Monetary regimes don’t fall often. Half a century ago, in 1971, Richard Nixon ended the Age of Gold by formally eliminating the dollar’s peg to the precious metal. Since then, the dollar and other currencies have rested on fiat—they’re worth something because governments say they are. You could call this the Age of Credibility. In place of gold, currency’s anchor is the trust in the central banks that issue them. Now credibility appears to be at an end. With central banks desperately ripping up their playbooks to try to rein in inflation that’s veered far beyond target, they’re admitting they’ve been wrong, and giving up on trying to steer the markets on their plans for the future.
That’s alarming, because the precedent of the 1970s is not encouraging. Oil briefly took over from gold as the anchor for currencies, and the world suffered through a period of protracted stagflation. The new Age of Credibility arrived courtesy of Paul Volcker, who as chairman of the Federal Reserve raised rates repeatedly at the turn of the ’80s and managed to squeeze inflation out of the system. For the four decades since, central bankers’ credibility has been the anchor. Provided everyone trusts central bankers to do what it takes to protect the buying power of the money, fiat currencies can work.