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The Currency Spectator
Weak Dollars, Weak Presidents
The real reason why Republicans never had a chance on November 4.
Our friend Steve Forbes has said that if you’re ever stuck in the middle seat on an airplane and want to clear some elbow space, start talking about monetary policy and your seatmates will start fleeing for the exits. But the subject was unavoidable this past election season, and it is precisely because President Bush had taken his eye off the importance of defending the greenback from its precipitous fall (perhaps he too thought the issue a yawner) that Republicans ended up in a world of trouble. Bush has followed a Ronald Reagan tax cutting strategy but a Jimmy Carter monetary policy. John McCain’s loss to Barack Obama in November confirms that the collapse of the dollar in recent years is a big explanation for the second straight voter repudiation of Republican economic policies.
It turns out that the direction of the dollar has a lot to do with who wins elections, and history proves it. Since 1960, when the dollar has remained strong the incumbent party has fared very well on Election Day. When the dollar falls in value over a president’s term, the voters usually throw the bums out. Why? A weak dollar is often the trip wire for other negative economic effects that hit Americans right smack in the pocket book: higher inflation at the grocery store and gas pump, stagnant or declining wages, and less international investment here, meaning fewer jobs.
When John F. Kennedy ran against Richard Nixon in 1960, he declared, “we can do bettah,” and as the pro-growth candidate called for a faster economic growth rate (5 percent) and a stronger dollar. Kennedy’s declaration on monetary policy was bullish and unequivocal: “This nation will maintain the dollar as good as gold at $35 an ounce, the foundation stone of the free world’s trade and payments system.”
The economy performed well while JFK was still alive, and boomed even more once Lyndon Johnson passed Kennedy’s tax cuts posthumously, which helped lay the groundwork for LBJ’s landslide victories in 1964. But as the ’60s wore on, investors increasingly questioned America’s commitment to maintaining the dollar’s relationship with gold. In private markets gold started to trade far above the Bretton Woods $35/ounce fix, which translated into inflation. By the end of 1968, consumer price inflation had risen to 4.7 percent. One unsung reason for the implosion of his presidency beyond the growing unpopularity of the Vietnam War was that Americans were experiencing the cruel economic retardant of creeping inflation.
Under Nixon the economy performed well and inflation was still relatively tame through his first term, so he won a huge re-election. But Nixon severed the dollar’s peg to gold in 1971, and by mid-1973, a new and ferocious inflationary phase had been unleashed.
With the dollar now lacking credibility, commodities, including gold, boomed. From 1972 to ’73 oil prices rose 300 percent, meat prices were rising at a 75 percent annual rate, and the price of a bushel of wheat rose 240 percent. After the second dollar devaluation in February 1973, Treasury Secretary George Shultz said, “There is no doubt that we have achieved a major improvement in the competitive position of American workers and American business.” Arthur Burns assured the Federal Open Market Committee that the inflationary impact of the dollar’s devaluation “would be quite small.” They sounded much like Messrs. Paulson and Bernanke today.
With the real economy weakening due to rising inflation, Nixon’s approval ratings tanked, which allowed the relatively minor scandal of Watergate to force his resignation. Some years after he left office, Nixon told a group of friends and advisors that the policy decision he regretted most was taking America off the gold standard, and that had he not done that, he could have withstood the Watergate scandal. Gerald Ford had no response to the massive inflation he inherited from Nixon—except “whip inflation now” buttons and oil price controls—and he was tossed from office as food and energy prices continued to accelerate. His opponent in 1976, Jimmy Carter, hung the 16 percent “misery index”—the inflation rate plus the unemployment rate—around Ford’s neck.
