Money and Cultural Values Jude Wanniski August 6, 1999

I first began learning supply-side economics in 1971 from Art Laffer, when he was chief economist of the Office of Management and Budget in the Nixon administration. I did not coin the phrase "supply-side economics" until 1975 and did not name the "Laffer Curve" until 1977, although Laffer drew it on that cocktail napkin for me in December 1974. One of the first things I learned from him, after President Nixon closed the "gold window" on August 15, 1971, was that there would be unhappy social consequences to breaking the dollar/gold connection. When I met him for lunch on Monday, August 16, outside the White House, I asked him what was the most important element of the economic actions the President had taken the day before. Without hesitation he said it was the closing of the gold window. I didn't know what that was at the time, so my next question was about its consequences to ordinary people, and I fully expected him to tell me what good would flow from it. Instead he said "It's not going to be as much fun to be an American." In subsequent discussions in the weeks that followed, I began to understand a little bit of what he meant when he said the action had "severed the link between effort and reward." In the years following I applied the supply model to my study of history, and in each and every instance where I found a monetary inflation, I also found a breakdown of what we now call "social values." And I began to think through the many ways in which a severing of the link between effort and reward would poison a society and a civilization.

I've been thinking about these connections lately because of my exchanges with Dan Quayle, who is seeking the GOP presidential nomination in 2000, and has asked for my help. My first conversation with Quayle was back in February 1989, when he barely was sworn in as Vice President to President George Bush. I asked for the meeting specifically to warn that if the Bush Treasury persisted in demanding that the Mexican government devalue the peso if it wanted help, it would cause social chaos in Mexico. Only weeks earlier, several hundred people had died in rioting in Venezuela, I pointed out, because of a currency devaluation that had been pushed on the government by the International Monetary Fund. Quayle, who we know mostly because of his "Murphy Brown" speech, in which he decried Hollywood's celebration of the single mother, believes that "values" are more important to society than jobs, and of course he is right. A people can live on very little, and their societies still can hang together, as long as the fundamental standards of civilization are maintained. The common law or the rule of law is critical, and most law in one way or another involves the making and breaking of promises. And "money" is nothing more than a promise. When the government changes the meaning of money in its legal definition, through devaluation or appreciation relative to real things, it causes promises to be broken, legally, and there is nothing the ordinary people can do about it.

Being from Indiana, a farm state, Quayle has been receptive to my arguments about monetary deflation, and how the Federal Reserve has been responsible for the current plight of the American farmers and the communities that serve them. Note the letter he wrote to Fed Chairman Alan Greenspan a week ago, which I posted in my Memo on the Margin this week. He has been making the economic arguments in his campaign speeches in Iowa, but has yet to integrate it into his campaign theme on values. Here is how it works:

A "gold standard" is a "golden rule" for money. Do unto others as you would have them do unto you. If you are a creditor, do you want the government to inflate, which causes you to be repaid in cheaper dollars than you lent? Of course not. If you are a debtor, do you want the government to deflate the dollar, which means you must pay back more valuable dollars than you borrowed? Of course not. Farmers now should see both sides of this monetary game. Sure they enjoy the inflation part, because prices of what they produce go up first, and they easily pay off their debts. But when the central bank errs on the deflation side, farmers have to produce more in order to earn the dollars to pay their debts.

The best course would be for the dollar/gold price to be constant. Farmers never would get windfall gains at the expense of their creditors, but they also never would suffer windfall losses because of the gains of their creditors. It is a good deal all around, because farmers want their creditors to be healthy and happy, and the farm creditors want their ag clients to be prosperous. A floating dollar not only disrupts the lives of those who borrow and those who lend, but also it disrupts the lives of people who produce and people who consume, depending upon who is being shortchanged. In the current cycle of inflation/deflation, prices of commodities are falling, so consumers of them are happy while their producers have their backs to the wall. When the situation reverses, the misery moves in the other direction. Because these cycles are out of the control of ordinary people, they are helpless in defending themselves. If you work hard and save your money, only to see it evaporate in an inflation that rewards people who did not work, you begin to think of life as being fundamentally unfair. If the most basic promises are not kept, then that standard of behavior which is the glue of civilization gives way to cynicism, quickly followed by corruption and decadence. And if God will permit such unfairness, then God must be dead. Anything goes.

