Sound money, like gold or Bitcoin, is a terminology which implies ideals other than solely economical prosperity. It also contributes to the betterment of society by supporting the attainment of higher moral values and equality. In my opinion, sound money is key in the achievement of socio-economic prosperity, a concept that is cornerstone for the enfranchisement of every individual in society.
What exactly is socio-economic prosperity? From Wikipedia:
Socio-economics: is the social science that studies how economic activity affects and is shaped by social processes. In general, it analyzes how societies progress, stagnate, or regress because of their local or regional economy, or the global economy.
Prosperity: the state of flourishing, thriving, good fortune or successful social status.
If we combine both definitions, socio-economic prosperity could be defined as the flourishment in social status of individuals in a society as a result of the development of the economic environment.
With this definition in mind, the objective of this post is to review the evolution of socio-economic prosperity in the US since the abandonment of the gold standard, and thus of sound money, in 1973. I have focused my analysis on the US only. Why? First, because economic and social data is relatively easy to find. Second, because the US has been the leading nation in dictating the emergence and the imposition of the new fiat debt based monetary system. Lastly, because the trends in America before and after 1973 are generally replicated in other Anglo-Saxon societies.
Which parameters should be investigated to address a possible change in socio-economic prosperity? In my opinion, one of the most important parameters is the growth in real wages since it is the main driver for anybody to accomplish his social mandate in society, which is to provide for his family and to save for difficult times and for older age. Why? Because as households’ real wages grow, so does their purchasing power. As purchasing power increases, households can dedicate more resources to personal savings and to increase their income and their wealth which directly translates into a progression of social status. Real wages typically grow when the general economy expands and when the productivity grows.
Let’s start our analysis with the trend in real GDP and real wages (using the CPI index) before and after 1973:
The graph above captures a very telling story regarding socio-economic prosperity in the US since 1973. In summary, it demonstrates that since the abandonment of the gold standard, the growth trend of GDP and real wages was abruptly severed, with real wages regressing in 1973 and stalling from 1980 to 1998, while real GDP kept growing seamlessly through the transition from an equity based monetary system to a debt based one.
Clearly, a slowing growth in real GDP is not to blame for the negative outcome in the growth of real wages. Is it possible that labour’s productivity started stagnating after the rebuke of the gold standard and consequently, contributed to the stagnation in real wages? The following graph illustrates the trend in productivity and hourly compensation (wages plus benefits) before and after 1973:
Productivity growth post-1973 did slow down slightly from pre-1973 level, but it kept growing, nonetheless. However, hourly compensation followed the regressing and stagnating trend of real wages and started to uncouple from productivity growth in 1973.
The two trends depicted in the two graphs above illustrate an important and abrupt structural change in the economy. Before 1973 and during the gold standard, real GDP, productivity and real wages were growing synchronously. However, in 1973, the year when the gold standard was abandoned, this relationship was shattered, with real wages lagging significantly the progress in real GDP and in productivity.
Therefore, our focus now turns to five other factors that could have influenced the abrupt change in the relationship:
- An important structural change in the labour market;
- A major technical innovation increasing productivity;
- Change in labour unionization;
- Globalization; and
- A major economic change.
1947 marked the end of WW2 with an important impact in the demographics of the US. Indeed, that year saw a sharp rise in birth rates in the US, a trend that would continue until 1961:
That generation, called the baby boomers, would start participating in the labour force in 1967, as depicted on the following graph (data from FRED):
We can see that during the period of 1969-1983, unemployment started an upward trend, following the increase in labour participation rate. Is this coincidental? Let’s first analyze the yearly change in labour market participation during that period:
The average labour increase on a year per year basis was approximately 1.69% from 1949 to 1966, and 1.48% from 1967 to 1984. It is therefore difficult to link the structural change in the supply of labour to the increase in unemployment and resulting stagnation in real wages.
Some economists link the fall in real wages to the deflating consequence of the higher participation of women and immigrants in the workforce. Although in 2019 discrimination still explain the unfortunate disparity between wages of males versus those of women and immigrants, I find the argument weak in that women had been integrating the work force steadily ever since WW2:
Regarding immigration, it had also been relatively stable since the end of WW2 (source: Population Reference Bureau, US department of Homeland Security):
Additionally, economists and researchers sometimes assume a full substitutability between the workforce and immigrants, which is not necessarily true. Others, such as Paul Krugman, recognize that immigrants have a limited impact on income inequality, and thus, on real wages.
