In Part 1 of my commentary, called Clearing Up Some Misinformation, Part 1 ,I wrote about some of the incorrect characterization’s in President Obama’s speech about free markets and the policies of the 1920s as he addressed Osawatomie High School on December 6, 2011. I focused on some general terms, such as ‘markets’ and ‘economy’ and I also focused heavily on the government policies of the 1920s and how they were not laissez –faire. In part two, I will focus on the 1950s and 1960s and see how the President’s characterization stacks up to historical accuracy. The President said in his speech:
Now, it’s a simple theory [free market economics]. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible postwar booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.
The President says that the free market is not what led to the postwar booms of the 1950s and 1960s but implied that it was government working in concert with private industry that created prosperity. So what did lead to the postwar booms of the ‘50s and ‘60s? In an essay titled The Monetary Breakdown of the West, Murray Rothbard characterizes this period in terms of the Bretton Woods new monetary order ratified by Congress in 1945 and its short-term and long-term affects:
While the Bretton Woods system worked far better than the disaster of the 1930s, it worked only as another inflationary recrudescence of the gold-exchange standard of the 1920s and — like the 1920s — the system lived only on borrowed time.
In the Bretton Woods system, the United States pyramided dollars (in paper money and in bank deposits) on top of gold, in which dollars could be redeemed by foreign governments; while all other governments held dollars as their basic reserve and pyramided their currency on top of dollars. And since the United States began the postwar world with a huge stock of gold (approximately $25 billion) there was plenty of play for pyramiding dollar claims on top of it.
One of the key features in the Bretton Woods agreement was that individuals could no longer redeem dollars for gold but foreign governments could redeem their dollars for gold. With the dollar being undervalued and the post-war currencies of Europe being overvalued (trying to retain their pre-war value) the dollar was “scarce” and, as Rothbard explains:
There being plenty of room for inflation before retribution could set in, the US government embarked on its postwar policy of continual monetary inflation, a policy it has pursued merrily ever since.
Basically, the United States monetary policy combined with the Bretton Woods agreement allowed the Federal Reserve to create new dollars. With the injection of new dollars into the economy, an artificial boom was created that lasted well into the late 1960s. There were several other factors that contributed to the United States post-war economic performance, including increased savings during the war years (which allowed capital investment), untouched infrastructure by the devastation of war (while European countries were partially destroyed), and a decreased amount of federal spending after the war. However, Rothbard explains that:
As the 1950s and 1960s wore on, the United States became more and more inflationist, both absolutely and relatively to Japan and Western Europe. But the classical gold-standard check on inflation — especially American inflation — was gone.
…economic law has a way, at long last, of catching up with governments, and this is what happened to the inflation-happy US government by the end of the 1960s. The gold-exchange system of Bretton Woods — hailed by the US political and economic establishment as permanent and impregnable — began to unravel rapidly in 1968.
Similar inflationary policies that were implemented in the 1920s and leading to the “Roaring ‘20s” were being reintroduced and integrated into our economic system during the 1950s and 1960s. The policies that mirrored the 1920s were playing in the background and fueling an inflationary boom which eventually led to the recession of the 1970s. The President is correct – free market economics is not what led to the “incredible postwar booms of the ‘50s and ‘60s.” In fact, it was the opposite – central economic planning, intervention in the market, and currency manipulation and inflation that led to the booms of the 1950s and 1960s. And what was the result of the short-term, illusory prosperity? According to Mark Thornton, in his essay titled The ‘New Economists’ and the Great Depression of the 1970s:
The experiments of the new economists also resulted in higher price inflation, as would be expected from the “stimulating” fiscal and monetary policy of the 1960s. From the beginning of 1946 to the beginning of 1965 the consumer price index increased by 71.4%, but then increased 20% by the end of the decade.
Also, due to the inflationary policies and the structure of the Bretton Woods agreement as reviewed by Rothbard above, Thornton explains that:
The U.S. had printed too much money during the 1960s and had caused a “run” on the dollar by foreign central banks who sought to cash in their dollar holdings for gold.
Inflation, coupled with the “run” by foreign banks, caused the end of Bretton Woods in 1971. As President Nixon was imposing price-wage freezes, he also completely eliminated any ties the US dollar had to gold and ended the gold standard completely. Rothbard concludes:
For the first time in American history, the dollar was totally fiat, totally without backing in gold. Even the tenuous link with gold maintained since 1933 was now severed. The world was plunged into the fiat system of the 1930s — and worse, since now even the dollar was no longer linked to gold. Ahead loomed the dread spectre of currency blocs, competing devaluations, economic warfare, and the breakdown of international trade and investment, with the worldwide depression that would then ensue.
In the President’s speech, he is quite good at using smoke and mirrors, sleight of hand, and misdirection all brought to you by misinformation about the history of the events he references. He claims it was the “theory” of free markets that led to the Great Depression and it is not what led to the boom of the 1950s and 1960s. The President is just incorrect in his assertion that free market economics led to the Depression, as summarized in Part 1. Ironically, the President is correct that it was not free markets that led to the boom of the ‘50s and ‘60s. However, he states this as if it was a great thing and government brought prosperity to the country. “Prosperity”, created by inflationary practices, sure helped create the boom, but these same policies, of which the President appears to be fond of, also led us into the worldwide recession of the 1970s.
The President seems to want to use monetary manipulation and inflation, two significant contributing factors to the two worst depressions in world history, to bring us out of perhaps the third worst depression in world history. It was, in fact, these same policies pursued by the Federal Reserve since the 1990s that sparked the housing boom in the 2000s. The trend is clear and identifiable: Inflation, economic manipulation by the Federal Reserve, and federal fiscal policy leads to temporary periods of “artificial” prosperity followed by severe depressions. Can we allow our President to blatantly mislead high schools, colleges, business owners, taxpayers, and voters with flowery, “magic” speeches or must we be responsible for discovering the truth behind government intervention in our economy? I believe that…
Eternal vigilance is the price of liberty.