Carter was elected with a voter mandate to slow inflation, but in June 1977, Treasury Secretary Michael Blumenthal communicated to the markets his desire to see the dollar weaker. He got his wish. The dollar price of gold rose 270 percent to $850 an ounce during Carter’s presidency. Inflation skyrocketed to 14 percent. The greenback fell so much in purchasing power during Carter’s reign that in 1980 the joke was that if you found a dollar lying on the ground, you’d pick it up to see if there was anything of value underneath it. The dollar was at a post-World War II low at the end of Carter’s presidency. His Keynesian economists thought a weak dollar and inflation would create jobs. That didn’t happen. Inflation and unemployment reached a combined 20.5 percent in Carter’s last year.
RONALD REAGAN REVERSED THE DOLLAR’S collapse, and he often said, sounding like JFK, that his goal was to “make the dollar as good as gold again.” Though he never achieved his greater desire of returning us to the gold standard, the growth wrought by tax cuts helped soak up excess liquidity and the dollar soared. He also gave Fed chairman Paul Volcker the green light to throw the brakes on the money supply to choke inflation. This was one of the most successful Reagan policies: the inflation rate fell from 14 percent to less than 4 percent in two years. The price of gold fell by more than half.
The dollar actually rose during George H. W. Bush’s presidency, making him the outlier here. But the elder Bush got money right and taxes wrong—just the opposite of W. Mr. Bush’s 1990 tax increase created a recession. The U.S. experienced a significant credit crunch from 1990 to ’92 and for the first time since the late 1970s America became an exporter of capital. This led to a temporary trade surplus, but that didn’t help the economy at all, nor did it create jobs. Bill Clinton defeated George H. W. on a message that “it’s the economy, stupid.”
Robert Rubin, Clinton’s economic adviser and then treasury secretary, was an unfailing advocate of a strong greenback. The Clinton administration’s strong-dollar policies, combined with reduced penalties on investment through a capital gains cut in 1997, were a boon to the economy, so much so that Clinton survived the Monica Lewinsky scandal and left office with 60 percent approval ratings.
President George W. Bush’s dollar policy never matched his rhetoric. Though it paid lip service to the notion that a strong greenback is in our national interest, tariffs on steel, shrimp, and lumber along with mercantilist stances against China and its yuan/dollar peg strongly signaled to the markets that the administration sought a weaker dollar. Under Alan Greenspan, Federal Reserve Board rate cuts created negative real interest rates in 2005, thus subsidizing credit to banks.
The dollar has fallen 40 percent versus major currencies alongside a 240 percent rise in the price of gold since 2001. Bush’s imitation of Jimmy Carter when it comes to dollar policy has blunted not only some of the highly positive effects of his investment tax cuts; unsurprisingly, Bush’s approval ratings resemble those of Jimmy Carter.
So why is it that weak dollar policies presage bad presidential outcomes for the incumbent party? We believe that weak dollar policies make Americans poorer—just as tax hikes do. Inflation erodes the earnings of the electorate and has the real effect of a pay cut.
As the late Wall Street Journal editorial page editor Robert Bartley wrote in The Seven Fat Years, “inflation always creates winners and losers, redistributing wealth. When currencies collapse, capital becomes scarce for entrepreneurs and businesses. Workers are thus bitten twice by inflation; first through the reduced value of their earnings, and second with investment slowdowns that make it impossible for employers to increase their wages commensurate with rising prices.”
With the dollar at historical lows, it’s often remarked that fixing our inflation problem will be painful. This couldn’t be further from the truth. A stronger dollar right now would increase wages, lower prices at the pump and the grocery store, and drive investment back to these shores. It is the best stimulus plan of all and it costs nothing.
About the Author
Stephen Moore is a member of the Wall Street Journal editorial board.
Letter to the Editor View all comments (41) | Leave a comment
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Ryan| 1.27.09 @ 8:29AM
I think that the Reagan era more or less proved that we don't need to be on the gold standard. Guys hawking gold probably would say otherwise, but I'd rather base my worth on something other than pretty rocks.
That being said, we may have had a weak dollar for a bit too long. I don't subscribe to the matter that a weak dollar=a bad dollar, simply because it's good for American businesses to sell their stuff.
