Today, stocks and bonds will not rise or fall — for the simple reason that 33 years ago, in 1971, President Richard Nixon declared the last Monday in May a federal holiday — the day we remember America’s fallen soldiers, plus other loved ones who are now gone.
I remember my uncle, Abraham (Al) Weiss. He didn’t lose his life in World War II. But I think he did lose a part of his soul.
When he joined the army, he was assigned a paper-pushing desk job at Allied army headquarters in Bristol, England, as a war supplies purchasing agent. But Uncle Al became so disgusted with the rampant kickbacks and corruption he saw among his superiors, he requested a transfer into battle.
The army obliged, and a few days later, Al was across the English Channel, surrounded by the enemy in one of the fiercest battles of the war — 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.
He was never the same again, and he lived alone for the rest of his life.
And of course, I also remember my father, Al’s younger brother. Dad didn’t go to war, but he did battles of another kind — to help save the American dollar from attack, both at home and abroad.
Unfortunately, despite two major victories, that battle also ended in great disappointment, due largely to another action taken by President Nixon in 1971.
Indeed, six months and four days after Nixon declared this day a national holiday, Nixon also made another declaration …
* In a radical move to try to stop escalating inflation, he declared a ninety-day wage-and-price freeze, which later only made inflation far worse.
* In an equally radical move to reduce the nation’s growing trade deficit, he declared a 10% surcharge on most imports, only making the deficit still bigger.
* Most radical of all, he took the United States off the gold standard, effectively devaluing the dollar and …
* He dismantled the system that had maintained the stability of the dollar in foreign exchange markets, based on a major World-War-II-era agreement. (More on this agreement in a moment).
Nixon did 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 changing his policies and trying to address the true causes of the inflation — he tried to get away with just attacking its symptoms.
Taken together, Nixon’s radical moves in 1971 were simply an all-out attack on the American dollar. Nixon, the same president who had just declared that all Americans will take a day off to remember those who died defending America, now was undermining the American dollar, a major source of America’s strength around the world.
So in the years that followed, my uncle, my father, and I did more than mourn the dead. We also bemoaned the decline in the dollar, a trend that has continued, on and off, to this very day.
JUST THIS PAST WEEK …
The long and steep dollar decline has resumed. The dollar fell against the euro, the Swiss franc, Japanese yen, and other key currencies. Gold, the antithesis of the dollar and paper money, surged again, a key signal of more dollar weakness to come.
Why?
The immediate cause is the world’s declining confidence in America’s political and economic leadership … plus all the time it’s taking for the Federal Reserve to finally lift interest rates from lows not seen since 1959.
But the real roots of the dollar decline are far deeper — both conceptually and historically. To truly understand how serious this is, follow along with me through some of the key events that have brought us to where we are today.
BRETTON WOODS. It’s July 1944. We are at the Mount Washington Hotel in this New Hampshire resort town.
The war in Europe and the Pacific is still raging; and many of those to be remembered on future Memorial Days, still dying.
However, gathered here with us are 730 delegates from 44 countries, seeking to bring order out of the financial chaos of recent years.
In smoke-filled rooms, they are talking about the financial instability that reigned during World War I … during the boom and Depression years between the wars … and now, again, about financial instability that they fear will prevail after World War II.
Once the war ends, they want, once and for all, a stable world financial system — based on a stable dollar, stable prices, stable interest rates.
THE GOLD STANDARD?
To achieve this, a few of the delegates are talking about going back to the gold standard. They say it’s the only way to stop governments and politicians from sacrificing the future of their people on the alter of the short-term benefits they think they can get by printing more money.
They say the gold standard is the only way to tie all foreign currencies down to stable and predictable rates. Gold’s value would be the anchor. All the currencies would revolve around it.
But most of the delegates disagree. They say the gold standard is old-fashioned and too restrictive. They argue that there’s not enough of it to go around, and that it is “eggregiously ill-distributed” among the countries that would need it.
Finally, after weeks of debate in closed-door sessions and a seemingly endless private meetings, a proposal emerges:
“We will recapture the advantages of the gold standard without the gold standard,” they say. “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. The other major currencies of the world will be the planets.”
This system is more complex than the gold standard. But it works. And after the war, the Bretton Woods agreement creates the basis for one of the longest and most stable periods of growth in modern American history.
MONTGOMERY WARD HEADQUARTERS. Over ten years have gone by; and it’s now winter, 1954
My father, J. Irving Weiss, rushes out of a meeting with one of his best clients, Sewell Avery, Chairman of this giant American retail company.
The reason for his haste: He has just learned that Louis Wolfson, a Florida junk dealer who has risen to the control of a large industrial concern, 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 is this huge bundle of cash that has now become the prime target of the Wolfson raiders.
Dad is firm in his beliefs. “Avery,” says Dad, “has the right to be conservative; he 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, to prevent inflation, to 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 decides to do something to defend Avery, and, by extension, the dollar.
He organizes the “Businessman’s Committee For Seasoned Management.”
He enlists bankers and businessmen including …
– 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 … and many others.
And in the heated “proxy fight” (shareholder election) that follows, Dad wins the battle. The next day, the New York Times calls it “one of the fiercest battles in the history of corporate finance.”
But it is even more than that. It is the mid-century battle that marks the dividing line between all those who prioritize growth versus all those who prioritize stability.
Both groups seem to have the same goal — to prevent a recurrence of the tragedy called the Great Depression.
But whereas the growth advocates seek to cut it off as soon as it appears, the stability advocates feel that, in the long term, the only way to prevent a great bust is to prevent a great boom. They believe that both extremes should be avoided in order to maintain a pattern of balanced growth and social stability for future generations.
