March 26, 2000. It's the Dollar, Stupid

The Fed increased interest rates by the widely expected 25 basis points, and the stock market responded not just with relief but with exuberance. What is more, as The Wall Street Journal observed ("Why the Fed Hasn't Fazed Big Borrowers," March 22, 2000, p. C1): "It isn't only the stock market that is defying the Federal Reserve. So are (get ready for a big list) the bond market, the mortgage market, the corporate-loan market. In short, a lot of what has to do with borrowing."

Asked about the Fed's action, Treasury Secretary Summers chimed: "With these sound fundamentals, supported by fiscal discipline, I believe this expansion has a long way to run." Were the fundamentals really as sound as Mr. Summers suggests, he would have made an unqualified denial of any intervention by the Exchange Stabilization Fund in the gold market. Instead, last week the Treasury Department produced answers to GATA's questions in the form of two letters, one from an acting assistant secretary for legislative affairs and the other from its inspector general.

As will be elucidated more fully in my next commentary, neither letter read carefully directly addresses possible intervention in the gold market by the ESF -- a sui generis body under the exclusive, unreviewable control of the Secretary of the Treasury and the President. Coming more than two months after Alan Greenspan's personal letter to Senator Dodd responding for the Fed to GATA's questions, these letters from lower level Treasury functionaries bear every indication of an exercise in Clintonese.

Last week too, the Commerce Department reported that the January trade deficit hit a record $28 billion, with $34.7 billion of net goods imports offset by $6.7 billion of net services exports. Regional balances included a negative $5.6 billion with Japan, $6 billion with China, $3.6 billion with Western Europe, and $2.5 billion with the so-called NICs (newly industrialized countries of South Korea, Taiwan, Hong Kong and Singapore). A department undersecretary commented (The Wall Street Journal, March 22, 2000, p. A2): "So long as the U.S. has a very healthy rate of return on investments in U.S. enterprises, we'll continue to attract the financing we need to carry the trade deficit." His observation comes much closer to the truth than anything said by Mr. Greenspan or Mr. Summers.

The following table of international monetary reserves is taken from the IMF, International Financial Statistics, March 2000 (figures mostly as of December 1999/January 2000), and World Gold Council calculations based thereon (, with corrections for Dutch and British gold sales through March 2000. All figures except metric tonnes of gold are in US$ billions, with gold converted at US$295/oz. and SDRs translated at a rate of SDR1 to US$1.37. Although foreign exchange reserves are stated in dollars, their composition while predominantly dollars also includes other hard currencies (e.g., euros, yen, pounds). Other reserves are primarily IMF Special Drawing Rights (SDRs) and IMF reserve positions.

  Country/            Gold     Gold @    Foreign   Other   Percent
   Area/Org.        (Tonnes) US$295/oz.   Exch.     Res.   in Gold

   Euro Area         12457      118       225      25.5      32.1
     Germany          3469       32.9      51.5     8.1      35.6
     France           3025       28.7      33.8     5.7      42.1
     Italy            2452       23.3      18.3     3.6      51.5
     Netherlands       912        8.6       6.2     3.4      47.5
     Portugal          607        5.8       8.1      .4      40.4
     Spain             524        5        32.1     1.9      12.7
     Austria           408        3.9      13.9     1.1      20.5
     Belgium           258        2.4       8.4     2.5      18.3
     Fin.,Ire.& Lux.    55        0.5      11.1     2.3       3.7
     ECB               747        7.1      41.6    (3.5)     15 
   Switzerland        2590       24.6      30.2     2        43.3
   United Kingdom      590        5.6      24.5     5.7      15.6
   Swe.,Den.,Greece    384        3.6      51       3         6.3
   Japan               754        7.2     283       8.9       2.4
   China               395        3.7     155       3         2.3 
   Hong Kong             2.1      0        96      `0         0
   Taiwan              435        4.1     107       0         3.7
   India               358        3.4      32       0.7       9.4
   Russia              415        3.9       8.5     0        31.7
   So. Korea            13.6      0.1      77       0         0.2
   Indo.,Malay.,Sing.  134        1.3     134       1         1.0
                     -------    -----    ------   -----      ----
     Sub-Totals      18527      176      1223      50        12.1

   United States      8139       77.2      32.2    28.3      56.1
   IMF                3217       30.5
   BIS                 203        1.9
   All Others         2821       26.7     451      22         5.4
                     -------    -----    ------   -----      ----
    Totals          32907      312      1706     100        14.7

