Golden rule: Alan Greenspan belongs to a long line of gold bugs. But he might do more to spread the faith.

'GOLD is money, and nothing else." So J. P. Morgan testified before the House of Representatives' Pugo Committee (investigating the so-called money trusts) in 1913. A little more than forty years later, in 1945, Cambridge don John Maynard Keynes and U.S. Treasury official Harry Dexter White created a new world monetary system that was based on a steady dollar linked to gold at $35 per ounce, thereby ushering in a 25-year period of postwar Western prosperity. After Lyndon Johnson and Richard Nixon broke the Bretton Woods monetary discipline, leading to 15 years of stagflation, it was left to Ronald Reagan's advocacy of a gold-price rule (and tax cuts) that provided Paul Volcker with the hard-money ground to stand on in order to restore price stability and rebuild the U.S. economy.

Nearly 125 years before J. P. Morgan uttered his dictum, at the very beginning of American economic history, Alexander Hamilton was able to outflank Jefferson and Madison in 1791 and persuade President George Washington to sign into law a bill to create a consolidated national debt that would trade freely on the open market, along with a national bank that would issue currency notes fully redeemable in gold specie. By 1794 United States bonds had the highest credit rating in Europe, according to John Steele Gordon's recent book Hamilton's Blessing. Of course, looking as far back as the historical eye can see, gold has always been endowed with a certain mysterious monetary property, even a religious connotation. In ancient times the priest-kings had the first gold coins minted in temples, suggesting that the gods, not men, created money.

In today's world of high technology and global markets, it has become fashionable to disbelieve in both God and gold. Too bad, for continued application of old virtues would greatly assist the transition to the next millennium. Belief in a higher spiritual power would surely improve individual relationships and the general tone of discourse in political life as well as civil society. In monetary terms, the gold price remains the single best indicator of monetary value. Call it the mother of all inflation indicators.

Take a look at recent history. The $800 gold peak in 1980 predicted that year's 13.5 per cent top in the consumer price index. By 1985 gold prices had fallen to $300 per ounce, and a year later the CPI troughed at 1.9 per cent. Then, as James Baker took over the Treasury Department and embarked on a three-year quest to devalue the dollar on foreign exchanges and to pressure Volcker to create too many new dollars at home, gold gradually climbed to $475. Sure enough, in 1989 and 1990 the CPI averaged 5.1 per cent, the stock market stagnated, and the economy briefly lapsed into recession.

During the 1990s, however, Federal Reserve chairman Alan Greenspan refocused monetary policy on the goal of price stability and near-zero inflation. In numerous testimonies on Capitol Hill, Greenspan invoked the use of gold (and broad commodity indexes) as a key advance-warning barometer of inflation fears. What's more, Greenspan has worked hand in glove with Clinton's economic-policy strongman, Robert Rubin, a canny former Wall Street bond trader and arbitrageur who recognized early on that price stability and a strong dollar were essential to maintaining low interest rates in the bond markets and steady economic growth.

THE results of the Greenspan - Rubin hard-money collaboration are striking. Inflation, as measured by the new GDP chain price index (more accurate than the CPI), has averaged only 2.5 per cent for the past five years, very close to the inflation rate of the Bretton Woods period, when the dollar was formally linked to gold. Reduced inflation has increased investment returns and enhanced capital formation (think of it as an economy-wide tax cut). Consequently the stock market has soared, as has household net worth. Recent polling data suggest that 43 per cent of the adult population of this country are now invested in the stock market, nearly double the participation from seven years ago.

And guess what: the price of gold has averaged only $370 per ounce during this period, just a bit more than ten times the old Bretton Woods par value of $35 per ounce. Gold's critics argue that this proves gold is meaningless. No one's paying any attention to it. There's no investment interest. Good! It is precisely the low and stable gold price that has accurately signaled the decline of inflation and the emergence of price stability. If people were investing heavily in gold, as they did during the Seventies, it would be a very bad sign, an inflationist sign, probably auguring an end to the bull-market economy that has now lasted 14 years.

But, the anti-gold bugs say, gold is low because European central banks are selling the barbarous metal in order to meet deficit targets in advance of the European Union's single-currency plan. But a recent London-based study reports that daily gold trading has increased to nearly fifty million ounces, well more than double the entire gold holdings of all European central banks combined.

Then there are the monetarists, especially on Wall Street, who argue that elevated stock markets around the world are a function of overly rapid money-supply growth. According to this view, a new bout of higher inflation is lurking just around the corner. But hang on a minute. What's really happening is an unprecedented increase in the demand for money. With free-market economics spreading around the world, there are more opportunities to put more money to work more profitably than at any other time in history. And let's not forget the incredible high-tech boom, where fast information processing and communications breakthroughs, and the business application of these techniques, has created an unprecedented productivity boom that is expanding the supply side of the world economy. In the United States, numerous studies (including some by Federal Reserve staff) suggest that if the Commerce Department could figure out the proper accounting of the economic impact of high technology, we would see that inflation is actually less than 2 per cent (as the gold price suggests), productivity nearly 3 per cent, and real GDP growth between 4 and 5 per cent. Think of it as the steam engine, the railroads, autos, the light bulb, and the telephone. Only more so. We are in a long-wave prosperity.

As long, that is, as entrepreneurs and inventors have the benefit of stable prices and sound money (and minimal taxation) to guarantee proper rewards for risking financial life and limb. Fortunately, Alan Greenspan recognizes this. He is following the lead of classical British economist John Stuart Mill, who wrote in 1848 that monetary value would be maintained by using the price of gold: "There is a clear and unequivocal indication by which to judge whether a currency is depreciated, and to what extent. That indication is the price of precious metals." So, from the priest-kings, to Hamilton, to Mill, to Morgan, to Keynes, to Reagan, and to Greenspan, the story line is linked to gold.

What remains is to institutionalize the gold-price rule formally. This would guarantee honest money well into the future. After all, Mr. Greenspan is 71 years old and mortal. Now is the time for the Fed chairman to cap his distinguished career by formally adopting a gold-point rule. Should the precious metal rise above about $375 -$400, signaling excess money, the central bank would automatically raise the federal funds rate. Should gold fall below $300 - $325, signaling deflationary money, the bank would ease by lowering the overnight funds rate.

This would ensure that tomorrow's dollar would have the same value as today's. In spiritual and monetary terms, it would be a new-millennium golden rule.