One of our favorite newspaper editorials ran in the Wall Street Journal on January 20, 1988, as the collapse of the Soviet Union — already clear to such visionaries as, say, Ronald Reagan — was just over the horizon of the European financiers. The Gorbachavian communists in the Kremlin were attempting to make in Zurich their first Western bond offering, and had issued a prospectus similar to what we in America would, in its preliminary state, call a red herring because of the red type in which the cautionary notes were printed on the side of the front page. The Journal ran out its assessment of the absurdity of the Soviet offering under the headline “Red Red Herring.”

We’ve often thought of that harbinger in the context of the current crisis over the fiat dollar, but it was all brought together in a column by Judy Shelton in today’s Wall Street Journal. She notes that many in America “fear that our nation is going the way of Europe —becoming more socialist and redistributionist as government grows ever larger.” But, she warns, “the most disturbing trend may not be the fiscal enlargement of government through excessive spending, but rather the elevated role of monetary policy.” She’s referring to the way the Federal Reserve, as she puts it, “uses its enormous influence over banking and financial institutions to channel funds back to government instead of directing them toward productive economic activity.”

“For evaluating the damaging effects of this unhealthy symbiosis between banking and government,” Ms. Shelton writes, “the more instructive model is the Soviet Union in its final years before economic collapse.” She notes that the Soviet Union went bankrupt “even as its fiscal budget statements affirmed that government revenues and expenditures were perfectly balanced.” Her observation reminds us of that editorial about the “Red Red Herring.” The way the prospectus presented the accounts of the Soviet banking institution that was offering the bonds in Zurich, why, it was possible, if for a fleeting moment, to imagine the thing was a real bank keeping its accounts in real money. Two years later, history made her own accounting, and the Kremlin proved to be bankrupt.

In the Soviet Union, Ms. Shelton recalls in her piece in today’s Wall Street Journal, the central bank “was making up for the difference between government revenues and government expenditures by creating empty credits to be disbursed by central-planning bureaucrats.” She notes that by the time Mr. Gorbachev came to power in 1985 with his vow to, as she put it, “address the disastrous financial situation of the Soviet Union through ‘perestroika,’ or restructuring, the budget deficit being financed through the nation’s central bank amounted to more than 30% of total government expenditures.”

Shocking as that is, feature the Fed. “In 2011,” Ms. Shelton writes, “the Fed purchased a stunning 61% of the total net Treasury issuance, thus absorbing a huge portion of the fiscal overhang. Meanwhile, the Fed has been making funds available to member banks at record-low interest rates, targeting zero to 0.25% in the federal funds market and charging less than 1% on primary loans through the discount window.” She calls it a “bad combination,” in that “[t]he Fed, a government agency, not only conducts monetary policy through commercial banks using Treasury debt and by extending virtually cost-free lines of credit; it also regulates those same entities.”

She warns of the recent suggestions “that perhaps the solution is to involve our central bank even more in the lending decisions of banks—by having the Fed grant special funds to American banks for the express purpose of re-lending them to government-approved nonfinancial borrowers.” She writes that such suggestions “highlight how alarmingly dirigiste the entire system has become” and asks, “Can central planning be far away?” Not that central planning is going to solve anything in the long run.

We would not want to suggest in respect of the Federal Reserve that there is the kind of fraud going on that was represented by the Union of Soviet Socialist Republics. Our own view of the Fed is that it is not so much a fraud — it is filled with honest employees — as an illusion. In any event, there were those who, at the Fed’s creation a century ago, warned of the temptations that lay ahead. The problem, then as now, lay in the Congress, which finally threw up its hands in the early 1970s and precipitated us into the era of fiat currency. Now we are in this astonishing period in which the Congress is getting ready to demand, on the centenary of the Fed, a full audit of the institution, and the Fed is resisting. Let the Congress read the Red Red Herring of long ago to be reminded that the future didn’t work.