Mission Creep and Monetary Policy

When Richard Nixon took the dollar off gold in 1971, the hope was that this move would free up monetary policy to focus all its energy on combatting unemployment. In lieu of price stability, the nation would get jobs, the argument ran.

With the gold link gone, however, further objectives aside from unemployment-fighting soon came up for consideration. As environmental regulations exploded in the 1970s, the Fed released extra money so that corporations could finance their compliance. In the 1990s, as business executives worried about the “Y2K” glitch in the computer system, the Fed lowered rates to lessen budget pressures on companies as they outfitted their machines with “patches.”

Who would have ever supposed that it falls to the currency issuer to make ad hoc decisions on how to pay for reducing pollution or upgrading computer ware? When the currency is not officially collateralized – such as in gold – all sorts of larks may present themselves to the issuer as worthy of its attention and be taken seriously as such. Under the convertibility discipline of gold, however, these requests are passed on to other places – where they belong.