due date. So, we will have to be
24 very careful on that.
25 I think what we should do on that is just to keep

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that in mind, see how much progress we can make this morning

on various items and then, at the start of our afternoon
session, decide how we will proceed; whether to have another

meeting or whether we can do it by correspondence or what.

If that's agreeable with everybody, I propose that

we get on with our agenda. All right, now the first item on

the agenda is Congressman Paul's proposal that the Commission

recommend repeal of the authority to compel delivery of gold
to the Treasury under economic emergency conditions.

10 Congressman Paul, would you open the discussion?
11 CONGRESSMAN PAUL: Thank you, Mr. Chairman.
12 It has been my understanding that the power of the
13 Secretary of the Treasury to take in gold or require its
14 delivery to the Treasury has not been explicitly repealed.
15 I have felt that it would be wise for us as a
16 Commission to at least make the recommendation that this be
17 the case, since several times it has been implicitly repealed
18 in that the government has no longer deemed it necessary to
19 have this power.
20 This would require changes,. I believe, in three
21 different areas; the Gold Reserve Act; the Federal Reserve
22 Act; as well as the Trading with the Enemy Act.
23 I would just like to get the Commission to commit
24 themselves one way or the other on it.
25 SECRETARY REGAN: Does anyone want to speak to that?

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1
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DR. McCRACKEN:

May I ask a question?

SECRETARY REGAN: Certainly.
DR. McCRACKEN: What would be the status of this
kind of thing in case of, for example, some kind of military
emergency even if these actions were taken, would the
President still have, under the War Powers Act or something,
the capability to do this, if for some reason it were

necessary?
CONGRESSMAN PAUL: My understanding is that if you

repealed the power in all three, including the Trading with

11 the Enemy Act, that this would eliminate the power of the
12 President to do so, which would be my intention. I would
13 think it would be unnecessary for a government to have this
14 power and I think it should be repealed.
15 I think that those who have come to the conclusion
16 that gold is no longer money should definitely agree with
17 this, as well as those of us who believe gold is money.
18 DR. McCRACKEN: Thank you.
19 GOVERNOR RICE: Mr. Chairman, I would just speak
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briefly against the proposed additional recommendation.
SECRETARY REGAN: All right.
GOVERNOR RICE: It seems to me that that part of
the President's war power is a handy thing to have. One
remembers that gold was useful in a row-boat off the harbor
of Algiers when we were engaged in a conflict.

If the Treasury and the Federal Reserve, pursuant

1
2

to other action, had depleted its gold stock, I wouldn't want

President Reagan, in time of war, to be without that power.

So, I'll have to. vote no.

SECRETARY REGAN: Do you have any opinion,

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8
9
10
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12
13

Congressman Reuss, regarding the 1933 and '34 provisions?-."-The
Treasury brief —• as I read it, it seemed to indicate those
had already been repealed by practice and overtaken by other
things. I didn't know whether you had any view on that.
CONGRESSMAN REUSS: As I read the Treasury Legal
Memo, and that's all the law I know on this, they — that
memorandum suggested that the power of the President in time
of war or emergency to compel the delivery of gold so that it

14 can be used in the public interest in the war, is still on
15
16

the law books.
Indeed, I gather from Dr. Paul that he agrees with

17 that.

That's why he's proposing that that be amended,

18 position is that that would not be a good amendment and we
19 should vote not.
20 SECRETARY REGAN: Governor Partee?
21 GOVERNOR PARTEE: Well, my understanding, Mr.
22 Chairman, from the Legal Memo is that '— perhaps we ought to
23 talk about it in terms of the three citations in the Legal
24 Memo, if that would be acceptable to you.
25 The first one, 12 U.S.C. 248(m) is still there, but

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it's not enforced because of the overriding law changes.

The second one, 31 U.S.C. 315(b) has been repealed; and

the third one is the War Powers Act.
I don't have any feeling about the first. If it's

still on the books and it's been overturned by a subsequent

law, why it seems to me we could take it off; we could strike
it with no difficulty.

But, I would certainly be opposed to doing away
with the authority of the President under the War Powers

Act because even as a commodity, it seems to me that the —

in the extremity of a war, the President ought to have the

opportunity to mobilize any commodity in the country,

including gold.

CONGRESSMAN PAUL: Mr. Chairman, I understand the

argument for this, but also I understand that the basic

reason for this is that gold is the universal money and that

this represents power and it represents the ability of

government to transact, especially under emergency conditions.

But, I think this contradicts every argument against

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gold as being money. If this is the case, that it's a war
powers issue or a special commodity, why don't we worry about
the other commodities?
It seems to me that every businessman must deliver
to the Treasury uranium in a time of war as well as tin or
silver or aluminum or whatever. I think that it's totally

8
unnecessary; I see that if we truly live in a free country,
even under the conditions of war, the free market and the
3

privilege of dealing with gold, then gold should be something

that should be protected then as well.
I think that we sort of counter ourselves if in

one breath we say that the American people have some freedom,

but we can suspend it, you know, there are times — and

unfortunately, there are times when we do the same thing
with the First Amendment. We suspend those privileges, too.

That's not the intention of the Constitution. The

11 right to speak out and use freedom of speech in a time of war
12 is still as sacred as it is in a time of peace.
13 The right to own gold and the right to retain this;
14 if there's always a threat in a time of war, we're just really
15 not delivering to the people the amount of freedom and
16 protecting that freedom that I think they deserve.
17 SECRETARY REGAN: Does anyone else wish to speak?
18 CONGRESSMAN WYLIE: Yes.
19 SECRETARY REGAN: Congressman Wylie.
20 CONGRESSMAN WYLIE: My initial reaction is that
21 this may indeed be beyond the charge which Congress gave us
22 as the Gold Commission, to get into this issue as to whether
23 the statute should be repealed.
24 But over and beyond that, Mr. Secretary, I have a
25 lot of confidence in your judgment in emergency situations.

IBS, fan.

It seems to me as if Governor Partee made a good argument,
that we may need to marshall all of our resources in a time
of an emergency. Gold is not just another commodity as
evidenced by the meetings that we have had here and the fact
that Congress has decided it's not just another commodity.
6

So, I think that we ought to leave it pretty much

where it is. Thank you.

SECRETARY REGAN: Thank you. Incidentally, wouldi

you talk to a point for just a few moments for my edification

again, about these '33 and '34 provisions as to whether they

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have already been repealed and whether or not, if this
Commission wished to specifically repeal '33 and '34, or
recommend that '33 and '34 be repealed, we could do that and
split that off from the War Powers?
LEGAL COUNSEL: Yes. The two provisions that were
enacted as part of the overall legislation to terminate the
domestic gold standard for the United States; the first one
was part of the Emergency Banking Relief Act of 1933.
That essentially provided that the Secretary of the
Treasury, in his-discretion, can withdraw gold coin, gold

bullion, other forms of gold, from circulation and pay other
21

forms of legal tender in exchange for the gold that was
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delivered to the Treasury.
In 1934, as part of the Gold Reserve Act of 1934,

a provision was included that mandated that all gold coin be
25

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[IRS, Inc.

10
withdrawn from circulation.

The 1933 statute, in our view,

has been repealed implicitly by the statute that was enacted
in 1974 to again permit American citizens to own and hold
gold.
In our view, the two statutes would be totally
6

inconsistent and therefore, the latter statute impliedly
repealed the former. That view is also consistent with the

opinion of the Law Revision Council of the House of
Representatives that presently is reviewing all of Title 31

of the United States Code in order to simplify it and recodify

it.
There is presently a bill pending that would

12
13

codify Title 31 and this provision would be deleted as having

been already repealed by the 1974 legislation.

Similarly, the 1934 provision, which appears at

31 U.S.C. 315(b) which said all gold coin is withdrawn from

circulation, in our view was a one-time provision and applied

only to such gold coins as remained outstanding on January 30,

1934, and no longer has any legal effect.

That conclusion is also supported by the Office of

the Law Revision Council and 315(b) is deleted from their

revision of Title 31 of the Code as it's proposed to be

codified.

These two issues are very separate and distinct

from the question of the President's war emergency powers that

11
1

are contained in the Trading with the Enemy Act.

provisions were reviewed in 1977 by the Congress in their

I think it was more than three-year review of the War

Those
—

Emergency Powers of the President.
It was retained solely with respect to circumstances
where there was a war declared by the Congress, limited to
the specific provisions; that is, the importing, exporting,
8

hording, melting or earmarking of gold coin or bullion.
In other words, it's not a categorical authority to

withdraw gold from circulation, but only the authority to

withdraw it in order to investigate, regulate, prohibit any

transactions in foreign exchange transfers of credit or pay-

ment between, by, through or to any banking institution and

the importing, exporting, hording, melting or earmarking of

gold or silver coin or bullion, currency or securities.

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the President in times of war.
SECRETARY REGAN:

Thank you.

Which came first

here; the granting the citizens the right to hold gold again
and then looking over.the President's emergency war powers?
That's correct.

LEGAL COUNSEL
SECRETARY REGAN:

In 19

—

In other words, the Congress had

passed one rule first and then had that in mind at the time

that it passed the second one?

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So, it's a very limited power that is retained for

LEGAL COUNSEL:

At the time that they reviewed and

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12
then retained the pre-existing wartime authority.
SECRETARY REGAN: Thank you. Chairman Weidenbaum,
3

did you have your hand up?

CHAIRMAN WEIDENBAUM: Yes, Mr. Chairman.
I'd like to underscore Congressman Wylie's point.
As I look at this esoteric provision, in light of all of the
urgent policy questions facing the United States, this

doesn't strike me as having the kind of priority that warrants
a Commission's recommendation.

10 Under the circumstances, I would oppose and vote in
11 the negative, should a formal motion be made.
12 GOVERNOR RICE: Question, Mr. Chairman?
13 SECRETARY REGAN: I would ask for a role call.
14 Let's see if we can phrase the question. Congressman Paul,
15 since this was your proposal, do you want to phrase or frame
16 the proposal for us?
17 CONGRESSMAN PAUL: That the Commission repeal all
18 laws that grant the authority to require the delivery of gold
19 to the President.
20 GOVERNOR RICE: Roll call, Mr. Chairman.
21 SECRETARY REGAN: Would you call the roll, please?
22 GOVERNOR RICE: Mr, Castamagna?
23 MR. COSTAMAGNA: No.
24 GOVERNOR RICE: No?
25 MR. COSTAMAGNA: No.

13
GOVERNOR RICE:
DR. JORDAN:

Mr. Jordan?

I have Senator Dodd's proxy which I

send to the Chairman. Senator Dodd votes no.
SECRETARY REGAN:

Did Mr. Coyne give his proxy

to anyone?
6

DR. McCRACKEN:

No.

SECRETARY REGAN:

DR. JORDAN: No.

SECRETARY REGAN: I take it, Dr. Jordan, you have

He did not; okay.

Senator Jepsen?

10 Senator Jepsen's proxy?
11

DR. JORDAN:

Yes, I do.

SECRETARY REGAN: Mr. Lehrman? Dr. McCracken?

DR. McCRACKEN: No.

SECRETARY REGAN: Congressman Neal? Governor Partee.

