In PodCasts
  • August 15, 1971, Nixon ends dollar convertibility to gold
  • Since 1971, Dollar moves from 1/35 of an ounce to 1/1700 an ounce of gold
  • Summer of 2021 is just as hopeful as the summer of 1929!


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

50 Years Of Freedom From That Nasty Gold Standard
August 10, 2021

“You could argue that the 2020s is vastly different than the 1920s because of the evolution of money and credit. With looser monetary standards has come a radical expansion and credit. I think of it as the hollowing out of our system. Asset inflation is part and parcel to the increases in the quantity of money and credit. And yet it’s wealth without substance, standing without importance, shape without form, shade without color, paralyzed force, gesture without motion.”
— David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.

Sometimes you say something, Dave, and it puts a song in my head, and we were talking about the summer of 1929. Of course, Bryan Adam’s song, Summer Of ’69 came to mind. And it talks about, “I knew that it was now or never. Those were the best days of my life, back in the summer of…” He says ’69. But, it applies. He says, “Nothing lasts forever. We should have known that.” Those are the words. So the summer of 1929, that was a really, really good summer. Who’d have thought the fall was going to change everything?

David: It was phenomenal. It was very good. And the summer of ’69, for many people, it was the best experience of their life. I don’t know that Woodstock would have been that for me. But the summer of ’29, the stock market performed exceptionally well. There was some underlying fragility oozing out here and there. Volatility was increasing, but participants couldn’t be dissuaded from participating.

It’s almost the same thing we see in the Chinese equity markets today. We talked about this last week. There’s notable relief in the Chinese equities markets, speculators quickly have come back into the Shanghai exchange and into the more tech heavy exchanges. No such relief appeared in the Chinese credit markets. Again, you’ve got the equity crowd partying like it’s 1969, but the bond crowd not so happy, junk that stayed under pressure, yields in the property development and asset management companies were still pricing in eminent collapse. And you’ve got this really interesting juxtaposition of hyper-positivity with dire negativity. And dire straits, shall we say.

Kevin: Yeah, just another musical reference, Dire Straits. Speaking of dire straits, it’s interesting. We had this talk and this worry about inflation, yet we see moves talking about the China market. I was starting my Traeger Grill with my phone, Dave, okay? On Sunday night. And I purposely don’t look at the markets, but these days you’ve got a grill that actually can be controlled from your phone. But guess what? I can also check the markets after they open in China, and gold was down a hundred bucks.

And it was like, “Okay, I’m going to pretend like I didn’t see this. I want to make sure that I enjoy my steak tonight.” But when you see a straight line down like that, talk about dire straits. A lot of times people think, oh my gosh, gold’s no longer going to be an inflation hedge. But really what it was, was a bunch of traders who—or maybe a single trader, who knows?—that sold a bunch of paper gold that wasn’t backed, into the market. For the technician, they loved it because it came down and hit the levels they had been looking for before the bounce.

David: When you start a Traeger, do you think low and slow, do you think reverse sear? What happened on Sunday was probably more of the full-on, 700 degree, just get this baby fried.

Kevin: How about the super smoke? Okay. I’ve got the super smoke setting where the thing just looks like it’s—

David: Billowing.

Kevin: It’s a chimney. Yeah. And so I think what was happening was we were being super smoked.

David: Well, erratic swings well beyond the scope of normal trading began in the sovereign bond market. And we’ve seen quite a bit of volatility over the last week to 10 days in both commodities, I’m thinking of oil and gold. So oil and gold, lots of volatility, early trading in gold was notable Sunday. You mentioned just a large paper position hitting the market in thin trading conditions.

Kevin: Yeah. And it’s important to understand for the listener when you see those kinds of moves in the market, it doesn’t involve the real product. Okay. What you’re dealing with is a commodities contract. But let’s look at hedge funds because when they’re all in, man, they’re bold. But when they get out, they’re just as bold, aren’t they?

