Gordon L. Weil
Everything has a price.
Today that price is set in dollars. To produce more dollars, you can change their
value by simply printing more of them.
Or, to boost borrowing by individuals, businesses or the government, you
can cut interest rates, which has the same effect as printing more money. That’s what President Trump wants to do.
This sounds like a boring economics lecture is coming. But stay awake, because these basic facts
have a direct and major effect on everybody.
Not just banks and billionaires, but everybody. Even entire countries.
When people stopped bartering, trading one good for another,
gold evolved into the standard by which prices are set. Major currencies could be exchanged for gold,
so anyone would accept the paper money. This
was the so-called gold standard. But the
amount of gold could not keep up with the need for money, especially to finance
World War I. The printing presses ran.
The US end up with most of the gold, and the dollar quickly
was widely accepted by other countries as being as good as gold. It was so reliably consistent that little was
cashed in for American gold. The amount
of dollars would thus exceed the amount of gold backing it and resting in
vaults.
President Franklin D. Roosevelt ended the gold standard for
individuals, preventing them from trading their dollars for gold coins. But other countries could still convert their
dollars into gold. This new system was
known as the gold exchange standard.
In 1971, President Richard M. Nixon ended access to gold,
even for other countries. The dollar
alone would serve as the international standard of value. Gold has no fixed relationship with the
dollar and has become a commodity. Its
value has soared as people seek to hold it as their ultimate financial protection.
Nixon wanted to promote prosperity by pumping more money
into the economy. He also induced the
Federal Reserve, which controls the supply of money, to lower interest
rates.
While the economy benefited in the short term, Nixon’s extreme
actions brought record high inflation. Ultimately,
after Nixon was gone, the Federal Reserve had to boost interest rates to halt
inflation. That drastically cooled the economy, but the
dollar became reliably stable.
This history reveals how a limited gold supply was replaced
by a well-managed U.S. dollar as the world standard, used as a commonly
accepted value of goods and services. Average
Americans, dealing with their personal debt, may miss the degree to which the
world depends on the dollar and the Federal Reserve to maintain its
reliability.
President Trump now seeks to repeat Nixon’s mistake. He, too, wants to pump more money into the
economy, believing it will promote growth and personal incomes, reduce federal
interest costs, and enhance his reputation.
He demands that the Federal Reserve sharply cut interest rates, allowing
more money to flow into the economy. He doesn’t
worry about inflation.
Not only is a stable dollar, protected from inflation,
important to Americans, but other nations rely on the Federal Reserve to protect
the value of their own currencies by holding the dollar steady. If Trump’s policy succeeds, weakening the U.S. dollar will export
unwanted inflation to a strongly integrated world economy.
Trump mistakenly claims that the Fed chair determines
interest rates. Change the chair and you
change the policy. But rate decisions
are made by a 12-member body, including the seven Fed board members and five presidents
of regional Federal Reserve banks.
His plan appears to be to create his own Fed board majority,
just as he has done at the Supreme Court.
Three members are sure to be his nominees. He needs one more.
To gain control, he is trying to fire Lisa Cook, a current
member. Her case is now before the
Supreme Court. He has also begun a spurious
investigation of Jerome Powell, the current chair. He may try to influence Fed
bank president appointments, though he does not make them.
If his policy succeeds, the dollar will begin to lose its
role as the world’s standard. It might
be replaced by the Euro or China’s Yuan or by nothing. Beyond opening the way for worldwide inflation,
his efforts would likely result in the loss of much American economic power.
His appointment of Kevin Warsh as the new Fed chair assumes
that the nominee agrees with the president and will cut rates. But both Warsh and the Court may give higher priority
to maintaining the dollar than to supporting Trump. Meanwhile, Warsh’s Senate confirmation may
depend on the Trump administration ending its Powell investigation.
The danger to the American economy, other nations and U.S.
power from a purely political interest rate policy set by a Trump-dominated Fed
is great. The damage might be beyond
repair.
