Cryptocurrency: Celebrating 50+ years of Monetary Debasement and Debt That Politicians Put On Your Head

grarpamp grarpamp at
Wed Aug 18 03:18:27 PDT 2021

Ferguson: 50 Years After Going Off Gold, the Dollar Must Go For Crypto

It was Sunday night on Aug. 15, 1971, and many Americans were watching
television — the most popular show that evening being the Western
series “Bonanza.” (Older readers will recall that it chronicled the
adventures of the Cartwright family — Ben, his three sons and their
Chinese cook — on their Ponderosa Ranch in Nevada.) At 9 p.m. Eastern
time, the Cartwrights and their rivals on the other two networks were
interrupted by the somewhat less popular figure of President Richard

The word “bonanza,” according to the Oxford English Dictionary, was
introduced into American English in the 1880s to describe a highly
productive or profitable mine, such as the silver mines of the
Comstock Lode in Cartwright country. Ironically, Nixon was disrupting
Sunday evening to tell Americans that the days of precious metal were
over. The link between the U.S. dollar and gold — a link that dated
back to the country’s adoption of the gold standard nearly a century
before — was to be severed. The age of fiat money — that is, of
currency backed by nothing more than the credibility of the U.S.
Treasury — had dawned.

Not that Nixon put it like that. It’s worth watching a clip of his
address to remind yourself just how terrible the production values of
U.S. politics used to be. Nixon looks as if he is addressing the
nation from a passport photo booth, a nasty blue curtain all but
matching his equally nasty blue suit and tie. There were no
teleprompters then, so he constantly looks down at his script. You
would not know from his flat delivery how many hours he and his
advisers and speechwriters had devoted to this historic text.

Americans by now were used to presidential addresses about Vietnam. It
was less usual to have a lecture on the economy on a Sunday night.
However, as Jeffrey E. Garten explains in his gripping account of the
speech’s origins and consequences, “Three Days at Camp David,” the
announcement had to go out before financial markets opened on Monday.
In his own charmless way, Nixon was dropping a bombshell.

“The time has come,” Nixon declared, “for a new economic policy for
the United States. Its targets are unemployment, inflation and
international speculation.” There followed a succession of
presidential pledges, in ascending order of radicalism: to introduce
tax breaks to encourage investment; to repeal the excise tax on
automobiles (but only U.S.-made ones); to bring forward planned income
tax deductions (though with offsetting spending cuts); to impose a
90-day “freeze” on all prices and wages; and — the bombshell — “to
suspend temporarily the convertibility of the dollar into gold.”
Finally, Nixon announced a 10% tax on all imports — in a word, a

For foreign leaders, finance ministers and central bankers, this was
stunning. Not only would the U.S. dollar cease to be convertible into
gold; the U.S. was apparently turning away from the free trade it had
embraced at the end of World War II and reverting to protectionism —
though this proved to be just a threat to get the Europeans and
Japanese to accept the dollar devaluation. In the words of Henry
Brandon, the chief Washington correspondent of the London Sunday
Times, this was the “moment of the formal dethronement of the Almighty

Except that it wasn’t.

>From the distance of half a century, the most surprising thing about
what the Japanese called “the Nixon shock” was precisely that it did
not mark the end of the era of dollar dominance. On the contrary, the
U.S. currency has only grown more important — its privilege even more
exorbitant — since Nixon severed its link to gold.

There is an important lesson here for every commentator who is tempted
to speculate about the dollar’s demise (and I have done it myself more
than once). My old friend Steve Roach, the former chairman of Morgan
Stanley Asia, made the standard case in January. Since then, the
dollar has essentially flatlined, according to the trade-weighted
indices produced by the Bank for International Settlements.

The arguments for a dollar crisis back in 1971 are familiar to modern
ears. Inflation was rising. The budget deficit was worrisome. The
trade deficit was growing. And Asian and European competitors were
eroding U.S. economic leadership. Nixon’s economic bombshell needs to
be seen in the broader context. He and his national security adviser,
Henry Kissinger, were struggling to extricate the U.S. from an
unpopular war in Vietnam. They were in the midst of a bold attempt to
deal directly with China’s communist government in the hope of putting
pressure on the North Vietnamese and their Soviet backers.

