The Class-Backed Dollar

Editorial of The New York Sun | September 1, 2013

"After disclosing some “gender undertones” in the maneuvering over the next chairman of the Federal Reserve, the New York Times is out with a new scoop — this one over the issue of class. “The most obvious topic for a Democratic Fed leader to emphasize is the sharp growth in income inequality, which many scholars think has destabilized the economy,” writes the paper’s Washington correspondent, David Leonhardt. He goes on to quote one contender for the job, Lawrence Summers, as saying he thinks “the defining issue of our time is: Does the economic, social and political system work for the middle class?”

Mr. Summers, a former treasury secretary, is important in part because, according to the earlier dispatch in the Times, Mr. Summers is the individual who is being advanced for the job by the faction that favors a man. The reporters who broke that story, Binyamin Appelbaum and Anne Lowrey, disclosed that the individual favored by the faction that wants the next Fed chairman to be woman is the vice chairman of the Fed, Janet Yellen. At a time when the monetary debate is in a state of flux, the idea that the dollar should be based not on gender but on class is a scoop.

Call it the third mandate. The first mandate would be your basic price stability, which mandate has obtained since the founding of the Fed a century ago. The second mandate would be your full employment, which was legislated by the Congress in 1978 in a law called Humphrey Hawkins, after two Democrats, Hubert Humphrey and Augustus Hawkins, both men. The measure was signed by another Democrat and man, President Carter. The combination of the price stability and the full employment is your dual mandate. The third mandate would be to manage the dollar in a way calculated to help the middle class.

Why it’s the middle class that the dollar should be managed to help isn’t dwelled on by the Times. But the thinking of the Times must be that your poor people don’t have many dollars to worry about, so the question of whether their dollars hold their value doesn’t affect them as much. The rich people have so many dollars that they, too, don’t care whether the dollar holds its value. So one can start to see the outlines of how Messrs. Summers and Leonhardt are thinking. It prompted us to type into the New York Times’s search engine the phrase “rise of the American middle class.”

One of the first cables it turned up, if sorted by relevance, is a post by Paul Krugman, introducing his Web log in September 2007. In it the columnist offers a paean to the middle class, which the future Nobel laureate says he grew up in and was created by the New Deal. He offers a chart that traces the “share of the richest 10 percent of the American population in total income,” which Mr. Krugman calls “an indicator that closely tracks many other measures of economic inequality.” It illuminates four periods in our recent history. Mr. Krugman focuses on one, which he labels Middle Class America.

The span labeled middle class America were years when society was “without extremes of wealth or poverty, a society of broadly shared prosperity, partly because strong unions, a high minimum wage, and a progressive tax system helped limit inequality.” But the odd thing about it — about Mr. Krugman’s column — is that he fails to mention one other feature of the period. The dollar was defined as a matter of law through most of the period as being a 35th of an ounce of gold. Mr. Krugman’s chart shows the American middle class period running from the 1930s right up until the early 1970s.

What brought that era to an end? Well stub our toe if it wasn’t the beginning of the period of fiat money. This is the period in which Congress stopped defining the dollar in terms of gold and turned to the concept of fiat money, when the dollar was whatever the Federal Reserve said it was and was, in any event, convertible into but another piece of government issued scrip. Mr. Krugman calls the period “the great divergence.” We call it the fiat years, when the value dollar has collapsed to, at last check, less than a 1,385th of an ounce of gold. So here's the real scoop: If the Times wants to recapture the era when the middle class soared, history suggests the thing to do is to define the dollar not in terms of employment or gender or class but in terms of gold."

http://www.nysun.com/editorials/the-class-backed-dollar/88395/