On the Wall Street Journal op-ed page, Lewis Lehrman delivers a lament over the 40th anniversary of Richard Nixon’s “new economic policy.”

In the middle of August 1971, President Nixon announced an ambitious package of reforms intended to quell the country’s gathering inflation problem.

Nixon imposed a temporary wage-price freeze, to be followed by a longer period of wage and price controls.

He imposed a 10% tariff on imported goods, mainly aimed at Japanese manufactures.

And he withdrew from the Bretton Woods financial system, severing the dollar’s last connection to gold and allowing the dollar’s value to float (i.e., sink) against the yen and other foreign currencies.

The Nixon program did not succeed. From almost every economic point of view, the subsequent 10 years would be the second worst decade of the 20th century, after the 1930s. (Although in retrospect, the 1970s were a walk in the park compared to the economic disasters of the period since 2007.)

I give Nixon few marks for his actions in 1971. Richard Nixon was a dreadful economic manager, a point ferociously documented in this excellent study by Allen Matusow.

But Lewis Lehrman’s critique — a critique often echoed in the Journal’s unsigned editorials as the paper’s own point of view — raises some very complicated problems.

Here’s the story they want to tell:

Once upon a time, money was not created by governments and central banks. Money was honest stuff, created by God and dug out of the ground by hard-working miners. That money was gold, and so long as the U.S. dollar rested on gold, the U.S. knew stability and prosperity. Then a great sin occurred. In August 1971, the U.S. departed from gold. Since then, money is whatever the government says it is. As a predictable result, money has lost its value and we are all poorer for it. The answer is to repent and revert to money stamped from metal.

The story is worse than fantasy. To the extent that the story contains truth, the elements of truth are exactly the opposite of those the Journal and Lehrman would have you believe.

The United States adhered to the classic gold standard for a surprisingly short time: from 1873 until 1934 with a brief time-out during World War I. During those 60-minus years, any bank could present dollars to the U.S. Treasury and receive gold in exchange at a fixed price: $20.67 to the ounce.

The commitment was in practice a lot less rock solid than it seemed.

The American monetary system did not work very well in the 19th and 20th centuries, and repeatedly the U.S. crashed into crises that left international bankers doubting that the federal government could or would honor its obligations.

And for most Americans, the gold standard of 1873-1934 delivered pretty miserable results, including two terrible depressions (1893-1896 and 1929-1940) plus the long grinding squeeze of the deflation of 1873-1893. I don’t think it’s entirely a coincidence that the years of the U.S. gold standard were years of violent labor strife, radical ideology, attacks on the political system by a series of protest parties, and two presidential assassinations.

The U.S. quit the gold standard in 1934. While the dollar continued in theory to be defined as worth a certain amount of gold (1/35 of an ounce), in practice, a dollar was just a piece of paper. If you took your dollar to the U.S. Treasury and asked to exchange it for gold, they’d call the cops: it was made illegal for private citizens to own gold.

After World War II, the U.S., Great Britain and the other major capitalist economies negotiated a new international monetary order, often called “Bretton Woods” after the New Hampshire hotel where the deal was struck.

Under Bretton Woods, the U.S. agreed to exchange dollars for gold at the new price of $35 an ounce. But — and here’s the crucial part of the story, the part that the Wall Street Journal always omits to say — the only people allowed to make the exchange were other governments and central banks. If you or your cousin Ned presented yourself at the Treasury to exchange dollars for gold, they’d still call the cops: It remained illegal for private citizens to own gold.

And there’s more. The way the system actually worked, the two governments that accumulated the most dollars happened to be West Germany and Japan — the two countries most dependent on the United States to defend them against the Soviet Union. So if ever it happened that a German or Japanese central banker or finance minister had the idea to try to exchange dollars for gold at the $35 price, well, Treasury wouldn’t quite call the cops on them … but Treasury certainly had ways to change that central banker’s or that finance minister’s mind.

And there’s still more!

Bretton Woods was the most intensely managed, most statist monetary arrangement in the history of the world. It allowed countries to forbid their citizens to own foreign currency. (Most European countries had some form of exchange control until 1959.) It permitted all manner of other government activism. The whole system was backed by a world financial government, the International Monetary Fund, empowered to make loans to any country that found itself short of foreign currency.