There are a number of points about this table worth noting. Among the more salient are: (1) long continued U.S. trade imbalances have caused huge dollar reserves to build up in a relatively few surplus nations; (2) virtually all these nations continue to run large trade surpluses with the U.S. as evidenced by the most recent trade figures; (3) the Euro Area, given its large gold reserves and continuing substantial trade surpluses, has some $200 billion in unneeded foreign exchange reserves; (4) gold reserves outside Europe and the U.S. are relatively tiny; (5) at US$295/oz., gold provides less than 15% of official world liquidity, but gold remains the next largest single component of international monetary reserves after the dollar; and (6) despite its position as a chronic deficit country, the U.S. declines even during periods of dollar strength to expend dollars to build up its foreign exchange reserves.

Two points deserve special mention. First, official monetary institutions hold a little less than one-third of the above-ground gold supply. At US$295/oz., all the gold in the world equals around $1 trillion, or less than the total combined current market capitalization of Microsoft and Intel. This comparison against the market cap of just two companies is an indication of not only current stock market madness, but also the egregious relative undervaluation of gold versus dollars.

Second, the overhang of dollars is highly concentrated in a few central banks. Accordingly, a rush to exit dollars by just one large holder could easily produce a stampede. So too, a major move into gold by one of the large Asian holders of dollars could rapidly evolve into a gold buying panic.

Not shown in the foregoing table is the dramatic slowdown in the growth of world foreign exchange reserves. The following table shows total foreign exchange reserves as reported by the IMF for all member countries from 1992 through 1999. The figures, reported in SDRs, are given in US$ billions for the end of each period translated at the appropriate end of period rates.

                      1992  1993  1994  1995  1996  1997  1998  1999

 Total Foreign 
   Exchange Reserves   926  1030  1184  1385  1561  1610  1636  1708
 Increase from
   Prior Year                104   154   201   176    49    26    72
 Percentage Increase
   From Prior Year           11.2   15    17   12.7   3.1   1.6   4.4

The IMF's statistics cover only official monetary reserves. They do not include private investment flows. The following table is taken from the Federal Reserve Bulletin, March 2000 and November 1997, Tables 3.15, 3.24 and 3.25. All amounts are in US$ billions; 1999 figures are as of Nov. 30 or for the first 11 months.

        Category                       1995  1996  1997  1998  1999 
    U.S. Liabilities to Foreign
         Official Institutions            631   759   777   760   781
    Net Foreign Purchases
         of U.S. Treasury Bonds           134   245   184    49   -15
    Net Foreign Purchases
         of U.S. Stocks                    11    12    70    50    99 
    Net Foreign Purchases
         of U.S. Bonds                     87   128   134   179   236
    Net U.S. Purchases of
         Foreign Securities               -99  -106   -89   -11     9

Taken together, these two tables suggest that the current dollar-based international financial system is on the cusp of dramatic breakdown. Official international liquidity has almost ceased to grow as official monetary institutions refuse to continue to add to their dollar reserves. The international dollar liquidity created by U.S. trade deficits now shows up not in official reserves but as private investment in the U.S. financial markets. At the same time, private U.S.investors have largely exhausted their exodus from foreign financial markets.

The importance of capital and investment flows, and particularly cross-border equity investments, in determining current exchange rate movements is the subject of a recent article in The Economist ("Test-driving a new model," March 18, 2000, p. 75). Noting that the "the new correlation between stock markets and exchange rates may be fickle," The Economist nevertheless opines (p. 76): "The key to the dollar's future almost certainly lies in Wall Street; a bursting of stockmarket euphoria would drive down the dollar sharply." In the meantime, the more the U.S. buys from foreigners, the more dollars return for recycling into stocks at ever higher valuations. What's really new about today's American economy is not its technology. It's America's ability, courtesy of foreigners, to buy itself rich.

None of the tables above includes much in the way of non-interest bearing currency, which official monetary institutions and private investors hold only in small amounts. Steve Hanke, the leading advocate of currency boards, estimates that 70% of U.S. currency circulates outside the country, as do 35% of German marks. See S. Hanke, "How to Abolish Currency Crises," Forbes (March 20, 2000, p. 145) ( Of course, U.S. currency circulating overseas also represents dollars that could flood into official monetary authorities in a dollar crisis.

