Economics & Trade Policy

No, the Dollar Is Not Dying

This article is in response to Trevor Whitney's article Is the Dollar Dying?

“In truth, the gold standard is already a barbarous relic.”

John Maynard Keynes

This year, the Republican Party polished off an idea formerly relegated to the dustbin of history. In its official party platform, the GOP calls for a commission to study the possibility of “a metallic base for U.S. currency” – in other words, a return to the gold standard.

The last time a major political party officially endorsed the idea of tying the nation’s currency to a limited, volatile commodity[1] was in 1984. That year, the economy was booming, the dollar was peaking and the dream of a return to the gold standard was in its death throes after President Reagan’s 1982 Gold Commission rejected the idea.

The world today looks wholly different, with a struggling economy and an embattled dollar. And the gold standard, once thought dead, has staged something of a comeback. In 2011, a whopping 44 percent of likely voters said they favored a gold standard. Representative Ron Paul has led the charge, (falsely) declaring any monetary system without a metallic base to be unconstitutional[2] and calling for an end to the Federal Reserve’s “debasement” of the dollar.

The argument goes something like this: without the gold standard, inflationary policies by unaccountable elites[3] at the Federal Reserve have steadily destroyed the dollar. Gold standard advocates point out that the U.S. dollar has lost around 95 percent of its purchasing power since Congress passed the Federal Reserve Act in 1913. This is true. It is also true that over the same period, average annual income per person increased 8,150 percent.

Gold standard advocates have also criticized the Fed’s use of unconventional monetary policies over the last few years, saying that they debase the dollar. Such policies have been aimed at keeping monetary conditions loose in order to prevent a repeat of the Great Depression and stimulate the economy in the absence of any Congressional action. Chief among these policies are asset purchases meant to pump dollars into the economy and nudge down long-term interest rates. This procedure is known as “quantitative easing,” or “QE.”

Normally, the Fed raises and lowers short-term interest rates to tighten or loosen the money supply as needed. However, during the Great Recession, interest rates hit rock bottom and could not drop any further. The Federal Reserve thus turned to more unconventional tactics, like QE, to keep monetary conditions loose.

And it had good reason to do so. In their 1963 magnum opus, “A Monetary History of the United States,” Milton Friedman and Anna Schwartz proved that the Fed’s inappropriately tight monetary policy caused the Great Depression. Later economists would show that the gold standard had been a key reason for this tight policy, and that the faster a country left the gold standard, the faster it recovered economically.[4]

One of those economists, a man named Ben Bernanke, apologized to Friedman and Schwartz on behalf of the Fed in 2002, saying: “You’re right, we did it. We’re very sorry, but thanks to you we won’t do it again.”

Six years later, as Fed Chairman, Bernanke got the chance to make good on that claim. As the American economy tanked in 2008, he slashed interest rates and began employing unconventional policies to loosen monetary conditions. The result was that this time around America avoided a Great Depression, even though the initial blow to the economy was similar to that of 1929.

Still, gold standard advocates are unconvinced. To them, the Fed’s actions only debase the dollar, destroy the middle class and set the stage for the coming hyperinflation. (Never mind the fact that the Fed knows exactly how to wring inflation out of the system, having done so under Paul Volker in the early 1980s.)

It is easy to understand why, when faced with a huge meltdown and slow recovery, some Americans might be pessimistic about U.S. economic power. But that does not mean predictions of a dying dollar are any more accurate than they have been in the past. The last four decades have seen a number of premature eulogies for both the dollar and American power. Each was made during difficult economic times and each has, to date, been proven wrong.

There are some important differences between today’s monetary and economic climate and the past. Whereas once a strong currency was seen as a boon, today many nations are enacting policies that will keep their currencies down.

Developed nations are employing policies like QE in order to keep monetary conditions loose, ward off deflation and help exporters. Switzerland, for instance, explicitly said it would cap the value of the franc by printing as much of the currency as necessary to stop its rise. Developing nations, no stranger to pegging their currencies, are also determined not to undermine their export-led growth strategies through appreciation.

Expansionary monetary policy at home has not destroyed the dollar’s dominance because other nations are also dealing with the problems of slow growth and deflationary pressures. Additionally, the dollar is still considered a safe haven for frightened investors. This is why the dollar surged in value in late 2008, even as Lehman Brothers collapsed and the financial system seized up. There is no currency presently fit to replace the dollar.

This is not to say that the dollar will always be the world’s single reserve currency. It most likely will not. But it will not simply die and be replaced, either. A more realistic forecast is that a multipolar international monetary system will replace today’s dollar-dominated one.

Nor is this to say that the government has reacted flawlessly to the challenges it faces. Congressional inaction, in particular, has shaken confidence in the American economy through the debt-ceiling debacle and lack of any movement on short-term stimulus and medium-term deficit reduction. But on the monetary end of things, the Fed has acted aggressively to support recovery. In supporting economic recovery, the Fed has paved the way for a stronger dollar in the future.