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GOVERNOR PARTEE: No.
SECRETARY REGAN: Congressman Paul?
CONGRESSMAN PAUL: No.
SECRETARY REGAN: Congressman Reuss?
CONGRESSMAN REUSS: No.
SECRETARY REGAN: Governor* Rice?
GOVERNOR RICE: No.
SECRETARY REGAN: Senator Schmitt?
DR. JORDAN: No.
SECRETARY REGAN: Governor Wallich?
GOVERNOR PARTEE: No.
SECRETARY REGAN: Governor Wallich's proxy has been

14
1

given to Governor Partee.

CONGRESSMAN REUSS:

What about Senator Schmitt?

DR. JORDAN: I have his proxy also; I have a letter,

SECRETARY REGAN: You have his proxy also?

DR. JORDAN: Yes.

SECRETARY REGAN: Okay. Chairman Weidenbaum?

CHAIRMAN WEIDENBAUM: No.

SECRETARY REGAN: Congressman Wylie?

CONGRESSMAN WYLIE: No.

SECRETARY REGAN: Did I get your own vote, Dr.

11 Jordan?
12

DBS, Inc.

DR. JORDAN:

No.

SECRETARY REGAN: And the Chairman votes no.

Now, does anyone want to propose a split-off here?

That is, that we positively revoke '33 and '34 if it hasn't

already been superceded and the wartime powers kept?

CONGRESSMAN REUSS: Mr. Chairman, I think the

matter has been exhaustively researched by Treasury Counsel

and the House Counsel.

Why don't we simply note that those are dead horses,

and it's not necessary to kill them again?

SECRETARY REGAN: f33 and *34?

CONGRESSMAN REUSS: Yes, sir.

SECRETARY REGAN: Congressman Paul?

CONGRESSMAN PAUL: I propose that we have a vote on

15
1

the repeal of '33 and '34 provisions to call in the gold.

CONGRESSMAN REUSS: I ask for a roll call vote on

the motion that we have a vote on killing the already dead

horse. I ask that the Clerk call the roll.

SECRETARY REGAN: The vote will be on whether or

not we should have a vote on whether or not to repeal the

'33 and '34. Mr. Costamagna, are you ready to vote?

MR. COSTAMAGNA: Yes, sir.

SECRETARY REGAN: How do you vote?

MR. COSTAMAGNA: No.
SECRETARY REGAN:

11
12

CONGRESSMAN REUSS:

SECRETARY REGAN: Senator Jepsen?

DR. JORDAN:

SECRETARY REGAN:

DR. JORDAN:

SECRETARY REGAN:

(No response.)

21
22
23

Senator

Dodd?

DBS, Inc.

Mr. Coyne is absent.

Senator Dodd votes no.

Yes.
Dr. Jordan?

Yes.

SECRETARY REGAN:
DR. McCRACKEN:

Mr. Lehrman.

Dr. McCracken.

No.

SECRETARY REGAN:

Congressman Neal

(No response.)

SECRETARY REGAN:

Governor Partee?

GOVERNOR PARTEE: Yes.

16
1

SECRETARY REGAN:

Dr. Paul?

CONGRESSMAN PAUL: Yes.

SECRETARY REGAN: Congressman Reuss?

CONGRESSMAN REUSS: No.

SECRETARY REGAN: Governor Rice?

GOVERNOR RICE: No.

SECRETARY REGAN: Senator Schmitt?

DR. JORDAN: Yes.

SECRETARY REGAN: Governor Wallich?

10 GOVERNOR PARTEE: No.
11 SECRETARY REGAN: Chairman Weidenbaum?
12 CHAIRMAN WEIDENBAUM: Yes.
13 SECRETARY REGAN: Congressman Wylie?
14 CONGRESSMAN WYLIE: No.
15 SECRETARY REGAN: The Chair votes yes.
16 We have a tie — seven to seven.
17 CONGRESSMAN REUSS: I suggest we now move on to the
18 next item on the agenda.
19 SECRETARY REGAN: Since there is a tie, the motion is
20 automatically defeated and we will go on to the next item,
21 the next item being a review of the Commission report.
22 Now, we circulated this morning a revision of
23 Chapter 2 on historical experiences with gold. It reflects
24 comments Dr. Schwartz received from the Commission members.
25 Now, with this chapter, the Commission has received drafts of

BBS, Inc.

J. /

the entire report, including revisions of the introduction
and recommendations and Chapters 1 through 3.
This will be the first opportunity for comments on
Chapter 4, dealing with existing gold arrangements, proposals
for change in the gold market. I suggest we proceed section
6

by section, to see whether there are major comments or problems
with the report.

As we've done earlier, I think detailed or technical
drafting suggestions can be conveyed directly to Dr. Schwartz

or to the Treasury Staff. This will have to be done very

11 quickly following this meeting.
12 So, let's start with the prefatory material and
13 the annex describing the Gold Commission's permanent record.
14 This material contains a draft transmittal letter from me as
15 the Chairman; a title page which we plan to have printed dark
16 blue or light blue; and a list of Commission Members and an
17 acknowledgement of Dr. Schwartz's contributions to the
18 Commission's work and a table of contents.
19 CONGRESSMAN REUSS: It's all good stuff. I suggest
20 we approve it.
21 SECRETARY REGAN: My goodness. This is the first
22 time we've had to vote by voice. Any objections to any of
23 this material?
24 (No response.)
25 SECRETARY REGAN: All right. I'll assume, then —

DBS, Inc.

Governor Partee?
GOVERNOR PARTEE:

I almost hesitate to bring this

up, Mr. Chairman, but in your transmittal letter, the last

paragraph refers to the historic role of gold in the United

States — relating to the monetary use of gold, the economic
of
usegold. That is not my view of the principal affair.
I think the economic use of gold would be a better

use and I think that's important enough to bring it to the
attention of the Commission.

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SECRETARY REGAN: I think that's an improvement.

What word would you suggest?

GOVERNOR PARTEE: Economic stability.

SECRETARY REGAN: Economic stability?

GOVERNOR PARTEE: Yes, economic stability.

DR. McCRACKEN: Mr. Chairman?

SECRETARY REGAN: Yes, Dr. McCracken?

DR. McCRACKEN: I think I would not object to adding

economic instability or something like that, but I think our

representatives at the Federal Reserve are a little unduly

touchy, t would retain it.

SECRETARY REGAN: Does anyone else wish to comment?

CONGRESSMAN REUSS: There's the best suggestion of

all — let's go with that.

GOVERNOR PARTEE: I would accept the monetary and

economic stability.

19
1

SECRETARY REGAN: Monetary and economic stability.

All right, with that addenda, we'll then assume that all of
those things have been accepted.
We will then go on. I've got the annex in there

and I think that's sufficient and so forth. Now, for the

Introduction and Recommendations, Dr. Schwartz has prepared a

revision incorporating all of the recommendations agreed to

at our last meeting.
Before I ask for comment on this, I would remind the

10 Commission that Governor Partee has circulated a note suggest11 ing that Members may want to identify their individual points
12 of view by means of footnotes for their views on some
13 individual points, pointing out that some of the recommenda14 tions represent the views of only one or two members.
15 We've had some discussion of these questions at
16 earlier meetings and we do now have to decide how to proceed
17 on this. So, I'd like the Members to comment on Governor
18 Partee's suggestions as well as the substance of this section
19 of the report.
20
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22
23
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Chairman Weidenbaum?
CHAIRMAN WEIDENBAUM: I saw some merit in
Governor Parteefs memorandum to the Commission, because on
reflection, I don't think we made a sufficient distinction
between the recommendations of the Commission and dissenting
votes. In other words, calling majority and minority

20
recommendations elevates the dissenting votes and, if
anything, denigrates the recommendation of the Commission.
In retrospect, we now frankly have the benefit of
hindsight.

In retrospect, I would think it would have been —

and it might not be too late to make the modifications, I'm
not sure.

It might have been better to focus on recommenda-

tions of the Commission with the understanding that any
8

Member of the Commission jointly or individually write a
dissenting note to that recommendation.
CONGRESSMAN REUSS:

10
11

I would associate myself with

Chairman Weidenbaum and Governor Partee on that.

SECRETARY REGAN:

CONGRESSMAN REUSS: Yes.

CONGRESSMAN WYLIE:

SECRETARY REGAN:

CONGRESSMAN WYLIE:

SECRETARY REGAN:

You associate with that?

So would I, Mr. Chairman.

And so would you?
Yes, sir.

I think then that there is a

general consensus that where an individual wishes to insert a

19 personal footnote, that they be done; but remember that
20 Governor Partee also said he'd qualify those footnotes within
21 reasonable bounds.
He proposes that our comments be fifty words per

22
23

recommendation or less as one would have it.

I would just

24 have that as an admonition from Governor Partee to the rest
25 of us.

DBS, be

21
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GOVERNOR PARTEE:

I would think, Mr. Chairman,

that there would be goodly footnotes on which it's conceivable

to me that a number of Members might be prepared to join. So,

if we can have —
SECRETARY REGAN: Again, I think Dr. Schwartz would
have to be the coordinator of that type of thing.
DR. SCHWARTZ: The thing is you would have to do

this immediately; you couldn't put this off until sometime
next week.

It would have to be in my hands, at the latest, by

next Monday. So, if you are going to have some joint state-

ments of dissent, you'd better get together immediately.

SECRETARY REGAN: May I suggest this also, Dr.

Schwartz, that if you have two or more Members submitting

the same minority footnote, that you contact them and suggest

that they join.

DR. SCHWARTZ: Yes. That would be possible also.

This means that we will no longer describe what's now called

a "majority recommendationn in those terms; it will be the

recommendation. Then there would be a footnote attached to

it which will identify those who dissent.

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CHAIRMAN WEIDENBAUM: A motion to that effect needs

to be introduced.

DR. SCHWARTZ: That's right.

GOVERNOR PARTEE: I so move.

22
SECRETARY REGAN:

You so move.

Would you please

frame whatever motion it is that you're introducing so that
we all know what the motion is?
GOVERNOR PARTEE:

The motion would be that the

format of the Commission's chapter on recommendations be
6

revised to show not majority and minority recommendations,

but simply the Commission's recommendation on a matter with

then the capability for any Member to footnote the
recommendation and to show dissent from that recommendation

and reasons why the dissent is cast in a reasonable length

11 of space, say, around fifty words.
12

SECRETARY REGAN:

DR. McCRACKEN:

SECRETARY REGAN:

15 call for a show of hands.

Did you all hear that?
I second that.
Dr. McCracken seconds it.
All in favor?

(Show of hands.)

SECRETARY REGAN:

(Show of hands.)

SECRETARY REGAN:

CONGRESSMAN REUSS: Mr. Chairman, we now come, I

Opposed?

That's carried unanimously,

believe, to the. Introduction and Recommendations and I have —

SECRETARY REGAN:

Yes.

CONGRESSMAN REUSS:

some suggestions on that if

24 they are in order.
25

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I'll

SECRETARY REGAN:

Please proceed.

23
CONGRESSMAN REUSS;

The first one would be on Page

10 of Recommendation Number 2, on which I would like a little
debate and vote.
The tentative recommendation says, "We favor
Treasury issue of gold bullion coins of specified weights
and without dollar denomination or legal tender status to
be manufactured from its existing stock of gold and to be
8

sold at a small mark-up over the market value of the gold
content and recommends that the Congress implement this

proposal

"Furthermore, we recommend that the coin shall be

exempt from capital gains taxes and that the coins shall be

exempt from sales taxes."

In my view, Mr. Chairman, that is not a wise

recommendation and it should be deleted.

