Gold as Gold

If you've been around long enough to think the dollar doesn't go as far as it used to, you'd be right. I remember as a kid my parents buying a slick new Ford that cost $3,600. That same car today would cost about $30,000.

The questions are why and what does that have to do with today's woeful economy?

The answer to the first question is that a dollar now buys a sixth of what it did 40 years ago because of misguided monetary policy. So says Charles Kadlec of the American Principles Project. Up until 1971 the value of the dollar was pegged to the price of gold--a stable medium of exchange for thousands of years.

From the years immediately following World War II to the years leading up to 1971 when the U.S. cut the ties between the dollar and gold, the U.S. economy ran pretty well. During this 30-year period:

• Employment averaged only 4.7% (for three decades) and never went higher than 7%
• Real growth averaged 4% a year
• Inflation, checked by low unemployment and high growth, averaged less than 2% a year
• Interest rates were stable--moving in a 4%-6% range for 30 years

What happened in the 40 years since Pres. Nixon cut the gold cord? It hasn't been pretty:

• Since 1972 unemployment has averaged 6.2%, a point and a half higher than the average for the previous 30 years
• Real growth has fallen to less than 3%
• We've had the three worse recessions since the end of World War II (in 1975, 1982 and 2008)
• Consumer prices have risen at an astounding average of 4.4.% a year ever since the monetary swamis at the Fed replaced an ounce of gold in deciding what a dollar was worth
• Interest rates have been extremely volatile, with corporate bonds never falling below 6% in the period, and averaging 8% during this time

Wild swings in interest rates are the canary in the coal mine of financial uncertainty. Fluctuating interest rates are a sign the economy is trying to protect itself from a series of financial problems.

The purpose of devaluing the dollar was supposed to be to help American exports. Kadlec points out that since the time Pres. Nixon pulled the plug on the gold standard the dollar has lost 75% of its value compared to the Japanese yen. Nevertheless, during that period the U.S. has compiled a massive trade deficit.

Kadlec doesn't venture a guess why the economy worked so well when the dollar was pegged to gold. But it's clear that life was a lot better before the black-cloaked wizards at the Fed started crystal balling the value of a dollar.

The15th century Spanish conquistador Hernando Cortes famously said that his fellow Spanish explorers  "suffer from a disease that only gold can cure." One could say the same thing about 21st century Americans.

Just thought you might like to know.