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It
wasn’t too many decades ago that the dollar was, as the saying went,
“as good as gold”. It was a truism, almost too obvious for
mention because everyone understood the dollar’s essential attribute,
namely, that it was redeemable into gold upon demand.
This
redeemability was a fundamental building block that explained why the dollar
had value and was readily accepted and used as a means of exchange in the
purchase and sale of goods and services. The dollar did not require
legal tender laws or other forms of government force for it to circulate as
currency. It circulated freely by choice in place of gold, as a substitute
for it because gold was too valuable to use in transactions day-to-day as
currency. Gold was lost from abrasion as coins wore out over time, but
paper could easily be replaced at little cost when worn.
But
redeemability in practice actually meant far more than just the right
everyone had to exchange their paper currency into gold coin. It imposed an
essential discipline on the Federal Reserve and indeed, on the whole federal
government. It was a dependable governor that throttled dollar creation
because paper currency could only be printed if there was gold in reserve to
back it. If the redeemability was removed, the unyielding, externally imposed
discipline would go with it.
This
point was well understood. After redeemability was ended by Franklin
Roosevelt moments after assuming office in 1933, many thoughtful observers
began to warn that an important safeguard on the quality of the currency and
a necessary restraint on the growth of government had been lost. These
warnings continued for years, particularly by those knowledgeable about gold.
As but one example, a four-term Congressman from Omaha named Howard Buffett,
who was the father of Wall Street legend Warren Buffett, in a speech on May
4, 1948 said: “Our finances will never be brought into order until
Congress is compelled to do so. Making our money redeemable in gold will
create this compulsion.”
Rep.
Buffett’s admonition unfortunately fell on deaf ears. What’s
worse, the financial mess he spoke about pales in comparison to the disarray
of the federal government’s present finances. Because there has been no
discipline for decades on the creation of dollars, too many dollars have been
created. If the federal government wants to spend money, it is the primary
responsibility of the Federal Reserve to make sure that politicians get all
the dollars they want, regardless of the impact on the federal
government’s overleveraged and rapidly deteriorating balance sheet.
Despite
its pretentious claims and pompous rhetoric, the Federal Reserve does not
exist to fight inflation or encourage full employment or regulate
banks. It has achieved none of these aims, which is obvious from the
fact that inflation, unemployment and bank failures are recurring, if not
perennial problems.
Regardless
why it was created or the initial intentions established for it, in a fiat
currency world the Federal Reserve exists for only one reason – to
create all the dollars the federal government wants to spend. The Federal
Reserve does this job very well. Even as we have seen federal deficits soar
into the stratosphere over the past couple of years, the federal government
always has as many dollars as it wants to spend. However, these
deficits cannot last forever, which is one of the key points made in a speech
last week<>http://www.federalreserve.gov/newsevents/speech/bernanke20091019a.htm<>
by Federal Reserve chairman Ben Bernanke.
He
threw down the gauntlet – again, because he has made this point before.
Namely, politicians cannot continue spending at present rates. “The
United States must increase its national saving rate. Although we should
deploy, as best we can, tools to increase private saving, the most effective
way to accomplish this goal is by establishing a sustainable fiscal
trajectory, anchored by a clear commitment to substantially reduce federal
deficits over time.”
Like
much of the rhetoric from policymakers, it sounds good. But it never
translates into meaningful action. Maybe Mr. Bernanke is trying to distance
himself from the dollar’s ongoing problems and put the blame on
Congress and the President by highlighting that they are failing to maintain
a “sustainable fiscal” policy. But like Alan Greenspan who is now
trying to re-write history and put the blame for the housing bubble on anyone
but himself, the reality is that Mr. Bernanke cannot totally blame
politicians.
He
could do what Paul Volcker did, and raise dollar interest rates to send a
message to the market that he will not allow the dollar to be
destroyed. But that is not likely to happen. There has been no
indication that Mr. Bernanke will raise interest rates anytime soon, much
less raise them to the level needed to convince the market that he intends to
preserve the purchasing power of the dollar.
Sadly,
the dollar is no longer as good as gold. It is now only as good as the
empty rhetoric of politicians and central bankers.
James Turk
Goldmoney.com
Also
by James Turk
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James Turk is the founder of GoldMoney (www.goldmoney.com) and
the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com). Copyright © 2007 by James
Turk. All rights reserved.
Published by
GoldMoney
Copyright © 2008. All rights reserved.
Edited by James Turk, alert@goldmoney.com
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