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Setting the price too high would aggravate world inflation by having too much gold cashed in for dollars, thus in creasing the money supply. Establishing it too low would cause a run on U.S. gold supplies, as speculators rushed to buy up the undervalued metal. Only 2.8 billion ounces of gold have been mined in history. About 43% of that is now in the vaults of central banks and the International Monetary Fund; another 46% is in the hands of private individuals or churches as jewelry, coins or other investments.
Economists concerned about fixing the right price for gold have been discussing in recent weeks the problems of "re-entry," the space-age term to describe a return to the medieval metal. Laffer says the White House should announce that the U.S. will be going on the gold standard in say, three months. When G-day arrived, the Treasury would begin buying gold at the market price, and the Federal Reserve would partially back its obligations with gold, up to perhaps 40%. Economist Greenspan has another, milder proposal for testing the waters. He suggests issuing Treasury notes whose value is backed by gold. Financial markets would then gradually determine the value of gold by the price investors were willing to pay for the notes.
World financiers believe that a renewed reliance on gold would ultimately carry too painful a burden, disrupting the economies of the U.S. and Europe and possibly sending a number of Third World countries into bankruptcy. Said Ernst Schneider, a general manager of Switzerland's Credit Suisse bank: "I don't believe the world could take the discipline today."
Under a gold system, a country would have to accept severe recessions, or even depressions, whenever inflation exploded because of oil-price shocks or some other uncontrollable event. Neither the U.S., nor any other country, is likely to give up that much control over its economy. The dreams of gold are therefore likely to remain only dreams. —By John S. DeMott, Reported by David Beckwith/Washington and Lawrence Malkin/Paris