If the United States had been on an old-fashioned gold standard this year, foreigners would have taken their payment for our trade deficit in gold, rather than in Treasury bills and bonds, shares of stock, office buildings and factories. Gold was, as Karl Marx said it should be, the universal money. Return to the gold standard, and the trade deficit would drain money from America. We would see a shrinkage of credit, a reduction in economic activity followed by a drop in our demand for imports, eliminating our trade deficit at a hefty penalty to our prosperity.
You can see what would have happened to us on a gold standard if you look at what happened to France in 1981-82, when the Socialists came to power determined to get their country moving again.
Much of the jolt they injected into the veins of the French economy stimulated a frantic grab for imports--just as President Reagan's tax cut did in the United States. But foreigners weren't ready to accept French franc paper in return.
The value of the franc fell like a stone on world exchanges, interest rates jumped, unemployment rose as inflation soared, and the Socialists had to reverse their policies. The French had to live in a world that was on a dollar standard, as inflexible from their point of view (especially when Paul A. Volcker was managing the dollar as chairman of the Federal Reserve Board) as gold would be from ours.
It's against that background that one must see Treasury Secretary James A. Baker's suggestion late last month to the annual meeting of the International Monetary Fund and the World Bank. He proposed that the world's central banks determine whether their nations' policies were creating inflation by looking at what was happening to the price of a basket of commodities--including gold.
Having argued in 1980 in my book, "The Fate of the Dollar," that "a multicurrency reserve system requires an external numeraire, which in present conditions can only be gold," I am poorly placed to deny the logic behind the suggestion. But Baker's suggestion was an empty gesture; the same week he made the proposal, he also announced that the President's feet were set in concrete on the issues of no more taxes and no less defense spending. Whether our deficit was creating inflation or not, the President would veto any serious effort to reduce it. As a recent research report from Merrill Lynch pointed out, the use of a standard commodity price index as an indicator would tell the Fed and the European central banks that everyone must now restrict monetary growth and raise interest rates--which Baker and Fed Chairman Alan S. Greenspan have said neither they nor anyone else should do.
The purpose of returning gold to the equation is to establish what is called "automaticity"--that is, a system that automatically, beyond the powers of politics to prevent, forces countries with unwise policies to change them. As the game now plays, weaker countries have automaticity thrust upon them; stronger countries can manipulate their situation.
The central banks and finance ministries of the stronger countries would give something up if they accepted such an external standard. The purpose of coordinating their activities, presumably, is to minimize that sacrifice in an era when rapid information flows tend to send everybody scurrying to the same side of the boat every time the electronic gadgetry delivers a piece of news.
What the Administration has been proposing is that other people shall adjust their economies, at whatever strain, to accommodate our unwisdom. We have, in short, sought to make the world safe for Reaganomics. To prevent a hard landing for the dollar in the spring, the Japanese and German central banks, with a little help from other Asian and European exporters, acquired nearly $70 billion, printing great quantities of their own money in the process. They feel--quite properly--that the inflationary danger posed by this bulge in their money supply prevents them from stimulating their domestic economy further by running still bigger deficits.
Baker's suggestion, in other words, is yet another example of the frivolity that has characterized this Administration's approach to international economics. (In fairness, the Carter Administration may have been even worse.) A dozen years ago at Cornell University, a group of academics delivered a series of lectures on the theme, "America as an Ordinary Country." The curse imposed on the Reagan Administration, which doesn't for a minute believe that America is an ordinary country, is the need to live with the reality this projection has become. The curse on the rest of us is the Administration's response, which is to fake it.