David: Yeah. Hedge funds under pressure, they bring out the worst, not the best, in any market, as they shift from being leveraged and confident in the positions they’ve taken. Once they start taking some losses, however, they’re very quick to exit any trade that inflicts even the minutest of pain. And so leverage acts as a compressor of time. It juices returns in a condensed period on the upside, but also intensifies losses when bets turn sour. And noteworthy in our portfolio manager meetings, even this week, has been this particular observation: the hedge funds are on the run.

Kevin: Well, okay. So it goes back to the 1929 reference, the summer of ’29. Okay. There were people who were on the run in the summer of ’29. I mean, granted, it wasn’t many, most of the people were in the stock market and all in, because you had great corporate profits, you had everything going on. In fact, the imagination of the new radio and TV coming, you had all that going on summer of 1929, but you did have a few who said, “No, this is over-leveraged, I’m out.”

David: Yeah. No, you had a huge amount of mergers and acquisitions. You had the high flyers, were gobbling everyone up. And a real sense of promise. At the time, you had RCA expanding into movies, which was, again, this phenomenon, not unlike Netflix capturing as much sound space as possible and recording space as possible today. You did have a few concerned investors looking at overvaluation, 1929. And a number had already exited large positions as early as 1928, Jesse Livermore built a sizeable short position and was wrong. The market continued to move against him. There were a few notable voices of concern, particularly when it was excessive borrowing, they were looking at margin numbers. And you had Roger Babson, the permabear of the day. Bernard Baruch, Felix Warburg. They were all familiar voices of caution. And because they were the familiar voices of caution, everyone ignored them.

Kevin: Well, why wouldn’t you? I mean, the companies were making money. Dave, corporate profits were up just like what we’re seeing right now. But remember what you said a couple of weeks ago. Yeah. Granted corporate profits are up, but what you see is the sophisticated investors are actually selling on those announcements.

David: Yeah. Companies are making money. And with that, imaginations are very expansive. Valuations in that 1929 period were high. Again, there was a new world of growth in technology, which helps justify even larger numbers than in previous business cycles. So you had Columbia Gramophone, which traded at a price earnings ratio of 165. You had Radio Corp, which was at a PE of 73. National City Bank, it was interesting. A lot of the financials were trading at very high multiples as well. National City Bank at a PE of 120, Goldman Sachs at a PE of 129. And not a surprise when you look at the technology companies of the day. They traded relative to book value anywhere from 10 to 50 times their book value, and taken on average today, 1929 prices, believe it or not, were a fraction of the kinds of valuations that we have in the present period. So again, things were booming. Everyone was excited. Earnings were stupendous, Lehman brothers… actually, was Lehman Corporation at the time, went public in ’28. Goldman Sachs went public in ’28, there were just a lot of them. And think about that. They went public in ’28 and by ’29 are already trading at 129 times earnings. I mean, they were huge success story.

Kevin: Yes. But it all changed, and what did it take from the crash of 1929 to get back to break even?

David: In 1953—

Kevin: In 1953?

David: —‘29, the patient investor sat to get to break even until 1953, Barrie Wigmore in his book The Crash And Its Aftermath— This is a guy who was at Goldman Sachs for years, then retired, and as a retirement fancy wrote about a 700-page book on the history of the crash. It’s actually fantastic, best research done, I think. But he gives a lot of the backdrop for the investment of speculation who was doing what, when, and why. And there are perhaps no easy conclusions.

Hindsight is different than insight in advance. And so he had the value of hindsight writing in the 1980s, but the vast majority of investors who were coming into that period of time didn’t see any reason for concern. There was no reason for concern. In the months leading up to the collapse, you had corporate earnings which were impressive. In fact, they were setting new records. You had the economy, which was extending the 1920s theme of growth compounded. And this was almost like a post— We think of a post pandemic boom right now, you were past a major world war, and the resolution and the pent-up consumer demand, the roaring ’20s. It was like, “We’re back. The world is not going to end. And we are back.” The atmosphere was one that promoted investor participation, not caution. Quite the opposite. Even when you got into early October, you had a very positive tone in the press. You’d have a guy here or there say, “Oh gosh, things are really expensive.” The mood was bright. Nobody cared.

