“Economics is the painful elaboration of the obvious.”
– Friedrich von Hayek, a prominent economist during the Great Depression
Economic developments, particularly those with regard to global taxation and trade impact our lives in meaningful ways, though the causality and connections are not always obvious to the unenlightened. In an effort to enlighten, I have authored this first in a potential series of posts intended to amuse and educate readers with respect to history, economics, finance and capitalism itself.
Chapter Four — Violent as a Mugger
The United States of America is considered to have been “born” in 1776, concurrent with the signing of the Declaration of Independence. I came into the world two hundred years later, in 1976, though my birth certificate had merely one signatory as opposed to fifty-six.
During the month in which I was born, many events transpired, two of which were noteworthy in the context of late 20th century capitalism:
(i) Steve Jobs and Steve Wozniak founded Apple Computer, and
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(ii) the government began issuing two dollar bills
In hindsight, only one of these two events seems significant— Apple is the world’s most valuable company, while the two dollar bill is rarely used today.
While a U.S. dollar bill and a share of Apple stock may not seem comparable, both a dollar and a share of stock in Apple derive little worth from their physical properties, but rather derive the entirety of their value from what they represent and this can change over time.
A share of Apple stock represents a fractional interest in Apple’s profits, which have increased exponentially since the company’s founding in 1976. Therefore, an owner of Apple stock has been able to exchange their shares for increasing amounts of goods and services over time.
Conversely, during the first half of the 1970s, the purchasing power represented by a dollar bill declined meaningfully (by as much as 25% in 1975). Therefore, more dollars were required to buy the same physical good, and the government attempted to get in front of the logistical ramifications of this problem by reintroducing the $2 bill, roughly concurrent with my birth.
Fun Fact: Steve Wozniak, founder of Apple Computer uses a portion of the wealth realized from the increase in value of his Apple stock to buy sheets of $2 bills from the Bureau of Printing and Engraving. He cuts the sheets of bills, perforates the sheets so that individual bills can be torn off and binds them into a pad. He then tries to get people to think he is passing off counterfeit bills. If you run into Mr. Wozniak and he tries to pull this on you, don’t fall for it.
Alan Greenspan, former Chairman of the Federal Reserve, is commonly associated with a warning he proffered in 1996 (twenty years after my birth) when he suggested the stock market was suffering from a degree of “irrational exuberance.”
In 1975 (one year before my birth), the very same Alan Greenspan, then chairman of the Counsel of Economic Advisors, testified before Congress, delivering another stark warning, though one he is less commonly associated with. Mr. Greenspan’s warning could be summarized as follows:
“Capitalism is in crisis”
He said this for a few reasons — Most obviously, but perhaps least importantly, President Nixon had resigned in disgrace in the prior year. More concerning, especially from the perspective of an economist, was the fact that the federal government had twice imposed significant wage and price controls on the U.S. economy in the early 1970s. Furthermore, the Democratic Party had won a massive victory in the congressional elections of 1974, with a platform calling for increased federal regulation of prices, wages, rents and corporate profits.
He was not the only one concerned and, as the next few years would prove, the concerns were not unfounded. Indeed, as the 1970s came to an end, Businessweek wrote (in 1980):
“The U.S. is in danger of becoming another Brazil, with an intolerably high rate of inflation institutionalized. The result will be an end to the democratic system.”
As the 1990s came to an end, comedian Mike Myers wrote and starred in a little film called Austin Powers: International Man of Mystery. In the film, the eponymous Mr. Powers was cryogenically frozen in 1967 and revived in 1997. Upon waking from his three decade slumber, the fictional Mr. Powers said the following to a fictional British intelligence officer:
A lot’s happened since you were frozen, Austin. The cold war’s over.
Finally, those capitalist pigs will pay for their crimes, hey Comrades?
Austin, we won.
Groovy. Smashing! Yea capitalism!
Austin Powers missed the entire ‘crisis of capitalism’! By the time he awoke, the crisis was no more. So it is for Austin and others who may not have been alive during that era that I have penned this blog post. By the end, you’ll be yearning to read more about the gold standard.
The Times They Are A-Changing
Come senators, Congressmen
Please heed the call
Don’t stand in the doorway
Don’t block up the hall
For he that gets hurt
Will be he who has stalled
There’s a battle outside
And it is ragin’.
It’ll soon shake your windows
And rattle your walls
For the times they are a-changin’.
– Bob Dylan
When I was born in 1976, the United States had its very own currency — it looked like this:
Forty years later, the U.S. still has its very own currency. It still looks pretty much the same.
When I was born in 1976, France, Italy, Germany and Spain had their very own currencies. You could exchange them for goods and services all over the world. Forty years later, they no longer have their very own currencies. This makes some people sad.