[1] Gold standard advocates often cite price stability as a key strength. Yet the evidence shows that prices on a gold standard can actually be quite volatile in the short term.

[2] The Constitution prohibits states from making “anything but gold and silver coin a tender” (Article I, Section 10), but grants the federal government the power “to coin money [and] regulate the value thereof” without any gold standard requirement (Article I, Section 8).

[3] Most of this denunciation of ‘unaccountable elites’ is aimed at Fed Chairman Ben Bernanke – an interesting criticism to lob at a man who is not only appointed by the President and approved by the Senate, but must also phrase every sentence carefully, lest it move markets.

[4] It should come as no surprise that a recent poll of economic experts revealed that none of them thought returning to the gold standard would be a good idea.


5 replies on “No, the Dollar Is Not Dying”

I want to make sure that I understand. You believe that the Fed, by keeping the interest rate at effectively zero, and promising to keep it there for years, that the Fed is promoting a strong dollar?

Your response was appreciated. I do find your argument to be revisionist in nature, but I see value in the discussion presented.

To begin, footnote #2 is in direct conflict with its own claims. If “gold and silver” are the only thing that is legal tender (as per the Constitution), that is pretty clear cut and dry. You conveniently leave out the part in Article 1 Section 10 that states shall not coin money, a power which in Article 1 Section 8 is reserved to the Congress. If the Congress is to “coin money and regulate the power thereof”, then why does a 100% private bank currently do so? The Federal Reserve is as governmental as Federal Express. To claim otherwise is simply untrue.

Your claim of American incomes increasing 8,000% in 95 years works only to further my argument of devaluation of the dollar. In 2012, the dollar buys 95% less than in 1913. The incomes are higher because the dollar is worth less, therefore more dollars are required to make common purchases. Gasoline is a good that has been widely consumed over the last 100 years. Since gasoline was 5 cents/gal before, and is near $4/gal now, are American incomes really higher? Or are they simply handing over more paper notes for the same products? This is a very simple concept called inflation of the money supply, which lowers the buying power of dollars over time and forces prices to rise. It is a reality that I argued that we are currently undertaking. In Weimar Germany, it was common to see people pay for loafs of bread with wheelbarrows full of paper currency that had been devalued.

Your claim that the gold standard caused the Great Depression is a fallacy that is commonly believed in academia today. Indeed, have you ever heard of the Roaring 20’s? Guess what they were caused by? Loose monetary policy, unnaturally low interest rates, and inflation of the currency. Availability of credit skyrocketed, and people took on obligations that they could not pay for. Sound familiar? In the 1920’s, it was a quick move to ease unemployment that was a result of heavy US trade barriers. In fact, Austrian economists such as F.A. Hayek predicted the burst of the boom created in the 1920’s. This burst became the Great Depression. Modern day Keynsians, such as Paul Krugman, failed to identify the collapse of the housing market and only admitted that it existed after it was too late.

In the 1000 year history of experiments with fiat (unbacked) currency, not one has survived. Not one. Is that the kind of track record that should be exaulted on high? The Soviet Union thought it could do “quantitative easing”, and it ended in bread lines and a dramatic fall from international power. In fact, this year, China has moved to partially back their currency with gold, in anticipation of fully backing it with gold. They buy oil from nations we embargo, and only do it in gold-backed currency.

Can the US go back to a solid gold standard? Maybe not. But the unbacked printing of money today will have consequences in our generation and those beyond ours. People may stick their head in the sand, but reality must be faced.

Just wanted to clear up a few things.


“But on the monetary end of things, the Fed has acted aggressively to support recovery. In supporting economic recovery, the Fed has paved the way for a stronger dollar in the future.” It is the maintaining of economic recovery that supports a future strong dollar.

I think that unnecessarily plunging the U.S. back into a recession would be an irresponsible course for the Fed to take, and that it has so far steered a generally careful course. The effects of inappropriate monetary/fiscal policies can be seen pretty clearly in the Eurozone.


The Constitution, as my footnote says, prohibits states, not the federal government from being legal tender. I didn’t reproduce the entire excerpt, for space, but here it is:

“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”

It does not prohibit the federal government from doing so. And Madison’s writings show that such a prohibition was at least considered, so its absence is notable. Furthermore, the Supreme Court already decided this issue in the Legal Tender Cases.

I did not mention your point about Article 1 Section 8 because it was not really relevant to any of my other points and I had limited space. But, essentially, Congress has decided to delegate that power to the Federal Reserve. If they want to take it back, they may. But until then, the Supreme Court has already decided that a central bank is constitutional.