Kevin: Yeah. You talked about the brightness after World War I. When I first came to work for your dad, I was put on a mission. This is before the internet. This is back in the ’80s. And the mission was, “Kev, why don’t you go do research on the Peace Silver Dollar” that was first minted in 1921. And so I went down to Colorado University’s library. I studied, I wrote a piece on it. Anthony de Francisci was the artist. But the thing that I learned at the time was this amazing hope that this peace dollar would signify peace for all time. The war to end all wars was World War I. And it was the war that would end all wars. It would be a little like Fukuyama, The End of History. In other words, we were done.

And I’m wondering right now, we’re joking about the summer of ’29 being like Bryan Adams song “The Summer of ’69,” but do we believe, actually, that history still exists? Do we believe that there are consequences to massive bond market expansions, credit markets, prices on stocks being extraordinarily high, the creation of trillions of dollars without inflation? Do we believe, maybe, the end of history has occurred and we’re now wanting to mint the peace dollar, again?

David: It’s the way the financial markets are behaving, although, I don’t think that’s an economic reality. We are post-COVID 2021, and there is a euphoria within the financial markets which would suggest that risk is no longer something that we have to really take that much time to consider. And then things change.

Kevin: Yeah.

David: In 1929, psychology shifts and the mood of the market with it. In one moment, you’ve got the thundering herds of bulls, and then all of a sudden something’s different, like a vapor. Volumes vanish, investors seem to just simply flip a switch. In our day and age, we actually refer to it as risk on and risk off, as if it were simply the flipping of a switch.

The underlying structure of the market is key. And I think then, as now, you’re talking about a tremendous amount of leverage in the system—far more now than then, but the greater the force of the unwind— If you have a tremendous amount of leverage within the financial system, if that defines the structure of the market, you’ve got investor leverage, which is one thing, you’ve got structured products, which increase leverage within the financial markets as well. You’ve got corporate balance sheets adding to operational leverage, which is one more form of heightened leverage. We’re very leveraged here in 2021.

Kevin: Let me play devil’s advocate, though. Okay? Let me just play the other side of this because there’s got to be the listener going, “Yes.” But it’s different this time, because before, we were on a gold standard, you couldn’t just print money out of thin air. But at this point we’re not, can we avoid this? What we’ve been calling moral hazard, is it really a moral hazard? Have things changed since 1929?

David: There is a sense in which the markets operate on a different basis today than they did in 1929. Moral hazard has been perfected in the opening years of the 21st century, and investor behaviors still shift to risk off, but you have this ingrained and trained behavior, which is to step back in and to do so quickly, knowing that central bank largesse is going to backstop value at some level. And again, this is a partial prisoner’s dilemma. They have to do something because leverage in the system is so great if they don’t. You’re talking about going back to the stone age, essentially.

So a greater depression, this is the new era, a greater depression is not possible in an era of central bank muscularity. So it’s believed. So it’s believed. And so what we’ve seen is each time in the last 20 years, as the markets have begun to come unwound, the central bank steps in. And each time they’ve done that, it’s been with greater and greater muscularity. Bigger and more expansive balance sheet increases, right? We’ve been to the edge of the precipice, we’ve peered inside, but the greater commitment to survival and market perpetuation, what that does is it’s just calmed the nerves and emboldened the speculator of our day. We see that the central bank will act, they will act. And therefore we increase our bets, knowing that we’re going to get bailed out.

Kevin: And so we’re going to go back to the summer of ’29, though, because that was a roaring summer. I mean, the roaring ’20s were still going, but it’s interesting how politics have changed. For the person who thinks that Trump was a conservative, I think they need to understand that modern monetary theory was actually operable, whether they called it that or not during the Trump administration. Of course it’s continued under Biden. But Hoover, back in 1929, Hoover was uncomfortable, wasn’t he?

