The Gold Standard - The short view By John Authers

The Gold Standard - The short view By John Authers
Copyright The Financial Times Limited 2006
Published: December 15 2006 02:00 | Last updated: December 15 2006 02:00


It is more than 110 years since William Jennings Bryan, the first great US populist politician, warned that the US economy must not be "crucified on a cross of gold".

His fierce arguments against the gold standard won him presidential nominations, but never got him to the White House, and abandonment of the gold standard only came decades later.

But his spirit lives on. Critics of cheap money now believe that 2006 has shown how his ideas would work in action. US stock investors have had a very good year. The S&P 500 is up 13 per cent, in dollar terms. But if you take sterling as the base currency, US stocks are actually down for the year. In euro terms, US equities are barely flat. In gold, the hardest currency of all, the S&P has dropped 6.5 per cent this year.

For non-US investors, this could be a buying signal. Legg Mason's legendary stockpicker Bill Miller suggested this week that there might be big profits from betting on a resurgence of the dollar.

But Richard Bernstein, investment strategist at Merrill Lynch, cautions that the US is suffering from a form of "money illusion".

"The markets are rallying largely because the dollar is depreciating. If the underlying corporate assets maintain their values, then the stock market will accordingly rise as the dollar falls. Meanwhile, the relative standard of living of dollar-based investors slowly depreciates."

This rings true in the UK. Almost 40 years ago the late Harold Wilson, a somewhat less charismatic politician than Bryan by all accounts, defended a 14 per cent sterling devaluation by saying it would not mean that the pound, "here in Britain, in your pocket or purse or in your bank, has been devalued".

But in the years that followed the Wilson devaluation, as inflation took hold, Britons complained that the pound in their pocket had lost a lot of value.

Lower exchange rates usually lead to inflation as imports become more expensive. Even if they now have what Bryan wanted, Americans may yet feel that the dollar in their pocket has been devalued.