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DR. McCRACKEN: You're talking about the final
sentence or are you talking about the whole thing?
SECRETARY REGAN: Or the whole recommendation?
CONGRESSMAN REUSS: Well, the whole recommendation,
although I would intend, in the event that the whole recommendation is not stricken, to ask that the capital gains tax and
the sales tax exemption be the subject of an additional vote.
I'll be very brief. My view is that the whole
thing taken together sets up a competitive coinage, as Dr.
Schwartz'' report indicates. A great many people view this as

24
V

money, as a competitive coin with the dollar.

the House Banking Committee, who have studied the proposal,

are appalled at the suggestion that this be freed from the

capital gains tax.

The Members of

They point out, as do editorials in most of

America's leading newspapers, that you could hardly deal a

sharper blow to the market and stock equities than to say that

he who invests in a productive investment has to pay a twenty
percent capital gains tax, but he who speculates in gold,

10
11

Equally, at a time when the government is imposing

more and more fiscal duties upon the states to prevent them

from levying a sales tax on a gold bullion coin is to deplete

the one tax which they have which might conceivably enable

them to bridge the gap.

On February 25, Mr. Chairman, Congressman Wylie

and I wrote you, saying we submit the enclosed statement by

thirty members of the House Committee on Banking, Finance,

and Urban Affairs on the recommendation we're talking about.

We shall appreciate your making it available to all Gold

Commission Members.

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denominated as the gold bullion coin, is home free.

I'm not angry, Mr. Chairman, but a little hurt that

you didn't do that; that the Gold Commission staff, on March 1,

four days later, saw fit to distribute by weight of several

pounds of gold block material circulated by our friend,

25
1

Mr. Lehrman.

whelming majority of the members of the House Banking

Committee who must act on this legislation was disregarded.

But, the two little pages signed by the over-

I ask my staff now to make available on this day of
March 8th, the statement by the thirty good men and true
saying "Out with it. We wouldn't consider this recommendation. We oppose the Gold Commission's recommendation", say
8

the members who are bipartisan, who include the leadership on
both sides of the aisle, and who end up strongly urging the

Gold Commission to repair the damage it is causing.

I personally believe that the sell-off on Wall

Street is, in part, due to that improvident recommendation of

February 12th. Withdraw it, they say, while there is still

time to do it.

They go on to point out that the effects of the

sales tax prohibition on the states will be devastating. The

effects on monetary management of a new coin without legal

tender status can lead only to confusion.

They ask why, at this time, should we do further

damage to the nation's already weakened securities markets

by doing in the capitals gains tax?

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25

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In short, say the great majority of members of the
House Banking Committee, no purpose is served by the Gold
Commission's recommendation other than to appease the gold
lobby.

26
1

Now, let me just talk very frankly about that.

This whole Commission was set up because of the leadership

among the gold group, such as our friend Senator Helms of

North Carolina. No doubt about it — he introduced it in the
Senate and, as the manager of the IMF legislation for which
the Treasury was duly grateful, I as manager had to accept the
Gold Commission in order to get the International Monetary

Fund legislation through.
Last October, Senator Helms co-sponsored the bill

DBS, Inc.

S-1.704 with Senators McClure, Goldwater and Sims, which is

the precise model of this February 12th recommendation. It is

for a gold bullion coin exempt from capital gains taxes and

exempt from sales taxes.

After the books, a fact unknown to me was printed in

the press; namely, that the largest political contribution in

the history of politics — $4.6 million — was made by

Senator Helms' National Congressional Club to the campaign of

Mr. Reagan. It's perfectly legal, but it indeed suggests, as

the great majority of the members of the Banking Committee

have suggested — that this recommendation is simply an effort

to appease the gold lobby.

For all of these reasons, I ask for a vote on whethei

to adopt this proposal. I was heartened, incidentally, by

the fact that the caster of his own and several other crucial

votes in favor of this mischievous provision at the

27
February 12th meeting, our friend, Mr. Jordan, in his testimony six days later before the Joint Economic Committee,
indicated that he perhaps didn't know what he was voting
on, because he said repeatedly before the Joint Economic
Committee that he felt that all that that recommendation was
6

doing was to ask Congress to consider whether to get out this

kind of a tax exempt gold coin.

In fact, the recommendation says, "We favor it and

9
10
11
12
13
14

we recommend that Congress implement this proposal and further
we recommend that the coin shall be tax exempt", et cetera.
So, I would hope that Mr. Jordan would take the
opportunity that I'm now making available to vote against
the proposal. I think there's a good opportunity now for us
to improve the report so that we don't do something that we
would regret and which, in any event, doesn't have the

15
slightest chance of being considered by the Congress.
16
17

Thank you,
SECRETARY REGAN: First of all, I want to apologize

18
to you, Congressman Reuss. Apparently, that happened
19
somewhere in the Office of the Secretary that this was not
20
distributed. We are unable to ask you at this moment; it was
21
purely unintentional. I think it's one of the few things
22
that we haven't picked up and circulated.
23
CONGRESSMAN REUSS: That's clearly accepted and
24
that will be the last you hear of it. It is now before us
25

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28
1

and, as I say, there is the 75 percent of the House Banking

Committee. Now, 75 percent of the House Banking Committee can

be wrong, but I ask Members to look at the merits of this.

I hope that Members, on second thought, will agree
that this is indeed a mischievous recommendatation and should

not be honored.
SECRETARY REGAN: Dr. McCracken, you are first;

then Congressman Wylie; and then Dr. Jordan.
DR. McCRACKEN: Well, Mr. Chairman, it seems to me

I asked Congressman Reuss initially whether his comments were

11 directed at the final sentence of this recommendation or at
12

all of it.

Your response was all of it, as I understand it;

14 however, —
15 CONGRESSMAN REUSS: I would intend to get at the
16 second sentence, because that's the worst of it.
17 DR. McCRACKEN; Well, it does seem to me that in
18 this reconsideration, we ought to think not in terms of the
19 two sentences as a block but focus specifically on this
20 question of exemption from taxes.
21 As I read the statement here which Congressman Reuss
22 has now circulated, rather quickly, it seems to me a
23 reasonable interpretation that the major concern has to do
24 with the tax issue and, indeed, the basic question of whether
25 there should be such medallions or whatever they are called,

DBS, fas.

29
1 is largely disposed of by a rhetorical question at the top
2

of page two. The substance of the statement, in other words,

is directed at the exemption from taxes.

I think that's a reasonable interpretation of

this statement.

CONGRESSMAN REUSS: Reasonably reasonable, but I

have to say that that rhetorical question on the top of page

two is for real.
We do not see the wisdom of getting out a coin

10 called at this time, in lieu of two things — the difficulties
11 which our nation is now undergoing and the definition of
12 money. I know my colleague, Congressman Wylie, would speak
13 on this point; and he feels deeply about it.
14 Secondly, that which Treasury Secretary Miller
15 warned against a year and a half ago when I suggested — Look,
16 why not have the Treasury make a little seignorage money and
17 beat the Kreugerrands and the Maple Leafs.
18 I sent that up for the Treasury to comment on and
19 the Treasury, after pondering the matter for several months,
20
21
22
23
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did comment saying, "Well,* in a perfect world that wouldn't
be a bad idea, Ruess; but, would the undercurrents of the
gold bugs, if yon put into effect that kind of a coin, they
would say that this constitutes a great victory and is.the
first step toward re-enthroning gold.
Indeed, Secretary Regan's excellent predecessor,

Secretary Miller, was right, because that's exactly what's

happened. As Dr. Schwartz's exegesis well shows, the gold

block is already claiming victory. It turns out that this

little gold coin proposition was what they really wanted all
the time.
They didn't come in here with any serious proposal

of a return to the gold standard.
8

So, all I'm saying, Paul,

is that while I agree that the exemption from the capital
gains tax and the exemption from the sales taxes — this is

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the most mischievous of proposals. Really, the whole thing

should be voted on and I hope voted down.

But, if it isn't, I'll return to just the points

that you talked about.

DR. McCRACKEN: May I respond to that? My point

was simply that as I read the statement, it seemed to me a

reasonable interpretation of anyone reading the statement

is that the concern, really, and most of the discussion here

is concerned with the tax issue, not the substantive question

as to whether there should be that kind of — this kind of

medallion.

My own reaction is that I would support the

recommendation, excluding the final statement; that's why I

raised the question as to what you were objecting to.

CHAIRMAN REUSS: Let me say that particularly in

the light of your position, I'll

make sure that yQU get an

31
1
2

SECRETARY REGAN: Congressman Wylie?

CONGRESSMAN WYLIE: Thank you.

Mr. Chairman, I would not want to imply that the

purpose of this recommendation was necessarily to appease

the gold lobby and wouldn't attribute any such motive to this

This statement has been signed by several members

of the Committee already and whether to get into a discussion

as to whether that should be deleted, why, we went ahead with

it.

I think that what, in fact, has happened to

recommendations like this is that that may be an appraisal

of the situation, although I do not think that that was the

reason that this recommendation was adopted by members of this

15
16
17
18
19
20
21
22
23
24
25

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opportunity to be recorded on both of those propositions.

Commission.
I am opposed to the recommendation, as I stated in
the last meeting, and I think was one of only three who voted
against the full recommendation, for several reasons. One,
which Congressman Reuss and Dr. McCracken already mentioned
is the capital gains issue.
At a time when we're trying to get whatever financial resources are available into productive investment, it
seems to me wrong to suggest that if there is money out there
for saving that we put it into a gold coin or whatever this is
so that it can be put in a can in a backyard for some future

32
date and brought out and then if it's m o r e valuable sold,

there
wouldn't be any capital gain on it.
2
I 3objected to it also — and I think that's been
touched
on adequately. I objected to it also because we were
4
issuing
a gold bullion coin, Dr. McCracken, which was without
5
legal tender status.
During the course of the discussion the last time,
I 8said that I didn't think that other countries issued gold
coins which did not have a legal tender status. I suggested
that
to we delete the word coin if we're going to do this, and
call
11 it a gold bullion piece or a gold bullion medallion
and
12 recognize it for what it is.
It
13 would be the first time that we would have a
separate
so-called non-legal status coin minted by the
14
United
States. I do think that the record ought to be
15
corrected
at this point, because I asked the question as to
16
17
whether
there was any other country which issued gold bullion
18
pieces
which did not have legal tender status such as the
Maple
Leaf or the Kreugerrand.
19
20 Coyne responded that indeed the Maple Leaf
Mr.
21 the Kreugerrand and others did not have legal tender
and
22
status or could not be used, as his words put it, for the
payment
of private debt.
23
24 S

°'

We went to th

^ Library of Congress and found

25
out that in the case of Canada, there is a specific law which

33
1

says that it can be used for the payment of private debt.

We are also told by the Library of Congress that that's also

true in the case of the Kreugerrand. They are getting some

supporting data on that.
So, as I say, I do think that the record should be
clarified from that standpoint. I will vote with Mr. Reuss'
motion for a couple of reasons.

One, I don't think we should issue a so-called gold
bullion coin without legal tender status; we ought to call it

what it is if we want to do it. I don't think we should do

it, so we're going to get into a discussion a little later on

before the Subcommittee on Coins in the House as to whether

or not we should issue a gold medallion to finance the

Olympics. How far are we going in this?

We have issued already gold medallions which are

in the safe and are not being purchased by the American

public. If they really wanted to buy gold, they could buy

those medallions which are already, as I say, in the safe.

