This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

-- T.S. Eliot
"The Hollow Men" (1925)

The world is not ending. Despite the wrenching turmoil in global financial markets and morbid allusions to the death throes of capitalism, it ain't over. Not until people quit believing in themselves, not until people quit believing in a better future.


But the whimpering is real, and justified, because it hurts to have your world come crashing down. And global financial markets are definitely crashing, even when the impact is momentarily softened through massive injections of artificial money -- "artificial" because the fiat money does not represent a store of genuine value but rather an airy government claim to future wealth yet to be created.

In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions -- More regulation! Less complex financial instruments! -- let's not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange -- the measure, the standard, the store of value -- which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.

It is the money that is broken.

These days, we don't often refer to the validity of the money itself but rather to "monetary policy" and how the Federal Reserve has managed to calibrate the money supply to economic activity over the last two decades. There are plenty of critiques; the most pointed ones blame former Fed chief Alan Greenspan for keeping interest rates too low, too long.

During his 19 years at the monetary helm -- from 1987 to 2006 -- Mr. Greenspan served under four different U.S. presidents. At least one of them, George H.W. Bush, blamed Mr. Greenspan for keeping interest rates too high. The stock market crash that occurred in October 1987, two months after Mr. Greenspan's confirmation under Ronald Reagan, sent the Dow Jones Industrial Average down 508 points (23%). It required huge injections of liquidity, which subsequently needed to be mopped up with tighter monetary policy. "I reappointed him," the elder President Bush said. "And he disappointed me."

President Clinton likewise reappointed Mr. Greenspan -- and soon learned the terms of the trade-off for reduced short-term interest rates: Bring down the fiscal budget deficit. Spurred on by a Republican Congress, it actually happened; the federal budget was balanced in 1998. All too briefly, the Fed's biggest concern was how to carry out future monetary policy if we ran out of government debt securities for open-market operations. The fiscal deficit subsequently ballooned after 2001, due to spending in excess of revenue growth, while interest rates and unemployment -- and inflation, counterintuitively -- remained low. One thing for sure: We will have more than enough government debt securities.

There's a reason for this short diversion into Mr. Greenspan's long watch. While he is readily demonized today -- Italy's finance minister recently characterized him as the man who, after Osama bin Laden, "hurt America the most" -- Mr. Greenspan is also the man who was awarded the Presidential Medal of Freedom and whose honorary titles include Knight Commander of the British Empire and Commander of the French Legion d'honneur.


Scapegoats are wonderfully convenient receptacles for our collective disappointment, but that's all. When credit markets seize up, when financial instruments disintegrate, when the dollar fails -- it's not because Alan Greenspan was not sufficiently omniscient. He wasn't, true. But no one ever was. No one ever could be.

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit -- currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt -- we are as doomed as those wretched citizens who relied on central planning for their economic salvation.



Whatever well-intentioned reasons existed in 1913 for creating the Federal Reserve -- to provide an elastic currency to soften the blow of economic contractions caused by "irrational exuberance" (and that will never be conquered, so long as humans have aspirations) -- one would be hard-pressed to say that the financial fallout from this latest money meltdown will have less damaging consequences for the average person than would have been incurred under a gold standard.

Moreover, the mission of the central bank has been greatly compromised. Can anyone have faith that Fed policy decisions going into the future will deliver more reliable money? Don't we already know in our bones that the cost of this latest financial nightmare will be born by all of us who store the value of our labor and measure our purchasing power in the form of dollars? As John Maynard Keynes, the famous British economist, observed in his "Tract on Monetary Reform," published in 1923:


The entire world has been affected by the breakdown of the U.S. financial system, thanks to the globalization of investment capital. But the free flow of capital -- along with free trade -- is a good thing, the best path to global prosperity. The problem is that the role of the dollar as the world's primary reserve currency has been called into serious question, both by allies and adversaries. Writing in the People's Daily, Chinese economist Shi Jianxun laments: "The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."

Let's do exactly that. It is time to take on the task of establishing a new foundation for international economic relations and financial relations -- one dedicated to open markets and based on monetary integrity. Every country is responsible for anchoring its own currency to the universal reserve asset, and every citizen has the right to convert the national currency into the universal reserve asset.

That's how a gold standard works. A bimetallic system, linked to silver and gold, works the same way. In either case the money is fixed to a common anchor -- and thus automatically functions as a common currency to serve the needs of legitimate producers and consumers throughout the world.


No, we need to fix the money. Literally.




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