Currency boards linked to the dollar are a means of sopping up dollars outside the U.S. It is perhaps not coincidental that Congress, as Mr. Hanke points out, is now considering legislation which would authorize the Fed to share seigniorage with countries using dollar-based currency boards. With all due respect to Mr. Hanke, small nations contemplating this route should tread very carefully, and he should include in his advice a full analysis of the longer term prospects for the dollar. More to the point, the first table shows that smaller, less-developed countries generally hold a very small proportion of their total reserves in gold, and thus will be among those most devastated by any dollar collapse.

Flight by foreign investors from falling U.S. financial markets is the Fed's doomsday scenario. Nor do foreign monetary authorities, already choking on excess dollars, want to be buried in an avalanche of rapidly depreciating greenbacks. Against this picture, current runaway U.S. financial markets -- bad as they undoubtedly are -- appear almost benign. Fear of a cascading dollar collapse explains the Fed's unwillingness to apply strong monetary medicine, the Secretary of the Treasury's covert efforts to contain the gold price through the ESF, and foreign reluctance to rock the shaky dollar boat.

What the foregoing tables cannot reveal is the trigger or the timing. No financial minister or central banker wants to be blamed for launching the world into a monetary black hole. Most would probably prefer that the crisis be precipitated by a geopolitical event extrinsic to the international financial system. But make no mistake, while none can know for certain how events will play out, all will act in what they consider the best financial interests of their nations when the crisis hits.

All these tables and figures point to one inescapable fact: when the dollar goes, gold will regain its glory. In 1971, the only viable alternative to Bretton Woods was floating rates centering around the dollar. No other currency had the size or depth to perform all the necessary functions of international settlement, let alone to do so over the objections of the U.S. and with the Cold War underway. But with the end of the Cold War and the birth of the euro, the major industrial nations of Continental Europe are no longer willing to be the monetary vassals of America. Having retained the bulk of their historic gold reserves, they are prepared to proceed on a more traditional monetary path in which gold -- not the U.S. dollar -- is the international monetary numeraire. They may not want to rock the boat, but they are quite prepared for the storm.

March 19, 2000. Defining Tuesday: Financial General or Market Appeaser?

Alan Greenspan and his colleagues on the Federal Open Market Committee have been given that rare opportunity: a second chance. The Fed's 1998 rescue of LTCM, subsequently exacerbated by its efforts to head off any Y2K-related liquidity shortages, has created an acute problem of moral hazard in the financial markets. Nowhere is the apparent asymmetry of Fed policy more evident than in the stock market, where market participants simply do not believe that the Fed is prepared to risk a bear market. The question is simple: who is in charge here? The Fed or the financial industry.

Last week's truly extraordinary volatility in the stock market provided further evidence, should any be needed, of a U.S. financial system running out of control. But these same market events also put the Dow and the NASDAQ back into relative balance, both less than 10% from their highs. At the same time, the newest PPI and CPI numbers were sufficiently indicative of inflation to be worrisome notwithstanding ample spin to the contrary. Inflation numbers in Canada and the EU, both of which maintain more reliable official statistics than Washington, were also higher. The ECB, with less of an inflation problem properly measured than the U.S., raised interest rates 25 basis points. Public concern over the inflationary implications of rising oil prices is mounting.

On the political front, both major parties now have their presidential candidates. While this development promises an excruciatingly long campaign, it also gives the Fed a small window in which to act without seeming too overtly political. Unexpectedly high CPI numbers moving into the summer and fall will permit no such apparent neutrality.

In short, the Fed has been handed the best opportunity that it could reasonably have wished to try to jolt the markets back into sanity without virtually assuring a crash. What action the FOMC will take on Tuesday is anyone's guess. What it ought to do is increase both the discount rate and the target rate on federal funds by 50 basis points, putting them at 5.75% and 6.25% respectively. It should also raise initial margin requirements under Regulation T to 75%. Even if higher margin requirements disadvantage small investors, they would tend to move them toward the sidelines sooner rather than later. Indeed, the protection of small investors is far closer to the original purpose of Regulation T than providing them with access to credit on a par with institutions.

Taken together, these actions would surprise most market participants and likely trigger a sharp market correction, but there is at least some reason to hope that the decline would stop short of outright panic. March options expired last week, and other option players should at least have been cautioned by the extreme volatility. What is more, the Fed's prior rate increases have not done much more than take back the cuts it implemented to ease the Russian default/LTCM crisis. Only now is it really beginning to traverse new ground. In any event, there is never a good time to try to deflate a bubble, but there is never likely to be a better time than Tuesday.