The years of Bretton Woods were years in which the internal economies and financial systems of the major capitalist countries were regulated as seldom before and never after in peacetime history. In the U.S. for example, the federal government regulated the price of every airline ticket, every ton of freight moved by rail or truck, and the interest paid on checking accounts, among many, many other interventions. The years of Bretton Woods were also the zenith of the union movement, with almost one U.S. worker in 3 belonging to a union. By all economic theory, those years should have been a total disaster.

Instead, they were a time of a dazzling — and unprecedentedly broadly shared – prosperity in the U.S. and Western Europe.

The response of the Wall Street Journal editors to this experience was audacious and ingenious:

They redefined a 40-year period in which private gold ownership was a crime as the zenith of the American gold standard. And they then credited that re-conceptualized gold standard with all the prosperity that their economic theory insisted should not and could not exist.

Bold.

Update:

To be clear:

I feel no nostalgia for the Bretton Woods economy, despite the good results it delivered in the three decades after World War II.

To sustain the Bretton Woods system required not only high — but ever increasing — levels of domestic and international financial regulation.

Through the 1960s, Presidents Kennedy, Johnson and Nixon added rule after rule intended to keep U.S. trade in balance, to prevent dollars from accumulating overseas, and to deter foreign governments from presenting dollars in demand for gold.

Under the classical gold standard of 1873-1934, the United States would have accepted a domestic recession (even a depression) in order to quash domestic demand, balance trade, and end the outflow of dollars. But that was just not going to happen in the modern world, not in the US, not anywhere — and everybody knew it. The Bretton Woods substituted financial controls for the old painful remedies, but by the late 1960s, the controls were becoming even more painful than the alternative: allowing currencies freely to trade against each other.

The modern currency float has its problems. There is no magical monetary cure, monetary policy is a policy area almost uniquely crowded with trade-offs and lesser evils.

If you want a classical gold standard, you get chronic deflation punctuated by depressions, as the U.S. did between 1873 and 1934.

If you want a regime of managed currencies tethered to gold, you get regulations and controls, as the U.S. got from 1934 through 1971.

If you let the currency float, you get chronic inflation punctuated by bubbles, the American lot since 1971.

System 1 is incompatible with democracy, because voters won’t accept the pain inherent in a gold standard.

System 2 is incompatible with the free market economics I favor.

That leaves me with System 3 as the worst option except for all the others.

What irks me about the Wall Street Journal’s version of history is the attempt to redesignate System 2 as System 1 — in order to avoid grappling with the dark side of either system. It’s ideological fantasy masquerading as monetary history.

One last footnote:

Ron Paul style libertarians offer their own false monetary history. Unlike the Wall Street Journal’s editorial page, which blurs the radical difference between the classical gold standard that prevailed before 1934 and the Bretton Woods system that succeeded it, Ron Paul libertarians blur the difference between the post-1873 gold standard system and the pre-Civil War system of bimetallism.

Before 1861, the U.S. treated both gold and silver as money: bimetallism. From the 1830s to the Civil War, the U.S. attempted to operate this bimetal system without even a central bank to act as regulator during expansions and lender of last result during contractions. The result was the worst of all possible worlds, combining hysterical bubbles with shattering depressions — two in just 20 years, 1837 and 1857 — all of it haunted by chronic shortages of metallic currency. As a result of the chronic shortage of gold and silver in the pre-Civil War period, “money” for most people meant paper currency issued by state banks — currency that (at best) lost more and more of its value the further it moved from its home market and that (at worst) became completely worthless when the issuing bank failed, as the issuing bank so often did.

Imagine living in a world in which you opened your wallet every morning and confronted a sheaf of money issued by different banks. Imagine a world in which you had constantly to calculate the exchange rate between Citibank dollars and JP Morgan Chase dollars. Imagine a world in which you could only paper your rec room with the leftover worthless dollars issued by Washington Mutual. That gives you some taste of what the monetary arrangements of the pre-Civil War U.S. were like.

Just generally, whenever anybody praises an arrangement from the past, it’s a smart idea to ask: “If this system was so great, why did people abandon it?” The answer should contain sufficient warning for all but the most infatuated cultists.