US Dollar: Nothing Left to Believe In?

Spectacular op-ed by Jim Grant in The New York Times. More than just about the bailout debate, it's about the US Dollar -- the "faith-based currency."

All was well for a time — indeed, for one of the most prosperous times in modern history. Under the system of fixed exchange rates and a gold-anchored dollar, world trade boomed (albeit from a low, war-ravaged base). Employment was strong and inflation dormant. The early 1960s were a kind of macroeconomic heaven on earth.

However, by the middle of that decade it had come to the attention of America’s creditors that this country, fighting the war in Vietnam, was emitting a worryingly high volume of dollars into the world’s payment channels. Foreign central banks, nervously eyeing the ratio of dollars outstanding to gold in the Treasury’s vaults, began prudently exchanging greenbacks for bullion at the posted rate of $35 per ounce. In 1965, William McChesney Martin, chairman of the Federal Reserve, sought to reassure the quavering dollar holders. He lectured the House Banking Committee on the importance of maintaining the dollar’s credibility “down to the last bar of gold, if that be necessary.”

Necessary, it might have been, but expedient, it was not, and the Nixon administration, on Aug. 15, 1971, decreed that the dollar would henceforth be convertible into nothing except small change. The age of the pure paper dollar was fairly launched.

I know it's popular to dump on Nixon whenever possible. Yet as bad as the 1971 move was (and is), Tricky Dick probably had no choice. Every post World War II administration has spent too much -- Truman, Eisenhower, Kennedy, Johnson and Nixon (who took office in January 1969). LBJ was particularly bad in spending, painting Goldwater as a war-monger in the 1964 election only to put half a million troops in Vietnam while spending on his Great Society that featured Medicare (which is a nightmare still to come). The US simply didn't have enough gold for all the money it printed.

But lets get back to Grant's piece:

Just how shall the Treasury secretary spend the $700 billion he’s begging for? Viewed from Wall Street, the administration’s recent actions appear erratic enough. Seen from the perch of a foreign investor, they must look very much like “political risk,” a phrase we Americans usually associate with so-called emerging markets, not with our own very developed one.

Where all this might end, nobody can say. But it is unlikely that either the dollar, or the post-Bretton Woods system of which it is the beating heart, will emerge whole. It behooves Barack Obama and John McCain to do a little monetary planning. In the absence of faith, what stands behind a faith-based currency?

And that's the question. Not only do politicians not want to answer that, they don't want you to ask it.

Comments

[Hopton]

John, are you a Goldbug?

[John]

I don't think I am. I've owned gold in the past, but don't have any (bullion or mining stocks) in the portfolio now.

But I am in favor of the gold standard for currency. The Mises Institute is a great resource for anyone interested.