When I was born in 1976, China had its very own currency. However, the government generally didn’t want its citizens to use it to buy goods or services outside of China. They realized this desire by fixing China’s exchange rate at a highly overvalued level and remained economically isolated. Forty years later, China still has its very own currency. Now many economists argue that China has fixed its exchange rate at a highly undervalued level.
The front of the U.S. dollar bill prominently features a depiction of the first president of the United States, while the back inexplicably incorporates a pyramid situated underneath a floating eye.
Supposedly, the founding fathers were inspired by the longevity of Egypt’s pyramids to include a thirteen-row pyramid on America’s great seal. Pyramids were man-made structures that physically stood the test of time and they were therefore chosen to symbolize our then fledgling nation’s aspirations to also stand the test of time.
In 1988, the family of the late Albanian dictator Enver Hoxha had a large pyramid-shaped building erected in the center of Tirana, Albania’s capital city, to serve as a monument to his communist legacy. This building, christened the “Enver Hoxha Museum,” was said to be the most expensive building ever been constructed in Albania at the time.
Less than three years later, communism fell and the museum was converted to something with more practical purpose — a nightclub that permitted even the most offensive of capitalist garb — blue jeans!
In the case of the short-lived Enver Hoxha Museum, selecting the pyramidal form to symbolize prospective longevity proved to be a metaphorical failure. This misapplied symbolism also applies to our nation’s currency. Despite the impressive physical properties of U.S. dollar bills, the value of the goods or services received for one dollar has not stood the test of time.
Fun fact: according to the federal government, it takes approximately 4,000 double folds (forward, then backward) to tear a note.
When I was born in 1976, with ten U.S. dollars, I could go to the movies roughly five times.
Forty years later, with ten U.S. dollars, I can go to the movies only a single time. This is particularly distressing since we can learn a lot about economics by watching movies — foreshadowing!
Economists refer to the relative increase in prices over time and fall in the purchasing value of money as “inflation.” It was primarily rampant inflation and the ill-conceived political attempts to combat the inflation which had put capitalism “in crisis” in the 1970s. Stated plainly, the dollar was not holding its value and Americans were suffering because of it.
Running in Place
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.”
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
– Red Queen, Alice in Wonderland
Technically, the paper bills we know as “dollars” are Federal Reserve Notes and they are issued by authorizing Federal Reserve member banks. The notes are “obligations of the United States” and “shall be redeemed in lawful money on demand,” which is a somewhat tautological artifact of The Federal Reserve Act of 1913. These last two sentences have little practical meaning. In practicality, a dollar is worth what it can purchase in terms of goods and services.
As a result of inflation in the 1970s, many ordinary Americans felt like they needed to earn twice as fast to outpace the cost of ordinary goods. Some examples:
- Over the course of a year between 1972–1973, the cost of meat, fish and poultry rose by 40%.
- Over the three years 1972–1975, the median price of a new home jumped by 50%.
- In the early 1970s, average mortgage rates were 7.5%, by 1975 they were 9% and by 1980 some mortgage rates reached 20%.
For the second time in a century (the first being the era of the Great Depression, 1930–1939), Americans ended a decade poorer than they began it and I had the curious fortune of being born in it.
The rampant inflation meant that
(a) in the present, in exchange for their hard-earned dollars, they would receive fewer goods or services back in return and
(b) any hard earned dollars that they managed to save would be worth considerably less in the future.
But it wasn’t all bad news — this decade did introduce the world to the PET ROCK, which may well be one of capitalism’s great triumphs.
For a less somber perspective on the impact of inflation, let’s go back to 1985 (a year which serves as the present in an old movie principally set in the past). Bear with me, the nomenclature may get “a bit heavy”…
Real vs. Fictional Futures
My introduction to the practical implications of inflation came in 1985 from the movie Back to the Future. Marty Mcfly, the film’s protagonist, unintentionally travels to 1955 using a DeLorean-based time machine created by an friendly, yet eccentric scientist named Doc Brown. Doc Brown had a dog named Einstein that also traveled through time (more on him later).
Marty has a number of adventures in Hill Valley along the way — most significantly interfering with his parents’ (then teenagers) original meeting — meaning they almost don’t get married, don’t have kids and Marty is very nearly erased from existence, not unlike poor Albanian Mehmet Shehu (if I ever get a chance to write Yea Capitalism — Chapter One, you’ll understand this reference). Fortunately, Marty ensures his parents fall in love, outsmarts the town bully, inspires rock and roll and eventually returns to the then present-day 1985 before memorably flying away, into a road-free future.
If you are unfamiliar with the film, fear not, as the plot points above have little to do with our discussion. As it pertains to our narrative here, the most relevant things he does in 1955 were these: he stops at gas station, reads a newspaper and drinks a Pepsi.
Although only nine in 1985, I had a modest allowance and a rudimentary understanding of what basic items cost relative to that allowance. Since this rudimentary understanding did not include an in-depth understanding of the PCE deflator, the 1955 prices in fictional Hill Valley seemed as absurd to me as a time traveling DeLorean. I couldn’t comprehend how or why a bottle of Pepsi could cost just 5 cents, a newspaper 10 cents and a gallon of gas 20 cents.
