Fireside Chat: Alex Pollock and Fifty Years Without Gold

[Music] welcome to the federalist society's virtual events this afternoon september 16th we are holding a fireside chat with mr alex pollock to discuss his recent article published last month and entitled 50 years without gold my name is evelyn hildebrand and i'm an associate director of practice groups of the federalist society as always please note that all expressions of opinion are those of the experts on today's call today we are fortunate to have with us mr alex pollock and mr wayne abernathy i will introduce wayne who will be moderating this afternoon's discussion wayne is a former u.s treasury assistant secretary for financial institutions and he's also the chair of the federalist society's financial services and e-commerce practice group executive committee we're very pleased that he's agreed to moderate this afternoon he will introduce mr pollock after our speaker gives opening remarks we will turn to audience questions if you have a question please enter it into the q a feature at the bottom of your screen you can enter questions at any time during the program but we'll handle those towards the end of this afternoon and again if you have a question please enter it at the bottom of your screen in the q a tab with that thank you for being with us today weighing the floor is yours thank you very much evelyn and very much appreciate all those who are joining with us and most especially it's an opportunity and a pleasure whenever you have the chance to sit and have a chat with alex pollock you'll always learn something and you'll enjoy it so i think you'll enjoy this conversation today alex is a distinguished senior fellow at the r street institute in washington dc he was the principal deputy director of the office of financial research at the u.s treasury from 2019 into 2021. i'd also point out that the depth of experience that alex has is very much hands-on he was president and chief executive officer of the federal home loan bank of chicago from 1991 through 2004 a very eventful period of time in the transition and the evolution of the policies of the federal hormone bank system and a lot of opportunities to learn at with hands-on working with the financial system he is the author of the book finance and philosophy why we're always surprised much as we were in 2020. i had the privilege shortly after that book was published of having an interview like this with alex on the federalist societies tab where we talked about the book and we're able to discuss some of the really very important but also very interesting points there and so that's uh if you want to go on the federalist society page and probably go and look up alex pollock type in that book and you might even find that conversation that we had it was wonderful he is also the author of numerous articles uh in a variety of different publications and frequent testimony before congress today uh we will be discussing some very important issues i also want to mention i thought this was interesting i was not aware of this alex alex serves as a director of the great books foundation where he was chairman of the board from 2006 to 2014. now as an introduction to what mr pollock is going to talk to us about in the class of important anniversaries nearly missed the most recent august was the 50th anniversary of the day in 1971 when the financial and monetary world changed by the unilateral action of the president of the united states and the u.s treasury alex pollock is here today to help us remember and also to understand why we need to remember that important event as well as to understand why it continues to affect the lives of all of us today alex will offer a few remarks to set the table then he and i will engage in a bit of a conversation after which we will turn to the questions that you have submitted to us evelyn has explained you can submit those at any point by just going down to the q a tab the chat tab is frankly for you to communicate with other listeners but if you want to give us a question use the q a tab if you would do that we will draw from that q a tab and bring those questions to the for and share them with all of you and most importantly alex will share his answers and that's the opportunity we'll have and now let me turn to mr alex pollock thank you wayne very much as always it's a real pleasure to have a discussion with you uh and to be here with the federalist society thinking about this 50th anniversary of a truly fundamental uh and definitive event in the monetary system of the whole world the system president nixon created in 1971 is our system of today and tomorrow as well for and for as many tomorrows as we can now foresee and the issues it entails are did entail starting in 1971 are very much still with us in the debates we're having now the title of this essay 50 years without gold was not what i called the essay where as you know the editors get to pick the title of publications the without gold title stresses what we don't have but what i wanted to really stress about the anniversary of august 15 1971 was what we do have and still have that is to say a world wide pure fiat currency that is to say pure paper and accounting entry money system everywhere in the world with floating exchange rates among fiat currency currencies hugely powerful central banks which operate as part of their respective governments along with this has come and continues endemic inflation and indeed central banks which promise to give us inflation forever that is they promised to depreciate their fiat currencies without limit now this is a remarkable contrast and it all comes from that uh that eventful sunday announcement in 1971 it's a remarkable contrast to the idea of what was previously called honest money which classic central bankers thought they were responsible to maintain honest money meant money with a stable value not a constantly depreciating value but now we all take for granted as normalcy the system that comes from 1971 a pure fiat money pure paper currency system with endemic inflation that just