“Inflation is always and everywhere a monetary phenomenon.”
— Milton Friedman
At last week’s Mont Pelerin Society meetings in Bretton Woods, New Hampshire, I organized an “ad hoc” session and invited several dozen guests, including government leaders, to respond to one of the most incredible charts I’ve ever seen.
Your editor showing the “permanent inflation” chart to David Malpass, former president of the World Bank, and economist Richard Rahn in Bretton Woods, New Hampshire.
Here below is a chart created in 2013 by Harvard professors Carmen Reinhart and Kenneth Rogoff in celebration of the 100th anniversary of the Federal Reserve Act.
Graph source: “Shifting Mandates: The Federal Reserve’s First Centennial”, American Economic Review: Papers & Proceedings, Reinhart and Rogoff (2013).
I asked several questions in the special meeting. (I ask my Chapman students the same questions.)
First, what was the cause of inflation prior to World War II?
The answer is pretty clear. Price inflation reared its ugly head during wartime, but then after the wars, prices came back down. It happened in the Revolutionary War, the War of 1812, the Civil War and World War I.
But then, something unprecedented happened after World War II — price inflation became permanent. It never went down. Despite all the talk of “fighting inflation,” the battle against inflation is never won.
Our group had a robust debate on this question. I gave them several possible choices as to the cause of permanent inflation. I asked, “which one is the primary cause?”
How would you answer?
What was the cause of permanent inflation after World War II?
- Never-ending wars
- The creation of the Federal Reserve
- Going off the gold standard
- Adoption of Keynesian economics
- Bretton-Woods Agreement
- All of the above
All five were possibilities. We have had numerous wars and a military-industrial build-up in the post-WW2 period.
Despite its mission to defend the dollar, the Federal Reserve Bank has certainly been an engine of inflation since its inception in 1913 and the end of World War II.
Going off the gold standard meant we no longer had the discipline of the “barbarous relic” to limit the money supply to the growth of monetary gold (2% a year, on average).
Keynesian economics eliminated the need for government spending to cut back during a recession or depression. Deficits became the norm, feeding inflation.
The Bretton-Woods Agreement made the U.S. dollar the world currency, and even though it was tied to the price of gold at $35 an ounce, it did not prohibit dollars to be printed at will.
So, it could be all of the above.
The Primary Cause Revealed
What did Reinhart and Rogoff blame for the permanent rise of inflation? The answer is (3), the gold standard. Note that inflation bottomed in 1933, when Franklin D. Roosevelt took us off the gold standard, and then inflation accelerated in 1971, when Richard Nixon took us off the gold standard completely.
All told, the United States was left with little or no monetary discipline other than the response of the bond and stock markets (which dislike inflation).
What’s the Solution?
My group of experts at the Mont Pelerin Society meeting argued over the solution to the permanent inflation problem. Some suggested that the best solution was to allow competing currencies, which was advocated by Friedrich Hayek, and move away from the U.S. dollar as the international currency. But that would mean numerous transaction fees whenever currencies changed hands. I suggested the idea of a single currency worldwide, the U.S. dollar, but most rejected the idea as monopolistic and giving excessive power to Washington.
So, we are left with our current inflationary system. As long as it doesn’t get out of hand, we can probably survive and prosper, as we have since World War II. After all, the stock market has done pretty well over the past 80 years. And so has gold, since going off the gold standard. I recommend investors have some of both.
New Edition of Maxims Now Available in Time for the Holidays!
Good news! I’m happy to report that the new edition of “The Maxims of Wall Street” is hot off the press, and now available for sale for the holidays. It makes a great gift, and many subscribers have bought multiple copies for clients, friends and their favorite broker.
Due to the sharp rise in costs in printing and mailing, for the first time since 2011, I’ve had to raise the price of Maxims by a buck. So, the price is now $21 for the first copy, and all additional copies are $11. If you buy an entire box (32 copies), the price is $327. The retail price on Amazon is now $26.95, so my prices are still quite a bargain. Plus, I sign all books and ship them for no additional charge if mailed inside the United States.
To order for the holidays, go to www.skousenbooks.com.
Good investing, AEIOU,
You Blew it!
‘Your Vote Doesn’t Count’
“Let’s start with the basics: Your vote will almost certainly not determine the outcome of any public election.” — Katherine Mangu-Ward
In an article, “Your vote doesn’t count,” Reason editor Katherine Mangu-Ward goes even further and states, “Why (almost) everyone should stay home on Election Day.” See her arguments here.
It reminds me of the late P. J. O’Rourke’s book title, “Don’t Vote: It Just Encourages the Bastards.”
This week, I was a speaker at the Great Economists’ Conference at Hillsdale College, and one of the speakers, a fellow economist, said, “Your vote doesn’t matter.”
I stood up and begged to differ (and many adult attendees congratulated me for speaking up).
Libertarians have many good ideas, but this isn’t one of them. It is one of the most wrong-headed and dangerous ideas out there.
It’s just the kind of rhetoric the Communists, Big Government promoters and other enemies of liberty want to hear: Stay home on Election Day and let us vote in our candidates.
Libertarians seem to forget that the voting franchise is one of the most important rights long fought for against emperors and dictators. Why? Because it allows citizens to throw the bastards out of office and restore good government.
Once everyone stops voting, do you think that the politicians in power are going to keep the right to vote available to citizens? Voting is expensive, and politicians prefer to keep on making new rules and regulations to their advantage.
Why Your One Vote Does Count!
More importantly, it’s vital that we understand that one vote does count. Why? Because voters who are passionate about their views are going to spread the word and encourage others to vote through talking, speaking, texting, e-mailing and engaging in social media. “No man is an island; no man stands alone.”
Many an election has reversed the tide by campaigning and promoting an idea, for good or for evil. It starts with the soap box and then quickly leads to further action. As Frederick Douglass stated, “A man’s rights rest in three boxes. The ballot box, jury box and the cartridge box.” In that order.
If you don’t exercise your voting rights, it won’t be long before you will end depending on the cartridge box to defend your rights.