The world is in economic crisis. Quite understandably, much attention has been given to cutting runaway government spending, a fundamental cause of the crisis. Much less attention has been given to the fundamental defects of the monetary system. These defects are at the heart of the economic collapse. Both budgetary and monetary issues must be examined and resolved.

The United States and the world should not be condemned to struggle with depreciating and appreciating currencies, with inflationary and deflationary monetary policies that are out of control.

The Heritage Foundation’s upcoming Conference on a Stable Dollar: Why We Need It and How to Achieve It on October 5–6 is an important step in examining the underlying causes of monetary disorder. The conference aims to establish the framework for a stable dollar. Inevitably, the attention of central bankers around the world is focused on short-term fixes, creating alternating episodes of inflation and deflation.

We must think beyond the current turmoil to a reformed domestic and international monetary system. A growing world economy and expanding world trade cannot endure without fundamental reform of the disintegrating world financial system. I wrote in the upcoming issue of The Intercollegiate Review:

Between 2009 and 2011, the world experienced a major emerging market equity and economic boom—but at the very same time, sluggish growth in the United States. Foreign authorities now react to inflation by raising interest rates. Why such a sluggish sequence in the U.S.? Because the Federal Reserve’s vast credit creation of 2008–2010 could not be fully absorbed by the U.S. economy, coming as it did after a wild panic and a deep recession. The unprecedented Fed credit expansion flooded into U.S. stocks, bonds, and commodities. Excess Federal Reserve credit and money also went abroad, causing not only a fall in the dollar but also the emerging market financial boom. What is the mechanism which links Fed credit expansion to the emerging market boom? It is simply this: financial authorities abroad purchase the incoming flood of excess dollars against the creation of their local currencies. There, the new local money is put to work promptly, creating a boom in all financial assets, and then a boom in the local economy as well.

On September 21, the Federal Reserve decided to continue its policies with slightly different means. It said:

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.…

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

This is no prescription for success; instead, it is a prescription for continued failure and perhaps another episode of deflation, followed by another Federal Reserve rescue operation.

It is time for Americans and their political leaders to design legislative reforms to resolve the issues of monetary disorder, budgetary chaos, tax disincentives, and regulatory barriers to growth.

Lewis E. Lehrman is the author of the forthcoming book, The True Gold Standard: A Monetary Reform Plan without Official Reserve Currencies, How We Get from Here to There. Mr. Lehrman is Chairman of The Lehrman Institute and heads its Gold Standard Now initiative, Mr. Lehrman is also a former Trustee of The Heritage Foundation.