Fireside Chat: Alex Pollock and Fifty Years Without Gold

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Fifty years ago, on August 15, 1971, President Richard Nixon put the economic and financial world into a new era. Through his decision to "close the gold window," he fundamentally changed the international monetary system into the system of today, where the whole world runs on pure fiat currencies. "The dollar was the last ship moored to gold, with all the other currencies on board, and the U.S. cut the anchor and sailed off." Nobody knew how it would turn out. Fifty years later, we are completely used to this post-Bretton Woods monetary world with endemic inflation and floating exchange rates, and take it for granted. Nobody thinks it is even possible to go back to the old world: We are all Nixonians now. How shall we judge the momentous Nixon decision in its context and since? A fundamental question with pluses and minuses remains. 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 expectation of an ideal monetary policy foolish?

Featuring:

  • Alex J. Pollock, Distinguished Senior Fellow, R. Street Institute, Author of Fifty Years Without Gold
  • Moderator: Hon. Wayne A. Abernathy, Chairman, Federalist Society Financial Services & E-Commerce Practice Group

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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Evelyn Hildebrand:  Welcome to The Federalist Society's virtual event. This afternoon, September 16, we are holding a fireside chat with Mr. Alex Pollock to discuss his recent article published last month and entitled, "Fifty Years Without Gold."

 

      My name is Evelyn Hildebrand, and I'm an Associate Director of Practice Groups at 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 will 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. Wayne, the floor is yours.

 

Hon. Wayne A. Abernathy:  Thank you very much, Evelyn. And very much appreciate all of those who are joining with us, and most especially, I would say, 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 Pollock is a Distinguished Senior Fellow at the R. Street Institute in Washington D.C. 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 Home Loan Bank system, and a lot of opportunities to learn, 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 Society's tab where we talked about the book and were able to discuss some of the really very important, but also very interesting, points there. And so that's -- if you want, you can go onto 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 in a variety of different publications and frequent testimony before Congress. Today, 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 the 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 fore 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.

 

Alex J. Pollock:  Thank you, Wayne, very much. As always, it's a real pleasure to have a discussion with you and to be here with The Federalist Society thinking about this 50th anniversary of a truly fundamental 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, and for as many tomorrows as we can now foresee. And the issues it entails are -- and did entail, starting in 1971 -- are very much still with us in the debates we're having now.

 

      The title of this essay, "Fifty Years Without Gold" was not what I called the essay for, 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, and that is to say, a worldwide pure fiat currency -- that is to say, pure paper and accounting entry money system -- everywhere in the world, with floating exchange rates among fiat 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 promise to depreciate their fiat currencies without limit.

 

      Now, this is a remarkable contrast. And it all comes from 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 1971a pure-fiat-money, pure-paper-currency system with endemic inflation. That just seems like normal to all of us, whereas before 1971, this world would have been considered extremely abnormal. But nobody now thinks it's possible to go back to that old Bretton Woods system, or before it, a gold-standard-of-one-kind-or-another system. And it probably isn't possible to go back.

 

      So this brings me to the title of what I called the essay originally -- and the title I like better -- which is, "We Are All Nixonians Now." 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 topic.

 

      Now, what does it mean that we're all, everywhere in the world, Nixonians now? Well, part of what we might think about is it's interesting to consider the price -- or what is really more appropriately thought of as the exchange rate -- of gold and the dollar. You will 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 US citizens to redeem dollars for gold. But they still promised it for foreign governments at $35 an ounce. So for $35 in dollars, you got one ounce in gold, or alternately stated, for a dollar, you got 1/35 of an ounce of gold.

 

      Now, of course, it's now about $1,800 an ounce, or alternately stated, about 1/1800 of an ounce of gold for a dollar. And you will see, if you do the math, this represents a 98 percent -- 98 percent -- devaluation of the dollar with respect to gold since Nixon's speech on that Sunday evening in 1971.

 

      Now, how ironic, in retrospect, is the claim of the principal US negotiator at the Bretton Woods conference, Harry Dexter White, that, as he put it, "The United States dollar and gold are synonymous"? 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 printing. 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.

 

      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 Nixon's decision and announcement of 1971 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 so-called great inflation of the 1970s which was 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 theoretical support and practical reasons to do it, has gotten us into -- we might have had them anyway, who knows -- but we have had a whole series of credit and foreign exchange and financial crisesabout one a decade.

 

      Now, what would have happened if President Nixon had made a different decision 50 years ago? First, of course, we have to remember that Nixon and his advisors, as you may remember, went for several days to Camp David to debate all this and work this out. And 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 then 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 greater than the amount of gold they had as people started to demand their gold back. And France is a particular example.