There is nothing in the world the President could do that would make all people everywhere more prosperous and happy, and more respectful of all standards of behavior than to once again make the dollar as good as gold. It is the last thing we would expect from a President who cheats at everything -- the exemplar of a "floating standard." Yes, the Establishment elites believe they would lose out, because they could no longer earn a living by playing the markets with their superior inside information and skills -- betting on inflation at just the right time, then pushing their chips to the deflation side of the table -- to win there too. Ordinary people love a gold standard because they are on an equal footing with the rich and powerful. The government prevents the rich from stealing from the poor, the speculators from winning at the expense of the workers. The people loved Caesar Augustus because he put Rome on a gold standard. They loved the monarchs of England, who built an empire around a gold standard. George Washington and Alexander Hamilton began our new nation on a commitment to pay the debts we had borrowed in terms of gold with assets of the same value. Napoleon was made Emperor of France when he dismissed his economists and fixed the franc to gold. The one U.S. President who was turned out of office was the one who broke the link between the dollar and gold. When that standard snapped, so did the social moorings of our people. In the 1930s, when excessive taxation and tariffs brought a Great Depression, the United States clung to a dollar as good as gold, and the link between effort and reward was sustained. There were fewer jobs, but fundamental values were sustained, and so was the centrality and solidity of the American family. The Nobel Prize-winning economists of today, including those who deify President Franklin Roosevelt, would like their students to believe that if only Roosevelt would have abandoned gold, the Depression would have ended. Roosevelt did devalue gold, to $35 an ounce from $20.67, in an attempt to raise farm prices and relieve farmers of their debts. But he maintained the link, which remained in place until President Nixon abandoned $35 gold in 1971.

President Reagan fairly ached to restore the dollar/gold peg when he was elected in 1980, but he was talked out of it by the wise men of the GOP -- those who had talked Nixon into breaking the link. Among the wise men was Alan Greenspan, always a gold advocate in theory, yet always finding an excuse why the time was not right. Reagan pushed his team to find a way back, before his term ended. In September 1987, Treasury Secretary Jim Baker addressed the IMF in Washington and announced the need for an international monetary reform. It would coordinate monetary policies of all the major central banks, using a "basket of commodities, including gold," as its REFERENCE POINT. The notion of merely using gold as a "reference point" appealed to Baker because it seemed to introduce the idea of a dollar/gold link in an innocuous way. How much damage could gold do as a reference point? There had to be some way to settle arguments between central bankers, on who should ease and who should tighten, if "coordination" were to have any meaning at all. If the price of gold went down in dollars and up in Deutschemark, the Fed would be obliged to ease a little bit and the Bundesbank would tighten a little bit. Neat! (Hey, folks, that's a gold standard!)

I was thrilled to pieces! It had taken me several years to persuade Baker and his deputy, Richard Darman of the need to ease our way to a gold anchor, in order to prevent future inflations and deflations. The Baker speech was greeted with horror by the monetarists and devaluationists, the way Dracula reacts to a crucifix. Alas, the idea died six weeks later when the stock market crashed. Baker's initiative was forgotten in the rubble on Wall Street. Why did it crash? Because Baker got into an argument with the Bundesbank on whether the U.S. should tighten or the Bundesbank should ease. Clearly the gold "reference point" indicated that the U.S. was at fault, as gold had risen in dollars since the Louvre Accord of the previous February, at which Darman created the idea of monetary coordination. Why did Darman, known as Baker's brain, permit Baker to get into this argument with the Bundesbank? Soon after the Louvre Accord, Darman left the government and went to work on Wall Street, to make some money. Baker was left in the clutches of a Treasury staff that hated Darman's initiative and were thrilled to be able to see it unravel. At the same time, the brand new Fed chairman, Alan Greenspan, gave an interview to Fortune, which came out the Friday before the Monday stock market crash. In it, he said he believed the dollar was overvalued and would probably have to devalue by 2% a year or so into the future.

The forces of darkness did not want a gold dollar. President Reagan did not get one, nor did the world that needs one. In the years since he left office, the social pathologies that I associate with a "floating standard" for basic promises continue to afflict the world. The IMF and Clinton Treasury department finally pushed Mexico into a peso devaluation and the crime rate in Mexico is now higher than in anyone's memory. Yugoslavia has unraveled at the hands of the IMF, which actually began its dirty work in persuading Belgrade to devalue in 1987, Reagan's last year. If the ethnic and religious carnage of Yugoslavia is not a perfect example of a hyperinflation shredding the social fabric of a multicultural society, what is? The Bush Administration pushed "shock therapy" on Moscow in 1989, when the ruble was four-to-the-dollar on the black market. Now it is the equivalent of 24,000 to the dollar, the country is held together by a Mafia, life expectancy among Russian males is falling like a stone, and we now must worry about who will get their hands on the former USSR's 30,000 nuclear warheads.

What will happen at Y2K? Most of the world's money is now digital, stored in computers that keep track of the trillion or so contracts that are made and liquidated each week. Jack Kemp wrote the President on June 11, urging him to fix the dollar/gold rate at something above $300 (an average over the last few years). There of course is concern on our part about the economic dislocations that might occur if the computer bug chews up some of that digital money. We also should be concerned about the social pathologies that might be released as well. Modern civilization could not exist without modern finance. If there is a disruption to civilization, people will tend to become uncivilized in their behavior.