Mirror of the Boom

These columns are ever ready to raise a cheer at the milestones of American prosperity. New highs in the Dow or in the Manhattan real-estate market are, to us, markers of the progress of the age. Quibbles, we leave to others — though, there is one thing. The yardstick by which these triumphs are measured is getting shorter. The dollar is setting 15-year lows in the world's currency markets. By the day, it buys fewer reals, Canadian dollars, rupees, rubles, euros, and pounds (to name only a few brands of scrip), not to mention our favorite measure of value, gold. In January 2001, as President Bush took the oath of office for the first time, a dollar fetched a 265th of an ounce of gold. Today, it would buy a 665th of an ounce, if you're lucky.

We do not forget, as some critics do, that the greenback is the greatest achievement in the history of money. A mere piece of paper, it can be reproduced on a high-speed press at virtually no cost. Yet, year after year, people the world over deem it valuable. The dollar may not be the first monetary brand to win a popular following outside the nation that coined or printed it. But it is the only pure paper currency to be so honored. When sterling ruled the roost from Waterloo until the early 1930s, it was exchangeable into gold at a fixed rate. Reading the story of the triumph of the U.S. dollar — collateralized not by gold but by faith and hope alone — a central banker from Mars would be struck dumb with admiration.

Actually, at current rates of depreciation, it is not hard to imagine that the dollar will soon astonish the average earthling, too. Many will come to wonder how a mighty nation could suffer so great a loss in the purchasing power of its currency. And they will be puzzled by the setting in which that depreciation has been allowed to occur. Prices at the checkout counter have been moving up, to be sure, but at nothing like the rates of the 1970s. Yet the dollar is plumbing new lows against currencies both major and minor. Against sterling, a piece of paper no more inherently valuable than any other, the dollar has not been so weak for 26 years. Thrifty American tourists are well advised to avert their eyes as the sterling-denominated taxi meter clicks away their savings on the cab ride from Heathrow to the London hotel.

Plainly, the world has more dollars than it needs, or knows what to do with. Some insist that foreigners want our dollars to invest in our markets. They can't get their fill of home-grown American common stocks or gleaming New York office towers, the argument goes. We allow that there's some truth to that claim. But it might just be that such foreign dollar holders prefer financial claims, or real estate, to the greenbacks they are starting to distrust. Then, too, hundreds of billions of dollars each year are figuratively orphaned. They wind up not in the hands of profit-seeking foreign investors but on the balance sheets of foreign central banks. In the past 12 months alone, $344 billion have been so channeled, raising the foreign central-bank dollar mountain to just under $2 trillion. Central banks absorb them because individuals can't, or won't.

Where do these central banks — Russian and Asian, for the most part — get the local currency with which to acquire the surplus dollar bills? Why, they print it. And that is the crux of the trouble. Not that many protest against it. The curious practice of printing one kind of money in order to buy another is, for now, much to the liking of Wall Street. Foreign central banks don't bury the dollars they acquire, but invest them in U.S. bonds. It's as if the money never left the 50 states. Other countries may eat their hearts out. To America alone accrues the inestimable privilege of consuming much more than it produces and putting the difference on the tab, financing it with the currency that it alone may lawfully print.

No such bliss was possible before the dollar was cut loose from gold in 1971. Way back then, a foreign creditor could present its greenbacks at the Treasury for conversion into American gold at the statutory rate of $35 an ounce. There was only so much gold in Fort Knox. Hence, there was only so much scope to borrow. In respect to its obligations to foreign lenders, America was kept on a leash. As for bullion, there's a reason its value in dollars is printed on page one of this newspaper just under the weather. Over the course of generations and centuries, gold has tended to keep its value. Over the same spans of years, paper currencies have tended to lose it. So while we glory in the soaring New York real estate market and the Dow nipping over 14,000 on intra-day trading, let us not forget the mirror image — the shrinking Bush dollar.