'While You're Up . . .'

"While you're up, get me Grant's," is the call that goes out from the editorial desk every other week. It's an echo of the famous old advertisement for the eponymous whiskey, only we refer to the financial newsletter Grant's Interest Rate Observer, which is issued every other week. The leading article in the latest number runs under the headline "End of the Honor System," and we hear the editor, James Grant, who no doubt wrote it, will make an appearance for questioning today at the Council on Foreign Relations.

Grant's quotes Secretary Paulson as insisting, before a Washington, D.C., housing conference the other day, that the American economy is "fundamentally sound." Well, we will give him "great," "resilient" even, or "nigh indestructible" (look how many politicians have tried). But "sound" is an accolade to which the administration — and, mark the point, the Congress — can but aspire, given that a necessary precondition to a sound economy is a currency that holds its value.

We are in the camp that believes sound currencies are the bedrock of sound banking systems, sound money markets, and sound credit markets. What a fundamentally sound economy would not be suffering, we suspect, is a credit crisis overlaid on a dollar crisis set along side an inflation outbreak. Grant's notes that the specialists at UBS were not exaggerating when they characterized the debacle in complex mortgage securities as "the biggest failure of ratings and risk management ever." Yet, these are not the dark 1930s but the plump 2000s, with robust employment and a stock market not all that far off its historic highs.

Crisis and mismanagement are staples of financial history. They were cyclical evergreens even during the soundest monetary epochs, notably the time of the international gold standard, which spanned the century between the Napoleonic wars and World War I. However, as we search our books and our memory, we can't come up with a time just like the present — a juncture in which macroeconomic prosperity is so anomalously joined to financial and monetary derangement.

It could just be that posterity, reviewing these tumultuous times, will smile at our wasted anxiety. Just possibly, the crisis of lending and borrowing will be seen as nothing more than the growing pains of a new financial technology. The millennial lending methods — by which mortgages are fashioned into securities and distributed to investors the world over, with lender and borrower never even shaking hands — could not have been attempted or even imagined before the advent of digital technology.

But it could also be that posterity will not be so forgiving as that. It could be that the descendants of today's lenders and borrowers and central bankers will see what so few now understand. They will recognize that the systems of money printing and loan propagation in place in 2007 were unanchored, that there was nothing behind the world's currencies except the bland assurances of the issuing governments. And they will connect, as so few now seem willing to do, the unsoundness of our monetary arrangements with the mess in our credit markets.

As long as the dollar was exchangeable into something besides nickels, dimes and quarters, only so much scrip could be printed. Paper is easy to print but gold is rare and costly and hard to dig out of the ground. In the day, the dollar was defined as 1/35th of an ounce of gold — foreign governments could convert their paper at that fixed rate — but that day ended on Aug. 15, 1971. From then til now, the dollar has been a piece of paper of no intrinsic value. There has been no check on its issuance except for the willingness of America's foreign creditors to absorb it.

The past five years or so has brought a huge new appetite for dollars from abroad. It would be nice to say that the takers of American scrip were mainly profit-seeking individuals who saw in our stocks and bonds and factories world-beating investment bargains. But the truth is that, increasingly, they have been governments and central banks, institutions driven by a desire to stimulate their export sales by making their currencies cheaper. The dollar brand, though it still commands trust outside the 50 states, has been diluted by the inflation of the Bush term, especially the kind of inflation that the economists' preferred measures fail to register, e.g., the prices of food, energy, gold, and houses.

If we are, as Grant's reckons, at the end of the honor system, America's official monetary gold would at $800 an ounce be, according to Federal Reserve data, worth $210 billion. Here would be a handy source of collateral for a sounder dollar. This is not something, if one reads the plain language of Article I of the Constitution, for which one would logically look to the administration or to our country's creditors. A movement to establish the soundness of the American dollar would have to begin with the institution to which the power to regulate its value was delegated, the Congress.