David: He was very uncomfortable. And when he would talk to the Treasury Department, he would let them know that didn’t like the circumstances that they had, and promoted sort of a liquidation as mindset. Summer ‘29 was exciting, nothing humdrum about corporate profits soaring, nothing humdrum about investors making a ton of money. You did see margin rates begin to creep up. You did begin to see volatility emerge, but again, no one really cared. Hoover was concerned about speculative excess, but he was in the minority, and he was the new guy. There really were no complaints, and hardly any caution was taken because money was being made. And everyone has a hard time toning that down.

Vegetius said that if you want peace, then prepare for war. And I think you could apply something quite similar in preparation for prosperity. You have to pay attention to risk analysis and moderation.

Kevin: It’s so interesting when you said that. Because I thought about minting the peace dollar saying that we’re never going to have war. Maybe that was a mistake. Now they’re beautiful coins. We sell peace dollars. I own some, you own some, but maybe we shouldn’t have been minting a peace dollar celebrating peace for all time, but we should have actually been creating the tank for the next war. I know you and I like to read history, but I’ve read a lot of Patton’s writings and Rommel’s writings. These guys knew, they were participants in the First World War, but they knew for a fact that the next war was going to be fought with tanks and in the air. And they began planning for the next war about the same time that we were minting the peace dollar.

David: My kids love taking advantage of exceptions and exclusions. And we have these little carve outs where they can use bad language. And one of them relates to, “Rommel, you magnificent bastard, I read your book.”

Kevin: Yeah.

David: And so it’s fun to hear a seven-year-old quoting Patton on that.

Kevin: But in the early ’20s, imaginations were running wild because World War I, and actually the plague that followed, were really devastating. But as you progressed, they had figured out also, we can talk about this a little bit later, but the gold standard really wasn’t the gold standard anymore. You could start printing money a little bit more than the gold that you had. So imaginations were running wild.

David: It’s funny. It slipped my mind. The Spanish flu was a part of those teen years coming out of World War I. We also had one of the greatest global pandemics. And so that sense of relief and going back to normal, the 1920s really was sort of a psychological shake off the blues. And speculation was a part of an expression of positivity and the world was going to be better. We were free, not only from the fear of warfare but from the specter of death. And I had forgotten about the Spanish flu, you’re right.

There wasn’t a lot of preparation for prosperity in terms of risk analysis and moderation. And you don’t find that in the summer of 2021 either. Profits are setting records, earnings are exceeding expectations by a country mile, you’ve got earnings up 86%. You’ve got revenues up 21%. And with those revenue and earnings beats comes the recalibration for the fall. Higher expectations still for the second half. And as they look at 2022, higher expectations still. As we mentioned a few weeks ago, these are expectations on the increase. Even as GDP ebbs, you’ve got the imagination of investors which is moving the opposite direction. While gravity may still be in effect, investors are pegging their imaginations to the interplanetary. Everybody’s got diamond hands. Everybody wants a ticket for the next Bezos or Musk mission to Mars.

Kevin: Well, I’ve got to admit, I wouldn’t mind going myself. Going into orbit doesn’t sound that great, but go to Mars, yeah. Unless you just have to be gone so long.

But all right, I’m going to bring us back down to earth for a second because, margin debt. When you see somebody going out and buying something, you go, “Oh, well, maybe they think it’s going to go up.” But when you see them borrowing to buy something, they really think it’s going to go up. So talk about imagination’s being paid.

David: I went on a run on Sunday, and we were dealing with a lot of smoke in the west. This is kind of the sizzling summer of ’21. And it’s SPACs, it’s NFTs, it’s cryptocurrencies, it’s unicorns. And it’s 91 various fires that are leaving their mark in the air quality for—

Kevin: Super, super summer. Super smoke, yeah.