To call it a gold bullion coin without legal status,

I think just confuses the whole thing. If we do it, we ought

to have a gold bullion coin with legal status or not call it

a gold bullion coin. We certainly oughtn't to say that it

will be exempt from capital gains taxes or exempt from sales

taxes.

DBS, Inc.

Thank you, Mr. Chairman

34
SECRETARY REGAN:

Thank you, Congressman Wylie.

Dr. Jordan?
DR. JORDAN: Thank you, Mr. Chairman.
I am tempted to simply read the transcript of a montt
ago when we had this same debate, but that might take too
6

long, so let me just read parts of it.

My own comment was — we had had distributed to us

at that time what we all agreed at that time was an excellent
paper by Treasury on the issue of capital gains taxation and

how, in fact, the current treatment means that people deduct

their losses but frequently not their gains.

Repeal of capital gains taxation might actually raise

revenue to the Treasury. The point I made last time was, "My

main point is that I found the paper very educational. I

15
16
17

received some public attention; it's been in The Wall Street
Journal and other places.

"I don't think that we should indicate we have

closed this issue, that we have settled the debate, and that

20
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24
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learned a lot by reading it. This is an issue that has

the public also wouldn't learn by the debate being continued.
"Let's not close it off, and we should indicate
that it should be discussed' further. It may be beneficial in
informing the public of some very important issues; however,
they ultimately come out on it."
In the JEC hearings that Congressman Reuss referred

35
to, I again made the point that the subject should not be
presumed to be settled at this time.

It was a useful paper

by Treasury; the issue should be somewhat further discussed.
We are recommending to Congress that it be discussed further.
On investment and whether or not this would have an
adverse effect on investment, of course not. When someone
buys a coin, someone else sells the coin. The dollars that
8

are exchanged for the coin do not go down the proverbial rat
hole; they are in somebody's hands.

The price of the coin may be influenced by these

transactions, but there is no loss of investible funds. Now,

on the other hand, if Americans choose to hold gold coins

and are purchasing foreign coins, there may be a balance of

payments effect. There may be some international flows

15
16
17
18
19
20
21
22
23
24

involved, not just where the domestic coin is produced.
That particular aspect would not be present.
As far as generally on taxation, it's my impression that
House Ways and Means and Senate Finance deal with the question
of what is taxable and what is not taxable, not the banking
committees.
If those committees want to hold hearings on this
issue, I would be happy to testify and maybe we should repeal
all capital gains taxation if we're concerned about unfair
treatment of common stocks versus coins. I would be happy
to testify on that. But, I think that a recommendation for

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36
exempting these coins from capital gains taxes should stand.
SECRETARY REGAN: Thank you, Dr. Jordan.
Congressman Paul?
CONGRESSMAN PAUL: Thank you, Mr. Chairman. I
would like to suggest that we make a point of order on
whether or not a vote of this sort is even in order; considering the fact that we have followed an agenda; we have had our
8

plans at our last meeting.

We went over this and proxies

were delivered for that specific purpose.
10

on the agenda.
The question is, if we revote this, do we revote

11
12

everything else that anybody wants to do?

square one and start all over? I really question whether or

not this is in order.

Are we back to

I think the appropriate way for this to be handled

15
16

is with a footnote.

another vote; and it was planned, it was set up and it has

passed.

We took a preliminary vote; we took

I know Mr. Reuss is very frustrated; at times, he's

19
20

had to throw things and at times, he has walked out of the

room.

up a new vote and do it again.

23
24
25

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This has not been

But, I do not see why we have to accomodate and take

I think that particular vote is out of order and
it should be put in a foot-note.
Now, I would like to address the subject of the

37
1

recommendation from the Congress.

to recommend to the Congress; the Congress doesn't recommend

to the Commission what they should recommend to the Congress.

It's the craziest thing I've ever heard of.

The Commission is set up

Now, the other thing is I went over and talked to
some of the people who signed that. One man said that he had
one objection; it was the taxes. So, we'll settle that in the
8

Congress when we pass the law.
Why do we have to come back and accomodate thirty

members of the Banking Committee? Besides, there were two

occasions where I was the. only member of the Banking

Committee who objected to a piece of legislation and by the

time it got to the House floor, it was defeated.

So, I think the way a committee is run versus the

way people look at things on the House floor completely

differ. So, I think that we should totally ignore the

recommendations of the Congress to recommend to the

Commission what they should recommend to the Congress,

or we'll get into a foolhardy position which is just totally

redundant and makes no sense whatsoever.

The fact that Mr. Reuss is so anxious to undo this

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contradicts everything that he has said or a lot of what he

has said. I have his release here, strongly endorsing a

gold coin a year or two ago. He voted in the preliminary vote

endorsing this gold coin.

38
His main objection now is the fact that there might
be some competition. That, I cannot believe — no, I can
believe it; it's just that it's an outrage to think that a
little bit of competition for the American people should be
condemned. I think if we are that fearful of a little bit
6

of competition, that big government has to be so big and so

tyrranical that we can't have a smidgeon of freedom, then I

think we're in a sad state of affairs.
I think it should be not voted on. I think if

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Mr. Reuss has his opinion, he ought to put it in the footnote

and it should be handled that way.

I have one question as far as the definition goes.

I would like this to he clarified, because I assume that we

are not going back and revoting every recommendation.

That has to do with the definition of legal tender.

Maybe legal counsel can help us to put a statement in to

clarify this. It says, "We favor Treasury issue of gold

bullion coins of specified weights and without dollar

denomination or legal tender..."

Now, when we refer to it, do we mean that as legal

tender, it is not acceptable at all in the payment of taxes?

Are we limiting it to that or does this mean that there could

he no acceptance of the coin in debt settlements?

I think there is quite a bit of difference, because

if there is a coin and there's a contract, we certainly don't

39
1

want to assume that there could not be an acceptance of debt

settlement.
SECRETARY REGAN: Thank you. Governor Partee?
GOVERNOR PARTEE: Mr. Chairman, I do think we have
a serious procedural question here that we need to determine.
This matter, as all other matters, was voted on
last time. There were several members of the Commission at

the last meeting that aren't here re-casting their votes now.
It could well change the outcome and could well be objected to,

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or perhaps objected to, by those who weren't here.

I, as you know, didn't care for the capital gains

aspect of this. The way you put the question, I didn't have

the opportunity to vote against the capital gains part of it

which may have been a procedural difficulty at the last

meeting; I'm not sure.

I also note that although we have had very much

discussion on this subject, the material leading up to the

recommendation on capital gains is almost nonexistent. I

would hope that Dr. Schwartz would expand that section, (d),

on page nine, which just asks three questions about capital

gains and makes no other comment about it.

We do have material from the paper and elsewhere,

I think, to expand that and properly indicate that it was

very much the subject of the Commission. If it would be

possible to have small modifications in the recommendation,

40
1

and I do believe you're going to have to make a ruling on

what we do here, if that would be possible, I would note to
you that the recommendation having to do with capital gains
taxes is stated as strongly as the recommendation having to do
with the issuance of a gold coin.
It doesn't say that we recommend that this be
studied or that we recommend that consideration be given or

anything like that. It just says we recommend that it should
be exempt from capital gains taxes. That, too, — I mean,

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if we were to make modifications, it seems to me even in the

sense of a majority vote, you might want to modify that to

make it more of a recommendation for study rather than an

outright recommendation.

SECRETARY REGAN: Mr, Costamagna?

MR. COSTAMAGNA: Thank you, Mr. Secretary.

I first became aware of the statement of the House

Committee on Banking as reported in the Reuter's News

Service, and was considerably taken aback by the fact that

the ink wasn't even dry on our recommendation and it was

already being — what appeared to me — being set up for

defeat in Congress,

I may be naive on what happens here in Washington,

being so far away, but I must point out that there is great

support for what was done here in terms of the gold coin out

West. I'd like to read to you a couple of paragraphs from The

41
San Francisco Chronicle dated February 19, 1982, which was
subsequent to our last meeting.
"There are a number of plusses about the proposed
Eagle. One is that it will be easily available. The gold
medallion that went on sale in July of 1980 was unpopular, and
no wonder. It had to be ordered through the Post Office and
delivery took six weeks.
8

"Another advantage to the Eagle is that any
profits from its sale will be free of capital gains taxes.
Americans now actively buy and sell the gold coins of several

other nations — the South African Kreugerrand being a highly

successful offering. Americans purchased five to seven

million Kreugerrands in 1980.

"The year gold reached its peak at a price of

15
16
17
18
19
20
21
22
23
24
25

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$875 an ounce; they have purchased 33 million of them since
the coin was introduced in '67. We like the idea of these
Eagles. They won't, of course, be like those dollar denomination gold pieces of cherished memory, but it seems eminently
sensible to have them available for gold bugs thereby
keeping American dollars at home that might otherwise go,
for instance, to South Africa for Kreugerrands."
This past weekend, I also had occasion to spend
several days at the Conference of Bankers out West. These
are bankers primarily from the West, the mid-West and the
Southwest. I believe there were approximately twenty to 25

42
1

states represented.

I found great support for the idea of a gold coin

amongst these bankers. They were very interested in the

workings of the Commissionr they were interested in the fact

that this was even a subject of discussion here in Washington;

and that these proceedings had been taking place.
They were greatly interested in the idea of a gold

coin. I found the majority of people that stopped and talked
to me about it were very enthusiastic about the idea. I might

10 add that some of them even wondered why it wouldn't be legal
11 tender, but that's another question we have not voted on.
12 I would also like to add, in conjunction with
13 Congressman Paul, that I thought we had resolved all of the
14 issues at the last meeting. I know of other little nuances
15 here and there that I would like to bring up again, but I don't
16 think we have the time, nor would I think it proper to do so.
17 I would just prefer to accept the recommendations
18 as they are presented to us here and get on with making our
19 report complete and complete it. Thank you.
20 SECRETARY REGAN: Thank you, Mr. Costamagna.
21 Dr. Jordan, do you wish to speak again?
22

DR. JORDAN:

Mr. Chairman, I move that we table the

23 motion
24

SECRETARY REGAN:

GOVERNOR RICE: I just wanted to say a brief word,

DBS, Inc.

Governor Rice?

43
Mr. Chairman. I voted for this recommendation at the last
2

meeting, but with a great deal of unease; largely because I

favored issuing the coin but at the same time did not like the
tax aspects of the recommendation.
On balance, I was persuaded by the argument that

Dr. Jordan presented, both last time and here, and presented

in the Treasury paper, that the Treasury revenue situation

would be improved by the capital gains aspect.
I would myself be much more comfortable if we could

separate these two aspects; one, issuing the coin; and two,

11 the tax aspects. I would, therefore, welcome the opportunity
12 to vote on both.
13 So, I would end up associating myself with
14 Professor McCracken and Governor Partee.
15 CONGRESSMAN PAUL: Mr. Chairman, a motion to table,
16 I think, takes precedence, and I think we have to go ahead
17 and vote on that.
18 CONGRESSMAN REUSS: In a Parliamentary inquiry,
19 Mr. Chairman, there is before us Mr. Jordan's motion to table.
20 CONGRESSMAN PAUL; I believe it is not debatable.
21 A motion to table is not debatable.
22 CONGRESSMAN REUSS: That's what's in the regular
23 order and if the Chairman will gavel down those who are
24 trying to — by asking for a Parliamentary inquiry, which is
25 in order.

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SECRETARY REGAN:

You may

—

CONGRESSMAN REUSS:

As I understand the motion to

table, it is not debatable; it leads to an immediate vote on

the proposition I put; namely, the vote on the two sentences.

