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 (1945–53), and rose impressively in the Eisenhower administration (1953–61), to about 300 and 600; in the Kennedy and early Johnson years (1961–65), the gap stretched to 350 and 1,000. In the later Johnson, Nixon, Ford, Carter, and first Reagan years (1965–82), 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 (1982–89), elder Bush (1989–93), and Clinton (1993–2001) 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.
Nearly $5 trillion of the total U.S. GDP of $14 trillion is legal fees, consultants’ fees, and payments to financial-transaction facilitators, reflecting the overlawyered nature of the country and the excessive preoccupation with deal-making (with insufficient attention to whether the deals are wise or not). Medical activities consume another $2.5 trillion, at least $1 trillion of that traceable to the fact that the recipient of coverage is usually not the person who pays for it, and the fact that the legal-preventive component is excessive. (Neither of these problems is addressed in the slightest by the current health-care bill.)
America determined that the metal lunch box and blue overalls were demeaning and saddled itself with the liberation of service industries, as all but the most sophisticated manufacturing fled the country (while millions of low-wage job seekers were allowed to enter the country illegally). Yet the U.S. remains, by a narrow margin, the greatest manufacturing country in the world.
The present vulnerability of the dollar and rise in the gold price, as the government contemplates a decade of trillion-dollar annual deficits and large increases in the money supply, have led some people to be nostalgic about the gold standard, as a discipline against the inflation that has eaten 96 percent of the stock market’s upsurge in value since 1933.
Roosevelt was right to demonetize gold partially in 1933, as the Europeans, in perfect accord between the newly installed Nazis in Berlin and the beleaguered coalition governments in London and Paris, wanted to peg the dollar at an artificially high level. Nixon was right to enact complete demonetization in 1971 because the world was trying to cash out of dollars, to the disadvantage of the U.S. But since then, the world’s hard currencies have been like a group of mountain climbers all tied together. They are only as strong as each other, and for 15 years the U.S. public has been spending more than it earns and importing much more than it exports.
The value of the world’s currencies cannot be determined by the success ratios of the world’s gold prospectors and mining engineers, and a return to the gold standard is a mirage. What is needed, at the least, is fiscal and monetary reporting that highlights the inflation numbers, and a consensus to restrain inflation with as much righteous tenacity as is applied to recession management and depression avoidance. And the U.S. must incentivize the reemergence of the balanced economy, with more saving, investing, and sophisticated manufacturing, and affordable consumption of nonessential goods.
Keynes is the most famous of those who provided a method of smoothing down eruptions of unemployment and economic sluggishness, but those techniques don’t really increase prosperity any more quickly, over time, than traditional economic encouragement to increased productivity, which led Britain, Germany, and the U.S. to electrifying, almost inflation-free, though syncopated and unevenly distributed economic growth, from the American Revolution to World War I. Politicians should stop preening and primping because of avoidance of depressions since World War II and recognize that economics is half psychology and half grade-three arithmetic; that it really is the dismal science, as well as the devious one; and that, in fact, it isn’t much of a science at all.
– Conrad Black is the author of Franklin Delano Roosevelt: Champion of Freedom and Richard M. Nixon: A Life in Full. He can be reached at cbletters@gmail.com.