HOW THE DOLLAR RULES BY FIAT / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

BOOKSHELF

NOVEMBER 28, 2011

How the Dollar Rules by Fiat

How did the dollar become the world's principal currency and what is its future?

By JAMES GRANT

The Founders defined the dollar as a weight of gold or silver. We moderns have undefined and disembodied it. The 21st-century greenback is neither connected to nor—as they say on Wall Street—collateralized by anything tangible. You can materialize it on a computer, like a tweet.

"Greenback Planet" is the story of this amazing monetary transformation. The narrative begins in the 18th century and races to the present, pausing to catch its breath at some of the great American monetary landmarks: Andrew Jackson's veto, in 1832, of legislation rechartering a predecessor to the Federal Reserve; Abraham Lincoln's recourse to greenbacks, or fiat currency, to finance the Civil War; resumption of the gold standard in 1879, with which it once more became possible to exchange gold for paper and vice-versa at a fixed and statutory rate; J.P. Morgan quelling the Panic of 1907; the
Federal Reserve not quelling, never mind preventing, the Great Depression; the crazy-quilt monetary improvisations of the 1930s; the halfway gold dollar of the post-World War II era; and the creation, in 1971, of the pure paper (later digital) model of today.

Mr. Brands is a paper-money man, though the subtitle of his book—"How the Dollar Conquered the World and Threatened Civilization as We Know It"—seems to betray some reservations. It betrays, as well, the author's zest for provocation. The American currency, he extravagantly claims, has "made America rich," "defeated communism" and "knitted the planet into a single economy more fully than any currency before." I would say that enterprise made America rich and that communism, rotten from the start, defeated itself, with a timely push from Ronald Reagan. And I would say that the British pound "knit" the world economy together long before the birth of Ben Bernanke, while the golden solidus of ancient Byzantium circulated as global money ages before the reign of Queen Victoria.

Without an over-scrupulous regard for history, the historical narrative zips along.
.
Mr. Brands has written biographies of Benjamin Franklin, Andrew Jackson, Theodore Roosevelt, Woodrow Wilson and Franklin D. Roosevelt. He has written diplomatic history, political history and business history. Some academics—"one book men," as Samuel Flagg Bemis, the prolific Yale diplomatic historian, contemptuously called them—write hardly at all. Mr. Brands, a history professor at the University of Texas, seems to do nothing but.
.

Greenback Planet

By H.W. Brands
(University of Texas Press, 139 pages, $25)

.
I would advise more reading. Many have plowed the ground that Mr. Brands here so lightly treads, but to the best of these worthy forerunners the author scarcely tips his hat.
.
Conspicuously unacknowledged are such critics of the modern dollar system as Jacques Rueff (1896-1978), the adviser to Charles de Gaulle who was wont to assert that the U.S., free to print as many dollars as it found expedient, was spending itself into debt and the world into crisis. Not a bad diagnosis, as things have turned out. Worse than Mr. Brands's sin of omission, however, is this sin of commission: His assertions that there is something new under the monetary sun.
.
Actually, with the exception of the automatic-teller machine, we've seen it all before. Inflation is as old as the first coin clipped for a bit of valuable metal, and the first bad loan no doubt followed hard on the founding of the first bank. The author writes that Lincoln, by detaching the dollar from its golden anchor, "made possible innovations in finance unimagined by previous generations." But John Law, the 18th-century Scottish economist who served as finance minister for Louis XV in France, not only imagined this particular innovation but also implemented it for the king—with disastrously inflationary results.
.
"Stubborn tradition" is Mr. Brands's explanation for the persistence of mankind's adherence to currencies backed by something other than the good intentions of the governments that print them. If so, humanity is stubborn for cause. The invariable rule on paper currencies, as the author does not quite right come out and say, is that they lose their value. Will the dollar prove an exception? The rising price of gold suggests that many doubt it.
.
As if he were not a historian at all but rather a newspaper columnist up against a deadline, Mr. Brands keeps losing the historical thread. Thus he erroneously writes that "the financial panics of the early 19th century in America were local affairs, confined to a modest number of firms and affecting comparatively few people." The Panic of 1837 in fact rattled teacups in the City of London almost as violently as it did in New York and Philadelphia, as recounted in Bray Hammond's masterly 1957 history, "Banks and Politics in America."
.
On the still-fraught question of the Great Depression, Mr. Brands maintains that excessive lending against stock-market collateral, "rather than Main Street mortgages," sent the banking system down the hole. The record actually shows that the banks suffered little through margin lending. Real estate was rather their salient soft spot, as it so often is.
.
In the Republic of Letters, the land of authors, it falls to journalists to write the glib, forgettable books, scholars the ones that last. Law-abiding writers respect these ancient boundaries. The author of "Greenback Planet" is a trespasser.
.
Mr. Grant, the editor of Grant's Interest Rate Observer, is the author, most recently, of "Mr. Speaker! The Life and Times of Thomas B. Reed, the Man Who Broke the Filibuster."