Should the Fed move instead to accommodate the consensus prediction of another increase of 25 basis points, it will miss what historians are likely to view as its last best chance to avoid anything other than an unprecedented debacle. To carry on the metaphor from my last commentary, Tuesday may then be Mr. Greenspan's Munich.

March 14, 2000. Collision Course: Gold and Greenspan

Alan Greenspan has not always had as much difficulty defining money and differentiating it from credit as he did in his Humphrey-Hawkins testimony quoted in the prior commentary. In his 1966 essay "Gold and Economic Freedom" (reprinted in A. Rand, Capitalism: The Unknown Ideal), the future Fed chairman discussed the consequences of the Federal Reserve's decision in 1927 to reduce interest rates in response to a mild U.S. contraction and continuing losses of British gold due to its politically inspired lower rates:

The "Fed" succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

Today the Fed's critics see wild speculation, particularly in the technology sector where stock market valuations exceed all historic norms of rationality. However, the Fed chairman is among the most influential propagandists for the so-called "new" economy. Cogent commentaries on the new economy by Veneroso Associates ( suggest not only that the new economy's claimed productivity increases are greatly exaggerated, but also that no one should be more aware of the shaky statistical foundations that underlie them than Alan Greenspan. See "The Myth of the Productivity Miracle: Part III," Sept. 20, 1999, pp. 2-3. Indeed, as he must know, the U.S. is the only major country in the world that uses the hedonic price deflator to adjust its GDP statistics for the increased power of computers. See "The Myth of the Productivity Miracle: Part II," Sept. 20, 1999, p. 7. While the distortions of GDP resulting from this practice are difficult to quantify precisely, there can be no question but that the result is a significant overstatement of GDP relative to both historic experience and other nations.

Wide availability of high speed computer power has given birth to a huge business in financial derivatives. Indeed, the Black-Scholes option pricing formula in combination with dynamic or so-called "delta" hedging has revolutionized financial markets. Highly complex trading strategies based on these concepts produced the 1998 LTCM debacle (, which sufficiently threatened the world payments system to scare the Fed into three interest rate reductions when it should have been moving in the other direction. Nevertheless, both Mr. Greenspan and the Secretary of the Treasury have portrayed financial derivatives as useful financial stabilizers not requiring further regulation by Congress. See, e.g., Statement of Board of Governors of the Federal Reserve System, House Banking Committee, March 25, 1999,

Black-Scholes and delta hedging require estimates of volatility based on historic experience and operate properly only in fully liquid markets. Whatever the benefits of financial derivatives in normal markets, unexpected volatility or loss of market liquidity can raise havoc with them, leading not just to large losses but to market destabilizing events. Like LTCM, the problems of Ashanti, Cambior and certain gold banks brought on by the Washington Agreement illustrate what can happen when financial derivatives crash on wrong assumptions or abnormal conditions. John Hathaway with his usual insight gives an update on the gold banking situation in his most recent article, Apocalypse No (Feb. 2000,

Similar incidents are possible in interest rate or stock market derivatives, particularly under the unusual conditions that could follow from the Treasury's bond repurchases or an unwinding of current egregious overvaluations in leading NASDAQ tech and net stocks. Far more frightening, however, would be the consequences of a panic flight from the dollar on almost all financial derivatives.

A statistical analysis of recent gold price movements provides further evidence of Anglo-American manipulation of the gold market. See H. Clawar, A New Gold War? (March 13, 2000, While Mr. Greenspan denies that the Fed is trying to control gold, he must know whether the U.S. and British treasury departments are actively involved in a coordinated scheme to cap the gold price. Indeed, the vehemence of the denial that he made to Senator Lieberman regarding possible Fed interference in the gold market suggests an effort to distance both the Fed and its chairman from an expected future scandal over manipulation of the gold price. Yet as long as this manipulation takes place sub rosa, gold's usefulness as a monetary indicator is compromised. One result is unwarranted criticism of the Fed's efforts to restrain credit growth. See, e.g., J. Wanniski, "The Numeraire" - Supply-Side University: Spring Semester, Lesson #6, March 10, 2000 ( ("There can be no 'inflation' or 'deflation' with gold constant," and only a "noodlehead" would think otherwise.)

