The Magazine

Fiat Money, Fiat Inflation

Why we need a dollar as good as gold.

Mar 21, 2011, Vol. 16, No. 26 • By LEWIS E. LEHRMAN
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But middle-income professionals and workers, on salaries and wages, and those on fixed incomes and pensions, are impoverished by the very same inflationary process that subsidizes speculators and bankers. Those on fixed incomes will likely earn very little or even a negative return on their savings. Thus, they save less. New investment then depends increasingly on bank debt, leverage, and speculation. The unequal access to Fed credit was everywhere apparent during the government bailout of favored brokers and bankers in 2008 and 2009, while millions of not so nimble citizens were forced into bankruptcy. This ugly chapter is only the most recent in the book of sixty years of financial disorder.

The inequality of wealth and privilege in American society is intensified by the Fed-induced inflationary process. The subsidized banking and financial community, along with the chaos of floating exchange rates and an overvalued dollar, underwritten by China and other undervalued currencies, has submerged the American manufacturing sector, dependent as it is on goods traded in a competitive world market. In a word, the government deficit and the Federal Reserve work hand in hand, perhaps unintentionally, to undermine the essential equity and comity necessary in a democratic society. Equal opportunity and the harmony of the American community cannot survive perennial inflation.

If the defect is inflation and an unstable dollar, what is the remedy?

A dollar convertible to gold would provide the necessary discipline to secure the long-term value of middle income savings, to backstop the drive for a balanced budget, and to end the dollar standard and the special access of the government and the financial class to limitless cheap Fed money. And the world trading community would benefit from a common currency, a nonnational, neutral, monetary standard that cannot be manipulated and created at will by the government of any one country. 

That is to say, dollar convertibility to gold, a nonnational common currency, should be restored. And dollar convertibility to gold should become a cooperative project of the major powers. This historic common currency of civilization was, during the Industrial Revolution and until recent times, the indispensable guarantee of stable purchasing power, necessary for both long-term savings and long-term investment, not to mention its utility for preserving the long-term purchasing power of working people and pensioners. In a word, the gold standard puts control of the supply of money into the hands of the people, because excess creation of credit and paper money can be redeemed for gold at the fixed statutory price. The monetary authorities are thus required to limit the creation of new credit in order to preserve the legally guaranteed value of the currency.

To accomplish this reform, the United States can lead, first, by announcing future convertibility, on a date certain, of the U.S. dollar, to be defined in statute as a weight unit of gold, as the Constitution suggests; second, by convening a new Bretton Woods conference to establish mutual gold convertibility of the currencies of the major powers.

A dollar as good as gold is the way out. It is the way to restore real American savings and competitiveness. It is the way to restore economic growth and full employment without inflation. It is the way to restore America’s financial self-respect, and to regain its needful role as the legitimate and beneficent leader of the world.

Lewis E. Lehrman is chairman of the Lehrman Institute.

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