You might say that Joe Biden confronts a somewhat similar landscape
(for Vietnam, read Afghanistan) except that the deficits of 2021 make
the deficits of 1971 look trifling. The federal deficit in Nixon’s
first term peaked at 2.1% of GDP. In the words of a July 21
Congressional Budget Office report, “At 13.4% of GDP, the deficit in
2021 would be the second largest since 1945, exceeded only by the 14.9
percent shortfall recorded last year.” And that doesn’t include the $1
trillion infrastructure bill that the Senate just passed, which the
CBO thinks would widen the budget deficit by another $256 billion over
10 years. Nor does it include the $3.5 trillion antipoverty and
climate package that the Senate majority leader, Chuck Schumer, would
also like to enact this year.

As for the trade deficit, you have to squint to see one in 1971. It
was a negligible $1.4 billion — true, the first trade deficit since
1893, but still tiny in a $1.2 trillion economy. The overall current
account deficit at the time of the Nixon shock was 0.2% of GDP. Today
it’s 3.5%.

As Garten tells the story, 15 white guys (as I said, the 1970s were
different) repaired to Camp David and thrashed out Nixon’s new
economic policy. The Texan force of political nature that was Treasury
Secretary John Connally got most of what he wanted: in particular, “to
screw the foreigners before they screw us.”

The losers were Paul Volcker, then a Treasury undersecretary, and the
other financial technocrats who had hoped to re-engineer the Bretton
Woods system — with the International Monetary Fund’s special drawing
rights (a synthetic reserve currency) taking the place of gold. Yet
Connally was playing the part of a wrecking ball, as Kissinger pointed
out when he came to understand what was being cooked up. (He was on
his way to Paris during that fateful weekend, for secret peace
negotiations with the North Vietnamese.)

“I will be perfectly frank with you,” Connally candidly told reporters
after Nixon’s TV address. “None of us know for certain what will
occur.” Politically, it delivered the boost to the administration’s
popularity Connally and Nixon had anticipated. But the collateral
damage to American foreign policy — as Asian and European markets and
currencies went haywire — took many months to repair. Not until the
Smithsonian Agreement in late December were new exchange rate
arrangements in place, whereby everyone else accepted the reality of
dollar devaluation.

And even this did not last. First the Brits devalued, then the
Italians (prompting Nixon’s famous outburst, “I don’t give a shit
about the lira”). The dollar had to be devalued again in February
1973. By the end of that year most major currencies were floating —
the outcome always preferred by Connally’s far more sophisticated
successor as Treasury secretary, George Shultz.

You can see why journalists such as Henry Brandon thought it was the
end of the line for the dollar. The 1970s became a horror show of
double-digit inflation. At its nadir, the dollar had depreciated by
around 50% compared with the Japanese yen and German Deutschmark. Yet
neither currency displaced the dollar, despite numerous prophecies of
that outcome.

The dollar rallied strongly in the first half of the 1980s — to the
extent that there had to be coordinated intervention to weaken it
under the September 1985 Plaza Accord. It had another wave of strength
in the second half of the 1990s. And contrary to most predictions
before the global financial crisis of 2008-9 — including the
influential warnings of my old friend Nouriel Roubini, New York
University’s so-called Dr. Doom — the dollar strengthened rather than
weakened at times of economic stress, from the bankruptcy of Lehman
Brothers Holdings Inc. to the plague of Covid-19.

Why was this? Why has the dollar remained dominant despite the
apparent instability of this “nonsystem” (as the economist John
Williamson called it) of sometimes floating, sometimes pegged exchange
rates. I offer a three-part answer.

First, although the “great inflation” of the 1970s was disruptive, it
proved to be curable. As Federal Reserve chair, Volcker administered
the bitter medicine of higher interest rates and a recession that,
combined with the supply-side reforms of President Ronald’s Reagan
administration, fundamentally reset expectations. Independent central
banks succeeded so well in reducing inflation that in 2004 Ben
Bernanke, then a Fed governor, boasted of a “great moderation.”

Second, the system of liberalized capital markets born around this
time — beginning with the eurodollar market — gave the dollar even
more international utility than it had enjoyed under Bretton Woods. As
the dominant currency not only in central bank international reserves
but also in a rising share of international trade transactions, the
dollar was more than ever the sun around which the other currencies of
the world revolved.

Third, the terrorist attacks of Sept. 11, 2001, strengthened rather
than weakened the U.S.-centered international financial system. Direct
hits on the World Trade Center, a short distance from the New York
Stock Exchange, could only briefly disrupt the smooth operation of
American financial markets. And when the U.S. government went after
those who had financed al-Qaeda and other extremist groups, it
discovered a hitherto underestimated superpower: the ability to impose
financial sanctions on any country or entity that defied Washington.

