The Blog

Our Paper Dollar Problem

8:17 AM, Aug 16, 2011 • By WILLIAM KRISTOL
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

Forty years ago yesterday, President Richard Nixon suspended gold convertibility, and the U.S. (and the world) went onto a “paper dollar standard.” Two pieces yesterday on the fortieth anniversary of Nixon’s announcment, by Lew Lehrman in the Wall Street Journal and Jeffrey Bell in the Washington Examiner, explore the consequences of that decision and make the case for considering a return to the gold standard.

Twenty dollar bills

They’re well worth reading (along with their recent pieces in TWS, and Judy Shelton’s, on the same broad topic). The current crisis is monetary as well as fiscal. It began, after all, with a housing bubble and a financial crash that were far more related to monetary than fiscal policy (the budget deficit was small and coming down in 2007). The way out may well end up requiring as thorough a rethinking, and as radical a reorientation, of monetary policy as of budget policy. But the monetary debate has lagged behind the fiscal debate. It’s time to begin to catch up. And the good news is that the solution rests on the same broad principles: the restoration of limits and standards for the federal government’s printing and spending of money.

Lehrman details Nixon’s 1971 decision, which, as he puts it, “sowed chaos for a decade.” Bell explains how the iron will of Reagan and Volcker saved us in the short term from the natural implications of fiat money. But “enlightened statesmen will not always be at the helm,” and, as Bell puts it, “those who succeeded Reagan and Volcker allowed the debt-driven paper system to inflate—and burst—a steadily worsening succession of financial bubbles.” Now the Fed desperately maintains zero-percent interest rates, punishing savers in the name of saving us from another recession, and world financial chaos seems to be the price for the “system”—fiat money and arbitrary governance by the Fed—we stumbled into forty years ago.

If you want to consider the case against the paper standard, and for a dollar as good as gold, you can begin by taking a look at the interesting material assembled at thegoldstandardnow.org. Meanwhile, here’s a taste of Bell’s argument:

Last Tuesday, August 9, the Federal Reserve’s open market committee voted 7-3 to keep short-term interest rates in the neighborhood of zero percent through the middle of 2013.

Translation: An extreme, unprecedented policy first adopted in December 2008, in place so far for 32 months, will likely continue for another 24 months. Adopted during the most recent presidential transition, this policy by mid-2013 will have encompassed and outlasted the entire elected term of President Obama....It seems fitting that this Fed confession of continued monetary paralysis was announced just days before the 40th anniversary of the final closing of the gold window by President Nixon on August 15, 1971....

Is the word “paralysis” an exaggeration? Hardly.... In the post-1971 system, the role of the Fed is to set short-term interest rates. The open market committee’s announcement last week means that by the middle of 2013, the Fed expects to be enjoying its fifth year of vacation from its one universally acknowledged job.

Short-term interest rates are and will continue to be nonexistent for the foreseeable future. This means that when it comes to the post-1971 paper dollar system, the wheels have completely fallen off.

UPDATE: Rick Perry's instinct—there's a problem with the Fed printing money—is right. His formulation—it's "almost treacherous"—isn't right.

Mike Allen reports: “Last night, in response to a question about the Federal Reserve: ‘I’ll take a pass at the Federal Reserve right at the moment. To be honest with you, I know there’s a lot of talk and what have you about if this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. I mean, printing more money to play politics at this particular time in American history is almost treacherous -- or treason, in my opinion.’”

Recent Blog Posts