Capitalism is a panacea, after all. It cures symptoms of affluence as well as poverty.
We file this report from Manchester… where, according to legend, the industrial revolution began. Modern tools, steady money, and fossil fuel were put together, creating so much gas, it lifted mankind out of the mud of the Middle Ages and carried him aloft. Thrifty Scottish economists – notably Adam Smith and Adam Ferguson – saw what was happening and took note of the moral lesson: by foregoing the satisfaction of current consumption, savings could be invested in factories, machines, and new discoveries that increased the output from human labor.
In the same amount of time, thanks to his new tools, a workingman could produce more things. And, soon, the things made him rich. According to MeasuringWealth.com, during the second half of the 18th century, the typical British workingman earned about 60 pounds per year. It took only 4.25 pounds sterling to buy an ounce of gold, so he earned the equivalent of 14 ounces of gold, which is worth about 6,622 pounds sterling at today’s rates. A century later, in 1971, to be exact, his earnings had risen to the equivalent of 49 ounces of gold per year – or about 23,000 pounds sterling at today’s rate.
(Readers who are good at math will already be asking questions. The average wage in Britain today is only 23,177. In terms of gold, wages have gone nowhere for the last 37 years.)
But whatever wonder James Watt and the people of Britain’s industrial heartland wrought, their descendants in America have worked another one; in the midst of the greatest financial and technological boom ever, they have managed to actually reduce the value of their own labor.
Yes, dear reader, this week we turn our weary eyes away from the poor, the weak, and the huddled masses struggling to keep up with the price of rice… and focus on people who are struggling to keep up with their credit card payments. Here is a group of people upon whom nature piled so many blessings, she crushed the wit out of them. And, their wealth is being squeezed out too.
The United States of America has rich farmland, from sea to shining sea. Still, it is a net importer of food. In fact, it is a net importer of practically everything that can be moved. Every day that goes by it receives about $2 billion more of these moveable objects than it sends out in exports.
Prior to the Nixon administration, such an imbalance could not persist for very long; but however much God blessed America – with her purple mountains majesty and her fields of golden grain – was nothing compared to the way she was favored by the post-1971 monetary system.
“As ye plant, so shall ye reap,” it saith in the Bible. But in the period from 1997-2007, Americans could reap without planting. They could consume without earning. They could invest without saving, and spend as much as they wanted without running out of money. They were the world’s luckiest people – they had the world’s reserve currency… and access to the whole world’s credit.
The miracle that fundamentally altered the world monetary system happened on August 15, 1971, when Richard Nixon “closed the gold window,” at the U.S. Treasury. Before then, every nation’s currency was anchored to gold. Governments settled their imbalances in yellow metal; since each unit of paper currency represented an option on the treasury’s gold, it forced officials to be wary of issuing too many. But after August, 1971, the world’s monetary system upped anchor and sailed with the tide. Now, it all floats on a sea of paper money – and no one knows what’s beneath the dark ocean surface.
The Chinese merchant who sold widgets and geegaws to spendthrift Americans could not use dollars to pay his wages. He needed local currency. So he traded his dollars for yuan. And where did the Central Bank of China get enough yuan to buy up trillions of dollars? It had to create them. All over the planet, as the world’s stock of dollars rose… so did its inventories of local currencies. And then, what could it do with its dollars? Before 1971, it would have presented them to the U.S. Treasury and received one ounce of gold for every 41 paper dollars. In order to protect the nation’s gold, central bankers would have taken away the punch bowl and turned out the lights. Rates would have gone up; foreigners would have been encouraged to hold dollars (rather than exchange them for gold); Americans would have been discouraged from spending dollars – effectively stifling U.S. consumer spending and bringing the current account back into balance.
Then, in 2001, the U.S. financial authorities, led by Alan Greenspan, thought they faced a crisis. They panicked – giving Americans even more credit rope. With nothing to stop it, the supply of cash and credit rose at an even faster rate. And thus it was that Americans wrapped their good fortune around their necks like a noose. Instead of practicing the virtues that had made them rich – saving money, building new factories and learning new skills – they borrowed even more heavily than before.
And now their houses are being foreclosed and their bills are coming due. Worse, the value of their most important asset – their time – is being marked down with the dollar. According to our source, the typical American workingman in the late 19th century was already earning considerably more than an Englishman – 25 ounces of gold per year, rather than 14. He, too, became much richer as the industrial revolution progressed. By 1971, he was earning the equivalent of 82 ounces of gold, worth $76,000 today. But then he forgot his lessons. He stopped saving… his income fell… and his dollar dropped. Adjusting the average hourly wage for consumer price inflation, he earns slightly less today than he did during the Carter administration. Adjusting his wages to the fall of the euro, we find the average American earns less than the average Frenchman. And adjusting his wages to gold and we see he has lost a half century of wage progress. Today, he earns only the equivalent of 40 ounces of gold – or only about $38,000.
Markets and Money