Productivity | Strategy | Profitability
Productivity | Strategy | Profitability
A Particularly Prescient, Wartime and Post World War II Congressman. Back in 1948, a U.S. Congressman outlined the long-range problems of U.S. dollar debasement and the effective long-range solvency issues of the U.S. government, tied to President Franklin Roosevelt’s 1933 abandonment of the domestic backing of the U.S. dollar with gold. Those uncontained problems continued to evolve over the
decades and currently are deteriorating rapidly.
Growth in United States Government debt has been on a path of increasingly unsustainable and dangerous expansion since at least the early 2000s. Federal debt levels already exceed the total value of the U.S. Gross Domestic Product, with current federal debt growth accelerating rapidly relative to growth in the GDP, as shown in the accompanying graph. Discussed later, this circumstance bodes poorly for the long-range solvency issues facing the U.S. Treasury, as well as for the exchange-rate value and long-range purchasing power of the U.S. Dollar.
That four-term Congressman from the State of Nebraska was the Honorable Howard Homan Buffett (1903-1964), father of fabled business magnate and investor Warren Edward Buffett and a long-term advocate of returning the U.S. dollar to its domestic gold backing. The senior Buffett noted specifically the personal freedoms of U.S. individuals attendant with the redeemability of the U.S. Dollar for physical gold. He also discussed the inherent disruptive fiscal and monetary instabilities forced upon them and the United States government by President Roosevelt’s 1933 Executive Order “forbidding the Hoarding of gold coin, gold bullion and gold certificates within the continental United States.” Formal abandonment of the international gold backing of the U.S. dollar would follow in 1971, under President Richard Nixon.
Understanding how monetary debasement worked hand-in-hand with big government to kill individual spirit and incentive, Congressman Buffett penned a remarkably insightful article “Human Freedom Rests on Gold Redeemable Money” I in 1948, on which I offer some observations. At the time, he was running for re-election for a fourth term. He lost that race but was elected for a fourth and final term in 1950.
Up front in his article, Mr. Buffett noted, “So far as I can discover, paper money systems have always wound up with collapse and economic chaos.” Research by Ralph Foster later confirmed that in his study of roughly 800 fiat currencies in his Fiat Paper Money; the History and Evolution of Our Currency, where a fiat currency is one without the backing of a hard asset such gold or silver.
Described in the Buffett article, it was the loss of redeemability and the private ownership of gold that provided the restrictions to individual freedom. Before the ban on domestic gold ownership, if citizens did not like the way the government was being run, they just could cash in their dollars for gold, hold the physical metal and constrain domestic liquidity in protest, as mirrored in some related quotes from the article.
Buffett noted, “In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option of the holder of the paper money.”
“Before 1933 the people themselves had an effective way to demand economy. Before 1933, whenever the people became disturbed over federal spending, they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington. That happened on various occasions and conditions sometimes became strained, but nothing like the consequences of paper money inflation.”
“That redemption right gives money a large degree of stability. The owner of such gold redeemable currency has economic independence.”
Reflecting how the Congress of 1948 was besieged constantly by people seeking benefits from “the public treasury,” he offered, “Often these groups control enough votes in many Congressional districts to change the outcome of elections. And so Congressmen find it difficult to persuade themselves not to give in to pressure groups. With no immediate consequence it becomes expedient to accede to a spending demand. The Treasury is seemingly inexhaustable. Besides the unorganised taxpayers back home may not notice this particular expenditure—and so it goes.”
He argued that with the prior gold-backed system in place, “Congress would be forced to confront spending demands with firmness. The gold standard acted as a silent watchdog to prevent unlimited public spending.”
“I have only briefly outlined the inability of Congress to resist spending pressures during periods of prosperity. What Congress would do when a depression comes is a question I leave to your imagination.”
Seventy-one years later, those questions as to what the U.S. Congress might do, have been answered, with the U.S. Treasury facing long-range insolvency. Mr. Buffett’s observations and predictions, not only explain much of fiscal crisis faced by today’s federal government, but also suggest where the crisis is headed and where it ultimately could be stabilised, with the restoration of gold redeemable money.
THEN CAME PRESIDENTS NIXON AND FORD
Although formal redeemability of U.S. dollars for a certain weight of gold by the United States, remains suspended, the U.S. government allowed private ownership of gold in the United States to resume, in 1974, under President Gerald Ford. Such was subsequent to President Nixon’s abandonment of the Bretton Woods accord and the cessation of international convertibility of the U.S. Dollar for gold. While the United States remains off the gold standard, U.S. investors again have the ability to buy and own physical gold.
Discussed in “Returning to the Gold Standard Is Not a Substitute for Fiscal Prudence” in the Autumn 2018 issue of Executive Global, I noted that while a return to the gold standard could restore credibility and stability to a currency facing rapid debasement, as the U.S. dollar faces, that is not likely to happen at this point until such time as it might be forced by a currency, financial, economic or political crisis that offers no other way out.
FED CHAIR POWELL NOTED ‘’NONSUSTAINABILITY’ OF U.S. FISCAL POLICY
The current “nonsustainability” of U.S. government fiscal policies recently elicited comment from the Federal Reserve Chair. Reported by CNBC, “Federal Reserve Chairman Jerome Powell is concerned about the ballooning amount of United States debt. ‘I’m very worried about it,’ Powell said at The Economic Club of Washington, D.C. [January 10, 2019]. ‘From the Fed’s standpoint, we’re really looking at a business cycle length: that’s our frame of reference. The long-run fiscal, nonsustainability of the U.S. federal government isn’t really something that plays into the medium term that is relevant for our [FOMC] policy decisions.’ However, ‘it’s a long-run issue that we definitely need to face, and ultimately, will have no choice but to face,’ he added.’”
With the U.S. economy likely on the brink of an unfolding “new” recession, and the current U.S. Congress and Administration trying to appease liquidity strangled U.S. consumers, chances are nil of a serious effort by the Administration or Congress to balance the government’s fiscal operations, again, shy of a severe financial-market panic and/or economic downturn that forces the issue.
Reflected in the accompanying graph, more than seven decades after Mr. Buffett’s warnings, fiscal-year end September 30, 2018 U.S. Treasury debt was at a record $21.5 trillion, and the debt total just topped $22 trillion for the first time, in January 2019, Again the U.S. government’s national debt now is larger than, and growing faster than the GDP. With the government unwilling or unable to contain its growing insolvency issues, the U.S. Dollar faces difficult times ahead. Physical holdings of gold and silver can protect the purchasing power of one’s assets in the difficult times that follow. EG