Jim Grant on the "faith-based" dollar

Ron Paul's new book End the Fed should show up under the Christmas tree in our house sometime in the weeks ahead and maybe that's true in Jim Grant's house as well since it doesn't sound as though he's aware of what the Texas Congressman really has in mind for the central bank in this otherwise fine WSJ commentary about the U.S. currency.

Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head.

While the contents of Paul's new book are unknown to me for at least another 19 days, based on the title, my guess is there's a death sentence in there for the nation's central bank which, while it may spare his life, would certainly make the Fed chief feel as though he were dying.

Ahh well. Enough nitpicking. This is another fine op-ed piece by the long-time editor of Grant's Interest Rate Observer that should add to the growing concern about just where the Federal Reserve has taken us all over the last 96 years, the last two years in particular.

Some highlights:

In ancient times, the solidus circulated far and wide. But it was a tangible thing, a gold coin struck by the Byzantine Empire. Between Waterloo and the Great Depression, the pound sterling ruled the roost. But it was convertible into gold—slip your bank notes through a teller's window and the Bank of England would return the appropriate number of gold sovereigns. The dollar is faith-based. There's nothing behind it but Congress.

But now the world is losing faith, as well it might. It's not that the dollar is overvalued—economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors.

You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet won't buy a pack of gum.

Oh, just go read the whole thing - it's in the free section of the Journal.

It's a wonderful romp through the history of the dollar in a way that only Grant can do as exemplified by this characterization of the Federal Reserve:

It would save us from "deflation" by generating a sweet taste of inflation (not too much, just enough). And it would perform these feats of macroeconomic management by pushing a single interest rate up or down.

It was implausible enough in the telling and has turned out no better in the doing.

I wonder if Ben Bernanke reads stuff like this...