If the motion to table carries, it will be in

order, will it not, for me to ask for a separate vote on the

second sentence, that having to do with capital gains taxes
and sales taxes.

SECRETARY REGAN: Let's get this straight as far as
the Chair is concerned, with aid and assistance from Counsel.

As I understand it, if we wish to re-open any of

11 these agreed upon recommendations, it will take a majority of
12 those present to recommend that we re-open everything.
13 I warn you, though, that if we re-open one, we must
14 thereby re-open all. I don't see how we could re-open one
15 and not all of them. Then we will have to proceed as we did
16 last time, through the entire process again with modifications.
17 The time is growing very short, Gentlemen, as to
18 when we have to come to a conclusion. Last time, I know that
19 a lot of us didn't get what we wanted; many did get in part
20 what they wanted and so forth.
21 In the true spirit of a Commission, we came up with
22 a majority view and then this morning, we have now said that
23 when the views are expressed, they will be expressed as the
24 views of this Commission with ample opportunity for those who
25 oppose it to put into the footnotes that they do oppose it and

DBS, Inc.

45
this type of a thing.
So, what I shall do now then is to have a vote on
3

whether to table this motion. Then, if we wish to split this

one and just talk about the gains portion, we'll have to have

first a vote as to whether or not we wish to re-open it.

CONGRESSMAN REUSS: Let me, Mr. Chairman, express

ray strong objection to the conduct of the Gold Commission. In

the agenda before us, Item One, put on there by the managers

of the Gold Commission and yourself, gave the leader of the

10 gold block, Congressman Paul, a chance to bring up a
11 recommendation for gold.
12 Then we passed to Item 2, which says, "Review of
13 the Commission report, prefatory material" — we voted on
14 that. We could have voted it down; I thought it was good
15 and we voted for it. Introduction and recommendations —
16 that's what we're on now.
17 Certainly, we have a right to vote. What is this —
18 the Golden Rule Commission? Those who have the gold make
19 the rules? I think it's preposterous and I hope the Chair
20 will not press this gag rule which he's about to invoke.
21
22
23
24

Anyway, the motion is nondebatable; let's vote on
the motion to table and I ask for a roll call.
SECRETARY REGAN: The motion before us is a motion
by Dr. Jordan to table any — as I understand it, Dr. Jordan,

25 the motion that you're tabling is the motion that would change

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'46
the majority recommendation, item number two on page 010 of
the introductory material of the Commission, including the
Commission's recommendations; is that correct?
DR. JORDAN: That is correct.
SECRETARY REGAN: I'll ask for a show of hands.
6

CONGRESSMAN REUSS: Roll call, Mr. Chairman.
SECRETARY REGAN: A roll call. We'll have a roll

8
9

call on whether or not we should table this amendment.
Mr. Costamagna?

10 MR. COSTAMAGNA: Yes.
11

SECRETARY REGAN:

Mr, Coyne is absence.

Senator

12 Dodd?
13

CONGRESSMAN REUSS: No.

SECRETARY REGAN:

DR. JORDAN:

SECRETARY REGAN:

DR. JORDAN: Yes.

SECRETARY REGAN: Mr. Lehrman is absent. Dr.

Senator Jepsen

Yes.
Dr. Jordan?

19 McCracken?
20

DR. McCRACKEN:

SECRETARY REGAN:

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Yes.
Congressman Neal is absent

Governor Partee?

GOVERNOR PARTEE: Yes.

SECRETARY REGAN: Congressman Paul?

CONGRESSMAN PAUL: Yes.

47
1

SECRETARY REGAN; Congressman Reuss?

CONGRESSMAN REUSS: No.

SECRETARY REGAN: Governor Rice?

GOVERNOR RICE: No.

SECRETARY REGAN: Senator Schmitt is absent.

DR. JORDAN: Yes.

SECRETARY REGAN: Governor Wallich.

GOVERNOR PARTEE: No.

SECRETARY REGAN: Chairman Weidenbaum?

10 CHAIRMAN WEIDENBAUM: Yes.
11 SECRETARY REGAN: Congressman Wylie?
12 CONGRESSMAN WYLIE: No.
13 SECRETARY REGAN: The Chair votes yes.
14 Nine to five, it carries. The motion is tabled.
15 CONGRESSMAN REUSS: Mr. Chairman, I move that we
16 now vote by roll call on the second sentence; namely, whether
17 we recommend that the coin shall be exempt from capital gains
18 taxes and that the coin shall be exempt from sales taxes.
19 CONGRESSMAN PAUL: Mr. Chairman —
20 SECRETARY REGAN: Congressman Paul?
21 CONGRESSMAN PAUL: I would suggest that this is
22 identical to all of the arguments we just gave for the prior
23 vote and for the tabling. It is exactly the same.
24 When we spent at least two to three hours on this
25 recommendation, vie voted on capital gains separately from

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sales taxes.

I believe we did.

SECRETARY REGAN:

DR. SCHWARTZ:

Let's check the record.

I think we voted separately; it was

a majority vote.

SECRETARY REGAN:

GOVERNOR RICE:

6
7

We'll have the record checked.
Yes we did; there's no doubt about

it.
CONGRESSMAN PAUL:

8
9

on this.

Yes, we did.

We voted separately

By having already voted separately on this, I think

the Commission has made their statement and that I move to

table this motion as well, for the same reason that we tabled

the previous motion.

13
14
15
16

SECRETARY REGAN: . The amendment on capital gains
was an amendment by Congressman Paul.

"The coin shall be

exempt from capital gains taxes"— vote:

eight, yes; six,

no; on a roll call.

.Dr. McCracken?

DR, McCRACKEN:

Mr. Chairman, it seems to me the

key question here is this procedural question as to whether

we're going to reopen.

On the specific issue of this final sentence in

this recommendation, to start de novo, I would oppose it,

I think there is a much more fundamental question which two

or three have alluded to, including Chuck Partee, as to

whether we start in now —

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I believe the Council indicated

49
1

the same thing.

voted before? I must say I would question that as a procedure,

even though on this specific issue, the recommendation isn't

Are we going to reopen things that have been

quite what I would propose; and I'll take care of that in the
footnote.
SECRETARY REGAN:
7

There is a motion here to table

this second recommendation that the coins shall be exempt from

capital gains taxes.

We'll proceed by a roll call vote. Mr. Costamagna?

10 MR. COSTAMAGNA: This is avote?
11 SECRETARY REGAN: This is a vote now on whether to
12 table the second — The motion is that the second sentence
13 therein, "Furthermore, we recommend..." would be deleted from
14 our recommendation.
15 CONGRESSMAN PAUL; This is the motion to table.
16 CONGRESSMAN REUSS: No, I proposed that there be a
17 vote and Mr. Paul moved to table it so the motion is to be
18

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tabled.

SECRETARY REGAN:

The motion to be tabled,

MR. COSTAMAGNA:

SECRETARY REGAN:

CONGRESSMAN REUSS:

SECRETARY REGAN:

DR. JORDAN:

SECRETARY REGAN;

Yes.
Senator Dodd?
No.
Senator Jepsen?

Yes.
Dr. Jordan?

50
1

DR. JORDAN: Yes.

SECRETARY REGAN: Dr. McCracken?

DR. McCRACKEN: Yes.

SECRETARY REGAN: Governor Partee?

GOVERNOR PARTEE: Yes.

SECRETARY REGAN: Congressman Paul?

CONGRESSMAN PAUL: Yes.

SECRETARY REGAN: Congressman Reuss?

CONGRESSMAN REUSS: No.

SECRETARY REGAN: Governor Rice?

GOVERNOR RICE: No.

SECRETARY REGAN: Senator Schmitt?

DR, JORDAN: Yes.

SECRETARY REGAN: Governor Wallich?

GOVERNOR PARTEE: No.

SECRETARY REGAN: Dr. Weidenbaum?

CHAIRMAN WEIDENBAUM:. Yes.

SECRETARY REGAN: Congressman Wylie?

CONGRESSMAN WYLIE: No.

SECRETARY REGAN: The Chair votes yes

Congressman Neal -^

CONGRESSMAN REUSS: The same Congressman Neal who

was one of the glorious six who voted against the capital

gains outrage is not in a position to cast a roll vote.

SECRETARY REGAN: There will be no politicizing of

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51
the issue, if you don't mind,
(Laughter)
3

SECRETARY REGAN:

Congressman Neal, let me apprise

you of what has happened here. We have gotten to looking at

the second recommendation on the suggestion of Congressman

Reuss that there were members of the Senate Banking Committee,
to wit, thirty of them, who opposed this.

He thought the subject should be reconsidered by the
Commission. Governor Partee brought up the question of can we

now reconsider all of these new — all of the previously voted

upon issues and should we reopen them at this point.

Whereupon, there came amotion from Dr. Jordan to

table this suggestion of Congressman Reuss', and a vote was

taken to table it. Whereupon, Congressman Reuss then asked

that the second part of the recommendation which is on page

010 — the recommendation that the coin shall be exempt from

capital gains taxes and that the coin shall be exempt from

sales taxes be voted on.

Congressman Paul brought up the same point that this,

too, was out of order and should be tabled in order not to

reopen all of these individual items that we voted on last

time. We have just completed the first roll call on the

23 second portion of this; the first part was voted to be tabled.
24 The second part, we're voting on whether to table
25 or not. You can vote if you so desire; either yes to table or

DBS, Inc.

no, not to table.

CONGRESSMAN NEAL: Thank you, Mr. Chairman, for

reviewing this for me and I apologize for being late; it was

unavoidable. Could you tell me how the vote has gone so far?

(Laughter)

SECRETARY REGAN: Congressman Neal, the vote has
gone as it did previously — nine to five to table; nine yes

and five no.
CONGRESSMAN NEAL: Please, let me ask one other

10 question. In voting to table, we are saying that we're not
11 going to reopen the previous considerations?
12 SECRETARY REGAN: That is correct.
13 CONGRESSMAN NEAL: On this or any other issue?
14 SECRETARY REGAN: Specifically on this. If someone
15 else made a move to reopen another one of these items, then
16 we'd have to have a similar vote.
17 DR. SCHWARTZ: You should also apprise Congressman
18 Neal about the decision to give everybody a chance to —
19 SECRETARY REGAN: Oh, yes. We did decide early on
20 that in accordance with Governor Partee's suggestion that the
21 recommendations would be the recommendations of the Commission,
22 not specifying majority or minority.
23 However, any minority person or persons,
24 collectively or individually, could express in a footnote
25 objections to any one of the recommendations; hopefully,

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53
they would explain their reasons in fifty words or less in
the report.
CONGRESSMAN NEAL:

Thank you, Mr. Chairman.

I will

vote to table it.
5

SECRETARY REGAN: Table it. All right, now having

disposed of that, we should now proceed with the rest of the

Introduction. Any other comments?

CONGRESSMAN REUSS: Yes, Mr. Chairman.
On Arabic IV on the majority recommendation on

page 018, the second sentence, we favor continued study of

the role of gold in the monetary system and recommend that

Congress hold hearings on the subject.