And the Federal Reserve is not 100% privately owned. Yes, the Federal Reserve system is partially private entity created by Congress, but the Board of Governors itself is a federal agency, even if the entire system is not. And additionally, the membership of the Board of Governors is appointed by the President and approved by the Congress.

Also, the First and Second Banks of the United States were both partially private (the government only owned about 20 percent of the stock in each), and yet they were not only declared Constitutional but were the First Bank was created by some of the Founding Fathers — chiefly, Alexander Hamilton.

On purchasing power: I understand how it works, but an increase in income of over 8,000 percent more than makes up for the decrease in purchasing power. Incomes are much, much higher in real, inflation-adjusted terms. So inflation alone is not responsible for that.

And bringing up the Weimar Republic as a comparison to contemporary America is akin to Godwin’s Law. The two situations are completely different. For one, World War I reparations set the stage for Weimar’s inflationary problems. For another, we know how to stop inflation in America. It would cause a painful recession, but we can do it. We’re much less skilled at fighting deflation — and deflation was a very real danger over the past few years.

Ironically, the price level has been more short-term stable since the 1980s than it ever was under the gold standard. That is a documented fact. And that’s because price levels under the gold standard fluctuated according to how much gold was available at any given time (for a number of reasons). So, while price levels were stable over the long term, over the short term, there were very large swings in inflation and accompanying deflation — much larger than the 2-3 percent inflation we’ve had annually since the 1980s.

Interest rates were likely too low in the 1920s and 2000s, but that alone is not able to explain the magnitude of the ensuing crises. The disintegration of lending standards were both culprits to laying the kindling. As I mentioned, tightening monetary policy was huge to actually turning a regular downturn into something much worse (and there was indeed a close correlation between when an economy recovered and when it left the gold standard). In the Depression, simultaneous fiscal tightening made things much worse as demand took a huge hit. Even some New Deal policies (like wage controls) made things worse, though other New Deal policies (like federal deposit insurance and bank stress tests) helped boost confidence in the financial system.

Confidence in the financial system was critical. Bank runs led to a complete and utter collapse of the banking system. Recoveries from financial crises are, in general, longer than regular recessions. And completely rebuilding a financial system was always going to take a lot of time. None of these statements are controversial among economists.

Additionally, Austrian economists caused very real damage by telling everyone to do nothing and just let the bottom fall out of the economy to “purge the system.” This caused debilitating deflation. Hayek himself recognized the damage this did, noting that deflation caused huge damage to the economy.

Also, I don’t really put any stock in predictions. They just don’t generally mean much. People make predictions all the time — it is only the ones that come true that are remembered. Several economists “predicted” this recession as well, from various different backgrounds. It is probabilistically inevitable that a prominent adherent of a certain philosophy will make a high-profile correct prediction at some point. I also made this point in my essay by pointing out all the false predictions in the past that heralded the collapse of the dollar.

Actually, many paper money systems have survived. Namely, all of the ones now in existence. There are no major systems today now on a gold standard, so you could really say that it is the gold standard that has not survived too well. Nor would it today, for many reasons including the fact that wages are generally sticky and adjusting economies through deflation is intolerable to too many to survive in today’s world. Just look at the problems the Eurozone in this area for a modern example.

The Soviet Union never tried quantitative easing, as QE was pioneered in the 1990s. Furthermore, the context is completely different. I don’t think comparing a communist developing nation that had recently taken part in what was at the time the most devastating war in history (WWI) to contemporary America is the best way to go.

China, as it currently exists, is not going to go to a gold standard. The simple reason is that the political stability of the ruling regime is based on keeping the economy growing, and the gold standard necessarily results in deflationary periods to offset inflation. Such economic hardship would threaten the ruling regime’s power — and I have no doubt that even if China somehow transitioned to a gold standard (which they would manage carefully anyway, given their history of carefully managing their currency against the dollar, and the authoritarian nature of their system), they would abandon it as needed if economic factors threatened them.

There is also simply not enough gold in the world today for a return to the gold standard. Additionally, a gold standard is inefficient, as it costs a lot of resources just to be able to print more gold — and it still results in greater short-term instability in prices and economic growth. And it unnecessarily limits the grow of the money supply to a limited commodity, which has economic implications as well. In American history, for instance, the money supply would grow or shrink depending on whether were in a gold rush or simply could not find enough gold. This does not seem to be that rational of a way to run a monetary system.

Thank you for responding to my comment. You bring up the economy in your answer, not the value of the dollar.

You argue that the Fed is protecting the value of the dollar. And keeping interest rates low is considered by monetary experts the recipe for inflation.

So my question to you is, do you believe that by keeping interest rates at effectively zero for years, as the Fed as promised, that the Fed is protecting the value of the dollar? They may be doing this to help the economy, but does a zero percent interest rate protect the value of the money in your wallet?

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