From the nation’s 18th century founding until 1971, the dollar was defined as a weight of gold or silver. Americans did business with paper, of course. But these commercial bills and banknotes were convertible into monetary bedrock, the precious metals. The expression sound as a dollar derives from the ring of a gold piece when you plunked it on a counter.
Sound money coincided with balanced budgets. Government borrowings climbed in wartime and subsided in peacetime. The pattern was disarranged by depression in the 1930s and war in the 1940s. It was broken by the Johnson Administration’s guns and butter and entitlements programs in the 1960s. Richard Nixon administered the coup de grâce on Aug. 15, 1971, when he announced that the dollar would derive its value from the say-so of the government. The Fed could print as many green bills as the traffic would bear.
Many applauded that sea change, then and later. Easy money rarely fails to please–at first. It buoys stocks, bonds and commercial real estate. House prices jump, and car sales zoom. (Average auto-lending rates, now 4%, have been nearly sawed in half since 2007.) Politicians, noticing how a bull market fattens public pension funds, ratchet up the benefits they promise to retirees (a fact that state and federal pensioners are encouraged to remember on Election Day).
Periodically, the buzz wears off. What remains is a hangover of debts and promises. The proliferating dollars facilitate heavy borrowing. Ultra-low interest rates mask the cost.