seems like normal to all of us whereas before 191 1971 this world would have been considered extremely abnormal uh but nobody now thinks it's possible to go back to that old bretton woods system or before he had a gold standard of one kind or another system and uh it probably isn't possible to go back so this brings me to the title of what i call the essay originally and what i the title i like i like better which is we are all mixonians now uh yes when it comes to the world's monetary system at least we are all nixonians now now this is you will recognize a play on nixon's own statement that we are all keynesians now as he said but whereas in fact we're not all keynesians in fact we are all nixonians everywhere in the world practically everybody who at least who thinks about the issue on this uh on this topic now now what does it mean that we're all everywhere in the world mixonians know well part of what we might think about is it's interesting to consider the price or what is really uh more appropriately uh thought of as the exchange rate of gold and the dollar you'll remember that at the time of bretton woods the united states had promised to redeem in gold any outstanding dollar liabilities in the hands of foreign governments long before that they had taken away the ability of u.s citizens to redeem dollars for gold but they still promised it for foreign governments at 35 an ounce so for 35 dollars in gold and then 35 dollars in dollars you've got one ounce in gold or alternately stated for a dollar you've got 135th of an ounce of gold now of course it's now about eighteen hundred dollars an ounce or ultimately stated about one eighteen hundredth of an ounce of gold uh for a dollar and you will you will see if you do the math this represents a 98 98 evaluation of the dollar with respect to gold uh since nixon's speech on that sunday evening in 1971. now how ironic in retrospect is the claim of the principal u.s negotiator at the bretton woods conference harry dexter white that as he put it quote the united states dollar and gold are synonymous unquote that statement from 1944 sums up nicely the vast gulf between the intellectual world of bretton woods and the nixonian world and the nixonian beliefs of today but more important than the role of gold in this discussion just as i mentioned in talking about the titles of what one might call this essay is the monetary role of central banks as part of their governments now everywhere in the world as the invitation to this webinar asks is the international monetary system now permanently open to more money printing and more monetization of government debt making faith in central banks misplaced and an expectation of an ideal monetary policy foolish now the answers to this series of questions are yes yes yes and yes yes the international monetary system is now permanently open to more money trading yes the international monetary system is now vastly more open to the monetization of government debt as we're experiencing these days we might note it's also open to the monetization of real estate mortgages by the federal reserve big time for a couple of trillion dollars and to other assets such as equity securities by the central bank of switzerland for example uh and yes faith in central banks should you happen to suffer from it is misplaced and yes the expectation of an ideal monetary system is foolish such a thing does not exist there is no ideal there are only trade-offs as usual in economics and in politics everything has a cost and nothing is free so we should note for example while the nixon's decision and announcement of 1971 uh avoided the default by the united states when people were demanding gold and they would run out of gold well but they could avoid that default only by defaulting on their commitment to redeem dollars at all the next big cost of the decision was the great so-called great inflation of the 1970s which were was uh immensely destructive and maybe is a little hard to remember for many people now but the runaway inflation was the dominant financial reality of the time following the inflation of the 1970s came a series of financial crises first a disastrous series of crises in the 1980s and then another series of crises in the 1990s and then in the 2000s and then in the 2010s and then of course in 2020 so the monetary system of pure fiat currencies and floating exchange rates which had strong and serious financial uh theoretical support and practical reasons to do it has gotten us into i we might have had them anyway who knows that we have had a whole series of of credit and foreign exchange and financial crises about one a decade now what would have happened if president nixon had made a different decision 50 years ago first of course we we have to remember nixon and his advisors as you may remember went for several days to camp david to debate all this and work this out and uh they knew at the time and we should remember that nobody knew what would happen after this announcement they decided what they were going to do but that nobody really knew how it would turn out but they did know that they had to do something it looked like there was a building run on gold and of course like any fractional reserve system the united states had many multiples of dollar liabilities outstanding uh greater than the amount of gold they had it is as people started to uh to demand their gold back at france is a particular example in retrospect you know it was a great decision they made to take the gold instead of the rapidly depreciating dollar uh other countries at the time did not demand gold particularly the ones that were were most dependent on the united states military protection and were big dollar holders namely germany west germany at the time and japan were loyal holders and they took the losses when uh when we reneged on bretton woods but certainly others were demanding gold and france notably was demanding gold and they could see the gold running down so they had to do something uh secretary of the treasury conley at the time said we're sending out our goal by the bushel