September 1994 - Volume 12, Issue 9

The hour-glass of time clouds Time068.gif our vision about the ravages of inflation!

If you had been born in 1900, you would have seen many changes during your lifetime. Your per capita share of GNP was $246 and of the federal debt was $16.60. The federal government received about 3.1% of the GNP in tax revenues. You could take a dollar bill and convert it into gold dust.

Technology changed the face of the world. From covered wagons and ice boxes, we moved to horseless carriages, motorcycles, electric light, refrigerators, motion pictures, airplanes, space shuttles, computers, radio, television, and even the microwave, technology drove the economic engine.

While lie-detectors and voice stress systems were developed, their ability to be 100% accurate is questionable. The investigative reporter often has an axe to grind. Political promises must always be suspect. In 1914, Congress passed an income tax with a top rate of 6% on incomes of over $1,000,000 in 1914 dollars (that's over $14,000,000 today) and promised the American people that the "tax rates would never increase." So much for political promises!

The first half of the 20th Century & the "New Deal"

During this period, the federal government fought two World Wars and the effects of the Great Depression that began with the Stock Market crash of October 1929. After WW1, the Republican party controlled Congress for 14 years. The world wide depression and cry's for change led to a wholesale change in Congress in 1932. Most incumbents were swept out of office as the voting public demanded change. The "New Deal" proposed by Franklin Roosevelt and the Democratic party promised to restore prosperity.

On March 4, 1933, President Roosevelt took office and immediately declared a "National Bank Holiday." Four days later, the 73rd Congress convened. The first bill introduced was Roosevelt's Emergency Banking Relief Act (EBRA). It passed the House after only 38 minutes of debate and without a copy of the bill being printed. The next day, the Senate took up the same unprinted bill. After four hours of debate, this unseen bill passed by a 73-7 margin. Roosevelt signed the bill after the White House completed writing the bill at 7:30 that evening. No member of Congress ever saw the bill until after it was signed by the President. "Talk about a blank check."

EBRA permitted "sound" (maybe, they were anticipating stereo) banks to reopen upon approval of the Treasury and increased powers to the Federal Reserve Board and the Reconstruction Finance Corporation. The first 100 days had started. In March, Roosevelt also signed the act forming the Civilian Conservation Corps which placed 250,000 young men to work planting trees on the federal payroll. Also, the Glass-Steagall banking bill separating commercial banks and investment banks and creating the Federal Deposit Insurance Corporation passed in March.

Roosevelt also signed the Economy Act on March 20th which cut federal salaries by up to 15% and reorganized certain federal agencies in an effort to reduce deficit spending. In May, the Tennessee Valley Authority was passed. In June, Congress passed a joint resolution abandoning the gold standard and a year later, devalued the dollar by 59% raising the gold standard from $20.97 per ounce to $35.00.

The New Deal fails to solve the depression!

Yet, the overall depression got worse, not better. In 1935, the federal role in the lives of its citizens was fundamentally changed with the passage of the Social Security Act to serve as a safety net and the Work Progress Administration (WPA) to put people to work. The federal government now said to its citizens, we are responsible for you, your jobs and your welfare.

Despite the growing war clouds in Europe and Asia, U.S. foreign policy and the news media did little to prepare the U.S. for World War II. Many in Congress and the media were isolationists. The U.S. watched while Poland, Czechoslovakia, Austria, France, & Holland and much of Northern Africa fell victim to the German and Italian military. Despite Dunkirk, it took Pearl Harbor to change the U.S. into an active participant. Many historians have suggested that only the economic activities created by the military buildup during World War II brought us out of the depression despite all the rhetoric of the Democratic party and its politicians.

World War II and the Manhattan project (the largest secret U.S. government program in history up to then) brought nuclear power to the world and saw Italy, Germany, and Japan defeated. Yet from 1941 to 1945, the federal debt only increased from $48.7 billion to $258.7 billion, or by $210 billion. In each of the last 9 years ending in FY 1993, the U.S. deficit was greater than $200 billion!

Pay as you go!

Congress until 1950 basically kept expenditures in line with government revenues except for periods of war. About 1950, and with the advent of the Marshall Plan, Congress began borrowing its way to prosperity. Surprise, inflation began to accelerate.

In 1944, the Bretton Woods agreement created the International Monetary Fund. One of its functions was to provide a method for setting currency exchange rates between the major currencies after World War II. The currency markets in their unsettled state had been restricting the development of trade between rebuilding nations. In 1950, the currency exchange rates are shown in the following table as well as more recent data.

A U.S. Dollar will buy

Year Pound sterling German D-mark Swiss franc Japanese Yen French franc
1950 0.357 4.19 4.29 360 5.55
1980 0.469 1.96 1.78 210 4.20
Sep 1994 0.666 1.71 1.71 100 5.29

The Dollar Cost of

Year Gold per oz. Silver per oz.
1950 $35.00 $0.742
1980 $612.60 $20.60
Sep 1994 $380.00 $5.25

What's a dollar worth?

