The school of supply-siders who favor a gold standard is led by eminent writers and politicians, such as Robert Mundell, Arthur Laffer, Jude Wanniski, and Congressman Jack Kemp. They all want the Federal Reserve to follow a “price rule,” that is, to stabilize the value of the dollar by holding the price of gold at a certain point or within a certain range.
The Federal Reserve is to engage in open-market operations or adjust the discount rate to maintain the price of gold at a certain point or within a certain range. With a price rule of $300 to $400 an ounce, if the price approached $400, the Fed would contract its total volume of credit to exert downward pressures on the price of gold; when the price fell to $300, the Fed would expand credit and send the price of gold back up again. By stabilizing the gold price through credit expansion or contraction, all other prices would be stabilized in the end.
The supply-side scheme of price rules for gold is a derivation of Irving Fisher’s scheme for stabilizing the purchasing power of money by way of a “commodity standard.” However, while Professor Fisher (1867-1947) wished to retain redemption in gold, although no longer at a fixed weight of gold, most supply-siders have no such immediate intention. They would merely observe the price of gold, and then manage Federal Reserve credit in reaction to price changes.
In a sense, the gold price rule is akin to the Keynesian formula of full employment and economic growth through contra-cyclical credit manipulation; however, Keynesian managers expand and contract always with an eye on several indexes, especially those of employment and economic growth. The task of supply-siders is much simpler; they merely need to watch the price of gold.
The monetarists may notice a kinship to supply-siders despite their heated debates. Both build their structures on the foundation of a money monopoly and legal tender force; both would try to stabilize economic life through currency adjustments. Monetarists seek stability by means of a steady rate of currency issue; supply-siders prefer a price rule that calls for prompt adjustments in the stock of money. Both seek price stability.
Supply-siders seem to be alone in their great naïveté about the Federal Reserve System’s ability to hold the price of gold at any level. In 1934, after just ten years of Federal Reserve manipulation, the dollar was devalued from 1/20.67 of an ounce of gold to 1/35, which raised the price of gold from $20.67 an ounce to $35.00. The dollar has suffered two formal devaluations and countless “floating” devaluations since then, raising the price of gold from $35 per ounce to more than $300 today.
—Hans F. Sennholz, Money and Freedom (Cedar Falls, IA: Center for Futures Education, 1985), 43-44.
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