David: But for those of us who like cigars, it’s really not that big of a deal. The 2021 period has a whole lot of sizzle. And a part of the sizzle in the financial markets does come from margin debt, margin debt exaggerates trends on the upside and the downside. The margin debt is a simple expression of investor confidence. And there’s a lot of that right now, 882 billion at last count. And that’s up over 50% in the last 12 months. There were limited ways to leverage a portfolio in 1929. There are virtually unlimited ways of leveraging up today, structured finance and specific products, derivative products that people didn’t even have the imagination for 70, 80, a hundred years ago. Margin debt is one of those things that we had then. And we have now, it sits at all time highs as a percentage of GDP, as a percentage of stock market capitalization, not just in nominal terms, but relative to the size of the market overall. But it fails to capture the extent of leverage within the financial markets. The chance—

Kevin: And I wonder. I wonder if that doesn’t force the timing because we’ve talked before. Investing is about timing and trend. Now picking a trend is not that hard. If you just go back and look at history, this is why we talk on this commentary and why we read history and talk about it, because you can predict the future somewhat by understanding a long row of past events. Okay? But timing, when you force the timing of the prediction, doesn’t leverage do that?

David: Of course, leverage is the Achilles’ heel of investing today, and of the investing markets. Leverage is the attribute which forces hands and forces timeframes. We discussed Archegos and the Credit Suisse losses last week. Why take a five and a half billion dollar loss? Well, because with the application of leverage, the losses may be one billion, two billion, five billion, 20 billion, the numbers become exponential. And so firms like Credit Suisse and others who had exposure to Archegos, you’ve got gross exposure, which forces fast action. Leverages is an accelerant on the upside, leverage is an accelerant on the downside. So as we already said, hedge funds are on the run.

Kevin: Well, if they’re on the run, do they care about the price that they get? I mean, you talk about turning the switch on or off. Risk-on risk-off, risk-on risk-off. If they have to get out quick, does price even matter?

David: Well, this is where we assume— Like an investor who goes to Charles Schwab or Fidelity or TD Ameritrade and buys with the click of a mouse or sells with the click of a mouse. The hedge funds have similar arrangements. And to a degree that is true. But when you’re dealing with a leveraged entity, and this should be clear from our conversation with Archegos last week, $10 billion leveraged to $120 billion position in very concentrated single stock positions. There came a point where they didn’t have access to the mouse anymore. They weren’t calling the shots, and what happened next was entirely in the hands of their counterparty.

So we have hedge funds in that universe, they’re trading for private investors, they’re trading for pension funds, they’re trading for insurance companies, they’re leveraged, they hold highly concentrated positions— By the way, they’re largely invested in the same things. If you look at the composition of portfolios today, your mutual fund, your hedge fund, your largest ETFs, they all own the same thing. And it’s just sort of positive momentum, high leverage. These are the things that provide the key ingredients for current investment success. But if you have to unwind a leveraged position, it’s no longer in the power of the owner, right? Because there’s some question as to who owns what? And who is going to get the scraps of what’s left? Right? If you have to unwind a leveraged position, price is not your first consideration. It’s hardly a consideration at all.

Kevin: Just get me out, yeah.

David: It’s hardly a consideration at all. So we go back to this idea of a greater depression is not possible in an era of central bank muscularity, so it’s believed, but then there’s leverage. And anything at any price is possible with an unwind of leverage.

Kevin: So let’s go back to the summer of 1929, and let’s talk like a statistician would, Dave. I mean, how far overpriced are we relative to the summer of ’29? And then how far overpriced was the summer of ’29 relative to everything else?

David: Right. So price earnings multiples are one valuation metric. And the 10-year rolling average of the price earnings multiple is less volatile, probably a better measure than just a regular PE. 1929, that was pegged at two standard deviations above the mean. It was the most expensive the market had been to that point. And today we’re stretched beyond the third standard deviation.

Kevin: So beyond 1929?

David: Yeah, I mean, if you’re comparing one versus the other two standard deviations versus three standard deviations, we’re 50% more expensive than we were in ’29. The tide hasn’t turned, valuations can and will likely will stretch further. And that’s the nature of markets. Markets remain irrational longer than sometimes people can remain solvent. That’s the old quote from Keynes.

