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“We suffer from the longest and one of the worst sustained inflations in our national history. It distorts our economic decisions, penalizes thrift, and crushes the struggling young and fixed-income elderly alike.” – Ronald Reagan, January 20, 1981.
The day after Ronald Reagan’s election as the 40th president in 1980, Steven Hayward, the author of The Age of Reagan, noted that the “dollar rallied sharply on overseas markets.” The dollar’s rise was in fairness a mere continuation of something that had begun the previous January.
In January of 1980, gold hit an all-time high of $875. As the most constant measure of value in the world, gold’s rise from $35/ounce in 1971 to $875 signaled a substantial decline in the value of the dollar. Though modern economists horrifyingly view inflation as a function of too much economic growth, its real definition is a decline in the value of the currency; in our case the dollar. In short, and as is well known about a period when the value of the dollar collapsed, the ‘70s was an inflationary decade.
Though this showed up in a CPI (13% by 1980) that was far more reflective of monetary error than today’s (more on that later), Reagan properly did not explain inflation in terms of prices. As Hayward put it, the notion that “price increases cause inflation” is “akin to the logic that wet sidewalks cause rain.”
Or as Reagan put it when asked about inflation at a press conference early in his presidency:
“Why in the list of inflationary forces did I not mention gasoline prices and home heating fuel prices? Well, I have to believe that to a certain extent, I know that’s an unusual situation, prices are not so much the cause of inflation – price rises - they’re the result.”
The above was and is important. Price rises surely can be evidence of inflation, but at best they’re a symptom. Indeed, assuming doctors figure out tomorrow that eating three oranges per day will cure cancer and heart disease, it’s a fair bet that at least in the near term the price of an orange will rise substantially.
If so, it can’t be stressed enough that the above scenario is not an inflationary one. That’s the case owing to the simple truth that if we’re spending a great deal more on oranges, we must be spending a great deal less on other goods; orange price increases balanced out by price declines for other goods such that the price level is unchanged. Furthermore, spiking demand for oranges that might result in higher prices would serve as a signal to farmers that oranges are a profitable line of production. Soon enough orange supply production would rise to meet demand, thus bringing down the price. No inflationary episode to speak of.
Price increases certainly can indicate inflation, however, and at present they’re very much signaling it per Reagan’s logic. Reagan was a believer in the gold standard, or as he put it during the 1980 campaign, “No nation in history has ever survived fiat money, money that did not have a precious metal backing.” Notable here is that after Reagan won the New Hampshire primary in early 1980, the price of gold began to fall (meaning the value of the dollar was rising) right after, and it’s not unreasonable to suggest that a factor in the dollar’s rise was the looming election of a president who loathed cheap money.
Returning to the same press conference referenced earlier in which Reagan properly fingered price increases as at best a symptom of inflation (devaluation of the currency – always), the man who didn’t trust fiat money lacking precious metal backing explained why. Reagan commented:
“One economist pointed out a couple of years ago-he didn’t state this as a theory, but he just said it’s something to look at-when we started buying oil over there, the OPEC nations, 10 barrels of oil were sold for the price of an ounce of gold. And the price was pegged to the American dollar. And we were about the only country left that still were on the gold standard. And then a few years went by, and we left the gold standard. And as this man suggested, if you looked at the recurrent price rises, were the OPEC nations raising the price of oil or were they simply following the same pattern of an ounce of gold, that as gold in this inflationary age kept going up, they weren’t going to follow our paper money downhill? They stayed with the gold price.”
With his comment, Reagan made clear that he understood what’s true about money; that it’s a measure. The measure that was the dollar had shrunk substantially in the ‘70s, and the shrinkage (not shortages, or embargoes) explained the rise in the price of oil. Indeed, measured in the constant that was gold, the price of oil hadn’t changed much. In 1971 an ounce of gold at $35 bought 15 barrels of oil at roughly $2.30, and by 1981 when Reagan entered office an ounce of gold at $480 bought 15 barrels at $35. Oil’s price in 1981 wasn’t the inflation; instead its price was the symptom of the dollar devaluation that tautologically was the inflation. The dollar measure shrunk, and commodities most sensitive to the dollar’s decline quickly increased in dollar terms.
Of historical importance, back then oil and other commodities once again most sensitive to the true direction of the dollar were used by governments – including the Reagan administration – to gauge whether inflation was in existence or subdued. More to the point, quite unlike today when governments conveniently ignore the very commodities that are screaming dollar devaluation (an ounce of gold today buys 17 barrels of oil), this wasn’t done back when Reagan was president. As a report from the President’s Council on Wage and Price Stability (Hayward points out that Reagan abolished the unit within days of taking office) predicted, “food prices would rise by more than 10 percent in the coming year, and energy prices by 20 to 40 percent.”
Though the major media, politicians and hopelessly naive economists cling to the false notion that inflation at present is quiescent, back then the media better understood that inflation was a monetary phenomenon; the direction of commodities the best way to gauge its existence. As Newsweek put it about the economic situation that Reagan inherited from Jimmy Carter (and Carter from Nixon/Ford), he “may spend his first year in the White House presiding over precisely the same economic mess with which he tarred Jimmy Carter: high inflation, high interest rates and an unavoidable recession.”
Notable also about the time in question was the direction of investment. As Hayward put it, “the high inflation and high taxes of the 1970s had caused a disproportionate investment in tangible assets (such as real estate and precious metals) as an inflation hedge whose tax liability could be postponed indefinitely.” The latter quote to Austrian School thinkers is surely a blinding glimpse of the obvious, and as Hayward makes clear, it was common knowledge not long ago that in periods of devaluation, money flows into the “real.”
Looking back to 1980 as Reagan ascended to the White House, the dollar was weak as evidenced by a broad rally in commodities. Back then the latter scenario was understood to be inflation, particularly by Reagan, as commodities weren’t so much in short supply as the dollar in which they were priced had shrunk in value. The economy was weak because as opposed to investment flowing into the stocks and bonds that represented future innovative wealth creation, it was migrating toward tangible items like real estate and precious metals that wouldn’t advance us economically, but would protect the holders of money from the ravages of inflation. In short, the economy then was limping because the dollar was in an inflationary spiral downward, and its descent led to the relative starvation of economic innovators.
Fast forward to the Bush/Obama years, a broad commodity boom during both presidencies clearly indicates that the dollar has been weak. Amid this dollar weakness, commodities and housing have once again shined while the stocks that represent future wealth creation have in nominal terms (in real terms they’re well down) been flat. The economy has stagnated much as it did in the Nixon/Ford/Carter ‘70s.
In light of the dollar-related similarities, not to mention what Reagan understood inflation to be, it’s easy to conclude that Reagan would understand today’s malaise intimately. He would because just as he took over an economy wrecked by dollar devaluation, so do we suffer a dollar-weakened economy today. Back then, inflation measures like CPI were better geared to pick up on the monetary error that was smothering investment and growth, but today those same numbers have been reworked to obscure what is very much an inflationary age.
Importantly, if he were alive today, Ronald Reagan would not believe the government calculations that have tricked the political class and commentariat into believing that inflation is low. Reagan would know better, that inflation is very much a problem; one that weighs on the economy like no other policy at the moment. He would know it because he once lived it, and he fixed it.