One other point. Had we had BOTH fiscal restraint on the part of banks and individuals right now AND low interest rates, we wouldn't be facing a lot of the problems that we are having. There are a LOT of people who can afford a 30-year mortgage on a middle-class income for a modest-sized home at even a 6-7% interest rate.
JP| 1.27.09 @ 9:36AM
Ryan,
For years I believed as you do. In a way I still do. For me, what's changed is my complete mis-trust of our politicans at the Federal level. If anything, the Gold Standard forces Congress and Presidents to be frugal with taxpayer's money.
This frugality came to an end during the twin hurricanes of Vietnam and The Great Society. By Nixon's first term foreign banks who bought US dollars became alarmed at what they considered very risky defecits. One early morning during the late 60s banks from around the world began to redeem thier "investments" in gold. The dollar plunged and gold soared . Of course there wasn't enough gold in Ft Knox to even come close to covering the panic. Nixon simply announced later that week that the US was off the gold standard. Defecits have been running ever since.
We did prove that we can run a currency not backed by precious metals. I believe the main reason for that was a global confidence in the ingenuity and entrapenurial spirit of American businesses. That confidence I think is fast erroding thanks in large part to our federal goverment (See the damage Fanny Mae/Freddie Mac have to done to the global economy).
Gold, if anything would keep our lawmakers honest.
phesoge| 1.27.09 @ 9:57AM
It has been said by numerous Austrian Free Market economists that the way the federal reserve was acting would lead us right into the recession we are experiencing now. The fundamental flas in the system was this Fiat on money system that the Austrian economists said is doomed to cause this type of recession. Of course nione of our politicians ever lookj to them for advice. Oh wait thats right I do remember a republican gentleman from Texas name Dr. Ron Paul warning us of the need to return to a sound currency, and he was chastised by his party and treated awfully, and then the Republican party wonders why its in such a mess.
Ryan| 1.27.09 @ 10:03AM
The problem with the gold market is that they're not always right, as the Reagan years proved. They're only right when times are bad. 3-5 years down the road, when we're out of this mess, they'll be wrong again. The worst time to buy gold is right now - it's not going to appreciate in value all that much, and the guys hawking it are simply fear-mongering.
The government needs restraint on its own without impoverishing the rest of us who don't have gold. There is a serious risk of lack of growth if we ever went back to it.
We have to remember that Ron Paul didn't advocate the old-school gold system, and suggested something more floating. Maybe that is a better solution, but the BEST solution is to stay off of it and get people and the government to have some responsibility with their own and others' money.
Stan Redmond| 1.27.09 @ 11:57AM
While this is a good analysis I don't think the weak dollar had anything to do with McCain losing. This election was about the cult of Obama and the stock market crash. If it weren't for Palin McCain would have faced a deservedly humiliating defeat. And to be brutally honest here...98% of American voters don't have a clue about financial matters.
John| 1.27.09 @ 12:07PM
Gold Bugs have plagued humanity since the first fool found it somewhere and decided that it was somehow important.
Who knew that that first hunk of jewelery that Thag gave to Skrank would end up driving thousands of years of silly monetary policy?
Gold is a marginally useful metal. It's electrical conductive properties makes it great for semiconducting contacts. It's properties make it useful for coating object for electron microscope analysis. Gold is often necessary as a non-reactive hypoallergenic metal for dental and medical work.
It is really pretty when polished up and used for jewelery.
The major problem is and always has been that it is not useful as the measure of the real worth of anything. It has little real worth itself, and other than its relative modest scarcity... is not a rational marker or place holder for wealth.
There needs to be a rational formula that represents the true and consistent calculation of a nation-state's economic worth. Access to raw materials is one of the components... However, the obession with gold is an irrational that supports no useful modern economic purpose.
