Critics of the administration's Wall Street bailout condemn the waste of taxpayer dollars. But the taxpayers aren't the weightiest American financial constituency, even in this election year. The dollar is the world's currency. And it is on the world's opinion of the dollar that the Treasury's plan ultimately hangs.
That a piece of paper of no intrinsic value should pass for good money the world over is nothing less than a secular miracle. Before the dollar, the pound sterling was the preeminent monetary brand -- but it was backed by gold. You could exchange pound notes for gold coin, and vice versa, at the fixed statutory rate.
Today's dollar, in contrast, is faith-based. Since 1971, nothing has stood behind it except the world's good opinion of the United States. Now the world is changing its mind.
The remote cause of its troubles is the paper dollar itself. The age of paper money brought with it an increasingly uninhibited style of doing business.
The dollar emerged at the center of the monetary system that took its name from the 1944 convention in Bretton Woods, N.H. The American currency alone was made exchangeable into gold. The other currencies, when they got their peacetime legs back under them, were made exchangeable into the dollar.
Under the system of fixed exchange rates and a gold-anchored dollar, world trade boomed (albeit from a low, war-ravaged base). Employment was strong and inflation dormant.
The Nixon administration, on Aug. 15, 1971, decreed that the dollar would henceforth be convertible into nothing except small change. In the absence of a golden anchor, the United States produced as many dollars as the world cared to absorb. And the world's appetite was prodigious.
It was the very lack of gold-standard inhibition that permitted a buildup of titanic dollar balances overseas. At the end of 2007, no less than $9.4 trillion in dollar-denominated securities were sitting in the vaults of foreign investors. Not a few of these trillions were the property of Asian central banks. So, although the United States has run heavy and persistent current account deficits -- $6.7 trillion in total since 1982 -- they have been "deficits without tears," to quote the French economist Jacques Rueff. The dollars American debtors sent abroad America's creditors sent right back in the shape of investments in American stocks, bonds and factories.
