The piece on the current crisis that catches our eye runs on the Times op-ed page today under the headline “The Neoliberal Looting of America.” It’s by a law professor on the Coast, Mehrsa Baradaran. It’s about how, as she puts it, “the health of the finance industry and stock market are completely disconnected from the actual financial health of the American people.” By our lights, it’s a fabulous issue.
Professor Baradaran lays the problem to what she calls an “ideological coup” that has “quietly transformed our society over the last 50 years, raising the fortunes of the financial economy — and its agents like private equity firms — at the expense of the real economy experienced by most Americans.” The roots of the “intellectual takeover,” she reckons, lie in a “backlash against socialism in Cold War Europe.”
Our purpose here is not to dispute with Ms. Baradaran over the problem. It is merely to point out that an intellectual backlash against socialism is not the only thing that occurred in the last 50 years. For there was another ideological coup, and precisely 50 years ago. That would be the abandonment of the Bretton Woods monetary system that was set up in the closing days of World War II and undergirded the post-war recovery.
The collapse of Bretton Woods burst on the world scene with the so-called Nixon Shock. That was American’s decision to close the window at the Treasury Department. That “window” was where, under the Bretton Woods Agreement, foreign governments were supposed to be able to cash in their dollars for a 35th of an ounce of gold. Nixon closed it in August 1971. Within a few years, Congress formally launched the age of fiat money.
Talk about an ideological coup. This was the real thing. Fiat money meant there was no fixed value to the dollar, neither in gold nor silver. If one were to present a piece of Federal Reserve scrip — a sawbuck, say — at the Treasury, one could exchange it for neither gold nor silver but for merely more scrip, maybe ten singles, or slugs that, owing to the Coinage Act of 1965, are made of base metal dolled up to look like silver or copper.
What followed was just that about which Ms. Baradaran complains. And not just she. Also, say, Senator Elizabeth Warren. Or the economist Thomas Pickety. Or every Democratic politician worried about jobs. The unemployment rate, which between 1947 and 1971 — roughly the years of Bretton Woods — had averaged something like 4.6%, suddenly started soaring. It averaged some 6.4% in the next two generations.
What about Senator Warren’s favored indicator, the personal bankruptcy rate? For the first half of the century, bankruptcy filings were fewer than one per a thousand Americans. Suddenly, in the early- to mid-1970s the rate started soaring, to above five per thousand in the early part of this century. Then there is the inequality rate about which Professor Baradaran worries.
That worries Thomas Piketty. His chart 9.8 shows a sudden and staggering take off in the inequality rate, first in America, then in Europe. Yet it wasn’t the rejection of socialism that swept the world at that juncture. Socialism was rejected after World War II. What happened in the 1970s was the advent of fiat money — money with no legal attachment to any standard of value.
Is this all but a coincidence? In our view, it’s a tragedy that this question isn’t developed, or even acknowledged, by the left intelligentsia. Paul Krugman likes to say his favorite period was the 1950s, but avoids mention of the gold exchange standard. America was uniquely unscathed in World War II, but Bretton Woods monetarily made the era what it was.
What will force this debate into the open? In the Wall Street Journal, James Grant has just likened the chairman of the Federal Reserve, Jerome Powell, to Dr. Feelgood. In the latest number of Mr. Grant’s newsletter, the leading article points out that, following the expansion of our central bank’s balance sheet in the current crisis, the ratio of the Fed’s assets to capital is now a staggering 182 to one. When are the left-of-center sages going to catch up with this issue?