International monetary crises over the past quarter of
a century, culminating in 1971 and 1973 United States dollar
devaluations, not only have become fixed features of the financial
scene, but seeming national curses as well, defying solution. It is
incorrect, however, to offer the general public the misguided notion
that these crises take place without reason or warning. Monetary crises
have known causes; they are the results of economic cause and effect, as
sure in terms of results as any other natural laws men acknowledge and
respect. Economic history is filled with crises-currencies, and as a
result economies, rising and falling over thousands of years from
clearly understood, predictable causes.
No monetary crisis can be categorized as a curious
thing. Instability in a monetary unit, or system, may not be well
understood by the world's masses; but today the effects are felt
everywhere, here and overseas. Monetary crises affect people directly; a
devaluation anywhere temporarily restructures relative values in goods
traded between nations. Within the country devaluing, the very act wipes
out and marks down the value of savings and investments on a broad
front. Devaluation is little more than the governmental declaration of
partial bankruptcy. By fraud, through inflation, the point is reached
where government formally requires more of its inflated currency units
for an ounce of gold, raising the prices for all imported goods.
In the United States the fall of the dollar, by
devaluation, followed a direct line of annual Federal deficits, the
scattering of billions of dollars overseas, and a resulting inflation
between 1945 and 1973 which destroyed 57 per cent of the dollar's
purchasing power. In the 23 years prior to 1969 alone, foreign aid
expenditures totaled 138 billion dollars - paid for largely through
inflation. By the late 60's, foreigners held some 70 billion of our
rapidly depreciating dollars overseas; and, seeing the dollar's value
skidding, they accelerated their run, with our own cash, into United
States gold reserves. So we stopped redemption of gold for dollars, but
not till half the gold was gone. Now, only $11 billion in gold remains
at our "official" devalued price of $42.22 per ounce.
When we stopped selling gold for dollars, there was
only one course of action left to the holder of dollars abroad: come
back in and buy us out. This they did either on the United States stock
exchanges or, directly, by setting up their own companies on our soil.
We have made all this a little more expensive to do by devaluing. Still,
the number of dollars held out against us beyond our shores is
staggering. For a failing currency, Washington's only answer was
devaluation. There is never, of course, any serious talk there about
stopping inflation - the real cause of our recent dollar crises.
Cutting the Tie with Gold
Our monetary crisis has its roots in a decision of some
40 years ago to cut the ties with gold. At that point, the ultimate end
of silver redeemability in our currency, and the legislative actions
removing all legal ratios of circulating currency to gold reserves,
could easily have been predicted. When our currency was no longer
directly convertible by a citizen into gold, the bars were down;
government was free to inflate at will, and has done so ever since. The
1933 dollar is worth about 30cents as of 1973, and the decline goes on.
The recent dollar debacle was not the result of any
interactions between wages and prices as causative elements in
inflation; wages and prices rise in response to government deficits and
Federal Reserve System expansion of money and credit and are symptoms of
the disease, but not the causes. Some economists link the dollar crises
to faith in the free market as a substitute for a "managed" solution.
But there has not been a free market money for years, and the so-called
"managed" solutions have brought us to the current sorry state of
muddlement and monetary chaos. Then, grasping at straws, some blame a
lack of advance planning in economic activity to insure predictable
relationships among world currencies. Planning cannot accomplish this.
Elimination of inflation as a root cause would in itself impart the
basic stability required to insure workable international currency
relationships, particularly if currencies were tied to something of
value, like gold and silver.
Somewhere along the line the perspective became tilted.
Noted economists advocate more controls - control of the divergency of
wage/price behavior internationally, control of the so-called, but
non-existent, wage/price inflation. To further confuse issues, the
inconsistency of control policies from nation to nation has been cited
as clouding the situation in world monetary affairs.
The implications are clear: more controls, plus more
uniform application as a solution. This is merely to be blind to the
results of long years of political control and distortion to currencies
and economies in the so-called "free" world. The controls, and let us
acknowledge the vast quantity imposed within the United States, have
brought us to the present stage of near monetary collapse. At this point
we are being assured, by some, that more of the same will solve the
modern monetary dilemma.
What is needed is no controls, before the economic
structure collapses or "blows out" from the weight of the load. The
United States economy has survived a lot of dead weight and meddling
with the underlying currency system that supports us all. But the
economy has never had the invincible strength to survive long-term
monetary depreciation through inflation, in spite of its productive
gains. Today, as a result, values are "out of whack" for goods and
services - and, ultimately, hard economic reality will restructure those
values.
