The 'panacea' of capitalism
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We file this report, coincidentally, 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 pleasure of current consumption, savings could be invested in factories, machines, and new discoveries that increased the output from human labour. In the same amount of time, thanks to his new tools, a working man could produce more things. Soon, these things made him rich.
According to MeasuringWealth.com, during the second half of the 18th century, the typical British working man earned about £60 a year, the equivalent of 14 ounces of gold, which is worth about £6,622 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 at today’s rate. (Readers who are good at maths 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 past 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 middle of the greatest financial and technological boom ever, they have managed to actually reduce the value of their own labour.
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. And here is a group of people upon whom nature piled so many blessings: first the wit was crushed out of them; now the 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 it receives about $2bn more of these moveable objects than it sends out in exports.
Before the Nixon administration, such an imbalance could not persist for very long; but however God favoured America – with her purple mountains, majesty and fields of golden grain – that was nothing compared with the way she was favoured by the post-1971 monetary system. “As ye plant, so shall ye reap,” it saith in the Bible.
But in the period 1997-2007 Americans could reap without planting at all. 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 made this possible happened on August 15, 1971, when Richard Nixon “closed the gold window” at the US 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, officials were 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 what did the Central Bank of China do with its dollars? Before 1971, it would have presented them to the US Treasury and received one ounce of gold for every 41 paper dollars. Soon, the party would have been over. The US would have been forced to raise rates to encourage the foreigners to hold dollars and discourage Americans from spending them – effectively stifling US consumer spending and bringing the current account back into balance.
But with nothing to stop it, the tide of money and credit rose. Americans were mounting the scaffold; but the poor lumps thought they were on their way to heaven. Then, in 2001, the US financial authorities, led by Alan Greenspan, thought they were faced with a crisis. They panicked – giving Americans even more good fortune, negative lending rates, which they wrapped 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 and spent even more freely than before.
And now, their bills are all due and their kids all need shoes. Worse, the value of their most important asset – their time – is being marked down with the dollar. According to our source, the typical American working man in 1971 earned the equivalent of 82 ounces of gold, worth $76,000 today. But then he forgot the lesson of the industrial revolution that had made him rich. He stopped saving... and his income fell. Adjusting the average hourly wage for inflation, he earns slightly less today than he did during the Carter administration. But adjust his earnings to gold and his income has been cut in half, wiping out a half century of wage progress. Today, he earns merely the equivalent of 40 ounces of gold – or only about $38,000.
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