Therefore, although the increased participation of labour may have contributed to a downward pressure on real wages due to the economic theory of labour supply and demand, it does not appear statistically significant since the growth change in labour after 1973 was on average lower than before 1973. We have also seen that the impact of women and immigrants integrating the job market could not have had such a big impact on real wages since women and immigrants had been integrating the workforce steadily since the aftermath of WW2.
The major technological innovation of the 20th century, such as electrification, the automobile, the airplane, radio and television, to name a few, had already begun being integrated in the economy early in the century. Although these technologies kept evolving and being optimized since their adoption, none had a major breakthrough in 1973.
The important breakthrough of the internet, digitalization, the microcomputer, automation and robotization, and integrated circuits, to name a few, really started to have a significant impact in the early 1980s.
There was no major technological innovation in 1973 which would have displaced millions of laborers in such a violent way in favor of higher means of productivity and thereby contributing to the shift in the trend of real wages and unemployment pre and post 1973. Even if there had been, the impact of technology on the labour market is typically smooth and not as drastic as per the extent of the change in the trend of real wages under study.
Labour unions influence how corporate profits are distributed between business owners and employees. When businesses and unions work in harmony at arm’s length, one can expect real wages, productivity and real GDP to grow at a common pace. After the Great Depression, there was a surge in legislation supporting labour unionization, culminating in President Roosevelt’s New Deal:
Source: Bureau of Labour Statistics
As can be seen on the above graph, 1971 marked the beginning of a downward trend in union membership in the US, a trend which coincides with the increase of unemployment as we have seen earlier. What caused union membership to decrease?
One would argue that stagnating wages and falling union memberships may be a direct consequence of an increase in world trade, and thus in globalization. The following graph displays the trend in exported goods as a share of GDP:
The yellow line illustrates how world trade developed for almost 200 years. We can observe the net drop in trade following the Great Depression of 1929, the stagnation of trade through WW2, and an increase in world trade in 1973-1974 following the commodity boom which followed the first oil shock. World trade stabilized again until 1980, when the Chinese’s manufacturing power house started integrating world markets. Remember that the US started courting China early in the 1970s, and that China was still recovering from its civil war and revolution. The impact of lower Chinese wages really started affecting the markets early in 1980s, at which point real wages of the US slumped to historical lows (see preceding chart of real GDP vs real wages).
Therefore, globalization is hard to blame in explaining the stagnating trend of real wages which started in 1973 since world trade and low wages countries really started having an impact in the early 1980s. Similarly, globalization is also hard to blame on the downward trend in union membership.
So, what happened exactly?
We must remember that the late 1960s and all the 1970s were turbulent years in economic terms in the US. In 1969, President Nixon inherited a troubled economy from his successor, President Johnson, who had generously spent on funding the Vietnam war and expanded costly social programs. As inflation started gaining momentum, the Federal Reserve raised the interest rates from nearly 4% in September 1967 to 9.15% a year later, in September 1969, leading to a mild recession. As President Nixon ambitions were clearly to re-assess US’ superiority over the Soviet Union and China on the world stage regarding the outcome of the Vietnam war and to prepare his re-election in 1972 by maintaining and expanding social welfare programs, the independence of the Federal Reserve with its aim to seek economic growth without inflation getting out of hand were a hurdle to Nixon. Under pressure, the Federal Reserve Chairman, William McChesney Martin, resigned. Martin had maintained his faithful pledge of independence in the monetary policy management of the Federal Reserve in front of Presidents Truman, Eisenhower, Kennedy and Johnson for nearly twenty years since his appointment by Truman in 1951. The new Federal Reserve Chairman, Arthur Burns, was selected by Nixon to replace Martin as he shared the vision of the President of low interest rates. The substitution of the new chairman of the Fed, and the way it was done, started to worry the markets.
As inflation proved harder to control than expected under the new leadership of the Federal Reserve, President Nixon signed Executive Order 11615 in 1971 which was pursuant to the Economic Stabilization Act of 1970, and which had as its main objectives the control and the freeze of wages and prices, amongst other things. One of the consequences of wage and price controls was an increase in unemployment since the policy obliged companies to cut in their work force. Astonishingly enough, the US was moving towards policies resembling those of central planning used by its great foe, the Soviet Union under communism. Although the situation did stabilize just in time for his re-election in 1972, Nixon’s policies collapsed thereafter which led him to end the gold standard in 1973.