But the argument is today that markets are quite rational. They’ve priced in recovery, they’ve priced in expanded margins, they’ve priced in improved profits. The indices capture that reality, maybe return to some normalcy post-COVID, a little catch-up, pent-up demand from 2020, and all that gets factored into today’s prices. So we can justify where we’re at. And I think what you look at when you look at the history of the financial markets is, in large part, a history of justifications. History of rationalizations. We were just fine. We were doing just fine. And that’s how the song goes.

Kevin: Unless there’s a surprise. And he said, “We were young and restless. We needed to unwind.” He says, “But nothing lasts forever.” And that nothing lasts forever comes in the form of a surprise to the system. And I’m wondering if inflation is the surprise to the system that’s coming, because we talked last week, you have these corporate heads, okay? Whether they’re at Johnson and Johnson, or I just read something from Tyson Foods here recently, they’re basically saying, “Oh, you guys need to understand, we can’t raise prices quick enough.”

David: Yeah. So a few surprises are emerging. We mentioned a few sell-offs in response to the impact of inflation on margins last week. Clorox now adds itself to that list. And they said in their earnings call, “Higher commodity and manufacturing and logistics costs, most notably transportation.” Those are all the factors that are impacting their margins. As a percentage of net sales, cost of products grew to 63%, cost of products grew to 63% compared to 53% a year ago. And so as we look at the last part of the year, earnings per share are expected to be lower by 21 to 26%. Again, coming into year-end. So we’re happy about where we’re at. The markets are chugging along. You’ve got a few dropouts like UPS and FedEx and the companies we mentioned last week, add Clorox to the list. And there is an issue with prices increasing. Tyson Foods, costs are hitting us faster than we can get pricing at this point.

Kevin: That quote is amazing. I have to tell you, Dave, when I first graduated high school, I worked at a lumber hardware store a lot like what Home Depot would be these days. It was called Handy Dan, I mean, it’s same type of thing. And in the hardware department, which I was the department head for a while, I had to do price changes. I couldn’t keep up. I had clipboard after clipboard, after clipboard. I remember STANLEY Tools, that STANLEY Tools wall, we had to continue just as soon as we finished changing all the price tags on STANLEY Tools, we got another price change and had to go back and put price tags on top of that. And so when you do get into an inflation, I saw that quote from Tyson Foods, and I’m going to restate what you just now said. This is the quote, “Costs are hitting us faster than we can get pricing at this point.” I remember those days in the late ’70s, early ’80s.

David: Is it possible that price increases spoil the fairytale experience of ever-expanding profits, earnings, and stock values? We’re loving the summer. We’re loving the price increases, we’re loving making money. Is it possible that what goes up may also come down? The cascade in prices unimaginable for investors accustomed to central bank interventions.

Kevin: Right.

David: But you look at the structure of the market. The amount of leverage involved today, leverage increases the scale of commitments and opportunities on the upside, but also opens up multiplied downside, not just multiplied upside.

Kevin: I wonder if 1929 was like what we have now, too, where just about everybody’s buying the exact same stocks. Have you noticed? I mean, everything that’s happening in the market right now, it has the acronym FANGS, right? I mean, they’re all holding the same stuff, which means at some point, if they want to sell, they’re all selling the same stuff. I wonder who’s going to buy.

David: Yeah. And it’s funny, I’ve looked at a couple of hedge funds with their positions, disclosures, and so the after the fact disclosures, 13F, I think, is the report. And it’s fascinating to see, it’s a Tesla, it’s a Facebook, it’s a Google, it’s an Amazon. I think to myself, where’s the value add here? The only thing that they’re doing differently than their neighboring hedge fund is adding more leverage to the same exact positions. The most vulnerable stocks have always been the most popular stocks. And this is true in any era, why distribution provides the energy for higher prices? But that also flows the other direction. Every existing holder is also a potential liquidator, and the high flyers in every era also tend to see the exaggerated sell offs. So today would be Amazon, Google, Facebook, Microsoft, Tesla, Apple. Expect it. And it’s no different than the favorite names of past bull moves. Where a decline of 45%, 60%, 90%. Yeah. 1929 RCA was the big cheese, right?

