Some reasons a restored gold standard isn't likelyBy David R. Francis

The reaction of the gold markets to President Sadat's assassination offers one key reason why the world will not return to the gold standard -- despite the establishment by Congress of a Gold Commission.

On the Commodity Exchange in New York, gold's price pr ounce leaped $24 Tuesday before settling back to $451.70 an ounce for a gain of $16.40 on the day. Gold fell $7.70 on Wednesday in New York, and on Thursday it was down $4. 50 at the morning fixing in London.

Whatever, trading was hectic. US spculators flooded the market with orders. Arab investors joined the buying wave.

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If the Unitd States had been on a gold standard, it might have meant an outflow of $10 billion to $12 billion of gold, guesses Edward M. Bernstein, a Washington consultant to central bankers and other top financiers around the world. That, he adds, would have had "a big effect" on the nation's money supply.

A sizable drop in the money supply, if prolonged, can prompt a recession.

Under a gold standard, the dollar would be convertible into gold at a fixed rate -- let's say $430 an ounce. If the price of gold starts to rise above that level, the US Treassury would have to sell enough gold from its reserves to stabilize gold's price at $430. With reduced gold reserves, the Treasury would then have to trim the supply of money to the economy because of a rigid link between the size of the money supply and the amount of gold reserves.

Of course, this gold-dollar fixed tie is what the "gold bugs" want. They regard the gold standard as the antidote to inflation. Politicians would be unable to create new money on their own to pay for inordinate government spending to please the voters. Gold, a rare commodity, would give the system discipline, they maintain.

But to Dr. Bernstein, the gold standard that prevailed prior to World War I and was restored with great difficulty in 1925-30, "wasn't that good." The price level in the Unitd States in both 1850 and 1910 may have been the same. But in the years between, prices bounced around 30 or 50 percent as the supply and demand for gold changed. The business cycle was far more extreme than in recent decades.

Nonetheless, the officials of the last century had what Dr. Bernstein calls a "quasi-mystical" attitude toward the gold standard, one shared by similar enthusiasts today. This view, he notes, "had very little to do with what we would now regard as the central role of money in the economic system -- regulating production, distribution, and utilization of the national income. Nor was the gold standard regarded by 19th-century economists as successful in maintaining price stability."

On the contrary, one such British economist, W. S. Jevons, pointed out that price fluctuations were enormous and disruptive: ". . . There] is abundance of evidence to prove that the value of gold has undergone extensive changes. Between 1789 and 1809, it fell in the ratio of 100 to 54, or by 46 percent. . . . From 1809 to 1849, it rose again in the extraordinary ratio of 100 to 245, or by 145 percent, rendering government annuities and all fixed payments, extending over this period, almost two and a half times as valuable as they were in 1809. Since 1849 [to 1863] the value of gold has again fallen to the extent of at least 20 percent and a careful study . . . shows that fluctuations of from 10 to 25 percent, occur in every credit cycle."

The classical gold standard was, as Dr. Bernstein says, a symbol of political as well as financial morality. Its maintenance was the sole objective of monetary policy -- not high employment levels or even price stability. And monetary policy was supported by a stern fiscal policy. The famous British prime minister, William E. Gladstone, resigned rather than accept an additional L3 million of expenditures on the Navy to maintain British supremacy on the seas. Today, no government leader resigns over deficits many times greater.

But there are other reasons why the gold standard will not be restored:

* The majority of the 17-member commission will not recommend such a step.

* Treasury Secretary Donald Reagan publicly maintains his neutrality on the role of gold. But most key economic officials in the Reagan administration regard a restoration of the gold standard as impossible and undesirable.

* The gold standard would require the cooperation of other major industrial nations, and that will not be forthcoming.

Moreover, there would be difficult technical problems. The first one, says Dr. bernstein, would be determining an appropriate monetary price for gold. If the price was set too high, monetary authorities would have to buy most of current gold production and some private hoardings of gold. This would contract the money supply and the economy. If vice versa, the resulting monetary expansion would cause prices to rise until the monetary price of gold was right in terms of commodities.

Second, there could be a shortage over the long run of adequate new supplies of gold to assure a sufficient expansion of the nation's money supply to keep the economy running at a reasonable speed. Presumably, gold could be revalued upward once in a while to provide adequate monetary reserves. But would politicians be as tempted to do this as they are today to create excessive amounts of new money?

Third, there is the unsettled international conditions of today, such as the murder of President Sadat. That, says Dr. Bernstein, could be "the greatest difficulty."

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