 

      In retrospect, it's a great decision they made to take the gold instead of the rapidly depreciating dollar. Other countries at the time did not demand gold, particularly the ones that were most dependent on 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 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.

 

      Secretary of the Treasury Connally, at the time, said, "We're sending out our gold 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 redemption in gold. They could have devalued the dollar in terms of gold. And they knew that. That had various problems with it. One, it's very politically unpopular to announce you're devaluing your currency. Now, note, what they did resulted in devaluation, but it wasn't formally a devaluation.

 

      And the uncertainty is also hard. If you devalue, you have to devalue to some other number, but what is it? $70 an ounce? The Prime Minister of England suggested a decade before, to President Kennedy, "You're at $35 an ounce, just go to 70." Well, that would be a 100 percent rise 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 $100 an ounce in '71, and that would have been better. But nobody knows. You can't even know in retrospect, let alone for them at the time, what the right number was.

 

      Now, two of the participants at Camp David before the 1971 announcement -- namely, the chairman of the Federal Reserve, Arthur Burns, and a future famous chairman of the Federal Reserve, Paul Volcker -- both favored trying to keep Bretton Woods going, effectively devaluing, working it out with the other countries. But that was not the decision. The 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. They cut off other popular programming to bring you this announcement 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 said, specifically, was, "I've ordered Secretary Connally, 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 a choice that we still have today. So what did happen was, for the first time ever in history, in peacetime, 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 to buy the ammunition and the tanks. But in peacetime, this is the first time ever.

 

      And so here we are now, with this system. Now, and going forward, 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 does 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 to just have the central bank print up 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 to so-called modern monetary theory. I write that "modern" monetary theory because printing up the money is an exceptionally old financial idea. And so we have all these temptations. We're living them now. How much printing can there be without doing serious damage? And it all goes back to Sunday evening, August 15, 9:00 p.m. Eastern time, President Nixon's famous announcement, which we need to remember because it's so important for now and in the future. Thanks, Wayne.

 

Hon. Wayne A. Abernathy:  Thank you, Alex. Plenty of interesting things there. And 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 another, and so forth.

 

      And 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 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 have muddled along?

 

Alex J. Pollock:  Bretton Woods, as you say, Wayne -- 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 and then led into the 20s and the 30s. And I think they did a pretty good job. When 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 an agreed-upon international treaty, in 1945. It lasted until 1971. So that's 26 yearsnot very long. But on the other hand, as a human creation, maybe 26 years is pretty good.

 

      It survived through the amazing rebirth of economic growth and rebuilding of the world after the unbelievable destruction of World War II. So it had a good day. But did it have a fatal flaw? The fatal flaw -- you said that some country -- they knew that any time you set parities -- because under Bretton Woods, you had a fixed exchange rate between major currencies -- everybody had a say. Alright, it's four pounds to the dollar -- four dollars to the pound, or four Deutschmarks 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, that things would change, some people would do better than others, some people would have more inflation, some would be more competitive, and you'd have to change them. And so they built the changing the parities into the system.

 

      And then they built in, through the original meaning of the international monetary fund, a kind of bank to finance the period of tension when things had to be changed. But what couldn't be changed in Bretton Woods was the unique position of the United States. Everybody pegged their currency to the US dollar, and the US promised to redeem dollars in gold. And that, as it became clearer -- 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 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. And perhaps others did as well, but the French were very vocal about it.

 

      Anyway, so you had this unique position of the United States. Now, did that mean the system had to fail? 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 Lyndon Johnson guns and butter inflation? Maybe not. So it depended on the -- you might say on the international geopolitics of the world and 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 paritythe dollarso you depreciated the dollar against gold? After all, whether you have enough gold or not depends on the price. I mean, if you make the exchange rate in dollars -- on enough dollars per ounces 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 problems just like the current Nixonian system does.

 

Hon. Wayne A. Abernathy:  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.

 

Alex J. Pollock:  Yes, that's true. Yes.

 

Hon. Wayne A. Abernathy:  And Nixon, in essence, decided, rather than face that discipline, "I'm going to throw it off." Is that correct? Would you say that's right?

 

Alex J. Pollock:  I think that's right, although it was too late by then. 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 -- by that time, it was too late to face that this would -- the dollar was going to go down one way or another because the lack of discipline all happened during the 1960s with the run-up of US foreign obligations and US inflation. 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 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 the redeemability of a currency is always a discipline on the central banks 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, there’s world geopolitical competition going on, you have the amazing recovery of the European and Japanese, in particular, economies by this time. So there are going to be these stresses. I don't think Bretton Woods could have survived without major changes, like in the US dollar parity. Whether it could have been adjusted, of course, is one of those things that you can always debate because no one knows what the true counterfactual would have been.