Kevin: Mm-hmm (affirmative).

David: They were like Netflix of an earlier generation.

Kevin: So this happened before? But here’s what’s different, Dave, here’s what’s different. We have become so smart. We have evolved the money system so that we are unfettered from that foolish relic called gold, don’t you understand? Things are different. Why should anything ever come down because we no longer have our fetters?

David: There once was a banker who is remembered not for his professional career in lending but for his poetry. And I love reading TS Eliot, but “The Hollow Men” reminds me of what we have today: shape without form, shade without color, paralyzed force, gesture without motion. To me, that’s wealth without substance, standing without importance. I mean, this is the cultural critique of our day. You could argue that the 2020s is vastly different than the 1920s because of the evolution of money and credit. With looser monetary standards has come a radical expansion and credit. I think of it as the hollowing out of our system. In the 1920s, we had a limited credit system in part because of a strict relationship between gold and the dollar. Where the dollar… this is interesting. I don’t know that most people recognize this. The dollar was constitutionally defined as one 20th of an ounce of gold. It was constitutionally defined as one 20th of an ounce of gold.

Kevin: Wow.

David: And then in the 1930s, after a devaluation, it shifted to one 35th of an ounce of gold. The dollar was defined as one 35th of announce of gold. And that held until the 1970s, post Bretton Woods, the dollar shifted to one 400th of an ounce of gold. And it’s no longer constitutionally defined relative to gold, but we still have the same trend in play. This long-term trend is as plain as the nose on my face. This major shift brought with it a massive expansion in credit. Again, 1970s, post Bretton Woods, one 400th. Now today the dollar is one 1700th.

Kevin: Look at where we are. That’s amazing.

David: One 1700th of an ounce.

Kevin: Yeah.

David: And over time it’s marching towards even more minuscule values relative to gold. The quantities of credit grow, the quantities of leverage within the financial system expand without limit. Asset inflation is part and parcel to the increases and the quantity of money and credit. And yet it’s wealth without substance, standing without importance, shape without form, shade without color, paralyzed force, gesture without motion.

Kevin: We are about to celebrate a 50th anniversary next year, the 50th anniversary of International Collectors Associates. The firm that your dad started that you now are a head of ,started in 1972, but there was a genesis for the starting of our firm that we’ve worked at for so many years. That genesis was the anniversary that we’re going to celebrate this week, which is the 50th anniversary of Nixon finally closing the gold window.

David: We celebrate the 50th anniversary of a long and unhealthy relationship.

Kevin: Yeah, yeah.

David: Five decades ago, we took off the last remnants of control over our currency system.

Kevin: No more fetters.

David: Many economists celebrate that as liberation. We’ve run fast and loose with the value of the dollar ever since that. So from one 20th to one 35th to one 400th to one 1700th, we’re marching towards the dollar defined as one 4,000th, 10,000th. August 15th, 1971 was our final unhinging date, which opened the door to inordinate credit creation at a massive leveraging of the financial system. As long as prices rise, everyone loves leverage within the system, right?

William Reese Mogg wrote in 1974, he was an old Balliol Oxford guy, “Sanity consists in limitation,” he wrote, “The inordinate is always insane, and always ends in destruction. Because inflation is indeed inordinate, it, too, has a certain insanity about it. And it naturally tends to end in an explosion of destruction. The insanity of inflation leaves a mark of insanity on society. It changes a good society into one which as long as inflation lasts is holy and fraudulently unjust.”

Kevin: He sounds like your dad. He sounds like your dad because your dad, just for a little history, as you know, I mean, your dad was in stock brokering and bond brokering in the late ’60s, early ’70s, but he understood what Lord Reese Mogg just said. And that was that once you unhinge the dollar from gold, you will destroy the dollar. And I think your dad really had forethought. There were just a few men out there at the time who saw this and actually took action. And your dad started putting gold— He had to find the legal ways because gold had been confiscated in ’33 and it wasn’t made legal again until 1975. But your dad found a way to be able to put physical gold, legally, into portfolios based on what Lord Reese Mogg also said.

