Depiction of Hell, Church of St. Nicolas de Veroce
"The Monetary Sin of the West"
by Bill Bonner
“I do not believe, as a matter of fact, that the monetary authorities, however courageous and well informed they may be, can deliberately bring about those contractions in the money supply that the mere mechanism of the gold standard would have generated automatically.”
- Jacques Rueff
Poitou, France - "Say a prayer for the common foot soldier. Three cheers for the factory man. Poor fellow. He’s about to run out of money. Bloomberg: "The Mighty American Consumer Is About to Hit a Wall, Investors Say." "After staving off recession for longer than many thought possible, the US consumer is finally about to crack, according to Bloomberg’s latest Markets Live Pulse survey.
More than half of 526 respondents said that personal consumption — the most important driver of economic growth — will shrink in early 2024, which would be the first quarterly decline since the onset of the pandemic. Another 21% said the reversal will happen even sooner, in the last quarter of this year, as high borrowing costs eat into household budgets while Covid-era savings run down."
Our steps today trace the uphill struggle of the working classes. Over the years, thanks to capitalism and technology, his burden has gotten a little lighter, his steps a little easier. That is the story told by ‘time prices,’ which measure how much time it takes him, on the job, to buy basic food commodities and a roof over his head.
Modern man also expects to suffer as little physical pain as possible. Machines do the heavy lifting. Drugs dull the pain of bad teeth or sore muscles. And when there is a hurricane or a flood, we think the government should step in and step up, with blankets for the shivering…and food for the hungry.
And yet, America’s working classes may not appreciate their good fortune as perhaps they should. If they are feeling flush, they don’t know whom to thank. Nixon? Trump? Biden? If they are feeling blue, they don’t whom to blame – Keynes, Friedman…or Rueff? Mostly, they don’t know whether they are going or coming…or whose fault it is.
Remarkably, yesterday, we were invited to lunch at a neighbor’s chateau. It was a ‘old school’ social engagement – ladies in proper dresses, men in coats and ties. Champagne and hors d’oeuvres were served outside and then, we went into a sumptuous dining room, where we were seated next to a charming woman named Marie-France.
The conversation ranged over the political and social landscape -- the low birthrate in France…the need to raise retirement age…the great number of dying oak trees, and the real cause of WWI. Monetary policy, like a full stomach after a good meal, was bound to swell up. And it did, in a jolly way. “Without an anchor – like gold – money drifts,” we explained. “Pretty soon you don’t know where you are.”
Typically, having introduced monetary policy into the conversation, we might expect our ‘voisine de table’ to get a faraway look in her face, shift in her chair, and change the subject. Not this time. Instead, Marie-France smiled confidently. "Yes…we had an economist in our family, years ago, who used to say that dropping the link with gold was the biggest mistake France ever made.” “Really? Who was that?” “Jacques Rueff.” Small world.
Rueff was one of the great classical economists of the post-war era. He had been at the Banque de France in 1939, but was dismissed because of his Jewish ancestors. After the war, in 1958, in the middle of France’s war in Algeria, the economy was a mess, with runaway inflation and huge government deficits. The “Rueff Plan” set things right, by making the franc freely convertible into dollars, slicing the budget deficit in half, and reducing tariffs and exchange controls. The result was a boom that carried France into the 1970s.
But Rueff knew what time it was. He watched through the ‘60s as the US repeated, on a much larger scale, France’s errors in Indochina. He saw the outflow of dollars… and anticipated the end of the Bretton Woods system, when the US would no longer honor its obligations: “If we continue to operate under the same system, we shall some day arrive at the end of the means of external payments by the United States. This will mean that, whether it wants to or not, despite the agreement in the I.M.F. and the GAIT, it will have to establish an embargo on gold, establish quotas on imports and impose restrictions.”
It was Rueff who urged the French treasury to rush to Washington to exchange its dollars for gold while it still could. In February 1970, in his article in Le Monde, “The Monetary Sin of the West,” Rueff warned that the US would have to break the link between gold and the dollar.
Then, on August 15, 1971, the Nixon administration reneged on 200 years of solemn promises and ‘closed the gold window’ at the Treasury Department. Thenceforth, the anchor had been winched up. Neither France nor any other country could count on gold, at the statutory rate, to dispose of its surplus dollars. Instead, foreign governments had little choice; they almost had to buy US Treasuries…in effect, lending money to the US government and helping to shore up America’s proud tower of debt.
But of course, there is more to the story…more dots to connect…look what the new system did to America’s working classes. Wages had gone up more or less steadily, from the end of WWII to the mid-‘70s, at a rate of nearly 3% per year. But then, the new funny money paid off bigly for some people but not for the working stiff. After the ‘70s real wages were flat.
During this same period, after the ‘70s, financial assets were bid up by the new money. Their owners got richer and richer – not because they worked harder or increased output, but simply because they owned stocks, bonds, and real estate. While wages went nowhere, the wealth of the top 1% increased four times (from 1989 – 2022).
This drifty, shifty, anchor-less new money not only favored the rich, it undermined the economy. Even today, more than 50 years later, few people appreciate how it works or what it does. For this was a new kind of system -- a capitalism without real capital. Instead, it was capitalism on credit…where fake capitalists invested fake capital they had borrowed at fake interest rates in order to earn fake profits. Tune in tomorrow…for more!"
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