|
|
 |
|
| Thought Leaders: Finance |
A New Golden Age
Nathan Lewis
03/01/2008
|
The U.S. economy experienced a
golden age during the 1950s and 1960s. Per capita income rose from $1,385 per
year in 1950 to $3,587 in 1970. People talked about reducing the standard
workweek to 25 hours. Medicine made enormous advances, defeating infectious
diseases that had plagued humans for centuries.
 The foundation of this golden age was the monetary golden
rule—specifically the promise to keep the dollar’s value pegged at $35 per ounce
of gold, as designated in the Bretton Woods Agreement of 1944. Nothing new
there; the United States had been on a gold standard since 1789, as mandated by
the Constitution. In the two centuries that followed, with the monetary
stability of gold behind it, the U.S. rose from a fringe confederation of
farmers to a world power, and then to a superpower.
It is practically a truism that the decline of currency quality
is mirrored in the decline of a world power. Both the Roman Empire and the Soviet Union dissolved in hyperinflation. Likewise, a stable currency—one that
does not float up or down in value—helps create a fiscal situation that allows
economies to thrive. The U.S. was the sole major power to remain linked to gold
when the European governments devalued and floated in World War I, again in the
1930s, and yet again in World War II.
The United States’ 182-year commitment to the gold standard, however, officially ended on August 15, 1971, setting off an era of currency
devaluation and monetary uncertainty that continues to this day. Since 1971,
despite technological advancements, Americans have basically gone nowhere. In
2004, per capita income was $29,475, but the dollar had been devalued to the
point that it was worth only 1/400th of an ounce of gold. In 1965 dollars, which
were worth 1/35th of an ounce of gold, the 2004 per capita income is equivalent
to only $2,579. The stock market tells the same tale. The Dow Jones Industrial
Average reached a record high last year, but in Bretton Woods dollars, the Dow
was recently at only 689, well below the 1,000 level it touched in 1965. In
fact, by this measure, the Dow is right around the level it first hit in 1929.
At least there were dividends, right?
Fortune’s Favors
President Nixon took the country off the gold standard in 1971
to allow Arthur Burns, whom he had installed as chairman of the Fed in 1970, to
continue with the "easy money" policy that had been a response to the 1970
recession. By the end of 1972, the dollar’s value had been cut in half,
inflation had picked up, the economy was apparently doing great, the Dow was
making new highs, and emerging markets—Japan, in those days—were on fire. Nixon
was reelected that November. By then there was no political will for the kind of
policies that could stop the inflationary trend. The charade fell apart in 1973.
When Paul Volcker finally took a stand in the early 1980s, the dollar’s value
had fallen by 90 percent. The effects that became blatantly obvious in the
one-way devaluations of the 1970s also emerged, with more subtlety and at a
smaller scale, during the back-and-forth monetary movements of the 1990s.
It is practically a truism that the decline of currency quality is mirrored in the decline of a world power. |
These and other negative consequences should have come as no
surprise. "Such changes [in money] have produced in the past, and are producing
now, the vastest social consequences," John Maynard Keynes wrote in 1923, as he
surveyed the floating currencies in Europe following World War I. "Thus a
change in prices and rewards, as measured in money, generally affects different
classes unequally, transfers wealth from one to another, bestows affluence here
and embarrassment there, and redistributes Fortune’s favors so as to frustrate
design and disappoint expectation."
We appear to have become accustomed to this state of affairs,
along with the atmosphere of amoral opportunism it engenders. Today’s iron law
is: "I got mine."
At this time, we seem to be slipping into another episode of
inflation. The high point of the 1960s, in terms of real income and broader
cultural good health, may slip ever farther in the inflationary storm, and the
call for change would intensify. America can enjoy another golden age—a time
when the rising tide truly lifts all boats. We need only return to a system
that made the dollar as good as gold.
Illustration by Matt Mahurin.
Nathan Lewis runs a hedge fund in Westport, Conn. He is the author
of a new book, Gold: The Once and
Future Money.
|
|
|
|
|