I thought that the purpose of this Commission was

to lay to rest the question of gold and here, we recommend

15
16
17
18
19
20
21

that Congress keep it open forever by holding hearings.
In the light of the action of the Commission just
now to, in effect, throw out the agenda which led — or would
have led a reasonable person to believe that we were going to
have votes on this and weren't locked in, I'm probably not
going to be successful, but I move to strike that sentence
on page 018.
CHAIRMAN WEIDENBAUM: Just the second sentence in

22
23

the majority recommendation; is that it?
CONGRESSMAN REUSS: Yes, but I won't prolong the

matter, because the Commission's views are obviously quite
25

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54
fixed, so let's just have a vote on it.

CHAIRMAN WEIDENBAUM:

Is there a second to that

motion?
4

CONGRESSMAN REUSS:

CHAIRMAN WEIDENBAUM: Is there a second to that

motion?
SECRETARY REGAN:

7
8
9
10
11

Pardon?

Is there a second to that motion?

(No response.)
SECRETARY REGAN: No. I think that probably dispose
of it, then.
CONGRESSMAN REUSS: We proceed then to Arabic V

on page —

SECRETARY REGAN: Excuse me, Congressman Reuss,

before you get started on that. Governor Partee, you had your

hand up?

GOVERNOR PARTEE: No, it was not relevant to this.

SECRETARY REGAN: Go ahead.

CONGRESSMAN REUSS: There, the majority recommenda-

tion says, "The Commission recommends that Congress and the

Federal Reserve study the merits of establishing a rule

specifying that the growth of the nation's money supply be

maintained at a steady rate which ensures long-run price

stability. In addition, the Commission concludes that under

present circumstances, restoring a gold standard does not

25 appear to be a method for dealing with the continuing problem

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55
1

of inflation. The Congress and the Federal Reserve can study

ways to improve the conduct of monetary policy, including such

alternatives as adopting a monetary rule."
I would move to reform that section, which is
redundant, repetitive and topological — the third sentence

says about the same thing that the first sentence does.

Again, I'm defending against the "everything is

engraved in marble" rule which for some reason known but to
God, Mr. Chairman, you have imposed on this Commission.

So, can we have a vote on that?
SECRETARY REGAN:

Does anyone want to second that

GOVERNOR PARTEE:

I'll second that.

SECRETARY REGAN: You'll second that.

GOVERNOR PARTEE: I think, Mr. Chairman, that

Congressman Reuss makes a very good point; that it's impossible!

to change anything if we don't reopen in some degree these

recommendations. He's quite correct that this is a very odd

recommendation just structurally, the way it appears. It

seems to say the same thing twice in the first sentence and

in the third sentence,

SECRETARY REGAN: I'd like to remind both of you

gentlemen that the Chair did not rule that none of these

could be reopened. The Chair ruled that if a motion were

tabled, then it could not be then debated. But, if the group

11
12

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motion?

decided, the Commission decided by a majority vote, that it

wished to reopen any one of these things, it could so do.

Dr. Jordan?

DR. JORDAN: In line with your earlier remarks, the

decision to reopen any, whether this is redundant or bad

grammar or any other objection to it, the decision to reopen

on this one question raises a concern about reopening on all

questions.

So, I will oppose reopening on this, just on that

10 ground that I don't want to open it all up.
11 CONGRESSMAN REUSS: I asked for a vote on my motion
12 to reopen the issue. A show of hands will do for the moment.
13 SECRETARY REGAN: Are you specifying — what is it?
14 CONGRESSMAN REUSS: My motion is to reopen Arabic V.
15 DR. JORDAN: Do I understand that a motion to
16 reopen on V is a motion to reopen on all questions?
17 CONGRESSMAN REUSS: No, not at all.
18 SECRETARY REGAN: But, if you open that question, if you
19 have opened V, why not VI, VII, VIII, IX,. X? Then, we'd have
20 to have a vote of the majority of the Commission as to whether
21 we wished to reopen all of those others or not. We could do
22 one, but not do all, but certainly leave open that question
23 for a vote.
24 I think I would have to ask that you then decide
25 what you wanted to do.

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57
CONGRESSMAN WYLIE:

Mr. Chairman?

SECRETARY REGAN: Congressman Wylie?

CONGRESSMAN WYLIE: Just for clarification, you

would strike out the language on page 020; is that it?

CONGRESSMAN REUSS: My motion is simply to reopen

the Arabic V recommendation, which overlaps pages 020 and 021.
If that motion prevails, I would then of course — I must be

honest — feel emboldened to make similar motions as to
recommendations which are infinitely sillier than this one.

BS, Inc.

So, be aware — I asked for a vote.

SECRETARY REGAN: Do we all understand what we are

now voting on? Do you, Mr. Costamagna, understand what we

would be voting on? As to whether we should reopen Item V

for a change in language and a yes vote would suggest that

you do not wish to reopen; a no vote would say you do want

it open.

CONGRESSMAN REUSS: No, it's the other way around.

SECRETARY REGAN: It's the other way around; all

right. A yes vote, you want to reopen it; a no vote, you

do not want to reopen it.

CHAIRMAN WEIDENBAUM: Mr. Chairman?

SECRETARY REGAN: Yes?

CHAIRMAN WEIDENBAUM: I was about to cast a yes vote

to reopen, but Congressman Reuss, in his usual eloquence,

has convinced me that I should not open the proverbial

58
Pandora's box.

I'm going to vote no.

CONGRESSMAN REUSS: All right; Pandora votes no.
Now, let's get on with it.
SECRETARY REGAN: Mr. Costamagna, how do you vote?
CONGRESSMAN REUSS: I don't ask for a roll call.
6

SECRETARY REGAN: All right; you don't ask for a
roll call. All in favor of reopening, raise their hands.

(Showing of hands.)

SECRETARY REGAN: Two.

LEGAL COUNSEL: Do you have a proxy as well.

Congressman?

CONGRESSMAN REUSS; Yes, Dodd.

SECRETARY REGAN: All right; opposed?

(Showing of hands.)

SECRETARY REGAN: Nine to six opposed to reopening.

CONGRESSMAN REUSS: Mr. Chairman, and this will be

my last hurrah, the recommendation number six —

18
19
20
21

SECRETARY REGAN:

I would

assume only on this

subject.
CONGRESSMAN REUSS:

On recommendation number VI,

pages 023 and 024, the first sentence of the recommendation

22 says, "We favor no change in the flexible exchange rate system,
23 Now, I happen — as I've said many times — to be
24 quite satisfied with the flexible exchange rate system and I
25 don't favor any change in it, but the Gold Commission's duties

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59
1
2
3
4
5

were not to make pronouncements on flexible exchange rates.
They were to, and I quote, "To make recommendations concerning
the role of gold in domestic and international monetary
systems", and I therefore find this exceeds our jurisdiction.
And, as before, I move that we reopen Recommendation

number VI.

SECRETARY REGAN: All of recommendation number VI

or just recommendation number I?

CONGRESSMAN REUSS: You are quite right, number I.

SECRETARY REGAN: Majority recommendation number I?

CONGRESSMAN REUSS: Yes; right.

SECRETARY REGAN:

Again, we'll have a show of hands

13 on this.
14

DR. JORDAN:

Mr. Chairman, is there a second on

15 that motion?
16 SECRETARY REGAN: Is there a second on that?
17 CONGRESSMAN WYLIE: Mr, Chairman, I'll second it,
18 because I think I made a point of order against this
19 recommendation just on the same grounds that Mr. Reuss has
20 stated during the deliberations.
21 SECRETARY REGAN: All right. There is a second.
22 Now, a yes vote would recommend that we reopen Majority
23 Recommendation Number I under all recommendations, Arabic VI,
24 International Monetary Policy Arrangements. A no vote would
25 be that we not reopen it.

DBS, Inc.

60
All in favor, please raise your hand?

DBS, Inc.

(Showing of hands.)

CONGRESSMAN REUSS: Plus Dodd.

SECRETARY REGAN: All opposed?

(Showing of hands.)

SECRETARY REGAN: Nine to five. It sounds like

working hours. Nine to five, not to reopen.

All right. Is there anything else on this introduc-

tory portion and the recommendations?

(No response.)

SECRETARY REGAN: All right, I guess we now go to th€

chapters themselves. Here again, I would ask that when we

get into discussions regarding the wording in the chapters,

that if they are of a technical drafting suggestions or they

are detailed or things that are of that nature, that we get

the recommendations to Dr. Schwartz.

If it's something of substance, then I think we

should have a discussion of it. Governor Partee?

GOVERNOR PARTEE: Mr. Chairman, I had a number of

comments on the text of the section surrounding the recom-

mendations. I view that that will have to be considerably

rewritten, anyhow, because of the change in form that we're

going to take. So, I would be just prepared to hand my

comments to Dr. Schwartz. I'm not even sure if the comments

are all that appropriate because of the change in formats but

61
that will mean a considerable
2

SECRETARY REGAN:

—

May I suggest, Dr. Schwartz, you

contact Governor Partee and see what he has to say?

DR. SCHWARTZ: I presume you will submit the foot-

note dissents?

GOVERNOR PARTEE: Oh, yes; that also.
DR. SCHWARTZ: And any suggestions you've got for

the change in accompanying text. I should also add with
respect to the revised chapters one and three, that the

comments that the Federal Reserve staff sent with a covering

letter from Governor Partee came after I had already sent the

chapters back to Treasury, So, I'll take care of that.

13
14

SECRETARY REGAN:
as Chair,

On Figure 1.1, I cannot read that and I would

DBS, Inc.

I have a criticism if I might,

suggest that quite a few of these charts and

—

DR. SCHWARTZ: Yes. They are not professionally

drawn and they will be —

CONGRESSMAN REUSS: It's too bad, Mr, Chairman,

nothing can be touched and I'm sorry you can't read it, but

that's the way it —

SECRETARY REGAN: No, no, no. We're not on the

recommendations here.

DR. SCHWARTZ: Just the body of the report.

(Laughter)

62
1

SECRETARY REGAN:

Any other suggestions on

Chapter 1? Dr. Jordan, did I see your hand up?

DR. JORDAN: No.

SECRETARY REGAN: Okay. Chapter 2?

CONGRESSMAN REUSS: Mr. Chairman, can't we save a

good deal of time? This is all perfunctory — we can't

change anything; we can send in our comments.

SECRETARY REGAN: No. What I'm trying to get at is
there anything of substance now in Chapters 1 through 4 that

we should discuss, because we are trying to finalize here.

In all seriousness, I want to button up anything of substance,

if at all possible today, so that Dr. Schwartz can get on with

any substantive changes in these first three chapters. The

fourth chapter has just been issued.

Congressman Wylie?

CONGRESSMAN WYLIE; It's hard for me to say whether

this is a substantive recommendation or a change or not, but

I made this point a little earlier.

I think that the suggestion that we are here

because the Gold Commission is to study the growing concern

about monetary policy does not really reflect the reason for

how we got here.

In the developmental process of establishing the —

or of passing the law which got us here, I think more than

anything else, it was because of the debate at the time. I

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63
made this suggestion a little earlier —

on the international

monetary funds appropriations and more specifically, IDA,
that we were attempting to get them some suggestions as to
how we might get them some extra votes on that.
To say that the Gold Commission was enacted because
of a growing concern over persistent and accelerated inflation
and then relate it more specifically to monetary policy, which
8

I think it does a little later on, I don't think that accurately states how we got there; that's my opinion of it.

Plus, I think that there is too much emphasis on

suggesting that inflation is related to monetary policy. I

think, myself, that the record of inflation is more directly

related to huge budget deficits which require government

financing and has the effect of crowding out. That is

mentioned, but I thought that maybe a little more discretion

ought to be made on that.