full or words to that effect we've got to do something and we've got to do it now so that's what they decided to do so they had to do something but they didn't have to just cut off the uh the redemption uh in gold they could have devalued the dollar in terms of gold and they knew that that had various problems with it one that's very politically unpopular to announcer devaluing your currency now know what they did resulted in devaluation but it wasn't formally a devaluation yeah and the uncertainty is also hard if you devalue you have to have to devalue to some other number what is it 70 an ounce the the prime minister of england suggested a decade before the president kennedy you're at thirty five dollars in albums you just go to seventy well that'd be a hundred percent uh rise uh in the gold price or fall in the dollar would it be one of my academic friends suggested to me recently they should have gone to a hundred dollars an ounce in 71 and that would have been better but nobody knows that you can't even know in retrospect let alone for them at the time what the right number was now two of the uh participants at camp david before the 1971 announcement namely the chairman of the federal reserve arthur burns and the future famous chairman of the federal reserve paul volcker both favored trying to keep bretton woods going effectively devaluing working it out with the with the other countries but that was not the decision decision was to stop redemption of gold however even then in his speech president nixon and i remind you this was a sunday evening at prime time and on tv and they cut off other popular programming to bring you this announcement uh uh announcing the suspension of gold convertibility along with other things and by the way blaming it all on the international money speculators but what nixon says specifically was i i've ordered secretary conway temporarily to cease redemption of gold temporarily well of course it turned out to be permanent and maybe will always be permanent but at the time they thought maybe it would be temporary and they'd work something else out so you have all this uncertainty they had to do something they could have done other things but this is what they did choose at the time and it's the choice that we still have today so what did happen was for the first time ever in history in peacetime uh there was a worldwide fiat currency system note that it was common in wars to debase your currency and print up however much money you needed to pay the soldiers and and buy the ammunition and the tanks but in peace time this is the first time ever and so here we are now with this system now and going forward uh we're all nixonians and they have these problems like if it's just up to the central banks as part of the governments that they are to print up however much money they want well where's the discipline come from why don't you print up any amount and have as much inflation as somebody might be surprised by but you caused it anyway and there's of course the temptation of politicians who always want to spend to make their constituents happy suppose you can spend without taxing it's kind of a political dream and just have the central bank print up uh what you need borrow the money from the central bank which is really just borrowing the money from yourself which is really not borrowing at all it's printing it up this opens the temptation of so-called modern monetary theory i write that quote modern unquote monetary theory because printing up the money is an exceptionally old old financial idea there so we have all these temptations we're living them now how much uh printing can there be without doing serious damage and and it all goes back to sunday evening august 15th 9 p.m eastern time uh president nixon's famous announcement which we need to remember because it's so important for now and in the future thanks wayne thank you alex plenty of interesting things there and uh not knowing quite where to begin let me go back to a historical question to help this conversation go forward and i want to really go back to the bretton woods system this was created the system in the midst of world war ii and it was supposedly to be something that was going to last as far as the eye could see it was supposed to be a new way of dealing with the issues of how the countries exchanged with one another and traded with one and so forth so the question i have was the bretton woods system doomed to eventually the kind of failure where you would get a significant country like the united states or maybe a france or another country that would be so far have its currency so far out of whack that the only way that you could address the problem would be to suspend that system or could they actually muddled along bretton woods as you say wait and that's it and that's a really good question was created it wasn't quite in the middle of the war it was 1944 when they could see the end coming and they wanted to avoid the mistakes that had been made after the first world war [Music] and then led into the 20s and the 30s and i think they did it they did a pretty good job and you think bretton woods didn't last very long as a historical idea i mean it was approved by the congress and became law or became agreed upon international treaty in the 1945 lasted till 1971. so that's uh 26 years not very long but on the other hand as a human creation maybe 26 years is pretty good it it survived through the amazing rebirth of economic growth and rebuilding of the world after the unbelievable destruction of world war ii so it it had a good day but did it have a fatal flaw the fatal flaw you said that some country they knew that anytime you set parodies because under bretton woods you had a fixed exchange rate between major currencies everybody had to say all right it's four pounds to the dollar four but four dollars to the pound or four deutsche marks to the dollar as it was or four swiss francs and so on but they knew that those would need to be adjusted from time to time then things would change so people would do better than others some people