The Fed chairman acts as if the new economy is the productive miracle that its fans assert, financial derivatives are the generally benign stabilizers that their promoters claim, and the gold price is as sensitive as ever to monetary debasement. In the process he has put himself in the same position as his predecessors in 1927-29. Speculative imbalances, fed by grossly excessive credit creation and abetted by dubious financial hedging strategies, are allowed to grow. At the same time, the gold market -- with British connivance -- is rigged. But what is different this time is that the gold standard cannot be made the scapegoat for the Fed's errors.

Domestically, of course, the currency is no longer tied to gold. Going off gold was supposed to give the central bank greater flexibility in managing the nation's money supply. Instead, the end result has been to undercut not just its ability to regulate money and credit but also the very foundation of the banking system itself. Banking depends on a workable distinction between money and credit. Without it, the Fed cannot control the growth of the broad monetary and credit aggregates, and banks no longer possess a unique franchise separate and distinct from other financial intermediaries.

Money market funds buying commercial paper, government agencies like Fannie Mae and Freddie Mac securitizing loans, and brokerage firms making margin loans all act effectively to expand credit, but they do so outside the constraints of bank reserve and capital requirements. For an interesting discussion of this process and its effects on the monetary aggregates, see D. Noland, "The Credit Bubble Bulletin - Commercial Paper," March 10, 2000 ( Banking based on gold is a demanding business that done properly is a public good; banking without gold is a crippled business that, however done, has heretofore always ended in an orgy of paper and national ruin.

Internationally, the euro is poised to assume many if not all of the settlement functions that since 1971 could only be performed by the dollar notwithstanding the breakdown of the Bretton Woods system. What is more, unless the ECB and EU nations lose their nerve, the days of the U.S. and Britain dictating international monetary arrangements are over. There is no practical bar today to the euro bloc declaring full independence from the dollar by linking the euro to gold in some meaningful fashion. Indeed, a simple declaration that henceforth most of the EU's international monetary reserves will be held in gold rather than foreign currencies would likely have major adverse consequences for the dollar and the pound.

Nor is monetary confrontation with the euro the only possible nightmare scenario for the dollar. A problem for any world reserve currency is that major external holders of the currency have a potential weapon they can use against the reserve currency country. The importance of this weapon is magnified when the domestic financial structure of the reserve currency country is overextended or its external accounts are out of balance. Thus today, for example, any major confrontation between the U.S. and China over Taiwan would inevitably be complicated not only by questions about what China might do with its very substantial dollar reserves, but also by what other large holders of dollar reserves might do to counter any perceived threat to the value of their holdings.

What was once known as the Great War became the First World War largely due to the unwillingness of western democracies to face hard facts at domestic political cost. What Mr. Greenspan was able to call the Great Depression could well become the First World Depression for fundamentally similar reasons. Although another global depression would almost certainly knock the dollar from its reserve currency perch, it would mark not so much the end of a dollar-based financial world as the end of an illusion: that paper can replace gold as permanent, international money.

Just as the Second World War forced a return to greater realism in the conduct of international relations, a Second World Depression should bring about restoration of a more normal gold-based international monetary system. But in this event, Mr. Greenspan, having set out to play Mr. Churchill, is likely to end in the role of Mr. Chamberlain -- the man run over by realities that he could not see or would not admit.

March 7, 2000. Definitions of Money in Congress: Webster vs. Greenspan

Daniel Webster addressed the subject of the nation's money in a speech on the Specie Circular delivered in the Senate on December 21, 1836:

Currency, in a large and perhaps just sense, includes not only gold and silver and bank bills, but bills of exchange also. It may include all that adjusts and exchanges and settles balances in the operations of trade and business; but if we understand by currency the legal money of the country, and that which constitutes a legal tender for debts, and is the standard measure of value, then undoubtedly nothing is included but gold and silver. Most unquestionably there is no legal tender, and there can be no legal tender in this country, under the authority of this government or any other, but gold and silver, either the coinage of our own mints or foreign coins at rates regulated by Congress. This is a constitutional principle, perfectly plain and of the highest importance. The States are expressly prohibited from making anything but gold and silver a legal tender in payment of debts, and although no such express prohibition is applied to Congress, yet, as Congress has no power granted to it in this respect but to coin money and to regulate the value of foreign coins, it clearly has no power to substitute paper or anything else for coin as a legal tender in payment of debts and in discharge of contracts. Congress has exercised this power fully in both its branches; it has coined money, and still coins it; it has regulated the value of foreign coins, and still regulates their value. The legal tender, therefore, the constitutional standard of value, is established and cannot be overthrown. To overthrow it would shake the whole system.

