One of the favourite claims of fiat-money boosters is that a real gold standard promotes economic instability. That claim is at best dubious. What those boosters ignore is the fact that the gold standard provides a crucial kind of stability, which has been lost and is now missed. Back in the days of the real gold standard, not the gold-exchange standard that prevailed in the 1920s, there was long-term price stability. A gold coin of fixed weight and value could buy about the same goods and services in 1912 as in 1812.
This sounds like a mere factoid, but it had profound consequences for an age whose virtues have largely vanished. Thanks to the twin destabilizers of inflation and recession, what used to be sensible and rewarding prudence is now avoided. Given that economic liberals are all fiat boosters, it’s ironic that Federal Reserve monetary policy has eroded a virtue whose absence they now bemoan. To be specific, I mean long-term planning.
Yes, long-term planning: not at the high-corporate level, but at the ordinary individual level. Economic liberals being what they are, they have the idea that the latter has nothing to do with the former. It’s as if they believed that a pro athlete can get into the majors without working his way though sandlot, or that a concert pianist can start out professional without her building up mastery in the amateurs’ trenches. More grounded people realize that ordinary virtues like long-term planning are habits that have to be built up and cultivated before they’re used at the top level.
It’s easy to see what expansionary monetary policy and inflation do to the long-term planner. Imagine you’re back in 1955, and you’re fortunate enough to have $200,000. Back then, $200,000 could buy four executive-class homes or forty Cadillacs with most of the extras. It was a lot of money, enough to provide for a nice retirement.
Since long-term planning is a fool’s exercise without solid data, you as long-term planner would be attracted to bonds. Bonds make long-term planning straightforward. Unlike common stocks, bonds have a fixed payout. Unlike the dividends on preferred stocks, interest on bonds has to be paid or the borrower is in default. A fixed amount gets paid back on the maturity date. Back in the olden days of 1955, the average 20-year Treasury bond yield was about 2.9%. It was held as a given back then that a Treasury bond was the best credit a bond buyer could find.
Because of the stability, fixed payment and best-credit factors, a sober long-term planner would have put the money in 20-year Treasuries. Only United States Treasury bonds made it through the Great Depression unscathed. Even highly-rated corporate bonds sold off to deep discounts in the depths of the depression. Even corporates that never missed a payment caused a lot of worry for their owners in those depths. Treasuries, being worry-free, would especially commend themselves to the prudent long-term planner.
Buying those bonds would yield a safe, secure, well-planned-for annual income of $5,800 before taxes. The average wage back then was $4,100, so the income made for a comfortable retirement. It could easily shoulder $100 month rent for an average apartment with lots left over for food and gas; it was even enough for a fairly swanky apartment. A serviceable car could be had for mobility. $200,000 wouldn’t have meant an opulent retirement, but it would have meant a nice one even without Social Security. A comfortable, worry-free retirement: a fitting reward for careful, prudent long-term planning.
Twenty years later, in 1975, that long-term planning had turned into a long-term trap. The average rent was no longer a little below $100; it was $200. What meant a comfortable retirement was now little more than double – before taxes – the rent for a non-swanky average apartment. The formerly independent retiree, formerly free to enjoy life with little financial worry, was edging towards dependency on Social Security. What that meant for a retiree who hadn’t qualified for Social Security, I’ll leave you to guess. To add insult to injury, the $200,000 returned bought a lot less. It could be reinvested at about 8%, but that higher rate didn’t take away the privation that loomed as the maturity date approached. By the end of the term, that long-term investment became the cause of long-term stress headaches.
Inflationist monetary policy had done its work. The careful long-term planners got rooked. The more adventurous adapters made out all right, if they weren’t poleaxed along the way. Heavy borrowers at fixed interest rates, almost the archetype of imprudence, made out like bandits if their wages or salaries kept up with the cost of living. The prudent retiree’s sorrow was the imprudent mortgagor’s delight.
Of course, this example comes from the past - but the damage done to ordinary prudence still lives on. An entire generation learned that long-term planning was for dolts. We see the long-term consequences of this attitude today.
Had the United States been on the gold standard, there would have been price stability. The 1955 retiree would have lived out a stable and comfortable life. Anyone long-term planning as described above would have been rewarded, not punished, for thinking two decades ahead. Instead of learning that long-term planning was for suckers, the generation coming of age in the 1960s and ‘70s would have learned that long-term planning worked.
It’s a known fact that Federal Reserve monetary policy is biased towards inflation. The song of inflation and recession, far less in counterpoint than fiat-money boosters have assured us, has led to a Federal Reserve Note losing over 95% of its value over the lifetime of the Federal Reserve. Siren promises of fiat-money price stability don’t convince any more.
Discussions of currency debasement tend to be dry and abstract. They focus on matters like the consequences of monetary policy, the link between monetary policy and the inflation rate, the precession of real interest rates, and so on. Too little time is spent looking at the tears on the national fabric as a result of abandoning long-term price stability, the hallmark of the gold standard.
The above example of long-term victimization should indicate what’s been lost with the fiatization of money. Economic liberals decrying the lack of long-term planning in the life of business should realize that their fiat-loving predecessors had a large hand in gutting it from the business of life. It’s as if they had banned Little League, and wondered twenty years later why there are no baseball stars.