When Reagan Reversed the Collapse of the Dollar

The dollar’s plunge to less than a 5,000th of an ounce of gold this week prompts us to reprise the monetary crisis that greeted Ronald Reagan. It was 1981 when Reagan acceded to the presidency amid a soaring inflation. The value of the dollar had fallen at one point to an 875th of an ounce of gold before it was turned around under the leadership of Reagan and the Fed chairman at the time, Paul Volcker, who moved interest rates as high as 20 percent. The story is told in, among other places, “The Seven Fat Years,” by the then editor of the Journal, Robert Bartley. What made the difference 46 years ago was the leadership of a candidate, and then a president, who, in Reagan, grasped the role of gold in the monetary system. A decade before, after all, America was still pledged under the Bretton Woods treaty to redeem dollars presented to our treasury by foreign governments at a 35th of an ounce of gold. In September 1979, a Wall Street Journal editorial marked that while “an ounce of gold has undergone no permutations this summer,” the “dollar that was worth 1/300th of an ounce of gold six weeks ago is worth only 1/380th of an ounce today.” Bartley quoted a Berkeley professor, Roy Jastram, who talked of how amid turbulence a currency tends to fall and who asked, “But what happens when danger is sensed in every direction?”“There is one ‘currency’ with no indigenous difficulties — gold,” Jastram argued. Rising demand for it was “a short position against all national currencies.” His view informed the GOP platform in 1980, drafted as the dollar, in an era of stagflation, was plumbing new lows in terms of gold. “One of the most urgent tasks in the period ahead will be the restoration of a dependable monetary standard — that is, an end to inflation,” the platform averred. Reagan, the GOP standard bearer in 1980, warned that “no nation in history has ever survived fiat money, money that did not have precious metal backing.” Reagan’s pledge to restore honest money was doubtless a factor behind his landslide victory on Election Day. Within weeks of his election, he was making a case to the public for a restoration of a role for gold in the monetary system. He spoke of how the prices of oil and gold seemed to track one another. At the time, Reagan added, “we were about the only country left” that was “on a gold standard.” Then America ended the dollar’s gold convertibility. Now, he asked, looking at oil’s escalating price, “were the OPEC nations raising the price of oil or were they simply following the same pattern of an ounce of gold, that as gold in this inflationary age kept going up, they weren’t going to follow our paper money downhill? They stayed with the gold price.”The inflated price of oil, in Bartley’s account, “broke within weeks.” Reagan’s effort to strengthen the dollar, though, was not limited to rhetoric. The policies launched in his first term — especially his tax cuts and deregulation — fueled growth. Meanwhile, Volcker and the Fed raised the bank’s target rate to 20 percent and curbed growth in the money supply, breaking the back of the inflation that had become entrenched after the end of Bretton Woods.What a contrast with President Trump’s insistence Tuesday that “the dollar’s doing great.” Reagan, meantime, in 1981 named members to a United States Gold Commission that was tasked with finding a way back to sound money. The commission proved a disappointment, but by 1982, the dollar had recovered half of its gold value and held it through the Clinton years. Will America find a leader who understands monetary policy as Reagan did?

When Reagan Reversed the Collapse of the Dollar

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