Jacques Rueff Warned of the Faith Based Dollar Economy

Jacques Rueff died 30 years ago. But in a couple of articles written for Le Monde in February 1976, this economic advisor to Charles de Gaulle, explained today’s monetary system and what was likely to become of it. His articles were unusual, in several respects. It is rare for an economist to have any idea what is going on – especially a French one. And on the subject of economics, Le Monde has things worth reading about as often as Leap Years.

To fully appreciate Rueff’s insight – and how it applies to the macro- economic circus circa 2008 – you have to begin by understanding the problem of unemployment. In the world of the ’30s, the triumph of capitalism was no sure thing. Communism, for all its faults, at least put people to work. Capitalism often left them ‘sittin’ on the dock of the bay.’ And here we have our first measure of how far we have come since the ’70s; the average post-Mitterand Frenchman now believes that there are worse things than not working. Such as working, for example. Today, he is eager to pass laws to prevent it.

The real cause of joblessness is obvious, even to an economist. People don’t have jobs when it costs more to employ them than employers can get out of them. And in an economic downturn, the unemployment rate goes up. Because, in a slump, prices for ‘things’ fall quickly. But labor rates tend to be sticky. Workers have contracts. And rights! Employers’ profit margins are soon squeezed between slippery revenue…and stubborn costs for labor. Result: output falls and fewer workers can earn their keep.

In a free market, wages eventually ease their way down to levels that allow capitalists to exploit workers again. Always have. But for some reason, in Britain in the 1920s, this didn’t happen. Jacques Rueff identified the culprit even before Milton Friedman did:

“Since 1911, there existed in England a system of unemployment insurance that gave an indemnity to jobless workers, known as the “dole.” The consequence of this regime was to establish a minimum salary level, at which workers would prefer to ask for the dole rather than work for less. It appears that in the beginning of 1923 salaries, which had been declining with other prices in England, suddenly hit this new minimum. There, they stopped falling, and since then, they practically ceased to move.”

That’s why France runs such high unemployment rates today; its dole is bountiful. When you add up the costs of “charges sociales,” paperwork, and the minimum wage, more than one in ten potential workers is not worth the money. But no right thinking politician is about to suggest the obvious solution: get rid of the dole. So, Keynes came up with a subterfuge. The central bank should cause price inflation during a slump, he proposed. Rising prices for ‘things’ meant that salaries – in real terms – would go down. That was the greasy scam behind Keynes’ General Theory of Employment, Interest and Money: inflation robbed the working class of their wages without them realizing it. The poor schmucks even thank the politicians for picking their pockets: “salary cuts without tears,” Rueff called them.

“Full employment” was soon no longer a wish, but an obligation.

In France, the Constitution of 1946 obliged the government to present year an annual economic plan that achieves the goal of full employment. In the same year, Harry Truman pushed an Employment Act through the US Congress. And today the central bank of the USA has a “dual mission” – to preserve the value of the dollar while assuring full employment.

“No religion spread as fast as the belief in full employment,” wrote Rueff. “…and in this roundabout way, allowed governments that had exhausted their tax and borrowing resources to ressort to the phony delights of monetary inflation. ”

This is where the post-’71, dollar-based monetary system comes in. It allowed the US to issue dollars – and never have to redeem them in gold. At first, the inflation caused by the build up of dollars was moderate and agreeable, said Jacques Rueff. It reduced the cost of labor. Then, when the tether with gold was hacked off in the early ’70s, inflation began “galloping away.” Readers may remember that inflation got the bit between its teeth in the ’70s, racing along at a record speed of 14.8% in the US in March, 1980, and even faster in Britain. The US government was forced to borrow at 15% yields. Britain could barely borrow at all.

Jacques Rueff died in 1978. Had he lived, he probably would have been as surprised as we have been by the stamina of the monetary horses. Except for a brief rest while Paul Volcker was managing the stables, they have run from bubble to bubble…delivering more liquidity wherever it would do the most damage. All the while, inflation continued to cut the price of labor. Between ’74 and ’84, real wages fell as much as 30%. Then, more moderate levels of inflation held them down for the next 24 years.

But Rueff’s insight comes with a warning. The faith-based, dollar- dependent monetary system is like a loaded pistol in front of a depressed man. It is too easy for the US to end its financial troubles, Rueff pointed out, just by printing more dollars. Eventually, this “exorbitant privilege” will be “suicidal” for the western economies, he predicted.

Paul Volcker put the pistol in the drawer. Ben Bernanke has found it. And Jacques Rueff must look on in amusement to see what happens next.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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4 Comments on "Jacques Rueff Warned of the Faith Based Dollar Economy"

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I like these history lessons, thanks Bill <– not sarcasm


It would seem that you have a belief that it is more important to maintain the value of the capital accumulated by the capitalist than to maintain society.

When it comes to economics I think the most insightful articles I have read are here.


Beliefs have no place in the real world.
BB is many things, but he is not a believer! Capital begets wealth for some work for many and leisure for most of us. There is no society without deferred pleasures. Capital is deferred spending and is a tax upon cupidity. Those who cannot defer are obliged to labour more than those who can. How much are they to be exploited?

What we choose to do with capital is another story! Should their crops be destroyed to force them into factories?

If I may also comment Charles, it is seriously debatable whether “maintaining society” is really the same thing as maintaining full employment no matter the cost. There are other methods of helping those displaced by changes in economic circumstances so that “society is maintained” that do not involved inflationary money deception. It’s just that they aren’t political solutions, they are human and community level ones that cannot be centrally controlled. Do not ignore the fact that BB is just as flabbergasted at the way lower and middle class real wages have at best gone no-where in such a long time,… Read more »
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