At the time of these remarks, the nation was in the midst of a speculative boom in western lands. Webster himself was an active buyer, becoming so overextended that for a time he considered resigning from the Senate to work on restoring his personal finances. President Andrew Jackson sought to curb the speculation by directing the Treasury to require payment in gold or silver for public lands, a measure he took on his own authority and without action by Congress. Webster was aghast, considering the measure both ill-advised and beyond the President's authority. The boom collapsed in the Panic of 1837, blamed by Webster and many others on the specie measure, but attributed by most historians to the Bank of England's sudden restriction of loans to the U.S.

Responding to a question by Congressman Ron Paul (Rep., Tex.), Federal Reserve Chairman Alan Greenspan spoke to the subject of the nation's money in his Humphrey-Hawkins testimony on February 17, 2000:

By definition, all prices are indeed the "ratio of an exchange of a good for money." And what we seek is what that is. Our problem is we used M-1 at one point as the proxy of money, and it turned out to be a very difficult indicator of any financial state. We then went to M-2 and had the similar problem. We have never done M-3 per se because it largely reflects the extent of expansion of the banking industry. And when in effect banks expand, in and of itself, it doesn't tell you terribly much about what real money is.

So our problem is not that we do not believe in sound money. We do. We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employed is whether it gives us a good forward indicator of the direction of finance and the economy.

Regrettably, none of those which we have been able to develop, including MZM -- has done that. That does not mean that we think that money is irrelevant. It means we think our measures of money have been inadequate. And, as a consequence of that, we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes, until we are able to find a more stable proxy for what we believe is the underlying money in the economy.

Question by Dr. Paul: "So it's hard to manage something you can't define?"

Answer by Mr. Greenspan: "It is not possible to manage something you can't define."

What irony! Daniel Webster, senator and speculator, arguing for a flexible currency, gives an irrebuttable defense of gold and silver as the constitutionally mandated standard of value and sole legal tender. Alan Greenspan, Fed chairman and lionized central banker, professing allegiance to sound money, cannot identify what constitutes money in today's economy.

The monetary provisions of the Constitution have never changed. What has changed are the interpretations that politicians and judges put on them. The result is that the actual money of the country has gone from a thing that could be easily defined to a notion that defies all attempts at definition. In the process, the concept of a true standard of value has been lost, and the distinction between money and credit has been obliterated. The ultimate consequences are almost too fearful to contemplate.

The next President is almost certain to face a full-blown currency crisis. Bushwacked or Gored, a collapsing dollar will likely carry the next administration and its party into political oblivion. Nor would John McCain's economic prescription -- Alan Greenspan, alive or dead -- offer much hope for a different result. Indeed, of the candidates still standing, only Alan Keyes has demonstrated either the inclination or the intellectual firepower to tackle major constitutional issues in a meaningful way. Unfortunately for the Constitution, the odds are no more favorable for him than for the dollar.

February 29, 2000. British Monetary Disarmament: First Signs of Concern?

The cataclysm he foresaw had arrived. Poland lay prostrate, partitioned into German and Russian zones. In a broadcast less than a month after returning to the Admiralty and joining the War Cabinet, the First Lord stated: "I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma. But perhaps there is a key. That key is the Russian national interest."

Today's gold market is no easier to read than Russian intent in October 1939. But there is a key. It is the concept of gold as permanent, natural money. Those who consider sound money based on gold just a quixotic dream of gold bugs are making the same mistake as those who thought that "peace for our time" could be secured by diplomacy alone. Military power is the necessary weapon of last resort in politics among nations. Gold is the money of last resort in international finance. These lessons are as unyielding as any that history teaches.

At long last Britain's two leading financial publications are taking an interest in the gold market. Surely they have known for some time that neither Prime Minister Blair nor any of his ministers has offered an even faintly persuasive explanation for the gold sales being conducted by the Bank of England on behalf of the British Treasury. Although both journals write frequently about the euro and the challenge it poses to sterling, the huge gold hoard available to support the new European currency does not appear to impress them. Rather, what seems to have caught their attention are American gold bugs and their conspiracy theories about manipulation of the gold price.

