Today, stocks and bonds will neither rise nor fall.
The reason: 44 years ago, in 1971, President Richard Nixon declared the last Monday in May a federal holiday — the day we remember America’s fallen soldiers.
I remember my uncle, Al Weiss, who fought in World War II. He didn’t lose his life. But I think he did lose a part of his soul.
When he volunteered to join the army, he was assigned a paper-pushing desk job at Allied Army Headquarters in Bristol, England, as a war supplies purchasing agent. But he became so disgusted with the kickbacks and corruption he saw among his superiors, he requested a transfer into battle.
The army obliged, and a few days later, he found himself surrounded by the enemy in the Battle of the Bulge. When he returned home two years later, a war hero with injuries, he was greeted by the news that his fiancée had married another man.
And I remember my father, who waged battles of another kind — to help save the U.S. dollar from attack both at home and abroad.
Unfortunately, despite two major victories, those battles also ended in great disappointment, due largely to another government action — also taken by President Nixon, also in 1971:
Nixon devalued the U.S. dollar. He dismantled the system that had maintained the stability of the dollar in foreign exchange markets (based on a major World War II agreement I’ll tell you more about in a moment). And he set the stage for some of the most turbulent years in American economic history.
Nixon did all this because he had been pumping up the money supply and pushing down interest rates, creating the very inflation he was now trying to control. But instead of addressing the true causes of the inflation, he sought to strictly attack its symptoms.
Richard Nixon, the same man who had just made Memorial Day a holiday to remember those who died defending the American homeland, was now doing everything to doom the American currency.
Thus, in the years that followed, my uncle, my father, and I did more than mourn the fallen. We also bemoaned the decline in the U.S. dollar.
And right now, after a major rally, it has begun to fall again.
Just in the last few weeks, it’s down 4% against the Singapore dollar, 4.3% against the Australian dollar, 5% against the Canadian dollar, 5.7% against the euro, 6.3% against the British pound, 9% against the Brazilian real and a whopping 37% against the Russian ruble.
Among the immediate causes is the world’s declining confidence in America’s political and economic leadership — not to mention the Fed’s many delays in raising interest rates from nearly zero.
But the real roots of the dollar decline are far deeper. To truly understand how serious it is, join me now on a voyage through time to witness how some key events have unfolded …
|Mount Washington Hotel, Bretton Woods.|
Bretton Woods, 1944: It’s July. We are at the Mount Washington Hotel in this New Hampshire resort town.
The war in Europe and the Pacific is raging; and many of those who will be remembered on future Memorial Days continue to fall on the battlefields.
Meanwhile, 730 delegates from 44 countries have gathered, seeking to bring order out of the financial chaos of recent years.
In smoke-filled rooms, they talk about the financial instability that reigned during World War I, the Roaring ’20s, and the Great Depression. They fear similar instability will prevail after World War II.
Once the war ends, they want to establish — once and for all — a stable world financial system based on a stable dollar, stable prices, stable interest rates.
To achieve this, a few of the delegates talk about going back to a full-fledged gold standard. They say it’s the only way to stop governments and politicians from sacrificing our financial future on the altar of political expediency.
But most of the delegates disagree. They say the gold standard is too restrictive. They argue that there’s not enough gold to go around, and that it’s “egregiously ill-distributed” among the countries that would need it the most.
Finally, after weeks of debate, a proposal emerges that goes something like this:
We will recapture the advantages of the gold standard without the gold standard. We will fix dollar exchange rates into narrow bands. We will create a solar system of currencies that revolves around the dollar. The dollar will be the sun. All other major currencies will be the planets.
This Bretton Woods system is complex, but it works. After the war, it creates the basis for one of the longest and most stable periods of growth in modern world history.
|Sewell Avery, Chairman of Montgomery Ward, circa 1954.|
Montgomery Ward Headquarters, 1954: Over 10 years have gone by, and it’s now winter. My father, J. Irving Weiss, rushes out of a meeting with one of his top clients, Sewell Avery, chairman of this giant American retail company.
The reason for his haste: He has just learned that Louis Wolfson, a former Florida junk dealer, is rallying shareholders to mount an all-out raid and take over Montgomery Ward.
Sewell Avery is vulnerable to attack because he has been so conservative and has refused to plow profits into construction and expansion. He prefers instead to build up $300 million in cash reserves; and it’s this huge bundle of cash that has now become the prime target of the Wolfson raiders.
Dad is firm in his beliefs. “Avery,” he says, “has the right to conserve cash. We need men like Avery in Corporate America to keep the economy from overheating. We need them to help provide a cushion for bad times, prevent inflation, preserve the long-term value of the dollar.”
Wolfson, seeking to oust Avery and his management team, disagrees. He accuses Avery of “hoarding cash” and “running a bank with a department store front.” He says Avery is old-fashioned, a relic of the past.
Dad resolves to come to Avery’s defense. He organizes a committee — the Businessman’s Committee for Seasoned Management. And he enlists bankers and businessmen to sponsor the campaign — James Kemper, chairman of the Commerce Trust Company in Kansas City; Walter Paepcke, founder of Aspen, Colorado and chairman of The Container Corporation of America; former Senator Prentiss Brown of Michigan; plus many others.
According to the New York Times, it’s “one of the fiercest battles in the history of corporate finance.” Weiss and his supporters win. But as you’ll soon see, they lose the war.
Federal Reserve Board, Washington D.C., March 1958: Within a span of just 125 days, the Federal Reserve has dropped the discount rate three times and lowered bank reserve requirements twice.
