Polyconomics' Daily Memo on the Margin (commentary taken from http://www.polyconomics.com) December 27, 1999
Jesus Christ, Reference Point
Memo To: John McLaughlin From: Jude Wanniski Re: A Christmas Sermon
As a former Catholic priest who chose some 20 years ago to cross over into the world of secular sermons, as a talk-show host, you will appreciate the connection I made while listening to the Christmas sermon at the RC Church of Christ the King in New Vernon, N.J. The young priest, Fr. Paddy O'Donovan, who had been raised and ordained in Ireland, chose as his theme the imagery of Christ having been the Way and the Light for 2000 years. He told of an experience when he was a teenager, in the dead of one rare Irish winter where the lakes froze. He and two friends walked a few miles in a pitch black moonless night to the nearest lake, where they frolicked, running and sliding. Suddenly, they heard the sharp sounds of the ice cracking, and frightened, looked for a way off the lake. Because they had lost track of direction and the darkness was so thorough, they had no idea which way to go. Frantic, they looked in every direction and finally spied one light, which they knew would be "Casey's farmhouse," giving them, he said, "a reference point." While fearing for their lives, that one point of light enabled them to make their way safely off the lake to the security of Casey's farmhouse. To have been a follower of Christ over these 2000 years, you could lose your way again and again in the darkness, but when the ice begins cracking around you, you could remember the Way and the Light to security, to salvation.
I had to smile to myself, John, as I had been sitting there at Christmas mass worried about the Y2K computer bug and how difficult it will be for the world currency markets next week without a "reference point." You may have seen the op-ed I wrote for the Washington Times the previous weekend, urging our government and central bank to fix the dollar/gold exchange rate and to encourage the Europeans and Japanese to fix their currencies to this anchored dollar just in case. The only reason the modern world economy can function with 180 different currencies without the clear reference point that gold always provided prior to 1971 has been the power of powerful computers to keep track of hundreds of billions of contracts. It was only a few years ago, John, when almost all contracts managed by the world banking system were tracked manually, with ledgers and calculators. It could be managed then only because the dollar was fixed to gold at $35 an ounce, and our dollar was the world's key currency, its standard of measure. When other countries fixed to the dollar, they automatically fixed to gold. Instead of 180 different measures, there was one.
In further coincidence, back in 1987, I even persuaded James Baker III, when he was Treasury Secretary, to recommend to the International Monetary Fund that the major central banks of the world coordinate monetary policy, using a basket of commodities including gold, as the reference point. In other words, if the Deutschemark and dollar tried to fix to each other, they would not be able to tell which of their central banks were too easy and which too tight, unless they had an external "reference point." Baker made the proposal at the IMF meeting in early September, and as fate would have it, in October he got into a dispute with the Bundesbank over the dollar/DM exchange rate as the dollar slid against the DM. If Baker were on the system he had proposed just a month earlier, he would have had to defend the dollar by tightening monetary policy -- as the gold price was rising against a stable DM/gold price. Simultaneously, the new Fed chairman, Alan Greenspan, told Fortune magazine he thought the dollar was overvalued. Wall Street thought these guys had been informally coordinating the dollar/DM since February, in a deal struck in Paris, the Louvre Accord. Now that deal was blown and, if you recall, the stock market crashed. The Dow Jones Industrial Average lost a third of its value in a few days -- about the same as the Crash of 1929. If you would give JBIII a call, he will confirm that I met with him in his Treasury office six days before the Crash, bringing him a message from Professor Robert Mundell. (Mundell, of course, is the Canadian economist who just won the Nobel Prize in economics for 1999.) Mundell told me to tell Baker he should do everything in his power to defend the dollar, even if it meant selling gold from Fort Knox. Alas, JBIII may have heard what I was saying, but his other Treasury advisors nixed the idea and leaked their willingness to let the dollar decline to the Sunday NYTimes. On Monday, Wall Street crashed!
Well, at least there was no Great Depression. Instead of compounding that error and its implications for the taxation of inflated capital gains, Greenspan sobered up and worked fervently in the years that followed to prevent the gold price from rising. Indeed, his willingness to deflate the dollar from 1996 on, with gold losing $100 an ounce, may have crushed commodity producers here and around the world, but it has been good for the NASDAQ/Internet stocks, which are happy there will be no taxation of inflated capital gains.
Unless of course the ice starts cracking at Y2K and nobody knows how to get off the lake. So I sat there at Christmas mass at Christ the King, listening to Father O'Donovan, and I got the creepy feeling it was going to be deja vu all over again. Oh, I forgot to tell you, John, but a few days after Mundell learned he had won the Nobel Prize, he told Marshall Loeb of MSNBC's Marketwatch that it might be a good idea to fix the dollar/euro/gold rate, even if only temporarily, as we go through the Y2K threshold. That's right, he said it would reduce the risk of currency volatility. Every country in the world would be able to take it as monetary guidance from a stable, fixed point instead of sliding around on the cracking ice.
Now I know you have already taped your McLaughlin Group show for the coming weekend, John, but there will be other shows. You might take a minute or two from your holiday vacation to give a call to Jim Baker at his law office in Houston -- to tell him what Mundell recommends this time, and whether or not he thinks it would be a good thing to do. You also might tell JBIII that Wanniski not only thinks it is a good idea, but that he got independent confirmation from a higher source at the Christmas services in New Vernon, N.J.