Wednesday, December 05, 2007

Fiat and the Fed

Today's second column:

In 1933, gold backing was removed from the U.S. dollar, leaving Americans with a fiat currency. Unlike money that is linked to a metal of intrinsic value—usually gold—fiat currency is backed by the word of the government alone, and managed, at least in this country, by the Federal Reserve. The dollars you hold in your wallet cannot be exchanged for gold at the nearest bank; but they do have value, since it is understood that they can be exchanged for goods and services.

Proponents point out that, prior to the Great Depression, recessions occurred about once every twenty years. Since Keynesian theory lifted us from the Great Depression, recessions have been small and manageable. The kindly navigators of the Federal Reserve have steered us clear of economic disasters, the sort which inevitably occur when the currency is tied to gold.

Most people accept the myth of Keynes and agree that fiat currency is generally a good thing. To the contrary, a strong argument can be made for the abolishment of the Federal Reserve, and the re-linking of the currency to gold. The primary objection to the Federal Reserve is that it allows appointed—not elected—bureaucrats to manage much of the economy. It is tremendously unwise to allow for so much power to be vested in so few hands. One of the—alas, largely unlearned—lessons of the twentieth century, is that as government power increases, so too does its temptation to violence. Allowing Bernanke to run the Fed is as stupid as allowing Bush to war on whomever he pleases.

There are also historical objections to fiat currency. Libertarian Murray Rothbard explains, “At the end of 1776, the Continentals were worth $1 to $1.25 in specie [gold]… By the spring of 1781, the Continentals were virtually worthless, exchanging on the market at 168 dollars to one dollar in specie. This collapse of the Continental currency gave rise to the phrase “not worth a Continental.”

The same thing happened in France during their Revolution. After five years of mismanagement, the assignat wasn’t worth a Continental. It is telling that the American dollar has lost ninety-six percent of its value during the last seventy-five years. The Federal Reserve has watered down the value of the currency, just like all micro-managers before them; should we really be excited that they’ve spread out the inflation over a longer period of time?

It is also worth examining the myth of Keynes, whose pernicious doctrine states that government interference is good for the economy. The accepted opinion is that Hoover was a laissez-faire capitalist, who kept us mired in the Great Depression, until the interventionism of FDR extricated us from its deadly grasp. But, as historian Paul Johnson explains, Hoover was as much of an interventionist as FDR. Further, the economy didn't actually recover until ten years into the depression and seven years into FDR's presidency. Johnson notes, “If [economic] interventionism worked, it took nine years and a world war to demonstrate the fact.”

As the dollar continues its free fall, Americans may finally reexamine the value of a micromanaged currency. Ron Paul points out that “Fiat dollars allow us to live beyond our means, but only for so long.” But as students of Keynes know, in the long run, we, like the American currency, are quite dead.

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