What might have been
How maintaining gold reserves in the 1960's might have led to a better today
I try something a bit different this week, a bit of alternate history. The question I will explore is what might have happened had President Kennedy “gotten religion” on inflation and deficits and decided to push for a balanced budget in order to stop the decline in US gold reserves. I brought gold reserves up in my post on how the New Deal order fell. I showed a close correlation between deficit spending and declining US gold reserves and how that failure to restore budget balance led to the end of gold convertibility in 1971 and a decade of high inflation afterward.
Declining gold reserves means that other central banks prefer to hold gold rather than dollars as reserves. The reason for this preference, it would seem, is the belief that in the future, reserves as gold would retain their value better than reserves held in US Treasuries. Using the T-bill rate I calculated the value of dollar reserves held as bills relative to reserves held as gold to test this idea. After 1962, the future 10 year return on t-bill would fall below that for gold, showing that the preference for gold was justified.
In this alternate history, the Kennedy administration decides to take the declining gold reserves as an inflationary threat and shelves their plans for a tax cut. To get the budget balanced they needed to cut spending, which meant defense spending had to be cut as it was the largest budget category. The US could not afford to oppose the USSR everywhere, priorities needed to be drawn in order to achieve the desired reduction in spending. That is, 1960’s Democrats decide to prioritize domestic over foreign policy, as the original New Dealers did in in the Thirties. This means an end to US support for the South Vietnamese regime as well as cuts or delays in weapons programs. So, the first big change in this alternate history; there is no Vietnam War.
Kennedy still is assassinated, and Johnson becomes president. Johnson follows through on Kennedy initiatives as he did the actual timeline, but these no longer include a tax cut or the Vietnam War. The Civil Rights Law still happens and Johnson wins the 1964 election in a landslide. Because the budget is in balance, NAIRU remains at its 1950’s level, there is no resurgence of inflationary forces and no need for the Fed to start raising rates in 1963. As a result, there is no recession in 1966 despite the credit crunch at the time. In the real timeline there was likewise no recession, but this could reflect the considerable stimulus produced by the Vietnam War. Here I assume the low interest rates do the job the war stimulus did in the actual timeline.
What this means in the country moves into 1968, with no rising inflation and no Tet Offensive showing the bankruptcy of the administration’s war policy, and no Antiwar protests. This means the 1968 election would feature a sitting president from the party holding the dispensation running on peace and prosperity. The country would still be in turmoil due to the ongoing creedal passion period with protests for racial justice, feminism, gay rights and environmentalism, but we are going through the same thing today and it hasn’t affected how people vote that much so I doubt it would have had much effect in 1968. This means Johnson would have been a formidable opponent and top-draw Republican politicians like Nixon would demure from running. Johnson wins re-election handily.
Once Kennedy decided to opt for balanced budgets, to justify this choice, he illustrates his economic policy using a plot of the gold reserve over time, showing how the gold reserves were falling, leading to a future inflationary disaster when the gold ran out, until his policy reversed the flow, securing a bright economic future for all Americans. This graphic becomes a totem for Democratic economic policy. Johnson continues with this policy to conserve the gold reserve, declaring a higher price of $45 for gold in his second term that is easily justified in order to account for cumulative inflation since the Bretton Woods gold standard was established.
By the time he leaves office the idea that the gold reserve is sacrosanct has become a durable political meme, forming an eleventh commandment of American politics: Thou shalt not fuck with the gold reserve.
In 1972, America elects a Republican, here I assume it is Nixon. Nixon comes to office following a Democratic administration who followed the same sort of balanced budget economic policy as Eisenhower did and so he would have no incentive to declare himself as Keynesian and run deficits as the actual Nixon did. I assume the Arab oil embargo still happens, but that the price increase demanded is much less, closer to the 45/35 ratio implied by Johnson’s change in gold price. Nixon, not one afraid to act boldly (in the actual timeline he implements price controls) proclaims a $50 price for gold (which is still less than the previous inflation since the start of the Bretton Woods system and so can be justified as simply a normal adjustment). There is an uptick in inflation, higher interest rates and recession, as actually happened, but the post-recession stagflation does not materialize because Balance (and hence NAIRU) remains low. The economy recovers and Nixon wins reelection.
In his second term, Nixon enacts a similar program of economic deregulation as Carter did in the actual timeline. I also assume that Nixon, in an effort to maintain budget balance, passes the payroll tax increases that in the actual timeline were done in the early 1980’s. At this point I note that the New Deal order remains in place and that because of the avoidance of stagflation, the end of wage increases for workers in 1973 does not happen and SC culture remains intact. Furthermore. Nixon’s successful navigation of the Oil Crisis and his deregulation program provides the Republican party with sound economic credentials. Though the Democrats have set themselves up as the Guardians of the Gold Reserve, Republican can point out that they were fiscal conservatives first and will of course honor it by not engaging in reckless tax cuts or unpaid-for spending. Furthermore, they stand for unleashing capitalism (not through tax cuts on the rich as happened in the actual timeline) but by removing the chains of excessive regulation that were restraining America enterprise.