Scapegoats Sought
There are other common errors in addition to that of
trying to lay blame for inflation on the wage/price spiral. Convenient
scapegoats are found, often labeled as "other divergent factors"; fixed
rates of conversion, and currency conversion rates which were tied to
the dollar. This continues to ignore the underlying result of inflation
at home and overseas, the lack of convertibility in the dollar to
anything of value, and failure to keep our currency tied to some
commodity with high market value: gold or silver.
Balance of payments deficits seem to be recognized by
most economists as a major item in currency crises, which indeed they
are. Erroneously, however, both the export of private capital and goods
and military expenditures take the blame. This distortion is crucial.
The private sector of United States trade has been highly productive in
creating its own surplus. The problem of backbreaking deficits has
arisen only after the addition of military and foreign aid costs to the
trade equation. When these foreign aid and military expenses are added
to domestic social programs, the total load cannot be met by direct
taxation; inflation has been the literal evil alternative. And the
plight of the dollar worsens. By 1974, some sources estimate the
Euro-dollar holdings have risen to $100 billion. We can only envision a
long, continued siege of foreign buy-out in our own land - the exact
reverse flow, dollar-wise, of what took place immediately following
World War II. As the old saying goes, "It comes back to haunt us."
Another weak solution offered, and now in use, was the
scuttling of fixed rates of exchange - letting rates "float." But a
floating currency, by itself, is just as vulnerable to crisis when
destroyed by inflation as any "fixed rate" currency. Until the last
several years, the world had fixed rates. Yet, inflationary crises took
their appropriate toll, making mockery of rates which were mythical.
Surely the most foolish of times in the past few years must have been
when the United States declared the dollar to be worth $35, then $38, to
the ounce of gold while the free market in gold stood at twice that
level. This kind of wishful thinking continues today with the Treasury
gold level at $42.22 per ounce while the free market in gold is well
over the $100 per ounce mark and continues to move upwards.
Inflation Must End
The economic instability caused by floating currency
values will not be resolved until inflation is mastered. International
currency fluctuations will not be brought under control until inflation
is halted. Currency speculation, on all levels, will subside only when
inflation is ended world-wide. Inflation will stop only when governments
limit expenditures to within reasonable levels of taxation. Currently,
most industrial Western countries take between 35 per cent and 45 per
cent of personal income in taxes, and even then cannot run a balanced
budget at the national level.
One of the most damned, least understood aspects of
currency crises is that of speculation in and against various monetary
units. Speculation is cast as both a villain and a cause. Overlooked is
the fact that speculation is a legitimate function and a stabilizing
force in world-wide money matters. If a government refuses to protect or
stabilize the value of its own currency, why shouldn't the speculator
guarantee a level, at a price, in order to impart that stability to
future business transactions? And why deny business and trade the right
to speculate for their own needs relative to future money dealings?
Economists who decry speculation overlook,
conveniently, the fact that currencies rise and fall in relative value
to one another because of governmental sponsorship of inflation.
Eliminate inflation, and currency speculations will abate. Sadly, when
some governments prove unable to master their own currency, not only do
banks and businesses move to speculate against falling monetary units,
but other nations holding the falling unit jump in to liquidate any
weakening position.
We hear it said that gainers in monetary crises are the
international money speculators who thrive on and create the crises.
Gainers there are in speculative movements and crises, but it is not
true that speculators and their actions create a monetary crisis. The
monetary crisis is the child of inflation, born out of governmental
muddling and national banking mismanagement of currency and credit. The
seeds of crisis and destruction are sown in government's initial
decision to remove value from the monetary unit. When gold and silver
backing and convertibility are repudiated by government, money ceases to
be a commodity in which citizens can have faith. At that point the
inflation begins, the crises are foreordained, and speculators
ultimately will ply their trade.
Foremost economists of the day indicate that the
solutions to international currency problems lie in national policies.
How true. But which policies? Floating currency rates versus fixed rates
have nothing to do with the problem or solution. Again, either a fixed
or floating currency may be destroyed by governmental inflation. Neither
can government policies in price and wage controls, union legislation,
capital flow control, or increasing of tax levels be effective in the
foray. Existing taxation levels are today taking over 43 per cent of
personal income in the United States. Taxes on personal incomes and
corporations are squeezing out all conventional sources of capital
funding for the business community. The question is: Where will the
investment money come from when earning levels are insufficient to
provide? And at what interest cost on the borrowing?
