ECONOMIC COLLAPSE
Then Federal Reserve Chairman Eugene Meyer was so incensed by FDR’s decision that he resigned. Reinhart and Rogoff described what happened as “a restricting of nearly all the government’s domestic debt.”
in 1944 to participate in what became the Bretton Woods Agreement. The latter was a currency system that the dollar was at the center of. The dollar would be defined as 1/35th of a gold ounce, and currencies around the world would peg to the dollar. With massive amounts of debt to pay back as WWII was nearing its end, the U.S. chose currency stability over socialism. The post-war U.S. economy predictably boomed... Which brings us to modern times. In 1980, total U.S. federal debt was $900 billion. At the same time, the 10-year Treasury note yielded 11%. Forty years later, total U.S. debt is $27 trillion-plus, but the 10-year yields just 0.9%. Translated for the half-asleep, the cost of borrowing for the U.S. has plummeted amid soaring total debt. Despite how the dollar has endured stretches of weakness that had a Nixonian (Richard Nixon severed the dollar’s link to gold in 1971 – an explicit, economy-wrecking devaluation), 1970s quality to them (see Jimmy Carter, see George W. Bush), it remains the world’s de facto currency. This wouldn’t be true if the U.S. had chosen socialism, which is all currency devaluation is. So while it’s accepted wisdom among self-styled “deficit hawks” that the bill for excessive government borrowing is inflation and recession, there’s really no “there” behind all the emotional ranting. More realistically, it’s much easier for governments to borrow if the country currency is trusted. Wait a second... what? That can’t be! Actually, it can. And it is. But that’s another column...
No doubt some who should know better correlate soaring government debt with devaluation, but they’re mistaking causation.
No doubt some who should know better correlate soaring government debt with devaluation, but they’re mistaking causation. Sometimes governments choose socialism whereby they transfer their borrowing to workers, businesses, and savers. That’s devaluation in a nutshell. But what requires stress is that there’s no logical chronology that begins with debt incurrence and ends with socialistic devaluation. We know this because U.S. federal debt soared well above 100% of GDP during WWII, but this in no way led to a falling greenback. In truth, U.S. Treasury officials traveled to Bretton Woods, New Hampshire
John Tamny is a vice president at FreedomWorks, editor of
RealClearMarkets, and author of several books. His next, set for release in March, is When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason .
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January 2021
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