would have more inflation some would be more competitive and you'd have to change them so they built the changing the parities into the system and and then they built in through the original meaning of the international monetary fund to kind of bank to finance the period of of tension when things had to be changed but what couldn't be changed in britain woods was the unique position of the united states so everybody pegged their currency to the us dollar and the u.s promised to redeem dollars in gold and that uh as it became clear as the 1950s and 1960s progressed and it seemed especially clear to the french who described this arrangement as the exorbitant privilege given to the united states because the it meant the united states could run up its foreign debt the way no one else was allowed to and the french resented this greatly perhaps others did as well but the french were very vocal about it anyway so you had this this unique position of the united states now did that mean the system had to fail uh i don't it certainly meant that you'd have to have a big change someday when it turned out that the parity set for the dollar was not sustainable would that have happened without the vietnam war and the and the vietnam and the lyndon johnson guns and butter inflation maybe not uh so you depended on the um you might say on the international geopolitics of the world in the american role but it certainly did give a unique role for the united states as i said before could it have been fixed by just adjusting the parity of the dollar so you depreciated the dollar against gold after all whether you whether you have enough gold or not depends on the on the price you make if you make the exchange rate in dollars and enough dollars per ounce of gold you'll always have enough gold those are all imponderables but it certainly had bretton woods like all human creations had built-in tensions and and problems just like the current nixonian system does it sounds like from what you're saying alex that the bretton woods system as it was put in place given the prominent role of the united states was that it was to act as a discipline on united states economic policy yes that's true yes nixon in essence decided rather than face that discipline i'm going to throw it off is is that correct would you say that's right um i think that's right although it was too late by that and by the time nixon was looking at this problem and his very smart and top-class set of advisors all gathered out there at camp david but by that time it was too late to face the discipline the dollar was going to go down one way or another because the discipline the lack of discipline all happened during the 1960s with the run-up of u.s foreign obligations and and u.s inflation uh but yes and that's of course one of the things the french really resented was that everybody else was disciplined by the system but but not the united states in the short run although the system was intended as you so rightly say to be a discipline in the long run and and they redeem the redeemability of a currency is always a discipline on the on the central bank's printing and on the government spending well of course governments and central banks don't like to be disciplined by something outside themselves like a need to redeem and the united states didn't either and as i said you have to think about it in the context the cold war is on you know this world geopolitical uh competition uh going on you have the amazing recovery of the european and japanese in particular economies by this time so they're going to be these these stresses um it could i don't think bretton woods could have survived without major changes like in the us dollar parity uh whether it could have have been adjusted of course is one of those things that you can always debate because no one knows what what the true counterfactual would have been taking a step from then into today the still the significant uh role of the united states the united states dollar in the global economy continues maybe not quite as much as it was in 71 but it still predominates what is the discipline on the us dollar today or on u.s economic policy vis-a-vis the global community i we understand the disciplines we have within the united states what acts as a discipline globally or does the rest of the world basically just have to take how u.s economic policy is affecting the dollar and infecting them yes that's a key point i think one of the surprises out of 1971 and the cutting off of redeemability was the dollar continued right on as the world's dominant currency uh in spite of the fact that it depreciated a lot oh i mentioned uh well let's think of the swiss franc since it didn't turn into the euro for swiss francs to the dollar 1971 today less than one swiss franc will buy you a dollar uh 360 japanese yen in 1971 today less you know 100 or so so the dollar did have a tremendous depreciation but its amazing role uh as as dominant international currency continues and along with that the ability uh the exorbitant privilege as the french said to to get other people to finance you for by holding your your your liabilities continues well the reason for that is the underlying uh enterprising strength of the of the american market economy and its huge size we'll do other people but no europe put all the euro countries together they're about as big as the united states they don't have that dollar so there's some other things in there as well like the depths of the financial markets but it i think it is a surprise that having cut off what at least if you were hairy dexter white you thought was an essential idea as did most people of its time this a link of gold in the dollar now suddenly that went away but the dollars the stall are still dominant and we still maintain our exorbitant privilege so uh now now believers in cryptocurrencies and bitcoins think that those might change it but that's another discussion is another discussion and certainly one that we can look at at another time i do know though that at least for the last several years there's been at least talk