A Search for Wisdom
Occasional Paper #5
A PERSPECTIVE FOR
This paper was written in January 1968. It is reprinted here with only a couple of editorial changes. With hindsight today, the problems have really not changed for the better. There is still only a rubber yardstick with which to meet economic problems today. .The fundamental world conflict today is an economic one between two social ideas:
1. Man is free when his economic needs are fulfilled and therefore he should produce according to his ability and be provided according to his needs.
2. Man is free when he has an equal economic opportunity to pursue his chosen goals and retains the fruits of his labors.
According to either social idea there is economic exchange among men which is a form of barter. In both, money simplifies barter. History has repeatedly shown that rubber money controlled by the whims of a select few will not long serve. Rubber money prevents a scientific type of rational analysis in economics because there is no enduring yardstick for reference.
Physical sciences are developed on well defined basic dimensions of mass, distance and time. Given these dimensions we can predict the path to the moon. Through engineering we can design many of our modern products.
Predictions in life sciences are less accurate because it is not yet possible to give a basic dimension to "life". In a limited way we can modify biological phenomena such as the growth rate, but in psychology the predictive possibilities in behavior are more limited.
The basic elements of economics involve the efforts of man on raw materials to make desired products. The ability to measure the desirability of the products is limited. Perhaps it is possible to define the raw materials such as iron and the effort of man in terms of time. But the only way to define the desirability of the product is in its desirability to man. If we consider each man free to establish his own values we have a basic problem. Some men like oranges and others prefer apples. Some men want to go to the moon while others have built pyramids.
Man with his unique ability to delay rewards, needs a means of storing the products of his work. In its simplest form, if he builds houses, he finds it difficult to save houses, or if he grows food he finds it difficult to save enough apples to barter for his house.
In modern American society man has saved in life insurance, government bonds, savings accounts etc. Each dollar invested in government bonds in 1941 was worth $1.72 in 1960. Furthermore, in 1960 it cost $1.93 to purchase what the original dollar would have bought. In 26 years to 1966, holders of life insurance and other fixed dollar assets lost nearly $240,000,000,000 as the dollar depreciated to 44% of its original value. Such facts suggest that the old Boy Scout law to be thrifty has no virtue.
What can a man do rather than save the houses he builds or the apples he grows? He can learn from history how to conserve his savings. The history of the last 50 years in Germany and France has some good lessons. Commodities have provided the best protection. Among commodities today, gold is the best bargain. It is at the same price as in 1934 and it does not deteriorate. The French frank is worth less than 0.5% of what it was 50 years ago through inflation.
European bankers who have experienced this inflation are critical of the management of our dollars and our continued trade deficit. A couple of months ago England devalued the pound because it could not be supported by its commodity backing, silver. In this country the dollar demands on gold are nearly 3 times the amount of gold available. As in the game of musical chairs, someone is going to be caught with paper dollars and no gold.
To meet the problem, the US Government can do several things. We were in a similar position after the Civil War when we placed an embargo on gold. By 1879 we returned to a gold standard and enjoyed a long period of productive prosperity without inflation. We could do it again if the people would accept it.
We could devalue the dollar again an embezzle more savings from life insurance holders. They are not organized in unions therefore we could perhaps get away with it as we did in 1933. Unless steps were taken to prevent further inflation, more devaluation would occur as in France.
Many economists and others wonder what good gold is, - you cannot eat it. Gold is only as good as the demands people make for it. It is a convenient medium for barter. Another solution would be to free gold as we did silver last May. Let those who want gold buy it at the market price. In this country, paper dollars have represented a convenient way to barter with gold. If the government cannot keep its promise, then turn gold free and let those who want the it have it.
In the coming months no choice will be easy. If we can successfully draw on the support of the people, the US position would be best served by increasing the gold reserves to honor all dollar demands at the 1933 price. This could be accomplished by high taxes and reductions in government spending as after the Civil War. It would be fairest to our citizens and to the world markets. It would show the world we are trustworthy. If we resort to devaluation of gold, the amount should be to the free world market price and then the value allowed to fluctuate in the free market. The dollar should no longer represent a fixed relation to gold.
The most probable choice is the one England took a couple of months ago and it is probably the worst because it will not contribute to a solution of the problem. The dollar could be devaluated but not opened to a free market. Even with this windfall to our government, there would be a failure to correct the cause of the problem. We would be following in the foot steps of France. We would further erode the basic virtues on which our country was built.
In any case, money and its relation to all commodities are a part of the fundamental social conflict today. With an enduring monetary unit as a stable yardstick, we can examine the consequences of all economic activity. Thus, in the monetary choices ahead, I encourage all steps which will tend to remove the control of money-commodity relations from a select group of men in government. Manipulation of money by government fiat is wrong. Man should be free to buy and sell all commodities, including gold, as he desires.
I happen to believe that that social idea based on the premise that man should be entitled to and responsible to live with the fruits of his labors will serve the greatest number of men in the long run best. Regardless of the social ideas one believes, let us examine them all rationally with a proper measure. With the yardstick of money firmly established we can approach the economics of the social conflicts today in a rational manner.Glen B. Haydon, M.D.
Route 2, Box 429
La Honda, CA 94020HINDSIGHT is decicated to examining the past in a search for wisdom coping present. After all, hindsight is always 20/20. Extrapolations into the future are left to the reader.