Whether one subscribes to this philosophy or not depends on the era in which one grew up. During the decades immediately following World War II, it is in vogue. During the last decades of the century, it is considered “poppycock.” And maybe someday, it will come back into vogue again.
Nevertheless, in 1955, a time when the Depression is quickly being forgotten and many more years of growth lie ahead, Dad’s battle to protect the dollar is doomed to fail.
This is certainly the case with Montgomery Ward. Soon after the battle, Sewell Avery resigns. Montgomery Ward goes on to exhaust its cash reserves, accumulate huge debts and merge with Container Corporation.
Competing retail operations are expanding. Therefore, Montgomery Ward has to expand. There really is no choice. If they don’t, they are left behind, squeezed out of the marketplace, and eventually taken over by some other cashless, debt-powered giant.
The push for growth spreads quickly throughout the business world. Alcoa, American Motors, Chrysler, C.I.T. Financial, General Dynamics, General Motors, Sears Roebuck, Pan American World Airways and Zenith are just a few who lead the flock. For those companies that resist the trend, victories by moderates such as the Avery and Weiss team are the exceptions.
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.
Throughout the country, 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.
THE U.S. CONGRESS, JANUARY 3, 1959. President Eisenhower doesn’t have to wait two decades to learn that too much spending and big deficits lead to inflation. He doesn’t have to listen to the exhortations of still unknown economists who will blame the government’s deficits for the roaring inflation of later decades. He knows it all too well now 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.
In his State of the Union Address today, 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 and expanding, he announces that he will submit a balanced budget.
The most conspicuous reaction to Eisenhower’s speech comes in the form of an unrestrained yawn by the Senate Democratic leader, Lyndon B. Johnson. It’s the first warning of a major political attack by the Democratic Congress against the balanced budget.
But the cold war is a hot issue. Congress is being bombarded by signs of Soviet military and economic advances — Mikoyan bragging about Russian GNP and Russian rockets zooming off into solar orbit.
It’s the Wolfson Avery debate all over again, but on a far grander scale: Do we yield to the competition or do we invite economic instability? Eisenhower is more concerned about the economic instability and feels that, if the dollar should fall, America’s strength overseas will be threatened anyhow.
A flood of economic experts parade before Congress, testifying that “inflation is not a present danger.” Once again, the forces against excessive expansion and waste are labeled “anti-progress.” Once again, they are 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 the next day.”
In his news conference, he stresses repeatedly the fact that if Congress spends more it will have to tax more. His appeal fails.
But the next morning’s New York Times says nothing about it whatsoever: The headline is “CONGRESS VOTES RISES IN HOUSING: DEFIES PRESIDENT.”
As a result, public response is mute. The Administration’s grassroots campaign is virtually nonexistent. A week passes, and the American people remain silent: No protests, no editorials, no voter appeals to Congress.
Dad watches these events. He turns to me and 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 taking this sitting down.”
So Dad forms another committee, this time calling it the Sound Dollar Committee.
The plan: President Herbert Hoover will be the Republican co chairman. Presidential advisor Bernard Baruch will be 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. In a final attempt to win his support, Dad calls Baruch on the phone.
Dad, my Mom, my brother, sister and I are staying at the Florida Health Spa run by Dr. Stanley Weinsier in Orlando, Florida. Although I am only twelve I sense the urgency in my father’s voice when he finally reaches Baruch at his home in South Carolina.
The octogenarian talks about horseback riding and diving off a high board into his cold swimming pool. Then he says: “I have come to the conclusion that it’s not timely. We can’t stop their spending until they come to us for help. We really can’t do anything until we see the whites of their eyes.”
Dad tries to convince him. “You may be right, but we decided to start the campaign with a full page ad in the Wall Street Journal. We sent you a copy. Did you receive it?”
“Yes.”
“Then you know that it promotes the concept of a sound dollar with the concept of a balanced society and relates the two concepts. So far, the response has been excellent, and contributions are already coming in strong.”
“Fine, fine! But don’t you see? It’s all premature. Even if you get a good public response, it’s for naught. I can tell you from firsthand personal experience that very few in Washington want to pay any attention to moderate spending and conservative business policies. I have tried but they won’t listen. Later, when they come to us for help, when they’re in hot water because of these huge budget deficits, then we can do something. But not now. It’s too early.”
“That’s my point,” Dad responds. “We have to nip it in the bud! We can still put your name on the committee, if you’re willing. Herbert Hoover has agreed. The results show that the time is now. I’m quite confident of that.”
Baruch sticks to his views: “I’m not! I’ve tried time and time again to give them this advice. Truman wouldn’t listen. Eisenhower wouldn’t listen. Now he’s changed his mind. But even if your campaign succeeds, I question whether they’ll follow through.”
Even without Baruch’s support, however, the campaign is a resounding success. The 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 its nationwide mail in campaign to fight inflation, balance the budget and protect the dollar.
A Congressman walks into his offices, is struck immediately with 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 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 twelve 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.”
The most pronounced transformation is the one brought about in high levels of government.
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 to this very day (including hidden deficits in federal accounting.)
AUGUST 15, 1971. Nixon dismantles the Bretton Woods agreement and devalues the dollar.
LATE 1970s. Inflation surges to double-digit rates in America. Bond prices collapse. Long-term interest rates surge past the highs made during the Civil War, the war from which Memorial Day first began.
BACK TO THE PRESENT
Can it happen again? Are we doomed to refight the same battles that we thought we had won so many times before? Only time will tell.
In the meantime, please remember those who have fallen — both in the battle for the American homeland as well as the battle for the American dollar.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