but the european community that they would like to see the euro be something of a challenge to the dollar in terms of its international role so far that hasn't gone very far i was at a meeting a few years ago in in beijing where we had uh through translation i heard i presume the translation was fair we had a speaker from the chinese communist party making a very impassioned speech about how the role of the us dollar had to end but i haven't seen anything that's really done that but i think to the extent the bretton woods system assumed that the u.s role was permanent is it a mistake to assume that the us dollar roll today is a given or can't actually or could actually become a troubled thing well if we were having this webinar in let's say uh july 1914 instead of august 1914 in july 1914 we would have assumed that the dominant worldwide role of the pound sterling which was the king currency of the whole world and the and the currency of the capital markets capital of the world namely london uh looked pretty solid and it wasn't as it turned out it was basically destroyed by the first world war which gave the dollar the chance to to assume it's its uh then dominant role in new york to replace london basically and all as a result of the uh the printing uh that all of the countries involved in the first world war did to finance finance the war and to destroy the value of their currencies while they were at it so no nothing is is permanent we know that all things are trade-offs and certainly both chinese and europeans uh and uh and bitcoin enthusiasts and whatnot think well couldn't we replace the role of the dollar and i don't think you should always you should never assume such things can't happen because the world is a way of surprising us as a as an author of a book once said we're always surprised uh and and our imaginations do not limit the possibilities uh of the world uh just like i think the world was surprised by nixon's action in 1971 uh still with us today it doesn't i don't think there's much chance we're going back to pre-1971 but in the fullness of time seems to me uh we certainly could go to something other than we've got you meant you asked me before wayne and i didn't answer it what is the what is the limit or what of the what is the discipline and of course the limit of money printing whether you call it modern monetary theory or something else is always destruction of the value of the currency otherwise known as rapid inflation uh and and that will destroy wages and destroy savings it does it slowly if the inflation is fairly low but it does it rapidly and noticeably if the inflation is high the federal reserve in december last year predicted 2021 inflation would be 1.8 percent that was another of their completely mistaken forecasts of which there are many over the years and one of the reasons why it's so hard to have discipline on central banks is that nobody including the central banks themselves really knows what the results of their actions will be but the the discipline is i believe the most important one the children between as i said what they used to call honest money that is to save money that maintained its value versus a a money which it becomes clear both to the domestic population and to the international holders is rapidly uh depreciating in value and and that is an ongoing discipline which i believe cannot be avoided that brings me to the question i'd like to ask and and by the way i'll mention as well to uh our participants if you have questions that you'd like to put to alex uh please use the q a tab that you'll find at the bottom of your screen and type in your questions there and i'll be happy to present those to alex and perhaps as i ask this question and alex answers it you may have some questions you wish to point but this is yeah as you're mentioning the discipline sounds like there is in a sense a market discipline there that whatever you try to do to avoid the markets the markets assert themselves and i'm wondering wasn't it better to replace the bretton wood system of government pegged values with a system where the markets by and large decided the values of currency uh we in essence had that domestically but we didn't have that internationally but now don't we have both well domestically we have of course vibrant markets we hope to keep them vibrant under the various pressures of the day but we also have a a mandated single currency now if you were really a total free market thinker you you might like to have as friedrich hayek proposed in 1974 multiple currencies operating within a domestic economy as well that's one of the foundational uh ideas of the cryptocurrency movement that you have multiple competing currencies now um at the time in 1971 of course there were strong voices milton friedman was the leading thinker of this saying well of course you have to have floating exchange rates because nobody knows what the right exchange rate is george schultz who was one of the principal uh advisors at the camp david meetings leading up to the nixon's announcement favored floating exchange rate rates and theoretically it's appealing isn't it you say well we don't know what it should be so we'll let the market decide and that's what most people still think as i said in the article if you ask almost any economist was this a good thing that nixon did in 1971 they say absolutely get rid of this unloaded link to the barbarous relic as uh as keynes called gold and we just have a market but and that's you know that's an argument but it doesn't get you to my the point i'd like us all to understand it doesn't get us to the ideal world it gets us to a world where there's still plenty of problems like where then is the discipline because it really isn't just a market it's a market plus the manipulations of the central banks that's what the exchange market is just like interest rates we don't have an interest rate free market in fact everyone runs around saying well the federal reserve sets interest rates that's the opposite of a market idea you don't have the market setting interest rates same is true