Two weeks ago Barry Riley, well-known columnist for the Financial Times, wrote a piece headed "The battle over bullion" (FT, Feb. 12, 2000, p. XXVI) ( Mr. Riley's principal source appears to have been GATA's web site, which he describes as "an entertaining web site where the conspiracy theory is debated endlessly." What is more, he sets out in considerable detail the hypothesis advanced here in Two Bills: Scandal and Opportunity in Gold, reprinted at the GATA site. Although he cannot resist a dig or two at the gold bugs, he tosses some well-aimed darts at Treasury Secretary Lawrence Summers as well. Then, echoing George Bernard Shaw's famous line about gold and politicians, Mr. Riley concludes: "Fixed-interest bonds and gold bullion represent two very different asset classes. One depends on faith in the long-term probity of politicians, the second offers a crude defence against their wars, taxes and inflations. Both markets have become huge speculative casinos, and neither seems to be under very good control."

Last week The Economist (Feb. 19, 2000, p. 71) took note of gold in an article entitled "Yellow peril" ( Admitting that it's getting harder to dismiss the gold bugs as "flat-earthers, clinging to outdated ideas," the unsigned column concedes that "underlying supply and demand for gold suggest that prices should be rising more strongly." Placing most of the blame for low prices on gold sales by central banks (but curiously failing to mention those of the BOE), The Economist concludes: "But the [central-bank supply] overhang is still there, leading to rumours that some central banker is covertly selling gold. Alan Greenspan, the Fed's chairman, has issued strong denials that it is he. But another thing gold bugs love is a good conspiracy theory. And, after all, if not the Fed, then who?"

Despite the brickbats, the FT and The Economist deserve some credit. At least they have picked up the gold story in reasonably intelligent fashion, more than can be said for their brethren on this side of the pond. But given the high level contacts and vast resources of these journals, it would be nice to see them do a little investigative reporting of their own. No major currency faces a more uncertain future than the British pound. By selling down its gold reserves, Britain is rapidly losing all room for maneuver in any upcoming battle between the dollar and the euro, both of which can call on substantial gold reserves. Yet while Britain's top financial writers uncritically accept the government's official but nonsensical justification for them, Britain's gold sales look dumber by the day.

Last time that the British were forced off the Continent, they were able to return with the American Army. Having spurned the euro at its debut, how does Britain get back into the EMU? Quite apart from meeting criteria for convergence that now look to be running the wrong way, there is an entry fee -- payable partially in gold. Currently the EMU is considering a possible doubling in the amount of foreign reserve assets -- currently 85% foreign currency and 15% gold -- that must be deposited with the ECB by member central banks ( In January 1999 the EMU refunded to Britain 143 tonnes of gold in consequence of its decision not to join the euro's first round. Four tranches into its current gold sales program of 415 tonnes, Britain has reduced its total gold reserves to 615 tonnes. At the end of its current sales, only 300 tonnes will remain, barely enough to cover a deposit to the ECB in an amount equal to twice its 1999 refund.

Any thought of still further increases in mandatory deposits with the ECB, or perhaps more likely an increase the percentage that must be in gold, does not appear to concern Mr. Blair's government. It plans to continue its prepare-and-decide policy, which it hopes will ultimately persuade a skeptical British public to embrace the euro. But just in case another American rescue might be needed, the U.S. International Trade Commission, at the joint request of Senate Finance Committee Chairman William Roth (Rep., Del.) and ranking member Senator Daniel Patrick Moynihan (Dem., N.Y.), plans hearings in April on the economic consequences for the U.S. should Britain be allowed to join NAFTA ( Only the most conspiratorially-minded could imagine any conceivable link between British gold sales quite possibly triggered by a U.S. request and American support for closer British ties to the dollar bloc, including eventual British entry into NAFTA.

But whatever the inanities of official Anglo-American monetary policies, we gold bugs carry on. Our motto: Never give up! Without an ultra machine, we have something almost as good: the internet. Linux hackers are not the only online community that can revel in the Gandhi quote: "First they ignore you. Then they laugh at you. Then they fight you. Then you win." What was once "the brightest jewel in the British Crown" is today even brighter, having imported each year since 1970 an amount of gold equal to 25% to 30% of annual world production. And on the conquering isle, what was once a pound is even at today's low silver prices less than a third of an ounce. Gandhi himself could scarcely have imagined a monetary score so lopsided.