As outlined in the script except below, in Back to the Future’s fictional 1955, Ronald Reagan was known as a Hollywood actor and the notion that he could one day become president seemed absurd.
Absurd or not, in the real 1980, Ronald Reagan was elected the 40th President of the United States and was known across most parts of the globe as “Leader of the Free World.”
This colloquialism was not used in Albania. In fact, the citizenry of Albania were not able to enjoy Steven Spielberg’s depiction of a fictional American 1955, in part for the following reason: throughout the film, Marty McFly wore Blue Jeans.
The movie Back to the Future became such a cultural phenomenon that, the real President Reagan quoted the film in his 1986 State of the Union address:
“Never has there been a more exciting time to be alive, a time of rousing wonder and heroic achievement. As they said in the film Back to the Future, ‘Where we’re going, we don’t need roads.’ ”
However, at the time of his election in 1980, President Reagan was not yet aware the decade would become the “time of rousing wonder and heroic achievement” he would subsequently refer to them as. To the contrary, in 1980, he summed up the prevailing sentiment on the economy thus:
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
The late 1970s was a difficult time for the American economy, so candidate Ronald Reagan came up with a campaign slogan that he believed would capture the public’s imagination — he put it on a on a button.
That button looked like this:
Reagan brilliantly framed the dismal economic climate to his advantage, using the following simple, reductive question to stir the emotions of the electorate:
“It might be well if you ask yourself, are you better off than you were four years ago?”
In 1980s Albania, that same question would not stir up comparable emotional longing— society was pretty much the same as it had been since Enver Hoxha consolidated his power in the 1950s, banning private property, religion and western culture (inclusive of movies about time travel). But it wasn’t all bad news — since there was effectively no foreign trade and the government controlled the provisioning of goods and services, Albania was inflation-free!
Coming into office in 1980, inflation was clearly top of mind for the American President and a few years later, inflation was of topical relevance for screenwriters Bob Zemeckis and Bob Gale (“the Bobs”). In their film, the Bobs attempted to represent American’s actual inflationary experience from the 1950s to the 1980s, including a scene to highlight 1980 Marty’s confusion when presented with 1950s prices.
In the not-creatively-named sequel, Back to the Future II, our protagonist travels forward in time thirty years, from 1985 to 2015. Mindful of their actual experience over the prior 30 years, the Bobs attempted to predict prices for some common items in their fictional 2015.
As outlined in the table below, their price assumptions incorporated only a modest increase to the actual annual rates of inflation experienced in the previous thirty years — 7% annually vs 6% annually for gas, for example. At the time, these assumptions may have seemed somewhat pessimistic, but not necessarily absurd.
In reality, the assumptions did turn out to be absurd. Inflation rates in the ensuing three decades declined dramatically and their fictional 2015 prices seem comical in hindsight relative to how things played out in the real economy. Let this be our first lesson in the powers of flawed extrapolation — it won’t be our last.
Fun fact: Film critic Roger Ebert gave Back to the Future II three out of four stars, criticizing it for lacking the “genuine power of the original,” but praising its slapstick humor and the hoverboard chase sequence. He neglected to opine on the film’s dramatic take on inflation.
In Back to the Future, Marty’s father George McFly had a personal maxim– “if you put your mind to it, you can accomplish anything.” In the film, George triumphed over those bullying him and favorably rewrote his fictional future.
In the real world, despite fighting a losing battle against inflation for a decade, we know that the U.S. does overcome its own inflationary bully. The ‘crisis to capitalism’ was staved off, but understanding how that was accomplished will require understanding where the inflation came from in the first place…
“When you are courting a nice girl an hour seems like a second. When you sit on a red-hot cinder a second seems like an hour. That’s relativity.”
— Albert Einstein
In 1916, a German scientist that shares a name with Doc Brown’s time-traveling dog, published a theory of general relativity in which he theorized that time, which had been previously assumed to be absolute, was in fact relative to the observer. When proven, this new framework significantly altered many scientific doctrines and our understanding of the physical universe evolved considerably.
During the decade in which I was born, the very same decade that brought us the PET ROCK, the value of U.S. dollar, once considered “as good as gold” would become a relative metric. The ramifications of this development would significantly alter then conventional economic doctrines and our understanding and management of the global economy would also need to evolve.
If the fictional Doc Brown had been present at the real conference held at Camp David in October 1971, during which President Richard Nixon and his economic advisers dramatically rewrote our economic future, he presumably would have summed up the sentiment with the following:
“Gold? Where we’re going, we don’t need… gold.”
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Yea Capitalism — Violent as a Mugger was originally published in Startups.com on Medium, where people are continuing the conversation by highlighting and responding to this story.