David: “We are the hollow currency. We are the stuffed currency, leaning together, headpiece filled with straw, our dried voices when we whisper together quiet and meaningless as wind in dry grass.” I mean, to me, it’s like what happened to our currency? This is the story of five decades. The gold value of the dollar has been in steady decline, a hollowing out for five decades.

For most investors, time is more constrained than that. And that timeframe of five decades seems irrelevant. We care about the day, we care about the week, perhaps the quarter, right? Because investors suffer from an extreme attention deficit disorder, but the constraints placed on the time value of money directly relate to what happened to the nature of our money five decades ago. And it’s played out over a long enough period of time that people don’t realize how severe the change is.

The greater the inflation of money and credit, the more speculation, the more short-termism become the characteristics that are the operative behaviors within a market. So the more we deal with illusions of wealth— We’re wealthy now, right? Because it seems that way. We’re dealing with such big numbers. Trillions here, billions there, what is it now? 26-, 2700 different billionaires around the world. We started the decade with about a quarter of that.

Kevin: Well, to quote Brian Adams, though, “I guess nothing lasts forever.” When he’s singing the Summer of ’69, what’s changed? Even from the ’60s, early ’70s?

David: I was reading a part of David Cornwell’s biography this weekend. The writer known as John le Carré. I don’t read a lot of fiction, but when I do, John le Carré novels are great. So his first global success, 1964, was The Spy Who Came in from the Cold. And he was sitting on a fortune after going through best sellers globally. Fortune sufficient to take care of a long list of extended family. We think of it as sort of having an entourage, taking care of an entourage. Now that you’ve made it, you’re responsible for— you feel that you’re responsible for everyone around you. Do you know his net worth was when he was sort of extending to take care of his entourage, a long list of extended family?

Kevin: Hmmm.

David: 20,000 pounds.

Kevin: Okay. So let’s put that in perspective though. What would that have been worth, about 40 or 50 thousand dollars?

David: Yeah, not much. I mean, in 1971, again, going back to our anniversary this week, August 15th. In 1971, Pew research reported that 61% of American households were in the middle-class, 61%.

Kevin: In 1971? So ’61, they say the strength of a nation is in the size of its middle-class, and 61% of Americans households were in the middle-class when Nixon took us off the gold standard, going back to 1971.

David: As of 2019, Pew Research reports the number, is it 51%? That we’re all wealthy now?

Kevin: Right.

David: Or so it seems because we’re dealing with larger numbers. How have so many Americans slipped away from the middle class in a period of GDP expansion, in a period of radically increased net worth? Everyone’s making more money. Everyone has more stuff, but the reality is, 50 years of radical inflationism have taken their toll. We look at a chart of Campbell’s Condensed Tomato Soup. This is Jim Grant’s contribution this week. Again, Campbell’s Condensed Tomato Soup. Between 1898 and 1971, prices barely nudged. And from 1971 to the present, the increase is nearly 10 times. It’s increased nearly 10 times since that fateful day 50 years ago.

Kevin: Okay. So from 1898 to 1971, prices barely budged on tomato soup, Campbell’s tomato soup. Well, and if you look at it, we were on a gold standard or a quasi gold standard up to the 1971 take-it-completely-off standard. Since then we’ve seen Campbell soup go up 10 fold, but we’ve also seen the dollar go from one 35th of an ounce of gold to one 1700th of an ounce of gold. So I guess this experiment, it may have worked for some, but it didn’t work for you and I, did it? We have to go buy the Campbell soup still, and we still have to try to hedge our dollars with gold.

David: And the experiment’s not over. We’re getting to the point where things get interesting. Broad money, measured by the center for financial stability—what they have as an M4 statistic, has increased 30% over the last year. That’s the largest gain in over 50 years. Kevin, things are just beginning to be interesting, and we’re not sure how it ends. It could be with a bang. It could be with a whimper.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany, you can find us at, And you can call us at 800-525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

Recent Posts

Start typing and press Enter to search