Everybody criticizes Congress, but let’s review an occasion when lawmakers got something right. The year was 1875.
The Civil War produced a disastrous hyperinflation in the South and considerable depreciation of paper greenbacks in the North. A decade after Appomattox, Congress still had not made good on its promise to make its paper money redeemable in gold. But in January 1875, Congress passed the Specie Payment Resumption Act.
Congress could have declared, “We don’t have the gold necessary to honor our pledge, so we’ll pay gold for greenbacks at 50 cents on the dollar.” But lawmakers chose to be honest, and to meet their obligations fully. The Act provided that all paper greenbacks would be redeemable on demand “at par” (100 percent of the earlier promise), beginning on Jan. 1, 1879.
Presidents Grant and Hayes and their Treasury officials believed the best way to avoid a run on the banks in January 1879 was to shore up the country’s gold reserves. They did so largely by selling bonds to Europeans in exchange for gold.
Redemption Day came amid rumors that people would flood the banks with their paper and demand the promised gold, but hardly anybody showed up at teller windows asking for the yellow metal. Why? Because the Treasury had accumulated more than enough gold to take care of convertibility, and the public knew it. When people have good reason to believe their paper money is “as good as gold,” they prefer the convenience of paper.
Americans are once again the victims of price inflation brought on by runaway government spending and printing of unbacked paper money. Does the Specie Payment Resumption Act of 1875 offer a model that could solve today’s problem? Yes and No.
Certainly, tying the dollar to a precious metal would exert a discipline desperately needed in monetary policy.
But two big, fat elephants ensure that an 1875-like reform would immediately collapse unless they are summarily escorted out of the room. One is dishonest politicians. Washington is overrun with them — people who are interested in short-term power, not the long-term economic health of the country. Many are economic morons, oblivious to the red ink they’re drowning in.
The other elephant is a massive, annual budget deficit. From 1865 until World War I, the federal government ran an almost unbroken string of budget surpluses. Today, it produces trillion-dollar deficits without batting an eye, and the President demands trillions more in unfunded spending and debt. If he announced that the dollar would henceforth be backed by gold, the world would laugh, and you and I would rush to the banks with our paper before the gold ran out.
Monetary discipline goes hand in hand with fiscal discipline. A return to sound money is impossible without a simultaneous return to sound budget management. Congress just voted to ship $40 billion to Ukraine without cutting so much as a penny from anything else. A couple weeks ago in these pages, a local columnist and professor called for more spending on student loans, oblivious to the student loan crisis we already have. This is self-serving economic ignorance.
We have neither a Congress nor a President, and perhaps no public consensus either, that would permit anything resembling the 1875 Act. Until we do, the dollar is destined for further depreciation as night follows day.
(Lawrence W. Reed, a resident of Newnan, is president emeritus of the Foundation for Economic Education. His most recent book is “Was Jesus a Socialist?” He can be reached at email@example.com.)