of exchange rates they there is a market but there is also the the interventionist manipulative activities of all the various central banks in this market and that's one reason why we can be sure that we won't ever reach the ideal world one of our participants has a question now if i can put that too and it i think it ties into this discussion where we are uh it reads as follows some historians to roman times linked debasing the currency roman times of printing money or as they make they would they would make impure gold to the need to tax capital to tackle inequality do you see any language to these three to these three issues inequality capital taxation and the non-gold free printing of money by the global superpower that's the question well i mean i'll just start off by saying i mentioned that quote modern unquote monetary theory is one of the oldest ideas and but this uh questionnaire by by uh bringing up the romans and before that the greeks uh depreciation of the currency was an idea that was already there i have to just take a minute to tell one of my favorite stories which is the story of the tyrant dionysius of syracuse who borrowed money from his subjects found that he was unable to pay in silver as he had promised so his response was simply to expropriate all the silver coinage the droplets from the citizens they had to turn them in to the government on pain and death and after they turned them in he melted them down and restamped according to the story each one drock mccoin two drachmas and then paid off the debt well that's exactly what governments and central banks do now and that's a form of taxation so if if your idea is that you want to spend but take money from some people and give it to other people well debasing the currency is one way to do it it's a very handy way for politicians to do it because you don't have to enact any legislation you just do it through your central bank it's a sneaky way of taking some people's money and giving it to the people who vote for you i have to tell in this context thank you for the whoever you are for the great question do you know the difference between banking and politics you may have heard this before wayne i don't know what's the difference between banking and politics banking is borrowing money from the public and lending it to your friends politics is taking money from the public and giving it to your friends and uh debasing the currency is one way to do that excellent another question here and actually this is if you're willing to take something a cryptocurrency question if i may or someone has asked that here's the question so are cryptocurrencies a new step away from monetary discipline or a step back toward them and depending upon the nature of the cryptocurrencies to those which countries would benefit and so forth uh under the what we see out there are there certain countries that benefit more than others well i think that uh a crypt a pure cryptocurrency like bitcoin is an ultimate fiat currency because uh although we have fiat currencies pure paper uh they are hooked to governments who who have armies and and force and the ability to to make people do things uh a a bitcoin is a pure fiat currency it isn't redeemable in anything gives its holder no right to any collateral or redemption and also doesn't have any force behind it so that's maybe even a pure fiat currency or a privately issued a key theoretical point in all this is can a privately issued fiat currency as opposed to a government fiat currency actually serve as a currency and that i think the answer that actually is no but we're we're still experimenting with that in in the market currencies with the so-called stable value currencies are themselves backed by other fiat currencies they're just they're just a they're just a dollar substitute a kind of payments uh mechanism and some of them at least say well we are backed by these so-called dollar reserves they're pretty uh reticent about saying what those dollar reserves consist of but note the currency does not give you the right to redeem in dollar reserves at least in some cases and uh and depending on what reserves as so-called you choose to hold uh but let's say you'd like to have some junk bonds in your reserves or russian debt or whatnot what you have is exactly a bank and the problems of any fractional reserve bank maybe the assets won't be sufficient uh to cover your liabilities there you go just going to repeat uh banking now as to what countries could benefit i think if you talk about cryptocurrencies uh and countries then you you shift into this very current debate about which i've i have written about whether central banks themselves should should issue cryptocurrencies or digital currencies i guess you can't call them really cryptocurrencies if they're issued by it by the central bank but it's the same idea should there be a digital pure digital currency issued by various central banks and then you say well some people say well this is another way that china wants to [Music] create a more powerful currency for itself and therefore a more powerful government by having a chinese popular central bank or government-issued digital currency um should the federal reserve issue its own digital currency would you would might think uh just build on the if it succeeded on the on the already existing dominance of the us dollar in international payments it would certainly make the central banks more dominant than the private banks which is one of the big drawbacks to them remembering that a long time ago central i say the bank of england was set up as a special bank with special privileges but it was a general bank it did business with the public and made loans well a central bank which became the dominant deposit taker through its digital currency and thereby had all this money which it had to do something with it so it made loans it'd be kind of a retro aggressive movement backwards in central bank history do central banks which are competitive with all the private banks as opposed to having a particular role so all these things and then none of these