Requiem for the Paper Standard and a Call for Restoration of the Gold Standard

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.

Perhaps even more revealing, it will have persisted for four years and eight months of the seven-plus years that will have been served by Fed chairman Ben Bernanke, whose second four-year term is scheduled to expire in February 2014.

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.

At the time, Nixon regarded his action as temporary, and in the context of that era virtually no one would have imagined that a pure paper dollar standard was capable of matching the amount of time Yahweh condemned his chosen people to wander in the desert of Sinai. But it has.

Is the word “paralysis” an exaggeration? Hardly. Policy wonks can argue single mandate (price stability) versus dual mandate (maximum employment and price stability), in the Fed’s words of August 9) until they’re blue in the face.

What cannot be argued is that 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.

These 40 years haven’t been all bad, or else the paper standard couldn’t have lasted this long. Because of the iron will in the 1980s of two extraordinary leaders, President Reagan and Fed chairman Paul Volcker, the double-digit inflation of the 1970s was halted and the world enjoyed a quarter century of extraordinary economic growth.

With Reagan’s simultaneous victory in the Cold War, for the first time in history virtually the entire world adopted capitalism and hundreds of millions of people in China, India, and elsewhere advanced from subsistence living to the middle class.

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