The actual 1972 Republican party platform called for opposition to corporate outsourcing:
We deplore the practice of locating plants in foreign countries solely to take advantage of low wage rates in order to produce goods primarily for sale in the United States. We will take action to discourage such unfair and disruptive practices that result in the loss of American jobs.
Here I assume that Nixon, in alignment with the economic nationalism expressed above, restores the tariff rates operative during the Eisenhower administration.
The alternate scenario presented above establishes a number of political and economic “facts on the ground” that were decided otherwise in the actual timeline. First and foremost was the sacrosanct gold reserve and its proscription against deficit spending. This would preclude the tax cuts that formed the core of the Reagan economic policy and was the key factor responsible for the evolution of SP business culture. This means financialization would also not have happened, nor would hyper-valuation of asset markets and associated financial crisis.
Second would be the establishment of a Republican position on economics. In this scenario, Republicans would be supporters of Democratic balanced budgets, but also advocates for the sort of effective deregulation Nixon did in the late 1970’s. In the actual timeline, the core Republican economic standpoint was to cut taxes on rich folks and run deficits, the inflationary consequences of which meant working people must be thrown out of work through high interest rates. There was no way to perfume that pig, and so Republicans built their brand on social conservatism, with their economics defined by a mythology of economic nirvana produced by showering rich investors (called “job creators”) with tax cuts, which they would then use for financial investments like stock buybacks rather investing profits back into job-creating business initiatives (see Figure 1).
Figure 1. Trends in stock buybacks and retained profits
Republicans in this alternate timeline would stand for making the existing SC-culture economic system work better, which would benefit all Americans. In the actual timeline, Nixon was the last Republican president who tried to develop effective policy, in this timeline he would show the way that Republicans could take equal responsibility for competent management of national affairs instead of leaving it all to the opposition as they do today. Democrats would be the fiscally conservative party who maintain the totem of the gold reserve as the Guardian against irresponsible tax cuts and spending. Their primary offerings would be creation of paid-for programs designed to improve the functioning and the morality of American society and strategic national investments to boost economic development because the system the New Dealers created required a growing economy to work.
In political terms this alternate history is essentially a Democratic version of what actually happened during the Lincoln dispensation. If we map Lincoln through Grant as equivalent to FDR, and Hayes through Arthur as equivalent to Truman, this makes Eisenhower equivalent to Cleveland, who were each the first Preeemptive president in their cycle. Cleveland was followed by McKinley-Roosevelt, who over three terms defined a fresh interpretation of the Lincoln dispensation that was still fully consistent with Republican principles. In this alternate history, I have Kennedy-Johnson playing this same role, in which they reinterpret the New Deal dispensation to include efforts (such fiscal restraint) to keep the covenant the New Dealers made with working Americans.
The important outcome from this alternate 1960’s and 1970’s politics is that the New Deal order (and SC culture) would have been retained. Without stagflation, the Volcker and Reagan revolutions and the deindustrialization they wrought in America (but not in its German and Japanese peers) does not happen. Maintenance of SC culture allows wage growth to continue into the 1980’s and 1990’s as happened in Germany. Wage growth implies labor has bargaining power, mostly likely because of labor shortage, forcing companies to compete for labor and to find ways to more effectively use the labor they have. Over 1940 to 1980, this translated into a rising wages for both white and black men, with black wages slowing catching up to white men. With the end of the New Deal order and SC culture this bargaining power evaporated. Wages for men of all races stopped rising and the ratio of black to white wages stagnated (see Figure 2). As I previously argued, this had an adverse impact on the marriageability of men, as well as their ability for low-skill workers to get a start on economic advancement (see Figure 1 in this post).
Figure 2. Wage trends for black and white men, actual and alternate historical.
Because declining gold reserves had been reversed and the inflationary 1970’s avoided, the preexisting trend of wages tracking growth in per capita GDP continues, as does the gradual narrowing of the wage difference between white and black men. Figure 2 shows what this might have looked like. Continued wage growth would have meant working class men of both races would have continued to enjoy good marital prospects and marriage rates would not have collapsed after the 1970’s.
Social researchers have identified what they call the “success sequence,” as a highly effective way to avoid ending up in poverty:
Finish high school.
Get a full-time job once you finish school.
Get married before you have children.
Having a job with rising future prospects (which is pretty much guaranteed in an economy of steadily rising real wages) made it much easier for a young man in the forties, fifties or sixties to become a successful male in American society, providing a powerful incentive for acquiring a job. Since a high school education was required for a lot of jobs (and would only become more necessary with economic development) finishing school would be a no-brainer for job-seeking working class men living in such an economy. That is, pursuit of the first two rungs of the ladder would continue as it had previously to the present day. Since the expectation was that a man with mediocre talent could, simply by working full time, provide a rising standard of living for his family over his work life, he enjoyed much better marital prospects than his modern-day counterpart who, bringing little to the economic table, can’t get a date. In the alternate timeline working class men would continue to marry as their fathers and grandfathers had.
In the alternate reality being explore here, the SC economic culture underpinning the New Deal Order continues on after 1971, instead of dying with the end of the gold standard. The success sequence continues to be navigated by generations after the Silent down to Generation Z, the youth of today. Marriage rates remain high and to the extent the analysis depicted in Figure 2 here is valid, incarceration rates would be lower than they actually were.