things are clear as as always in economics and finance i have a saying which is on every in every economic question you can always find numerous economists on both sides or perhaps on all sides of the issue which only shows it's not a science it's a kind of [Music] philosophical theory and that's certainly true of all these questions of cryptocurrencies and how this will or should play out i think it also shows that really many of these questions certainly with regard to currencies and money and so forth they aren't as new as we may think them to be they are really quite old aren't they i guess for sure here's a question i think relates to that would you be in favor this is one we received here from one of our participants would you be in favor of a return to a gold-based monetary system if it ever became politically possible and would this require a change in legal tender laws to allow gold to legally compete with the central bank fiat money yes well if i think what i would be in favor with in lines of uh hayek's theory is competitive currencies if you had a a currency redeemable in gold at a given rate uh you know you get such and such an ounce of gold for whatever unit of this currency is that might it might be a very interesting experiment to let it compete with the fiat currency issued by the government in the form of its central bank and used to finance potentially limitless deficits through monetization as i said before let alone mortgages through monetization uh however there's very little chance that any government will like this idea of allowing uh competitive currencies um on the issue of legal tender that's a really important one historically um at one time 150 years ago in this country the issue of legal tender was one of the hottest topics and there were a series of interesting cases which ended up in the supreme court about whether it was constitutional for the united states government to have made its non-redeemable people paper currency during the civil war a legal tender that you had to take if you had previously entered into a contract requiring payment in gold and you may remember the supreme court first held that it was unconstitutional and then president grant appointed a couple more justices and the next time around they held it was constitutional but it was a big issue in the day and that's a issue we sort of forgotten about the forcing of of currency on the on the public which is the fiat currency through legal tender of course that had a re-run in the 1930s when the united states government what seems amazing now confiscated all the gold of its citizens gave them paper money depreciated paper money instead happened in 1933 that ended up in the supreme court too and the supreme court held by about a five to four that the government being a sovereign had the power to do this because if you're a sovereign you can do these sorts of things good one for the federalist society fundamental philosophy absolutely and i think these constitutional questions are important that's why you have a constitution is to try to deal with these perennial questions and then that case that you mentioned i think there was also the issue of whether the paper or or debt of the government that said it was to be paid in gold and the government said well we're not going to pay that in gold anymore whether that was uh in constitution as i recall the courts upheld that as well no that you're absolutely right that was these are the same cases and you're absolutely right nobody disputed including the government itself that the clear and unambiguous commitment of the government to pay in gold on its bonds had been made but i'd like to summarize this in the following uh saying what does it mean to be sovereign when it comes to debt it means if you don't feel like paying you don't have to you just default just like nixon in 71. well i know we entered into these bretton woods agreements saying we would redeem these dollars if you're a foreign government for gold but by the way we're not doing it so and of course this this was extremely controversial at the time a lot of other foreign countries their governments were up in arms about this and you may remember there's a there's a well-known i was going to say famous but maybe it's notorious statement of the secretary of the treasury john connolly at the time who said to the europeans who are upset it's our currency but it's your problem that that reminds me of the uh the pawlik law of finance as i recall which is uh debts that cannot be repaid will not be repaid thank you absolutely right it's a matter of who bears the loss really that's exactly right exactly right and we're going through that again now in the aftermath of the covet crisis and it's financing now it's going to be all about who bears the laws well one of the ways you force people to bear the loss is by inflating this by monetization and putting the loss on the holders of your of your currency or savings denominated in your currency now a question here is as we've been talking about the role of gold one of our participants asked this question what about other commodities being the support for a currency doesn't a floating exchange rate system just replace gold as a reference commodity with currency itself or are there other commodities that could compete with gold and be maybe more broadly accepted domestically or internationally that's a classic question as well and a good one and many people have proposed some kind of a basket of of commodities uh that might be a basis or a currency cert theoretically you could certainly imagine it you know you get some kind of a generalized commodity uh index or something it's hard to do practically because how do you form the index and what are the weightings and the world changes uh just like it did for the for the bretton woods parodies but certainly theoretically conceivable gold is handy as we know because it lasts forever and it doesn't rust and it's it it's fairly small if you want to carry some coins around as uh as one uh family uh famous uh investment bankers who got out of germany in