Devaluation is a Curse
The devaluation "solution" relieves the pressure and
penalizes the consumer by increasing the costs of imported goods. But
devaluation is a curse in itself. Government assumes this to be a cure
to the crisis and then, feeling the pressure reduction, begins inflating
again, usually at a higher rate than took place before devaluing. Thus,
the stage is set for the next currency crisis and a future devaluation.
With inflation rampant in the Western nations we may indeed see an era
of competitive international currency devaluations in response to
repeated monetary crises - but only providing that the world somehow
staggers on without major economic/monetary collapse. The international
upheaval and its effects are increasing as inflationary rates rise
across the globe.
The nonsense of the age is embodied in the statement
that today no monetary solution exists. We are told that we must look to
coordination of national economic policies for our salvation in the
forming of stable, predictable exchange rates. But such coordination of
policy is unlikely unless forced, and force is not a moral solution.
Central banking monetary gyrations and manipulation by government,
resulting in inflation, are at the root of the approaching catastrophe.
There is a monetary resolution now, just as there has
been always. Any nation on earth can stand alone, relatively aloof from
the world of monetary crisis, by returning to a monetary standard backed
by and convertible into gold and silver -and by living within its means
of direct taxation. It will always be this simple, though a price would
have to be paid to return to this position. That price is the
liquidation of inflated values.
Sound Monetary Policy
In reality, everything depends upon monetary solutions.
As a futile response to crisis, the United States has called for a world
monetary system scrapping gold as a peg, with Special Drawing Rights
based on "average value" of a cross section of currency values, the SDR
to become the world-wide unit of financial accounting. This is a play at
the creation of an international monetary house of cards based on the
false premise that gold is no longer a realistic standard of value.
Valueless monetary systems are pre-doomed to fail.
On our own national level we don't even need a
predictable economic policy. Rather we must have a fixed, predictable
monetary policy which, by itself, will provide economic stability. Wage
and price controls of either permanent or temporary nature will be, and
are, self-destructive. Higher taxes will similarly destroy an economy by
draining away capital availability in an inflation. Policies of public
service employment to increase utilization of the unemployed, another
proposed stabilizer, become merely one more element of instability and
inflation; the public payrolls are now larger than we can afford to
carry.
Rather than monetary "restraint," this nation will find
ultimately there can be no stability without monetary restructuring on a
basis of real value. Our house, monetarily, will be put in order for us
if we choose not to do so voluntarily. Economic forces will at some
point oblige the adjustment. There is the possibility of the Federal
Reserve System precipitating the collapse by turning off the
money/credit flow; this would be a repeat performance of actions taken
in the latter part of 1928. Our inflation will have to end.
No so-called "cosmetic" surface paint job-continued
de-monetization of gold, patching up of Bretton Woods machinery, or
Special Drawing Rights - will lead to other than continued economic
chaos world-wide. Restraints on capital movements, whether instituted
against individuals, banks, or multinational corporations, will also
serve only to tie world economics and trade in knots. United States
policy will be effective on the international scene only when our
currency once again has "hard" value and we choose to exist, nationally,
within our means. At that point the rest of the world could follow the
lead or not, nation by nation, to its own liking. At least, under these
conditions, we would stand for something worthwhile in the international
limelight: financial stability and responsibility.
For what does this country stand now? Our government
sponsors our own self-destruction through inflation. This is the era of
planned expansion of money and credit through the Federal Reserve System
to support massive Federal deficits. The resultant inflation is
destructive of all social, moral, and spiritual values. Historically, no
national sense of unity has ever withstood the corrosive and erosive
effects of inflation. In the end, the national brickwork crumbles, the
nation's social fabric is ripped and torn apart. If a country's currency
has no fixed value, then for those citizens, neither does anything else
in life. Prosperity and economic stability can be achieved in any
country on earth through the exercise of strict monetary control and the
establishment of a hard currency which is convertible into gold or
silver. Less than this will only produce more of the same: national and
international crises, monetary upheaval, economic chaos, and moral
decline.
At the time of the original publication, Mr. Fyfe was
a financial consultant in Atlanta, Georgia.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
Vol.24, No.6, June 1974
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