There is another potential non-economic factor in criminality that would be unaffected in this alternate timeline, however. This is the impact of the creedal passion period the country went through in the late 1960’s through 1970’s. I proposed that creedal passion periods are the product of Peter Turchin’s social contagion mechanism. Turchin only deals with sociopolitical instability, but I showed that such episodes are typically associated with increased cultural instability with an influx of radical ideas disrupting culture as well as politics. In my post I characterized cultural instability as radical ideation in religious and moral beliefs. Radical behaviors, such as recreation drug use are also associated with these episodes.
Figure 3. Trends in rec. drug use and crime and their relation to radicalization periods
Figure 3 shows peaks in alcohol use in 1830, 1910 and 1980, that correspond to periods of radicalization (see Figure 1 here) that are identified with vertical dashed lines. Also shown are proxies for recreational drug use: Peruvian coca exports in the early 20th century and polling data on prevalence of marijuana use among American youth during the last third of last century. Both 20th century outbreaks of recreational drug use were associated with efforts to repress the behavior: Prohibition in 1919 and the 1914 Harrison Act regulating opium and coca distribution for the first episode, and the War on Drugs for the second. These actions pushed recreational drug use into the underworld, leading to rising crime levels. Crime level is proxied in Figure 3 using arrest rates in major US cities before 1910 and by homicide rate after 1910, with both measures set equal in 1910 to produce a continuous trend. For both radical periods, crime levels began rising in tandem with drug use, but then rose further after the repression began in 1919 and 1971. The falling crime trend during the late 19th century is suggestive of higher crime rates earlier in the century was which the pattern observed in Britian, for which crime data exist back to 1805. Crime peaked in 1842, which if replicated in America, would fit the pattern. The cause of these phenomena would be the same social contagion mechanism with more accepting views of certain recreational drugs being the “infectious meme” involved in the social contagion.
Since the radicalization cycle operates independently of economics, we can expect that the War on Drugs would still happen in the alternate timeline. Given the vigorous enforcement of drug prohibition shown above, it seems reasonable that a lot of people the alternate timeline would still have been received felony convictions and be unable to compete in the job market. Thus, though the magnitude of mass incarceration would surely have been reduced, it would not have been eliminated.
There is another important benefit we would have seen with the alternate timeline in our politics. Had the New Deal Order and SC culture continued, economic inequality would not have risen. This is a necessary corollary to rising wages. Rising workers’ wages means the benefit of economic activity are containing to flow to them, meaning income could not also be concentrating in hands of economic elites. That is, the elite overproduction that Peter Turchin sees as the cause of the civil strife to come in this secular cycle crisis would not have happened. The parties would not have become so polarized. Rather, both parties would still have intelligent arguments on the economy and foreign policy on which to debate, run on, and win elections. Republicans would favor a less regulatory, more market-based approach to the economy, and exhibit a preference for defense spending over domestic. Democrats would push for a more ordered, fairer economy and stronger safety net, favoring domestic over defense spending.
But today’s debates are different. Historical American debates like the Jackson’s “war on the Second Bank” or Free Silver, are perfectly understandable to me today, despite the fact that the world I live in today is radically different from time of these debates. But a modern debate, such as the debate about medical treatments for transgender minors, if viewed by my twenty-something self in the 1980’s, would be as incomprehensible to me as the Filioque controversy. I understand intellectually that this was a very big deal a thousand years ago even though I can’t see why it matters whether the Holy Spirit proceeds from both the Father and Son, or just the Father. Similarly, I understand intellectually that there are boys born into girl’s bodies and vice-versa, but I do not grok it.
These sort of religious/moral or identity debates cannot be settled through facts and logic (i.e. the tools of the Enlightenment). How would you resolve the Filoque using reasoning? You can’t. In the same way, there is no resolution for issues like abortion. Pro-life people see abortion as murder because they see the embryo and the fetus than comes from it as a person. It is a person because it has been endowed with a soul by Almighty God. That is ironclad. If the Christian God exists and He endows embryos with souls at the point of conception, as I believed growing up Catholic, then abortion is murder. On the other hand, if one does not think the Christian god exists or that there is such a thing as a soul, as I now believe, then abortion bans amount to the state making a law respecting an establishment of religion, which is forbidden by the First Amendment.
A world in which unsolvable disputes like the Filioque or abortion play important roles in politics is one where disputes are settled by violence, as happened in the Wars of Religion and the various internal Crusades before them. The Enlightenment project came out of the horrible devastation wrought on Western Civilization by these wars. It was the enlightenment that gave us the sort of rational political debates throughout American history I alluded to. And now both the Left and Right are rejecting the Enlightenment. The Left, through the embrace of postmodern thought denying the existence of objective truth, all knowledge is expressions of power, and the Right, who through their embrace of SP culture have created a world in which the only arguments they can make are expressions of power against groups of whom they disapprove).
As time goes by, I lose hope we can resolve this secular cycle crisis in a peaceable fashion as we did last cycle, unless external war forces political debate to return to real-life material issues.