time uh 1938 or so said the only real wealth is what you could take with you inside the toothpaste tube sewed inside your clothes and gold qualifies there but this is this is a a classic uh and perfectly sensible idea uh as i remember irving fisher who's one of the who wrote a wonderful book on the money called the money illusion the difference between the real inflation-adjusted value of money and the nominal value of money back in i don't know 1910 or something like that later on it was one of the fathers of central banks trying to stabilize prices as they used to do as opposed to constantly inflating prices and he as i recall had some kind of an idea like this of the basket of commodities you're trying to stabilize against i think it's one of those things it's harder to do in practice than in theory now really i have a short question that's been asked here but i presume the answer is not short but do you have a definition of the dollar quote unquote the dollar oh yeah that's an easy definition it's it's it's a unit of account on the books of the federal reserve it's sometimes represented by a piece of paper that says this is one dollar or but you can exchange that piece of paper it interchanges with the books of the federal reserve for a a a an accounting entry called the dollar whereas of course before at least if you were a foreigner the definition of the dollar was 1 35th of an ounce in gold what fiat currency has done is made it a flexible definition yes well and of course that if you're a central banker or a politician that's what you like you know that way having worked on legislation we're getting near near the end of our time but i do want to there's this one further question which goes to one that i've had for a while as you know a question i've had is when the bretton woods system disappeared why did the bretton woods institutions remain and someone one of our one of our participants is asking the question is maybe the imf's special drawing rights work as some kind of basis for global currencies well that's what they thought in the 1960s when these were created the special drawing of course the special drawing rights are only a basket of fiat currencies but that's what they were hoping at the time because already in the 60s one of the things that president nixon said in his speech in 1971 was well we keep having these dollar crises one a year and this was all during the 60s as the u.s deficits were higher and inflation was higher and the dollar was under pressure and people were building up the large dollar claims and foreign hands uh and s and sdrs were meant to be a potential way around it didn't they never seem to have worked too well but it definitely was the theory uh at the time i could i just stick in one more comment i meant to say this before in the 1971 speech of course it wasn't only about stopping uh to redeem dollars for gold was also when they when they an amazing thing really for you would have thought a basically market-oriented administration to do was to put in wage and price controls uh and a you before wade said something well can't you just control these things uh but does the market ultimately out uh ultimately uh overcome and of course that's what happened in the early 70s they put in waging price controls it turned into a vast bureaucracy uh it didn't succeed in the end and when they finally had to be taken off then the inflation exported in the mid 1970s and on so yes you try these uh control mechanisms but in the end they won't work either well as with all very fascinating conversations the clock is against us and we've pretty much run out of the time we've allocated but this conversation of course will continue one that we didn't really get into as much but and certainly save that for another day is how the end of bretton woods opened up the door for just almost limitless deficit spending all around the world for four years all around the world and what we have today that's why this is so relevant what we have today deficit spending is made possible by monetization which is the the freedom of the central banks which is i suggested you should not foolishly have faith in all created uh by the action of president nixon 50 years ago so this uh this is history but it's also very lively today and going forward we're living uh in in this nixonian world with with all of the problems that go along with it people are asking where do we find the discipline and that's of course the question yes any final words before we conclude well that's a great final question so let's work on that where we find the discipline we know that under the constitution of the united states the discipline is supposed to come from the congress the money power is clearly vested in the congress uh and one of the astonishing acts of arrogance really was the federal reserve saying on its own it could set an inflation target and and depreciate the currency infinitely now uh can we get such discipline from the current congress doesn't seem too likely but one might hope that there there would be a congress uh someday these these are deep and hugely important but classical problems which the answers aren't that easy thank you very much wonderful discussion and certainly as we say the conversation will continue evelyn i think the time is back to you evelyn hildebrand from the federalist society yes thank you very much to you wayne and alex for this great discussion thank you to our audience you sent in questions and comments and participated very grateful for everyone's time this afternoon if you have any questions or comments for the federalist society please send this to us at info fed sock.org and we welcome your comments um and i would only add our gratitude to our speaker and our moderator this afternoon and with that we are adjourned thank you everyone thank you [Music] you

Channel: The Federalist Society

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Keywords: #fedsoc, federalist society, conservative, libertarian, fedsoc, federalism, fed soc

Id: d1BUkP2X41o

Length: 62min 42sec (3762 seconds)

Published: Tue Oct 05 2021