There ought to be more emphasis on the fact that

inflation is geared to budget deficits over this period rather

than on monetary policy. I don't necessarily have any

20
21
22
23
24
25

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suggested language at the moment, but I did think that I
would be remiss if I didn't make that point from my own
standpoint for the record.
SECRETARY REGAN: Congressman Neal?
CONGRESSMAN NEAL: Mr. Chairman, I just wanted to say
that my recollection of how we got here was somewhat different.

64
1 Just to have that as a part of the record, I recall very
2

clearly that we accept that this Amendment establishing this

Commission was added as a non-germaine amendment in the

Senate to the International Monetary Fund bill and when it

was debated, I was managing the bill, the International

Monetary Fund bill.

I don't recall the exact discussion surrounding

this debate, but it seems to me very clear that everyone that
had anything to say and that those voting at that time were

10 most interested in the problem of inflation.
11 This is the concern about inflation and the idea
12 that possibly the use of gold in our monetary system might
13 have some beneficial impact on the rate of impact — this
14 was clearly the motivation behind establishing this
15 Commission.
16 Now that the Commission has, in its wisdom and I
17 think very correctly, after its study of history and hearing
18 witnesses and so on, come to the conclusion that gold or
19 returning or going to some sort of gold standard is probably
20 not a — is quite clearly not a wise move, but that if
21 historians or history pays any attention whatsoever to what
22 we are doing here, I would hope that it would reflect that
23 we have looked at this question of inflation with serious
24 intent and our recommendations indicate that we think
25 inflation is essentially a monetary phenomenon and that we

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65
1

are urging the Congress to take that seriously and deal with

that seriously. I just hope that that's how the overall
record of this hearing is read.
• I wouldn't want to — I don't think it should be —
the impression should be left that the concern that inspired

the establishment of this Commission was anything but a concerr

to try to do something about the problem of inflation.

Those that first proposed, thought that the solution
would be to tie our money to gold or to use gold as our money

or some other motiviation. But, underlying that, was a

sincere desire to do something about inflation.

I just wish myself that we could go a little bit

further in making a clearer recommendation. It seems to me

we have gone a long way and I thank you.

SECRETARY REGAN: Thank you. Mr. Costamagna?

MR. COSTAMAGNA; I would just like to say I would

concur in those remarks very emphatically, concur with

Congressman Neal,

SECRETARY REGAN: Congressman Neal's remarks?

20
21
22
23
24
25

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MR. COSTAMAGNA: Yes, sir; I do.
SECRETARY REGAN: Do you want to say anything at
this point, Dr. Schwartz?
DR. SCHWARTZ: I think in Chapter 1, we've given
full recognition to the role of fiscal policy and I do not
believe that, in the current version of that chapter, that in

66
any way we have slighted the role of fiscal policy.
SECRETARY REGAN:

Anything else to come up on

Chapter 1?
CONGRESSMAN NEAL:

Mr. Chairman, do I understand

correctly that if we have recommendations concerning changes
in language and syntax and so on that we might submit those
to Dr. Schwartz?
SECRETARY REGAN:

Yes, but necessarily, because of

time constraints, those must be in no later than next Monday
in her hands so that she can make them.

We are operating

under the time frame where we have to have this whole thing
set in type on or about March 26th if we're going to get it
to the Congress by March 31st.'
Accordingly, we cannot go along now with any
feeling that we have plenty of time to get things in.
DR. SCHWARTZ:

There are two types of things that

you can put in my hands . One, if you have any dissents in
the introductory chapter with respect to recommendations?
two, any changes that you would like to see made in the body
of the report, Chapters 1 through 4.
So, there are two types of
SECRETARY REGAN:
DR, SCHWARTZ:

The minority report?

Yes.

SECRETARY REGAN:
Dr. McCracken?

—

The minority comments.

Yes,

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67
DR. McCRACKEN:

Congressman Neal was not here when

we talked about adding the footnotes.
DR. SCHWARTZ:

Yes, I know.

CONGRESSMAN REUSS: Just so I may understand this,
5

footnotes have to be in by next Monday,'March 15? suggestions

for other changes have to be in by Monday, March 15; and
additional supplemental or dissenting views have to be in by

Monday, March 15th?
DR. SCHWARTZ: That's right, because basically, I

will have only the balance of that week to get the changes —

CONGRESSMAN REUSS: I'm glad that we're making clear

the time table. Then, as of next Monday, March 15th, that

effectively discharges the Commission? doesn't it? From then

on, it is printing and mechanical.

SECRETARY REGAN: No, not quite. I think that each

of us has to go over what the others' suggestions are. We

don't know what one or more members of the Commission might

be saying to Dr. Schwartz, so we have to have a final reading

of it.

20
21
22
23
24
25

Now, that can be done either privately or in a
meeting such as this.

By privately, I mean just by sending

in further written comments. We could, in effect, have either
one more meeting to go over everything, not to reopen the
recommendations of the Commission, but to see if somebody
feels that their footnote has been slighted or if it wasn't

put in or something of that nature,

I would want to make

absolutely sure that every member of the Commission has a

chance to see the text before signing off on it.
CONGRESSMAN REUSS: If we can pursue this a moment,
because I think it would he well to get it absolutely straight.

SECRETARY REGAN: Yes.
CONGRESSMAN REUSS: Everything — all pieces of

DBS, Inc.

paper — have to be in to Dr. Schwartz by the close of

business next Monday, March 15th. That's clear.

How about her then circulating —

DR. SCHWARTZ: Exactly.

CONGRESSMAN REUSS: — that which she proposes to do

by way of additions or subtractions from the report.

DR. SCHWARTZ: The whole thing —

CONGRESSMAN REUSS: The whole thing; indicating

what the changes are, if any.

DR. SCHWARTZ: That's right, exactly.

CONGRESSMAN REUSS: And then, giving a few days or

a week from receipt of that to members to object to

Dr, Schwartz, if they don't like any of the changes.

DR. SCHWARTZ: Right.

CONGRESSMAN REUSS: If she is incapable of resolving

those mini-disputes, then there would have to be a final

meeting. But, I would venture to say that there really doesn't

have to be a final meeting and since time is precious for

69
everyone here, if we can avoid it, it is good.
SECRETARY REGAN: I'm with you on that; if we can
avoid another meeting, I'd just as soon do it. But, frankly,
I don't want to shut it off so that if someone feels he
didn't have another opportunity to come forth with something —
but, if that's agreeable to all of you, we could actually
adjourn this meeting right now and come back in writing with
8

anything we have unless somebody has a major point that they
would like to make at this point.

We could adjourn; prepare our written comments;

get them into Dr. Schwartz; and then, after we have seen —

after you've all had a chance to reread what she will get

back to you, and we'll try to have a fast turn-around time

on that, whether or not one more meeting is needed.
CONGRESSMAN REUSS:

15
16

Mr. Chairman, I move we now

adjourn.

CONGRESSMAN PAUL:

SECRETARY REGAN: Congressman Paul first.

CONGRESSMAN REUSS: A point of order — my motion

23
24
25

DBS, Inc.

—

was made.
CONGRESSMAN PAUL:

21
22

Mr. Chairman

minutes.

All I'm asking for is a few

I think we can sustain

—

CONGRESSMAN REUSS: I do ask for a vote on my
motion, Mr. Chairman.
CHAIRMAN WEIDENBAUM: Mr. Chairman, there is a

70
1

point of order here on a motion to adjourn.

Mr. Chairman,

had you recognized Mr. Reuss when he made his motion?

SECRETARY REGAN: Yes, Mr. Reuss did have the floor
at that moment. I think, since we have time, Mr. Reuss
wouldn't mind his associate having a few minutes.

CONGRESSMAN REUSS: Two minutes.

SECRETARY REGAN: Yes, two minutes, we'll hear from

Congressman Paul.

CONGRESSMAN REUSS: I yield the two minutes.

10 CONGRESSMAN PAUL: Is he giving me the time or are
11 you giving me the time? I don't feel like we need to play
12 these games much longer.
13 I wanted to inquire about a date in that I am
14 interested in submitting an additional view that takes a
15 slightly different slant than the majority view. Now, would
16 that be the 15th or the 19th or the latter date that you would
17 need that by?
18 DR. SCHWARTZ: I want it by the 15th. By the 19th,
19 I hope to be able to resubmit to the Treasury the revised —
20 every part of this report that includes any kind of revisions
21 that you people have suggested to me.
22 If it gets to the Treasury by the 19th, you may
23 have it on the 20th.
24 CONGRESSMAN PAUL: Even though what I'm talking
25 about doesn't change the majority point, this is something

DBS, Inc.

in addition.

71
1

DR. SCHWARTZ:

In addition, you want

—

CONGRESSMAN PAUL: Okay, so you would still like

that by the 15th?

DR. SCHWARTZ: Right.

CONGRESSMAN PAUL: Then the only thing I would like
to do before we close, and I know people are getting to anxious;
to leave, is that I would like to thank the Treasury and the

Secretary and Dr. Sprinkel for having run, I think, very fair
meetings.

10
11

I have to confess, at the very beginning I expressed
some concerns and I think they were unfounded.

I want you to

12 know that, because I think everything has been run very well.
13 I am very satisfied and I thank you for It.
14 I think Dr, Schwartz certainly deserves a compliment
15 for her efforts and her ability to take a group like this and
16 try to make some sense out of it, I think that you've done
17 an exceptionally good job.
18 I would like to also state that even though my
19 views are certainly not the majority views of this
20 Commission, I think I have come to respect the views of
21 others, especially those who recognize, as I do, that
22 limiting the supply of money is a very important issue. I
23 think that I have learned to understand that viewpoint, even
24 though they would not make the use of gold as I would. I
25 think that I understand that view better. I appreciate the

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72
1

information I have gained from the Commission.

I think this

has been an important thing for me and I hope some others

have benefited by this.
I would like to state, though, that I still do

4
5

believe strongly that ultimately gold is the money.

I think

two votes, even though they were overwhelming in opposition

to my suggestion, is more or less proof that gold is really

money.
When the chance to eliminate gold from the monetary

9
10

system —

I wanted to see that the gold would be returned from the IMF

and in a similar way, to reject the notion that the government

can take ownership of the gold again.

nobody really wants to do it.

In a symbolic way,

But, when that time comes when we reject gold

completely, those who disbelieve in gold realize that there's

a great need to hang onto the gold in order for it to serve

that emergency function, because everybody knows by studying

history that paper is a very precarious thing and they must

resort once again to something that has served the people

throughout the world for 6,000 years as true money —

not

because I say so or not because a certain economist said so,

but because history says so.

For this reason, I do think that in due time,

24 possibly even in this decade, we will be in need of another
25

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serious discussion for the acceptance of gold in the monetary

73
1

standard. But, again, I'd like to thank you and express my

pleasure at having served on the Commission.
SECRETARY REGAN: Thank you, Congressman Paul.
Does anyone else have a clarifying question? Governor Partee?
GOVERNOR PARTEE: I hate to follow up a speech like

that with a technical, substantive question, and I'm sure
that most of the members of the Commission really haven't had

much of an opportunity to read these chapters, especially the
later ones; chapter four arrived just late last week.

