Golden Words and Paper Promises
"Truly, it is hard to imagine that it could be any standard other than gold, yes, gold whose nature does not alter, which has no nationality and which has, eternally and universally, been regarded as the unalterable currency par excellence." Charles de Gaulle
Honour to the memory of Charles de Gaulle: the last statesman to admit that gold might know better than statesmen did. That was 30 years ago and, ever since then, ministers and central bankers have been trying to push an inconvenient competitor onto the sidelines. The struggle continues. De Gaulle's words should be carved in stone, in letters (naturally) of gold. The time had come, he said, to establish the world's monetary system on a standard that was not in any country's gift: "Truly, it is hard to imagine that it could be any standard other than gold, yes, gold whose nature does not alter, which has no nationality and which has, eternally and universally, been regarded as the unalterable currency par excellence." Paper money would not do. The post-war monetary order laid down at Bretton Woods in effect put the world on a dollar standard, though the dollar was formally backed by the gold in Fort Knox. Now the Americans, so de Gaulle argued, were abusing the power of the printing press - to finance the war in Vietnam or to buy their way into Europe. The central bankers' gold pool was holding the price at $35 an ounce. De Gaulle pulled the Banque de France out of the pool and set it to buy gold.
That was the turning point, for gold and for the system. President Roosevelt had set the price at $35 before the war (apparently by throwing dice) and it was no longer defensible. The central banks, true to form, tried to defend it. They sold 2,678 tonnes in five months, and then broke up their pool and withdrew from the market. The gold price, they pretended, was still $35, but only when they dealt with one another. In the world outside, the price took off.
The fantasy world inhabited by central bankers lasted three years longer. This time it was the British who struck the fatal blow, albeit by accident.
Suspecting that the Americans were about to snap the link between gold and the dollar and close the window at Fort Knox, the Treasury expressed a tactless interest in converting Britain's dollars into gold. Crash went the window, snap went the link, and the dollar came off the gold standard. The Bretton Woods system could not and did not survive it.
Instead, the world had paper money, changing hands at rates which had been set free to float. To ministers and central bankers, it all looked too easy. They were apt to forget that a currency which had lost value abroad would go on to lose value at home. The dollar's managers forgot that. They pursued a policy that veered between benign neglect and competitive depreciation. (Sometimes these viruses seem to recur.) They got double-figure inflation and a stampede out of the dollar into its competitor: gold.
That was competition in action. The price of gold doubled in a fortnight and doubled again. At its peak it came close to $1,000 an ounce. Paul Volcker, the dollar's new manager, was in Belgrade, where the International Monetary Fund was meeting in a specially built glass-house. Quitting this world of illusion, he flew home, tightened money and jerked interest rates up. He recovered control at the price of a serious recession which spread through the developed world. Ministers and central bankers could agree that this was not their fault. So it must be gold's fault.
They set out to bomb the price by unloading their reserves. They made their paper products more competitive by allowing them to be more portable. They were helped by the collapse of the Soviet Union and the looting or clandestine sale of a large part of its gold reserves. The bullion robbers knew that gold had always been portable. (As de Gaulle said, it has no nationality.) After a decade of this treatment, the price was still almost ten times as high as it was in the days of the gold pool. Then more central banks announced their intention of selling. Then the price turned.
As investors, the world's central bankers were in a class of their own: the dunces' class. Like muddled hens on golden eggs, they sat on their reserves until they addled and then started pushing them out of the nest. They are the world's largest hoarders of gold and they ought to want the best for their investment - a strong market and a good price. With active management, they would be on their way to it.
As bank note printers, they want the exact opposite. They are licensed to print money, with monopolies in their own countries, backed by statute. So, they become a mutual benefit society, scratch each others' backs and hold each others' promises to pay. Europe's ministers and central bankers plan to go further and establish a single currency, with a monopoly that will be spread across a continent. The people on the losing end of a monopoly can only be the customers: the holders of money.
In the 30 years since de Gaulle's words of golden wisdom, the dollar price of gold has risen by a factor of 11 and the sterling price of gold by a factor of 20. Sterling has lost nine-tenths of its domestic purchasing power. This, we might say, is what happens when money is a paper boat that has hauled up its anchor.
It is also what happens when governments outspend their means and try to borrow their way out. Their debts pile up, and compound interest develops a momentum of its own. The world cannot count on getting through the next downturn without some supposedly advanced economy having to reschedule its debt, but the quiet way out of debt is depredation. It will pay to be selective about central bankers' promises. None of them looks quite as good as gold.
The great liberal economist Friedrich Hayek argued that competition would serve to keep money honest. It was a mistake, he said, to give the organs of the state a monopoly of printing money, lucrative as that might be. (The Bank of England's note issue department makes almost £1 billion a year.) No wonder that ministers and central bankers want to see off their oldest competitor. Portable, immutable and universal, it has seen them off before now.
Christopher Fildes OBE is one of the UK's premier financial columnists, contributing columns to the Daily Telegraph and the Spectator as well as being a director of the Spectator and contributing editor of Euromoney (of which he was founder-editor). Mr FiIdes is the only writer to have twice won the Wincott Award, regarded to be the senior award for financial journalism.