Time to come up with a standard, but it is really time for the gold bugs to go work on their divination schemes to increase their "wealth".
r/John
Paul Nelson| 1.27.09 @ 12:25PM
When Mr Moore says that a strong dollar would be the best "stimulus"package he is correct but it has one fatal flaw--it would reduce the power of the gummint and thus cannot be done.
Bruce| 1.27.09 @ 12:53PM
Mssrs Moore and Tamny failed to mention the negative side effect of Reagan's and Volker's inflation cure by tight control of the money supply: high interest rates and a recession in '81/'82.
Pingback| 1.27.09 @ 2:24PM
Warning: A Blog About Monetary Policy : The New Nixon: News and Commentary about the links to this page.
phesoge| 1.27.09 @ 3:07PM
Well said Ryan that Ron Paul didnt advocate the old gold standard. There has to be some transparency and a return to sound monetary policy with in government. If the current republicans were so free market they would make this a top priorority. Sound Monetary policy was stressed by the founding fathers and numerous free market economists such as Milton Friedman and those of the Austrian School. The majority of the Republican party has lossed its value. Very few are now actually pro free markets, sound monetary policy, individual liberties, and a foreign policy of non interventionism, small governemtn, and balanced budgets. These were the original values of the COnservative movement. All one has to do is look at the 8 years under Bush to see what has happened to these time honored principles.
Alan Brooks| 1.27.09 @ 8:45PM
Bush isn't president anymore, you cannot hold him culpable.
oh, geesh. this is going to continue for another year at least, Bush's enemies will squeeze out every last drop. You'd think Bush was Stalin.
Roy| 1.27.09 @ 10:10PM
Re: Moore: I like the idea but it costs nothing? I don't think so. There will be some short term pain, and given that Democrats are now wedded to the idea that nothing can ever go wrong even temporarily unless it is the fault of George W Bush, I don't see how they could go for that.
Pingback| 1.28.09 @ 9:00AM
Timothy Birdnow » Small Change You Can Believe In links to this page.
phesoge| 1.28.09 @ 9:52AM
I dont think Bush was Stalin I jsut think he was a lousy excuse for a conservative for the very reasons I mentioned above. His principles were far from those of whcih the original conservative movement stoof for.
KCuz | 1.28.09 @ 11:41AM
I think this article is spot on. We are looking at wicked inflation in 6-12 months due to the actions of the Fed and this stimulus package.
Right now the Fed has no way to measure liquidity. The price of gold has historically given us the best guide as to if the market is too liquid or not liquid enough. The Fed essentially "guesses" as to how much they need to pump in and waits to see if it will work. The gold market on the other hand is pretty instant and gives us a better guide as to how much should be pumped in and pulled out. Forbes and Kemp have both advocated for a "modified gold standard" and I think they are on to something.
The obsession with gold is based upon 6,000 years of human history (give or take). It could really be pegged to any commodity (oil for example), but based upon fiat isn't working.
Xenophon| 1.28.09 @ 1:57PM
Prices don't rise. The currency falls in value. That is what happens during inflationary times. This author, along with most others, gets his terminology all wrong. It confuses people when you tell them that prices are "going up". No they are not. Your money is simply being destroyed through government policy and it takes more and more cheap dollars to buy that pound of butter. The "price" of butter stays constant. But not your fiat currency.
G| 1.28.09 @ 7:46PM
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Alan Brooks| 1.28.09 @ 9:12PM
the writer has to write for a dumbed down audience.
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Weak Dollars, Weak Presidents | westorlandonews.com links to this page.
Nick| 1.29.09 @ 1:09AM
I can't believe Bob the economist and math major didn't post on this one.
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GMiki| 1.31.09 @ 11:09AM
You can hardly blame the gold bugs for this collapse. If gold is so unimportant, why have the central banks been manipulating it for years so it won't rise and compete with their countries' currencies?
This collapse has been coming for a long time and continually covered over. The reason is debt versus creation of real wealth. The CDOs and such junk were the death knell--a proliferation of useless assets. What would you rather have, gold or CDOs?
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