The Way Out of the Morass
Focus on beating inflation — and on genuinely productive enterprise.


Conrad Black

Largely lost sight of in the current economic debate is that the practice of spending our way out of recessions is a Faustian bargain — one that replaces occasional economic stagnation with devaluation of the purchasing power of the currency. From reading what routine articles and groceries cost Dr. Samuel Johnson in the 18th century, Charles Dickens almost a century later, and famous writers such as George Orwell and Robert Graves just after World War I, it is clear that the rate of inflation from 1770 to 1920 was almost imperceptible.

John Maynard Keynes is now a name as over-applied as Sigmund Freud: He no more monopolized the notion of counter-cyclical public-sector spending than Freud did interpretations of the subconscious (though both were pioneers). But the cost of Keynesian pump-priming during recessions is the steady diminution of the purchasing power of the currency.

The Dow Jones Industrial Average of key corporate stocks descended from 343 in the early autumn of 1929 to 34 in early 1933, a 90 percent decline. By the end of the Roosevelt presidency in 1945, it had recovered almost entirely to over 300, an impressive 900 percent rise. But adjusted for consumer-price inflation, it was back to 100 (still a very respectable 200 percent growth in twelve years).

For a time after 1945, the gap between the inflation-adjusted and the unadjusted Dow Jones numbers remained reasonably narrow. Both indicators were fairly steady at around 100 and 300 in the Truman administration (194553), and rose impressively in the Eisenhower administration (1953–61), to about 300 and 600; in the Kennedy and early Johnson years (196165), the gap stretched to 350 and 1,000. In the later Johnson, Nixon, Ford, Carter, and first Reagan years (196582), the Dow moved sideways at around 1,000, while the Vietnam War and oil-price inflation caused the inflation-adjusted number to evaporate by 70 percent, back to about 90, below where it had been at the end of the Roosevelt years nearly 40 years before. The inflation-adjusted number then moved sharply higher through most of the Reagan (198289), elder Bush (198993), and Clinton (19932001) years, from 90 to over 500; but the gap between the indicators ballooned, as the published Dow Jones Industrial Average skyrocketed to about 11,000. The numbers have since fallen off to about 400 and 10,000 (the Dow having risen almost to 15,000 in 2007).

In summary, the principal inflation-adjusted stock-market price indicator has risen in 100 years from 90 to 400, a 340 percent increase, having risen to a little above 500 in 1999 and 2007, or an increase of 450 percent; from 225 to 400 since 1929, a lackluster 80 percent in 80 years. But in the 76 years from the first FDR inauguration at the bottom of the Great Depression in 1933, the inflation-adjusted growth of the Dow has been from 40 to 400, a very respectable 900 percent gain, while the apparent and unadjusted rise in the Dow has been from 40 to 10,500 today, a rise of 26,150 percent (having peaked three years ago at 14,800, or a rise of 36,900 percent). In that time we have not had an economic setback remotely as severe as the Great Depression, when U.S. unemployment peaked at 33 percent, there was no direct relief for the unemployed, and the entire financial system, banks and stock and commodity exchanges, collapsed. By an imaginative combination of welfare, workfare, and economic stimulus in vast infrastructure and conservation projects, Roosevelt reduced unemployment from 33 percent to about 12 percent in 1940. And of the unemployed, most were engaged in federal public-works projects and were as legitimately employed as — indeed, more usefully employed than — European and Japanese military draftees. By a massive defense buildup in personnel and weaponry, FDR eliminated unemployment completely before the end of 1941, when the U.S. entered the war. At that time, one-half of the men and two-thirds of the women in the U.S. earned under $1,000 per year, and there were only 48,000 taxpayers (in a population of 132 million) who reported income of over $2,500 — but the inflation-adjusted Dow was only about 15 percent of what it is now.

In the more successful periods — the Roosevelt, Eisenhower, Kennedy, and Reagan years — the two growth-lines, apparent and inflation-adjusted, advanced more or less in parallel. From the mid-Sixties to the early Eighties, though, as I noted above, the Dow moved sideways but lost two-thirds of its inflation-adjusted value. This was known as stagflation. And in the Clinton years, the real value rose an impressive 100 percent, while the apparent value rose almost 400 percent. In that administration and the succeeding one of George W. Bush, savings were discouraged and borrowings encouraged by negligible interest rates and incentives to debt, especially in acquisition of residential real estate, and consumption generally was encouraged. Inflation was low and Clinton ran federal budget surpluses, but consumer prices responded aggressively to incitements to demand. This combination of factors helped ensure that most Americans who make less than $250,000 per year are now less well off than they were ten years ago.

Furthermore, too much of the GDP is really just the velocity of money and not real production, and there are too many jobs in the U.S. that are not productive work.