The abandonment of the gold standard was an abrupt and severe economic change which resulted in a loss of confidence of the markets in the US dollar, a situation which was furthermore amplified by the occurrence of the first oil shock in October 1973, and later, with the second oil shock in 1979. The abandonment of the gold standard had already begun in 1971 in the wake of wages and prices control when the Nixon administration devalued the US dollar versus gold by 8.5% (Smithsonian Agreement), and furthermore by 10% in 1973. Not long after this second round of devaluation, the gold standard was officially terminated, and the US dollar was fully decoupled from gold. The consequence of this decision was a continued devaluation of the US dollar in the foreign exchange market and against gold for over 45 years and an increasing inflationary environment, which resulted in a decreasing purchasing power of holders of US dollars:
Since cash constituted most of its income in the form of wages, an overwhelming proportion of the population saw its purchasing power reduced considerably through the fall of real wages for over 45 years.
Only a drastic economic measure like the end of the gold standard could have had the impact of drastically and abruptly severing the relationship of real wages with productivity and real GDP, resulting in an impoverishment and the stagnation of the social status of the overall population.
This post had as an objective to determine the socio-economic prosperity of society in the US before and after the transition from an equity based monetary system under the gold standard and a debt based monetary system under fiat money.
What we were investigating is the potential everyone in society had to accomplish his personal mandate, which is to provide for his family, to provide in difficult time and to plan his retirement. This is possible only if the concept of socio-economic prosperity is achieved for all. For this post, we have focused on the relationship between the growth in real GDP, productivity and real wages since wages represent the source of income of a vast majority of the US population.
We have seen that since the end of the gold standard, in 1973, the growth relationship between real wages, productivity and real GDP was drastically severed. Real wages regressed and then stagnated following 1973, while real GDP and productivity kept growing.
We have investigated whether an important structural change in the labour market might be to blame for this outcome. Although non-negligible, it is unlikely that the incoming waves of baby boomers into the labour market starting in 1966 resulted into the abrupt disconnect of the relationship between real wages and real GDP since the process was spread over many years and was relatively stable. It is also unlikely that the growing participation of women and immigrants in the labour force contributed significantly to the abrupt disconnect of the relationship since women kept integrating the labour force at a steady pace since the end of WW2 and that immigrants are not fully substitutes to the native labour force.
Technological innovation might also have caused a big impact on the job market with technology leading to an increased competition between humans and technology. However, there were no substantial innovation in 1973 that might explain the abrupt shift in the relationship between productivity and real wages. Furthermore, the impact of important technological innovation is typically spread smoothly over many business cycles, and not on a single year.
Globalization, as we have seen, seems very hard to blame to explain the stagnation of real wages. We have investigated whether low wages countries may have contributed to a downward pressure on wages, resulting in a decrease of union membership and in real wages in 1973. However, such low wages countries such as China started having an impact on the world economy at the start of the 1980s, not in the early 1970s.
The departure from a sound monetary system under the gold standard is to blame for the deteriorating position of wage earners in the US since 1973. The incapacity of the US government to reduce deficit spending led to an inflationary environment in the first place, which ultimately led to wage and price controls. Wage and price controls reduced the efficiency of free markets, leading businesses to cut their work forces and effectively reduce the balance of power of employers and employees in favor of employers. Most importantly, the abandonment of the gold standard led to a stark devaluation of the US dollar. Afterwards, wages were never realigned with the devalued USD, and were barely adjusted to compensate for inflation.
Wages represent the overwhelming source of income for most Americans. Therefore, I conclude that households’ ability to accomplish their social mandate to provide for their families has been weakened since 1973, and consequently, that socio-economic prosperity in the US has deteriorated significantly since the end of the gold standard. Given the fall and stagnation of real wages, households’ ability to save for difficult time and for retirement has been deteriorating ever since:
Since the monetary system drifted away from sound assets like gold to a debt based monetary system like fiat currencies, the very fabric of society has started crumbling into the dark territories of inequality. The resulting impact is an impoverishment of the mass. Sound assets like Bitcoin and gold help to mitigate the exposure of our wealth to the current debt-based fiat system.
In the next post, we shall review the concept of inequality in the US during periods of sound money under the gold standard and unsound money under fiat. We will see that assets such as gold and Bitcoin are key in the achievement of equality in society.