Government construction projects, more unemployment benefits and liberal amounts of mortgage money have been thrown into the pot. The federal budget looks like it’s going haywire, heading for a whopping $13 billion.
U.S. Congress, January 3, 1959: President Eisenhower doesn’t have to wait decades to learn that too much spending and big deficits lead to inflation. He knows it all too well in 1959.
Years later, when the dollar collapses, he doesn’t want to be blamed by economic historians as the President who doomed future generations. So he sets out to balance the budget.
|President Dwight Eisenhower delivers State of the Union address before joint session of the 86th Congress in 1959.|
In his State of the Union Address, Eisenhower complains about the excessive costs of military hardware and insists that “we must avoid extremes … of waste and inflation which could reduce job opportunities, price us out of world markets, shrink the value of savings.”
To minimize the danger of soaring prices and to keep the economy sound, he announces that he will submit a balanced budget.
It’s an event of major historic dimensions. But the most conspicuous reaction to Eisenhower’s speech comes in the form of an unrestrained yawn by the Senate Democratic leader, Lyndon B. Johnson — an early warning of a major political attack by the Democratic Congress against the balanced budget.
It’s the Wolfson-Avery debate all over again, but on a far grander scale: Do we push ahead with military spending and economic growth at all costs? Or do we protect the dollar and America’s global economic leadership? Eisenhower is more concerned about the latter and feels that, if the dollar should fall, America’s military strength will be threatened anyhow.
A flood of economic experts are paraded before Congress, testifying that “inflation is not a present danger.” Once again, the forces against waste are labeled “anti-progress.” Once again, they seem doomed to defeat.
White House, February 4, 1959: The White House spokesman announces that Eisenhower is “planning a grassroots campaign to combat spending legislation beyond his budget and will make a strong public appeal in his news conference.” But Eisenhower’s appeal fails, and the press makes no mention of it.
Public response is mute. The Administration’s “grassroots campaign” is virtually nonexistent. No protests. No editorials. No voter appeals to Congress.
My father turns to me and my Uncle Al and asks: “Could it be that the public doesn’t give a darn about the dollar? I don’t accept that notion. I’m not going to take this sitting down.”
He forms another committee, this time calling it the Sound Dollar Committee.
The plan: It will be non-partisan, with former President Herbert Hoover as the Republican co-chairman; Presidential advisor Bernard Baruch, the Democratic co-chairman. Then the committee will lobby and advertise for a balanced budget and against inflation.
Herbert Hoover is eager to participate. Bernard Baruch, however, despite his initial sympathies, is skeptical. “I’ve come to the conclusion,” he tells us in a memorable phone call, “that it’s not timely. We really can’t do anything until we see the whites of their eyes.”
Even without Baruch’s participation, however, the campaign is a resounding success. An initial ad in The Wall Street Journal merely sets off the first sparks and is followed by an ad in the Chicago Tribune. In a matter of days, the Tribune calls the Sound Dollar Committee, asking for permission to run a similar campaign at their own expense.
The Los Angeles Times, the New York Daily News and Reader’s Digest do the same. Soon, scores of newspapers and magazines join the Sound Dollar Committee bandwagon in a massive nationwide mail-in campaign.
A Congressman walks into his offices, is struck by the clutter of mailbags, and asks his clerk: “What’s all this? Where did all this mail come from?”
“They’re protests, sir.”
“Protests against what?”
“They’re coupons demanding a balanced budget and protesting inflation, cut out from the newspapers. They’re running big ads against inflation.”
It’s an avalanche! According to a Chicago Tribune survey on the Hill, the total response is 12 million postcards, coupons, letters and telegrams.
By mid-March, the public’s attitude switches from apathy to intense interest. According to Business Week, “Just about anywhere you go these days, the talk will turn to inflation. The subject comes up with friends at cocktails, in the brokers’ board rooms, and among businessmen who feel a responsibility to avoid price increases.”
All of a sudden, Washington is a “city full of inflation fighters. For an explanation,” continues the Business Week article, “there is no point in looking at the price indexes. They have been level for almost a year and there’s no sign they are getting ready to start rising.
“What underlies the rising inflation fever is this: Leaders of both parties are convinced that making a record against price increases is the soundest political assurance for the presidential and congressional races next year. Leaders in Congress began the session talking like big spenders; now they are talking about cutting Eisenhower’s budget.”
Senator Proxmire, who has been steadfastly in favor of the spending programs, changes his mind and votes for the budget cuts. One Congressman after another shifts his vote to support the Eisenhower budget.
And the budget is balanced! Unfortunately, however, it’s the last real balanced budget in history.
White House, August 15, 1971: Nixon dismantles the Bretton Woods agreement and devalues the dollar.
1979-1980: Inflation surges to double-digit rates in America. U.S. Treasury bonds suffer their worst collapse of all time. And Long-term interest rates surge past the highs made during the Civil War, the same war from which Memorial Day first emerged.
1987-2009: The nation suffers a series of booms and busts, punctuated by rampant increases in money supply, dollar collapses, banking failures and debt disasters.
2009-2015: The U.S. Federal Reserve embarks on a series of money-printing operations called “quantitative easing” that make earlier easy-money escapades seem small by comparison. It shoves official interest rates down to zero and holds them there for nearly seven consecutive years. Foreign central banks follow suit. All with consequences still untold.
And so I ask you: Will the victories we achieved in this losing war be forever in vain? Are we doomed to refight the same battles we thought we had won? Only time will tell.
In the meantime, please remember those who have fallen — both in the battles for the American homeland and the battles for the American dollar.
Good luck and God bless!