10 As I read chapter four, though, it struck me that
11 there is a difference between the first part of the chapter
12 and the second part of the chapter.
13 DR. SCHWARTZ: There sure is.
14 GOVERNOR PARTEE: I can see the Commission
15 reviewing and determining that these are adequate points;
16 they are characterizing different kinds of gold treatment in
17 the first part.
18 The second part on the gold market is a self-standing
19 highly technical separate subject. I'm wondering, in fact,
20 whether the Gold Commission really wishes to include this
21 material on the gold market as a part of a chapter that it
22 has read and approved and stands by and behind; or whether,
23 instead, it would rather have that material which is quite
24 interesting, on the gold market as a technical note, as a
25

DBS, Inc.

matter of fact, with Dr. Schwartz's name on it.

74
1

DR. SCHWARTZ:

I would have originally

—

CONGRESSMAN REUSS: The six minutes of the two

minutes that I yielded have now expired.

DR. SCHWARTZ: May I say that I originally thought

of that as an appendix, and then I recast it as part of the

chapter. I admit it's not really related to the initial part
of the chapter; it might be advisable to —

SECRETARY REGAN: I would suggest that each of us

then, take a look and re-read or for the first time, Chapter 4

10 as to whether or not the first portion of that should become
11 a separate paper.
12 DR. SCHWARTZ: I would like to make one final point.
13 You have not yet obtained from me the statistical compendium.
14 That will reach you by the end of this week; that is strictly
15 a collection of time series related to gold that I think
16 completes the coverage of the subject.
17 SECRETARY REGAN: May I say in concluding this
18 meeting that I may not have a chance to speak to each of you
19 and may not have another change apparently to speak to you
20 collectively. I do want to thank the members of this
21 Commission for having served on the Commission.
22 I know this has been a lot of work, unlike many
23 Commissions where the Chair did most of the work and the
24 Commission members merely went along for the ride; in this
25

DBS, Inc.

75
particular one, the members did the work and the Chair went
along for the ride. I certainly do appreciate all of the
3

thought that you gave to the papers you submitted; for having

participated in the lively discussions that we had, although
each of us may feel that his point was not the one that
prevailed.
Nonetheless, I think and I hope each of you can say

8 at least your opinions got a thorough airing. I admit that
Roberts Rules were fractured; I hope not beyond the ability to
10 restore them in any other Parliamentary area.
11 Nonetheless, I recall to your mind that at our
12 first meeting, we decided we would have our own rules. So,
13 the "Golden" Commission rules did prevail.
14 While I hope no one is every going to put them as
15 a subject for future Commissions, nonetheless, there is a
16 precedent that we've now established in having done this.
17 With that, I thank each of you for your services.
18 I am not discharging the Commission; I am merely saying that
19 this meeting is adjourned and probably, I will have to
20 communicate with you once more as to whether we have another
21 meeting or not. We'll let you know that as promptly as
22 possible.
23

Thank you all.

(Whereupon, the meeting was concluded at 12:00 p.m.)

DBS, Inc.

III.

Press Releases
—

June 22, 1981, press release announcing establishment
of the Gold Commission.

— July 6, 1981, press release announcing that
Dr. Anna Schwartz will assist in the work of the Gold
Commission.
— October 22, 1981, press release announcing that Gold
Commission will hold public hearings and invite written
views.
— November 4, 1981, press release announcing that Gold
Commission will hold public hearings and providing
names of witnesses.

Deportment o
WASHINGTON. D.C. 20220 TELEPHONE
run j. rarer, J^ A ATE RELtA&r.
June 22, 19 81
Regan Establishes Gold Commission

Secretary of the Treasury Donald T. Regan announced, today
the establishment of a Congressionally mandated "Gold Commission"
to assess the role of gold in the domestic and international
monetary systems.
The Commission will study U.S. policies related to gold and
will transmit to the Congress a report containing its findings
and recommendations.
Secretary Regan will chair the Commission, which will include
seven members of Congress, three members of the Board of Governors
of the Federal Reserve system, two members of the Council of
Economic Advisors and four distinguished private citizens.
The Commission members are:
Arthur J. Costamagna, Attorney, Mullen and Philippi, Santa
Rosa, Calif.
Herbert J. Coyne, Executive Vice President, J. Aron &
Company, New York, NY
Senator Christopher J. Dodd, Member, Committee on Banking,
Housing and Urban Affairs
Senator Roger W. Jepsen, Vice Chairman, Joint Economic
Committee
Jerry L. Jordan, Member, Council of Economic Advisors
Lewis E. Lehrman, President, Lehrman Corporation, New York, NY
Paul W. McCracken, Edmund Ezra Day University Professor of
Business Administration, University of Michigan, and
former Chairman, Council of Economic Advisors
Congressman Stephen L. Neal, Member, Committee on Banking,
Finance and Urban Affairs
J. Charles Partee, Governor, Federal Reserve Board
Congressman Ronald E. Paul, Member, Committee on Banking,
Finance and Urban Affairs
Congressman Henry S. Reuss, Chairman, Joint Economic Committee
Emmett J. Rice, Governor, Federal Reserve Board
Senator Harrison H. Schmitt, Member, Committee on Banking,
Housing and Urban Affairs
Henry C. Wallich, Governor, Federal Reserve Board
Murray L. Weidenbaum, Chairman, Council of Economic Advisors
Congressman Chalmers P. Wylie, Member, Joint Economic Committee
The Commission will hold its first meeting shortly and is
expected to meet subsequently on an approximately monthly basis.
Congress authorized the Commission in P.L. 96-389.
R-245

o 0 o

FOR IMMEDIATE RELEASE
July 6, 1981

Contact: Marlin Fitzwater
(202)566-5252

ANNA SCHWARTZ TO WORK WITH GOLD COMMISSION

Secretary of the Treasury Donald T. Regan announced on
June 22 the establishment of a Congressionally-mandated
"Gold Commission" to assess the role of gold in the domestic
and international monetary systems.
Today the Secretary announced that Dr. Anna J. Schwartz,
Member, Senior Research Staff, National Bureau of Economic
Research, has been selected to assist in the work of the
Commission, including the preparation of a final draft report,
with recommendations, for approval by the Commission.
»

It is expected that the first meeting of the Commission
will be held about the middle of July.
o 0 o

rREASURYNEWS_
apartment of the Treasury • Washington, D.c. • Telephone 5662041
FOR IMMEDIATE RELEASE
October 22, 1981

Contact:

Mary Boswell Watkins
566-2041

GOLD COMMISSION TO HOLD
PUBLIC HEARINGS AND INVITE WRITTEN VIEWS
The Gold Commission, established by Congress to study U.S.
policy with respect to the role of gold in the domestic and international monetary systems, will hold hearings on Thursday, November
12, and Friday, November 13, 1981.
The hearings will be open to the public and will begin at
10:00 a.m. on November 12 and 9:30 a.m. on November 13 in the Cash
Room of the Main Treasury Department Building in Washington, D.C.
The public is advised to use the Pennsylvania Avenue entrance to
the Treasury Department. The list of witnesses invited to testify
before the Commission will be announced in the next few days.
_' ; The public is invited to submit written statements on the
matters being considered by the Commission. Submissions should
be addressed to:
Gold Commission
c/o Mr. Ralph V. Korp
Director, Office of International
Monetary Affairs
Room 5050
Treasury Department
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Twenty copies of each submission should be provided for
circulation to Commission members. Such submissions may be included in the Commission's report or other publications relating
to the Commission's work. Written submissions should be received
at the Treasury not later than November 30, 1981.

TREASURY NEWS
jepartment
of the
• Washington,
D.c. • Telephone 566-2041
FOR IMMEDIATE
R E LTreasury
EASE
C o n t a c t : Mary Boswell Watkins
November 4, 19 81

566-2041

GOLD C O M M I S S I O N TO HOLD PUBLIC HEARINGS
The Gold C o m m i s s i o n w i l l hold hearings on Thursday, November 1 2 ,
and Friday, N o v e m b e r 1 3 , 1 9 8 1 . The hearings will be open to the public
and will b e g i n at 10:00 a.m. on November 12 and 9:30 a.m. on November
13 in the Cash .Room of the M a i n Treasury Department Building in
Washington, D.C.
The p u b l i c is advised to use the Pennsylvania Avenue
entrance to the Treasury D e p a r t m e n t .
The following witnesses are scheduled to testify before the
Commission.
1.

P 1 == »l<=1
**! O I 1 I — —

h u r s d a y , November 12, 10:00 a.m. - 1:00

D.m.

Dr. R o b e r t A l i b e r
P r o f e s s o r of International Economics and Finance
University of C h i c a g o
C h i c a g o , Illinois
Dr. Henry Mark Holtzer »
B r o o k l y n Law School
B r o o k l y n , New York
Dr. Allan H. Meltzer
M a u r i c e Faik Professor of Economics and Social Science
Graduate School of Industrial Administration
C a r n e g i e - M e l l o n University
Pittsburgh, Pennsylvania
Mr. Andrew G- E.
President
A. R a c z &
New Y o r k ,

Racz
& C h i e f Executive Officer
C o . , Inc.
New York

Mr. Robert E. Weintraub
Senior Economist
Joint Economic Committee
United States C o n g r e s s
W a s h i n g t o n , D.C.
2. Panel 2 —• Thursday, November 12, 2:00 p.m. - 5:30 p.m.
Mr. Ralph Benko, Esquire
A t t o r n e y at Law
P a t t i s o n , S a m p s o n , Ginsberg & Griffin, P.C.
T r o y , N e w York
R-457

- 2Mr. Edward M. Bernstein
President
EMB (Ltd) Research Economists
Washington, D.C.
Mr. David Bostian
President
Bostian Research Associates
New York, New York
Dr. Peter Kenen
Director, International Finance Section
Princeton University
Princeton, New Jersey
Dr. Murray Rothbard
Professor of Economics
Polytechnic Institute of New York
Brooklyn, New York
Dr. Robert Solomon
Guest Scholar
Brookings Institution
Washington, D.C.
Panel 3 — Friday, November 13, 9:^0 a.m. - 1:00 p.m.
Dr. William Fellner
Resident Scholar
American Enterprise Institute
Washington, D.C.
Dr. Alan Greenspan
President
Townsend-Greenspan, Inc.
New York, New York
Dr. Roy Jastram
School of Business Administration
University of California, -Berkeley
Berkeley, California
Dr. Marc Miles
Associate Professor
Department of Economics
Rutgers University, New Brunswick
New Brunswick, New Jersey
Dr. Earl A. Thompson
Professor of Economics
University of California, Los Angeles
Los Angeles, California

Dr. John Williamson
Senior Fellow
Institute for International Economics
Washington, D.C.
Panel 4 — Friday, November 13", 2:00 p.m. - 5:30 p.
Dr. Richard Cooper
Maurits Boas Professor of International Economics
Harvard University
Cambridge, Massachusetts
Mr. Richard Davies
Managing Director
The Gold Institute
Washington, D.C.
Dr. Rudiger Dornbusch
Department of Economics
Massachussets Institute of Technology
Cambridge, Massachusetts
Ms. Helen Junz
Vice President
International Economics
Townsend-Greenspan, Inc.
New York, New York
Mr. Alan Reynolds
Vice President and Chief Economist
Poiyconomics
Morristown, New Jersey
Dr. Hans F. Sennholz
Chairman, Department of Economics
Grove City College
Grove City, Pennsylvania

Full text of Report to the Congress of the Commission on the Role of Gold in the Domestic and International Monetary Systems : Contents of the Commission's Permanent Record : Volume 1 : I. Legislation and Legislative History, II. Record of Meetings, III. Press Releases

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