Only a crisis will bring money reform.

• Author: Melloan, George
• Position: Essay

"Well, if I had a nickel, I know what I would do. I'd spend it all on candy and give it all to you.... Cause that's how much I love you baby." That wasn't a very generous proposition even in 1946, when country singer Eddy Arnold wrote those words. But at least a nickel would buy a good-sized Baby Ruth or Clark bar. Today? A jelly bean, perhaps?

The Problem with Fiat Money

I don't think love has been devalued: consult pop anthropologist Lionel Tiger or maybe Lady Gaga for a more expert opinion. But we all know what has happened to the nickel. That's the problem with fiat currencies. They lose value over time, which means they fail an important requirement of money: that it serve as a reliable storehouse of wealth.

Some fiat currencies sink faster than others. I lived and worked in England in the late 1960s, at the height of the U.K.'s postwar socialist experiment. State mismanagement of the "means of production" was destroying the efficiency of British industry. At the same time the government was doling out more "free" goods, health care, for example.

This excess of consumption over production was steadily weakening the once-powerful pound sterling, forcing heavy government borrowing. The weakening pound was being abandoned as a reserve asset by central banks, even within the far-flung British Commonwealth. The result was inevitable, a sharp official devaluation (14.3 percent) of the pound in November 1967.

The End of Bretton Woods

To anyone who might think that the postwar monetary system was nirvana, recall that Bretton Woods was then still operative. Socialist Britain spent years fudging on its Bretton Woods obligations, hitting up the United States and the International Monetary Fund for money to tide it over until, as Mr. Micawber might say, "something turned up." Bretton Woods finally went belly up when the United States followed the British example with LBJ's "war on poverty," a big social spending campaign conducted at the same time we were trying to combat the spread of communism with a shooting war in Vietnam. Richard Nixon performed the coup de grace on Bretton Woods in August 1971 when he closed the gold window, thus destroying the system's central control mechanism, the exchange of gold among central banks at a fixed dollar rate.

The Politicization of Money

So there you have the problem. Fiat currencies are subject to the vagaries of politics. Highly productive countries can maintain currency stability more easily than...