 

Hon. Wayne A. Abernathy:  Taking a step from then into today -- still, the significant 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 US economic policy, vis-à-vis the global community? 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 US economic policy is affecting the dollar and affecting them?

     

 

Alex J. Pollock:  Yes. That is 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 in spite of the fact that it depreciated a lot. I mentioned -- well let's think of the Swiss franc, since it didn't turn into the euro -- four Swiss francs to the dollar in 1971. Today, less than one Swiss franc will buy you a dollar; 360 Japanese yen in 1971 -- today, less than a hundred or so. So the dollar did have tremendous depreciation. But its amazing role as dominant international currency continues. And along with that, the ability -- the exorbitant privilege, as the French said, to get other people to finance you by holding your liabilities, continues.

 

      Well, the reason for that is the underlying, enterprising strength of the American market economy and its huge size relative to other people. But note -- put all the euro countries together; they're about as big as the United States. They don't have that dollar, so there are some other things in there as well like the deficit in the financial markets. But I think it is a surprise that, having cut off what -- at least if you were Harry Dexter White -- you thought was an essential idea, as did most people at this time -- this link of gold to the dollar -- now suddenly, that went away. But the dollar is still dominant, and we still maintain our exorbitant privilege. So now believers in cryptocurrencies and bitcoins think that those might change it, but that's another discussion.

 

Hon. Wayne A. Abernathy:  That is another discussion, and certainly one that we can look at another time. I do note, though, that at least for the last several years, there's been, at least, talk at 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 Beijing where we had -- 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 US role was permanent, is it a mistake to assume that the US dollar role today is a given, or can't actually -- or could actually become a troubled thing?

 

Alex J. Pollock:  Well, if we were having this webinar in, let's say, July 1914, instead of August 1914 -- in July 1914, we would’ve assume that the dominant worldwide role of the pound sterling -- which was the king currency of the whole world and the currency of the capital markets capital of the world, namely London -- 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 assume its then-dominant role in New York to replace London, basically, all as a result of the printing that all of the countries involved in the First World War did to finance the war and to destroy the value of their currencies while they were at it.

 

      So no, nothing is permanent. We know that. All things are tradeoffs. And certainly, both Chinese and Europeans 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 has a way of surprising us. As an author of a book once said, "We’re always surprised." And our imaginations do not limit the possibilities of the world, just like, I think, the world was surprised by Nixon's action in 1971 -- still with us today. I don't think there's much chance we're going back to pre-1971, but in the fullness of time, it seems to me, we certainly could go to something other than we've got.

 

      You asked me before, Wayne, and I didn't answer, "What is the limit, or 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. 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 discipline is, I believe -- and the most important one -- the [inaudible 00:36:19] between, as I said, what they used to call "honest money" -- that is to say, money that maintained its value versus a money -- which it becomes clear, both to the domestic population and to the international holders -- is rapidly depreciating in value. And that is an ongoing discipline, which, I believe, cannot be avoided.

 

Hon. Wayne A. Abernathy:  That brings me to the other question I'd like to ask. And perhaps, as I ask this question, and Alex answers it, you may have some questions you wish to point. But this is -- 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 Woods system of government-pegged values with a system where the markets, by and large, decided the values of currency? We, in essence, have that domestically, but we didn't have that internationally. But now, don't we have both?

 

Alex J. Pollock:  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 mandated single currency. Now, if you were really a total free-market thinker, 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 ideas of the cryptocurrency -- the multiple competing currency.

 

      Now, 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 advisors at the Camp David meetings leading up to Nixon's announcement, favored floating exchange 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 outmoded link to the barbarous relic, as Keynes called gold, and we just have a market."

 

      And you know, that's an argument, but it doesn't get you to 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. There is a market, but there is also 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.

 

Hon. Wayne A. Abernathy:  One of our participants has a question now, if I can put that to you. And I think it ties into this discussion where we are. It reads as follows, "Some historians to Roman times link debasing the currency -- Roman times of printing money, or as they would make impure gold -- to the need to tax capital to tackle inequality. Do you see any linkage to these three issuesinequality, capital taxation, and the non-gold free printing of money by the global superpower?" That's the question.

