From the WSJ Opinion Archives
DISPATCH

High Hat
Is the dollar too valuable? Compared with what?

by SETH LIPSKY
Wednesday, July 11, 2001 12:01 A.M. EDT

Before sitting down to write this column, I put on my favorite hat. It's a fedora made by the French hatter Motsch Fils & Cie. A warm gray, it has a gold embossing in the band that says garanti castor naturel, meaning it's made of real beaver. Hard to come by these days. The hat is distinguished by another feature. It was, in the mid-1980s, the object of what may well be the strongest exchange rate ever commanded by the dollar against the modern French franc. The hat was priced at 1,300 francs, but I bargained it to 1,100. When the salesman stuck there, I asked him if he'd take a Reagan C-Note for it. "Ah, bien sur," he said, and I walked out with the chapeau.

I reached for my Moetsch as I began to reason out the lead story in Sunday's New York Times, which ran under a headline asserting "A Strong Dollar Clouds Prospects for Quick Rebound." More than six months after the Federal Reserve began battling to reverse the economic slowdown in the U.S., the Times reports, economists and business executives say an unexpected rise in the value of the dollar is complicating the prospects for a rebound. This is happening, the Times reports, despite six interest-rate cuts by the Fed this year that would typically be expected to weaken the dollar. The result is that American products have become more expensive when sold abroad.

It has to be said here that I am notoriously slow at these matters. I often have to read things several times to figure out what they mean. But it didn't take me long to grasp that when the Times refers to a rise in the value of the dollar, it appears to be referring to its value with respect to European scrip and the Japanese yen. I then went to the version of the Times story on the Web so that I could search the text automatically, and I ran a search to find the word "gold." I wanted to double-check my impression from reading the print version. Sure enough, it turns out that this entire dispatch about the value of the dollar doesn't include the word gold. Not even once.

Of course, there's no indication in the story of what the value of the yen or the euro is either, although the dispatch is illustrated with charts showing how these currencies stack up against one another. It's like comparing rulers embossed with different unnumbered lengths. One has more lengths than the other, though what length they are is hard to determine. To find out what the dollar's real value is--that is, the price of gold--one has to search elsewhere. It turns out that in fact the dollar's value has been decreasing in recent days and, in recent months at least, has been more or less steady, ranging between 1/250th and 1/275th of an ounce of gold.

Now if it sounds like I'm a typical gold bug, let me draw some distinctions. I'm not an economist, for better or worse, but a newspaperman. I am more concerned with accuracy of description than policy. And, for what it's worth, I'm not trying to criticize the journalism of the Times, per se. It just happens to be the paper that landed on my doorstep Sunday morning bearing a lead story about the "value" of the dollar. No doubt it reflects the kind of thinking that passes for a policy debate these days. My beef is that using some kind of plain-language test, it's impossible to connect the terms in which policy is being debated to anything real.

Back in 1986, The Wall Street Journal published a famous editorial called "The Bonn-Tokyo Deflation," which was accompanied by a shrewdly crafted chart. It depicted the price of gold in dollars, deutsche marks and yen. From a straight line across the center of the chart, representing no change in price, it showed the dollar angling up slightly, the mark angling down, and the yen plunging at a steeper rate still, as the gold price fell in those currencies. The illuminated the fact that, as another Journal editorial of the period put it, while the dollar had been inflating slightly against gold, the yen and the mark had been soaring. What was happening was the Germans and the Japanese were deflating.

These days the dollar seems to be more or less steady, at least in recent months. So if there's a problem it may well be that the Europeans and Japanese are allowing their currencies to weaken rather than pursuing other pro-growth policies like tax reduction and deregulation.

Not that the disinflation of the kind that occurred in America in recent years is entirely inconsistent with growth. By my lights the underappreciated story of the 1990s expansion is that it took place in the face of a decade-long working up of the value of the dollar against gold. There were some ups and downs, but it emerged at the end of the decade at something like 1/280th of an ounce after starting the span with a value of less than 1/400th of an ounce. But that would only underscore the point that the real problem here may have little to do with the value of the dollar and a lot to do with the problems in Europe.

Of course, there will always be those who contend that the choice of gold as a measure is purely arbitrary. I was thinking about that point some weeks ago, when I flew to Detroit to meet some colleagues. The forecast was for decidedly inclement weather, so as I departed for the airport I reached for my Moetsch. Beaver hats are celebrated for their ability to deal with rain. When I walked into the meeting, the hat got so much comment that it wouldn't have surprised me if I could have sold it for $200 or $300--or an ounce of gold--right on the spot.

In other words, for all its wear and tear, the old beaver skin had soared in value after all these years. This may be why beaver pelts used to be used for currency in parts of America. Or it may be further evidence that the inert and rare aspects of gold make it a preferable measure. I have my own view, but I'll keep it under my hat.

Mr. Lipsky is a contributing editor of The Wall Street Journal. His column appears Wednesdays.

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