Laying the monetary policies of the late 1970′s completely at the feet of Jimmy Carter is not entirely fair. Those policies which some see as the result of removing the gold standard from our currency began in earnest with Lyndon Johnson, found no trouble in moving across the aisle when Richard Nixon became a President from the opposition party, saw a brief hiatus with the more fiscally disciplined Gerald Ford, who lost to Jimmy Carter. So while it is true that the concept of fiat money did not start with Carter, it is also true that he did nothing to stop it, and in fact took what at the time was a very manageable problem and turned it into a full blown disaster.
I know that I’m opening a can of worms with the, “Paulian Gold Hawks,” and the, “Non Paulian Gold Hawks Are Conspiracy Theorists,” with this one. The problem is that both sides of the currency debate see everything as an either or situation, unwilling to cede to any type of third way of doing things proposal. Constitutionally, our federal government has been granted authority to determine our currency and to regulate it as they see fit. Our check on that authority is called the ballot box. If we send irresponsible people to Washington to attend our business, that is our fault, and indeed we have and will pay a price for that. The problem with the either or thinking is that it ignores that both sides of the debate have solutions that are deeply flawed and have in fact led to their own disastrous results in the past.
The gold standard was a leading cause of the depression of 1929, and the faith based currency and the use of fiat money during the 1930′s caused that depression to last a decade rather than 12 to 14 months. one places constraints upon an economy by not allowing precious capital to perform its function in the market place and the other allows the federal government to rob the citizens of their wealth with an unseen transfer of value by simply diluting the currency. The best answer lies along a different path entirely. Milton Friedman and Paul Volcker have told us the way already. Allow for a government created and controlled currency, but place some very specific constraints upon that creation by tying it to certain economic indexes, such as replacement, GDP, trade balances etc.
As for Jimmy Carter’s role in the process, it was based completely on an economic fallacy, and one that was proven by Carter’s experimentation that turned out to be disastrously wrong. He felt, as did all of the people who belonged to the bastardized Keynesian school, that employment and inflation were inversely related. With high unemployment numbers and a recession in full swing, Jimmy Carter believed that a purposeful economic inflation would spur economic activity and reduce unemployment. To put that into simpler terms, he believed as did all of those on the political left, that by increasing government spending, more money would end up in the hands of citizens, and that they would in turn take this money and spend it on goods and services and our economy would start to recover, by having our pump primed. This particular theory has always worked better in academia than in actual practice.
One of the reasons that the Keynesian theory, (calling the current Keynesian school Keynesian is somewhat misleading, as the current practice has gone well beyond any arguments Maynard Keynes actually made,) does not work, is that that it fails to accommodate itself to changes in human behavior. As rewards and penalties are earned or inflicted, behavior is adjusted to reap one and avoid the other. Another reason for the failure of Keynesian economics is the fact that a government has to get the money it spends from somewhere, be it from today’s citizens or tomorrow’s. Carter’s method and that of his Fed Chairman was the take it from the latter group. This was achieved by printing more currency, which devalued the wealth already in place with the private citizens, and then to spend the newly created currency on those wonderful social programs which people had been told were free.
There is a propensity to view inflation as the increase in the prices of those things we spend our money on. This is not only a wrong interpretation of the facts, but dangerously so for those in charge. Rising prices are a symptom of inflation. Just because it may take a while for that symptom to manifest itself, sometimes as long as three years as we are today finding out, does not mean that we should take it any less seriously. On March 8, 1978, Jimmy Carter nominated G. William Miller to the Fed Chairmanship. He was the only person to serve in that capacity without a background in economics or finance. He served the President and followed his policies without fail. With the printing presses turned on, he inflated the economy with reckless abandon. Unemployment, being totally independent in fact from inflation, remained high. A new word and term had to be created to describe the economic climate for the the late 1970′s. The word was stagflation, which described double digit inflation with zero or even less than zero economic growth. The term was of course misery index, which combined interest rates and inflation in some bizarre formula and was meant to predict how miserable Americans had become. By August of 1979, Jimmy Carter had received protests from business leaders, House members, Senators, many from his own party to force the resignation of Miller, who actually accepted another position as an enticement to leave. He was replaced by Paul Volcker, a man who publicly criticized Carter’s fiscal policies. With Miller as Secretary of the Treasury and Carter as President, they felt as though they would be able to force Volcker into continuing their policies, which he did not.
In order to bring inflation under control, Volcker had to increase interest rates to an astounding 21.5% at the zenith in 1981. The reason of course that this was necessary was that the purposeful inflation had been in place since 1965. It took something that drastic to bring about the cure. It should be noted that at one time, there really was such a thing as a conservative Democrat, and Volcker was one of those, as were Rick Perry and Ronald Reagan.
By the time Jimmy Carter left office, inflation was considered the worst economic problem our nation had faced since the pre WWII era. At one time, before the Constitution was adopted, three states actually used tobacco as the legal tender. It did not take the good people of Virginia, North Carolina, and South Carolina long to learn that they could grow their own. To illustrate the effect of how people noticed their own wealth diminishing due to the increase in the volume of money, a law was passed in all three states which made the punishment for lighting fire to fields growing tobacco execution.
In the years since the Carter Administration we have lost somewhat the sting from those years. Fewer people are around who remember them, and time has seen fit to heal some of the wounds. Listening to John Kerry drone on about the Bush economy being the worst since the great depression was comical. Anyone who was alive during that time remembers miles long gas lines, prices rising so rapidly that people were rushing out to spend their paychecks before their value dropped, often times quicker than the trek to the bank in order to cash them, and above it all, a President who went on national television to claim that the problem was that we as Americans were wrong for trying to improve our own living standards, (“there’s too much consuming going on out there.”)