 

Alex J. Pollock:  Well, I'll just start off by saying, I mentioned that "modern" monetary theory is one of the oldest ideas. And this questioner, by bringing up the Romans -- and before that, the Greeks -- depreciating 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 coinagethe drachmasfrom the citizens. They had to turn them in to the government on pain of death. And after they turned them in, he melted them down, and restamped, according to the story, each one drachma coin, 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 your idea is that you want to 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, 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 debasing the currency is one way to do that.

 

Hon. Wayne A. Abernathy:  Another question, here. And actually, this is -- if you're willing to take something -- a cryptocurrency question, if I may.

 

Alex J. Pollock:  Oh, sure.

 

Hon. Wayne A. Abernathy:  Someone has asked that.

 

Alex J. Pollock:  Sure.

 

Hon. Wayne A. Abernathy:  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, under what we see out there, are there certain countries that benefit more than others?"

 

Alex J. Pollock:  Well, I think that a pure cryptocurrency, like Bitcoin, is an ultimate fiat currency because although we have fiat currencies pure paper, they are hooked to governments who have armies and force and the ability to make people do things. A Bitcoin is a pure fiat currency. It isn't redeemable in anything. It gives its holder no right to any collateral or redemption, and also, it doesn't have any force behind it. So, that's maybe even a purer fiat currency, a privately issued -- a key theoretical point in all this is, can a privately-issued fiat currency, as opposed to a government-issued fiat currency, actually serve as a currency? And I think the answer to that, actually, is no, but we're still experimenting with that in the market.

 

      So-called stable-value currencies are, themselves, backed by other fiat currency. They're just a dollar substitutea kind of payments mechanism. And some of them, at least, say, "Well, we are backed by the so-called dollar reserves." But they're pretty 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 depending on what reserves -- as so-called -- you choose to hold -- 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 to cover your liabilities. And there -- you're just going to repeat banking.

 

      Now, as to what countries could benefit -- I think if you talk about cryptocurrencies and countries, then you shift into this very current debate, on which I have written, about whether central banks themselves should issue cryptocurrencies or digital currencies. I guess you can't call them, really, cryptocurrencies if they're issued by the central bank, but it's the same idea. Should there be a pure digital currency issued by various central banks? And then some people say, "Well, this is another way that China wants to 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." Should the Federal Reserve issue its own digital currency?

 

      What you might think -- just build on the -- if it succeeded -- 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, take 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, and so it made loans. It would be kind of a retrogressive movement backwards in central bank history to central banks, which are competitive with all the private banks as opposed to having a particular role.

 

      So none of these things are clear, as always, in economics and finance. And I have a saying, which is, "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 philosophical theory. And that's certainly true of all these questions of cryptocurrencies and how this will or should play out.

 

Hon. Wayne A. Abernathy:  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.

 

Alex J. Pollock:  Oh, for sure.

 

Hon. Wayne A. Abernathy:  They are really quite old, aren't they?

 

Alex J. Pollock:  Yes, for sure.

 

Hon. Wayne A. Abernathy:  Here's a question I think relates to that. "Would you be in favor" -- this is one we've 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?"

 

Alex J. Pollock:  Yes. Well, I think what I would be in favor with, in lines of Hayek's theory, is competitive currencies. If you had a currency, redeemable in gold at a given rate -- you know, get such and such an ounce of gold for whatever unit of this currency is -- that 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.

 

      However, there's very little chance that any government would like this idea of allowing competitive currencies. On the issue of legal tender, that's a really important one, historically. 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 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 as 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 that it was constitutional. But it was a big issue in the day.

 

      And that's an issue we've sort of forgotten about, the forcing of currency on the public -- which is a fiat currency through legal tender. Of course, that had a rerun 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. It happened in 1933. That ended up in the Supreme Court, too. And the Supreme Court held, by a vote of 5-4, 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.

 

Hon. Wayne A. Abernathy:  As I recall, then --.

 

Alex. J. Pollock:  Even for The Federalist Society, a fundamental philosophy, Wayne.

 

Hon. Wayne A. Abernathy:  Oh, 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 in that case that you mentioned, I think there is also the issue of whether the paper, 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 unconstitutional. As I recall, the courts upheld that as well.

 

Alex J. Pollock:  No, you're absolutely right. That was. They used 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 like to summarize this in the following 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.

 

      And of course, this was extremely controversial at the time. A lot of other foreign countries and their governments were up in arms about this. And you may remember, there's a well-known -- I was going to say famous, but maybe it's notorious -- statement of the Secretary of the Treasury, John Connally, at the time, who said to the Europeans, who were upset, "It's our currency, but it's your problem."

