From WSJopinion: Catholic newsletter the Pillar may be new on the scene, but attacking their methods or slandering them doesn’t diminish the uncomfortable truth that they reported about the Catholic church, writes MattHennessey
President Richard Nixon ended the redeemability of dollars for gold and ushered in the fiat money era on Aug. 15, 1971. Many economists look back on the occasion with delight, agreeing with John Maynard Keynes that the gold standard was “a barbarous relic.” Today nearly all economists believe the U.S. economy has performed better under fiat money than it would have with the gold standard.
This conventional wisdom is wrong. The gold standard wasn’t perfect, but the fiat dollar has been even worse. Fifty years after the Nixon shock, it is worth remembering how well the gold standard worked. Under a genuine gold standard, a monetary unit is defined as a specific quantity of gold. Coins, notes and deposit balances are used in transactions. Competition among gold miners adjusts the money supply in response to changes in demand, making purchasing power stable and predictable over long periods. The threat of customers redeeming notes and deposits for gold discourages banks from overissuing, ensuring that redeemable claims to gold generally circulate at par with gold.
The 1944 Bretton Woods system, which Nixon ended, wasn’t a genuine gold standard. U.S. citizens had been prohibited from holding any monetary gold since 1933, when President Franklin D. Roosevelt issued executive order 6102. Bretton Woods limited redemption of dollars for gold to foreign governments, which issued their own currencies and conducted monetary policy to support fixed exchange rates with the dollar.
Fiat dollars aren’t constrained by the supply of gold or any other commodity. The Federal Reserve can expand the money supply as much or as little as it sees fit, regardless of changes in money demand. When the Fed expands the money supply too much, an unsustainable boom and costly inflation follow. When the Fed expands too little, the economy falls into recession.
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