The increasing exertion of this superpower in response to a variety of
different challenges to U.S. power — from the Russian annexation of
Crimea to Swedish bank secrecy — revealed the full extent of American
financial paramountcy. Excluding any actor from the dollar payment
system was revealed as a more effective (and much cheaper)
geopolitical lever than sending an aircraft carrier strike group.
True, the U.S. could not restore Crimea to Ukraine. But it could
inflict real pain on the Russian economy and the Russian political
elite. Here was a powerful incentive to retain dollar dominance.

Yet the core of this financial power was and remains the U.S. banking
system. And two recent developments have exposed the weakness of this
core. First, the financial crisis originated in the
undercapitalization and poor management of the American banks and
their European counterparts. Second, and less obvious, technological
innovations began to expose the banks’ fundamental inefficiency. As
the Princeton historian Harold James insightfully argued last month:

    The dollar’s long preeminence is being challenged, not so much by
other currencies … as by new methods of speaking the same cross-border
monetary language as the dollar. As the digital revolution
accelerates, the national era in money is drawing to a close. … the
demand for a monetary revolution is growing.

    That revolution will be driven by digital technologies that enable
not only new forms of government-issued fiat currencies … but also
private currencies generated in innovative ways, such as through
distributed ledgers. … The world is quickly moving to money based on
information rather than on the credibility of a particular government.

In James’s neat framing, “Nixon’s closing of the gold window marked
the end of a commodity-based monetary order, and the beginning a new
world of fiat currencies.” Now, however, “we are moving toward another
new monetary order, based on information.”

Or are we?

The past 18 months have been an exciting phase of the monetary revolution.

The pandemic has sped up both innovation in decentralized finance and
adoption by a wider range of investors and institutions of established
cryptocurrencies such as Bitcoin and Ethereum.

In recent months, however, I have been depressed to see a wave of
attacks on cryptocurrency by the custodians of the established order.

Among the standard-bearers of the backlash against crypto is Hyun Song
Shin, with whom I once shared a staircase when we were students at the
same Oxford college. In the latest BIS annual report, Shin denounces
cryptocurrencies as “speculative assets rather than money … used to
facilitate money laundering, ransomware attacks and other financial
crimes.” Dismissing both Bitcoin and stablecoins, he argues that
central banks must instead expedite the adoption and issuance of their
own digital currencies, following China’s lead.

Martin Wolf of the Financial Times sounded an even more combative note
last month. Central banks and governments, he argued, “have to get a
grip on the new Wild West of private money,” and the best way would be
to introduce digital currencies of their own. “The state must not
abandon its role in ensuring the safety and usability of money,” Wolf
went on, echoing Shin: “Bitcoin in particular has few redeeming public
interest attributes … In my view, such ‘currencies’ should be

These messages are being received and amplified in Washington. The
President’s Working Group on Financial Markets, which is led by
Treasury Secretary Janet Yellen, has expressed concerns about two
stablecoins: Tether, which is under investigation by the Justice
Department, and Facebook’s Diem, which was supposed to launch last
month. Along with others such as Circle’s USDC, these stablecoins are
backed by dollar assets.  This has led  some — for example, the former
chairman of the Commodity Futures Trading Commission, Timothy Massad —
to argue that stablecoins are like unstable money market funds.

Another talking point (used, for example, by Fed Governor Lael
Brainard) is that stablecoins are analogous to the notes issued by
wildcat banks in the 19th-century U.S. This is very bad financial
history, as George Selgin has pointed out.

Perhaps the most startling illustration of this new mood was the
speech given by Gary Gensler, chairman of the Securities and Exchange
Commission, at the Aspen Strategy Forum on Aug. 3:

    Primarily, crypto assets provide digital, scarce vehicles for
speculative investment. Thus, in that sense, one can say they are
highly speculative stores of value. … We also haven’t seen crypto used
much as a medium of exchange. To the extent that it is used as such,
it’s often to skirt our laws with respect to anti-money laundering,
sanctions, and tax collection. … Right now, we just don’t have enough
investor protection in crypto. Frankly, at this time, it’s more like
the Wild West.

    The use of stablecoins on these platforms may facilitate those
seeking to sidestep a host of public policy goals connected to our
traditional banking and financial system: anti-money laundering, tax
compliance, sanctions, and the like. This affects our national
security, too.

As Kissinger quipped after a comparable litany of congressional
complaints about abuses by the intelligence agencies: “Except for
that, there is nothing wrong with my operation?”