 

Hon. Wayne A. Abernathy:  That reminds me of the Pollock law of finance, as I recall, which is, "Debts that cannot be repaid, will not be repaid."

 

Alex J. Pollock:  Thank you. Absolutely right.

 

Hon. Wayne A. Abernathy:  It's a matter of who bears the loss, really.

 

Alex J. Pollock:  That's exactly right. Exactly right. And we're going through that again now, in the aftermath of the Covid crisis and its financing. Now, it's going to be all about who bears the loss. Well, one of the ways you force people to bear the loss is by inflating, is by monetization, and putting the loss on the holders of your currency or savings denominated in your currency.

 

Hon. Wayne A. Abernathy:  And now, a question here. 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 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?"

 

Alex J. Pollock:  That's a classic question, as well, and a good one. And many people have proposed some kind of a basket of commodities that might be a basis for a currency. Theoretically, you could certainly imagine it. You know, you get some kind of a generalized commodity 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 and -- just like it did for the Bretton Woods parities -- but it’s certainly, theoretically, conceivable. Gold is handy, as we know, because it lasts forever and it doesn't rust, and it's fairly small, if you want to carry some coins around as one family of famous investment bankers who got out of Germany in time -- 1938 or so -- said, "The only real wealth is what you can take with you inside a toothpaste tube or sewed inside your clothes." And gold qualifies there.

 

      But this is a classic and perfectly sensible idea. As I remember, Irving Fischer, 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, was one of the followers 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 a 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.

 

Hon. Wayne A. Abernathy:  And 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?'"

 

Alex J. Pollock:  Well, yeah. That's an easy definition. 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 you can exchange that piece of paper. It interchanges with the books in the Federal Reserve for an accounting entry called "the dollar," whereas, of course, before, at least if you were a foreigner, the definition of a dollar was 1/35 of an ounce of gold.

 

Hon. Wayne A. Abernathy:  In essence, what fiat currency has done is made it a flexible definition.

 

Alex J. Pollock:  Yes. Well, and of course, if you're a central banker or a politician, that's what you like. You know that, Wayne, having worked on legislation.

 

Hon. Wayne A. Abernathy:  We're getting near the end of our time, but I do want to -- this 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 participants is asking the question -- is maybe the IMF special drawing rights work as some kind of basis for global currencies?

 

Alex J. Pollock:  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, "We keep having these dollar crises, one a year." And this was all during the 60s as the US deficits were higher and inflation was higher, and the dollar was under pressure, and people were building up large-dollar claims in foreign hands. And SDRs were meant to be a potential way around it. It never seemed to have worked too well, but it definitely was the theory at the time.

 

      Can 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 to redeem dollars for gold. It was also an amazing thing, really, for what you would have thought a basically market-oriented administration to do -- was to put in wage and price controls. And you, before, Wayne, said something -- "Well can't you just control these things? But does the market ultimately overcome them?" And of course, that's what happened in the early 70s. They put in wage and price controls. It turned into a vast bureaucracy. It didn't succeed in the end. And when they finally had to be taken off, then the inflation exploded in the mid-1970s and on. So, yes, you try these control mechanisms, but in the end, they won't work either.

 

Hon. Wayne A. Abernathy:  Well, as with all very fascinating conversations, the clock is against us. And it would pretty much run out of the time we've allocated. But this conversation, of course, will continue. One that we really didn't get into as much, and we'll 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 economies all around the world.

 

Alex J. Pollock:  Oh, yes. 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 freedom of the central banks, which as I suggested, you should not foolishly have faith in -- all created by the action of President Nixon 50 years ago. So this is history, but it's also very lively today and going forward. We’re living in this Nixonian world with all of the problems that go along with it.

 

Hon. Wayne A. Abernathy:  Where do we find the discipline? And that's, of course, the question.

 

Alex J. Pollock:  Yes.

 

Hon. Wayne A. Abernathy:  Any final words before we conclude?

 

Alex J. Pollock:  Well, that's a great final question. So let's work on that. Where do 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. And one of the astonishing acts of arrogance, really, was the Federal Reserve saying, on its own, it could set an inflation target, and depreciate the currency infinitely. Now, can we get such discipline from the current Congress? Doesn't seem too likely. But one might hope that there would be a Congress, someday. These are deep and hugely important, but classical, problems. Unfortunately, answers aren't that easy.

 

Hon. Wayne A. Abernathy:  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.

 

Evelyn Hildebrand:  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 those to us at info@fed-soc.org. And we welcome your comments. And I would only add our gratitude to our speaker and our moderator this afternoon. And with that, we are adjourned. Thank you, everyone.

     

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.