If you were born in 1900, and you were given a silver dollar, it was worth $1.00 in silver. Moreover, that same silver dollar would be worth between $5.00 and $10.00 today depending upon its condition according to some numismatics. It might be worthwhile to look at how the dollar has changed since 1900.


Year 1900 1950 1980 1994
Dollar value $1.00 $0.347 $.101 $.055
Per capita federal debt $16.60 $1,696.67 $4,036.00 $17,542.35
Per capita GNP $246.00 $1,877.00 $11,563.46 $24,588.37
Per capita debt as % of Per capita GNP 6.74% 90.39% 34.90% 71.34%
Consumer Price Index 100 288 988 1705
U.S. gold monetary reserve stock $930 million $23.9 billion $11.2 billion $11.1 billion

Today, to have the same U.S. purchasing power of that dollar in 1900, you would have to give someone over $16.82. That's right, today's dollar is almost worth less than a 1900 plugged buffalo nickel and is not redeemable in silver either. Or, anyone with $50,000 in net worth in 1900 would today be considered a millionaire!

In 1950, the dollar was still strong . . . but it stood on quicksand!

In 1950, the dollar was the bulwark of the world's currency system. Other than gold and with the fall of the British pound, the dollar represented the only major reserve currency acceptable to most trading nations. The Bretton Woods accords fixed the exchange rate for many world currencies. In 1950, the federal debt stood at only $257.7 billion, a slight decrease from 1945's level. The U.S. Treasury held $23.9 billion of gold reserves and all of our coins contained real silver. Why you could still get a silver dollar from your bank without paying a premium and silver certificates were still in circulation as well as Federal Reserve notes.

Since 1950, Congress has presided over the largest debt buildup in history. By 1960, the federal debt had grown to $286.3 billion. A panic started in the currency markets in 1960 causing President Nixon in late 1960 to take the nation off the gold-standard entirely. The discipline of a monetary backed system was to be replaced with paper.

In 1982, only 22 years later, the federal debt passed $1 trillion. Today, 12 years later, the federal debt exceeds $4.5 trillion dollars. To put it in perspective, the federal debt alone stands at around 70% of GNP and that does not include state, local, and other governmental subdivision debt nor consumer debt. The U.S. has been on a spending binge that is out of control. Today, the major question for prudent investors is whether the stopper can be put back in the bottle by the genie and if you believe that Clinton and his elves speak to the genie!

Since 1950, as the bastion of democracy, Congress assumed foreign capital would always flee towards the dollar in the wake of a currency crisis overseas and exchange rates were unimportant. It might be useful to look at foreign exchange rates then and now. Maybe Clinton's new motto should be . . . "It's the money, stupid!"

Foreign Exchange Values - then and now

Currency 1950 Sept 1, 1994 Dollar's % Decline
D-mark 4.19 Dm 1.71 Dm 59%
Swiss franc 4.29 1.463 66%
Japanese yen 360 100 72%

Since 1950, the American dollar has declined by over 60% against the other three major trading currencies.

Forgive them for they know not what they do!

Today, the U.S. is the world's largest debtor nation. Only against the British pound, French franc, and the Canadian dollar can we find currencies among those mentioned earlier that have depreciated against the dollar during the past 45 years. In these cases, their governments undertook policies which some pundits would say were more destructive towards destroying capital and decreasing national productivity than our own.

Confidence - - is a fragile thing!

Today, U.S. money is primarily Federal Reserve notes, or as some would say, just over-priced paper! An investment advisor has pointed out that the rest of the world is being conned by the U.S. Other nations work to produce items to sell to the U.S. market in exchange for Federal Reserve notes or paper money. At the day of reckoning, all that paper money both here and overseas will only be good for fires and toilet paper. He is now advising his clients to move all funds not absolutely necessary as working capital in the U.S. to off shore havens.

In late 1993, the monetary tide may have started to shift. It began in Malaysia and has now spread to India and other trading companies. Some manufacturing companies are no longer willing to price their contracts in U.S. dollars. Currencies such as the Swiss franc, or the Japanese yen, are acceptable.

This lack of confidence can become a wildfire just like some of the other panics down through history. Credibility in government is the bedrock of confidence. The current rush to pass any health care bill reminds me of the Roosevelt Emergency Banking bill. Another blank check! When the bill comes due, will our creditors decide to dump us.

Time is running out. The 94 Congressional elections may see a significant turnover in Congress as did the 1932 elections. But unless Congress addresses the problems of deficit spending and the necessity for reducing the debt, confidence in the dollar will be suspect in the eyes of our economic competitors.

Today, the war is being fought with financial weapons, not military ones. It's time we developed a plan to compete before the sands of time pass through the neck of the hour glass.

But then - - 'Tis Only My Opinion!

Fred Richards
September 1994

This issue of 'Tis Only My Opinion was copyrighted by Adrich Corporation in September 1994.

It is intended to provoke thinking, then dialogue among its readers. Quotation with attribution is encouraged.

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