Gensler went on to argue that pretty much everything that moves in the
world of crypto is almost certainly an unregistered security.
Likewise, any platform where crypto tokens were traded or lent is
subject to securities laws — and possibly also to commodities laws and
banking laws. All he asked of Congress was “additional plenary
authority to write rules for and attach guardrails to crypto trading
and lending.”

As if to answer that classic plea by a regulator for yet more power,
the Biden administration seized the opportunity presented by its own
bipartisan infrastructure bill to insert a provision that, in the name
of increasing tax revenue, would treat many, if not all, crypto
participants as “brokers,” potentially imposing 1099-issuing and
IRS-reporting requirements on them. Many of these participants merely
serve as nodes in a network, processing encrypted information, and do
not even have access to the information required by the bill.

A bipartisan group of senators — Republicans Pat Toomey and Cynthia
Lummis, and Democrat Ron Wyden — rode to the rescue with a compromise
amendment, which, while far from perfect, would have spared Bitcoin
and Ethereum miners, validators, hardware makers and, most
importantly, programmers themselves. Another bipartisan pairing,
Senators Mark Warner and Rob Portman, proposed a competing amendment
that would have created a carveout only for Bitcoin miners.

Yellen and the White House backed the Warner amendment, as it offered
a legislative basis for the universal digital financial surveillance
they seek without the political battle that standalone legislation
would likely require. While Bitcoin is the most widely held and most
valuable cryptocurrency, it is Ethereum’s rapid, decentralized
financial system based on smart contracts that worries Treasury.

Overblown claims, such as Democratic Senator Elizabeth Warren’s
warning that “shadowy super coders” would wreck the financial system,
recall the alarmist reasoning used by the State Department in the
1990s when it attempted to restrict cryptography — an attempt
overturned by the courts (in Bernstein v. United States), which deemed
code to be protected free speech. The Warner amendment was an
analogous attempt to choose “which foundational technologies are OK
and which are not in crypto,” to quote Coinbase chief executive Brian
Armstrong, a sentiment echoed by Tesla founder Elon Musk. In the end,
the amendments fell by the wayside and the original language stands.

The right response came from Senator Ted Cruz, who proposed striking
all crypto language from the bill. As “no more than five” senators
could answer “what the hell a cryptocurrency even is,” he said, “the
barest exercise of prudence would say we shouldn’t regulate something
we don’t yet understand, we should actually take the time to try to
understand it.”

I agree. And I also agree with the venture investor Adam Cochran (one
of many “crypto bros” commenting on these developments) that “there is
currently no greater way to risk the supremacy of the U.S. dollar,
than by introducing anti-crypto legislation … The risk of
cryptocurrency replacing the sovereignty of the U.S. dollar is *NOT*
that people will start to denote everything in Bitcoin. It’s that this
industry will set up shop elsewhere and it will use that currency.”

No doubt Cochran is talking his own DeFi book. But I like this
argument for historical reasons. As Harold James says, we are living
through a monetary revolution as profound as the one that swept away
the remains of the gold standard. But there is a difference. In the
1970s and 1980s, the attempts by governments to regulate the
revolution were swept away. Nixon’s price and wage controls were an
abject failure, just as the economist Milton Friedman (and Shultz) had
foreseen. Under Reagan, it was deregulation that enabled American
financial institutions to become the dominant players in international

The winners of my boyhood have become the bloated incumbents of my
middle age. The innovative energy has passed to the crypto bros,
leaving the established banks and their friends in Washington
scrambling to make the barriers to competition even higher. If
cryptocurrency is indeed the internet of money, then we are still at
quite an early stage of its development. Restrictive regulation in the
mid 1990s might have strangled in its infancy the commercialization of
the world wide web. Restrictive regulation of crypto could turn out to
be a very expensive mistake.

I feel in my bones that trying to compete with China to build the best
central bank digital currency is a mug’s game. The American way is to
let innovation rip.

Avichal Garg of Electric Capital is right in thinking that the best
strategy to preserve the dominance of the dollar is precisely to
encourage the international adoption of dollar-linked stablecoins,
rather than to stamp them out.

As the internet of money grows, the dollar is well placed to be the
preferred global on- and off-ramp, connecting the nascent “metaverse”
to the physical world where we still pay our taxes in fiat.

If we have learned nothing else from the past half-century, it is
surely that the best way to win a race with totalitarian rivals is not
to copy them, but to out-innovate them.

Make the wrong decision at this historic turning point, and we shall
be interrupting a much bigger bonanza than Nixon did.

More information about the cypherpunks mailing list