Jimmy Carter And "Stagflation"

Former U.S. President Jimmy Carter is the only president to live to 100. He was the president during the Iranian Revolution and Hostage Crisis, which is widely seen as ruining his chances for reelection. To remember him, and the notorious "stagflation" that I see him as getting unfairly blamed for, let's start with the Gold Standard.

Have you ever wondered why America never seems to have to worry about maintaining the value of it's currency? In 2022 we saw Russia prop up the value of the rouble by insisting that payment for hydrocarbon fuels be made in roubles, which maintained demand for the currency. The Bank of England later took action to prop up the pound. The value of a currency, unless it is "pegged" to something, operates by supply and demand.

Near the end of the Second World War, in the Bretton Woods agreement of 1944, America took advantage of it's position on the winning side and as the only major nation not seriously damaged by the war, to get the dollar as the world's reserve currency. This ensured that there would always be demand for U.S. dollars and thus there would never be concern about propping up the dollar's value.

The Bretton Woods agreement also meant convertibility of the dollar into gold. The Gold Standard is a system that is no longer used by any country in the world. The Gold Standard is the idea of basing a country's money on gold in order to provide currency stability. This used to be done by either actually making coins out of gold or, more often, issuing paper currency notes that are defined in value as being equivalent to a given quantity of gold. The notes may or may not be redeemable in gold on demand.

When a country begins printing money, particularly if it is a new country that came into being by fiat or upheaval, there may not be a lot of confidence in it's money. Backing the currency with gold provides the confidence that is necessary for the functioning of the economy. Backing a currency with gold also provides currency stability in troubled times, limiting any swings in value. If we want to virtually eliminate inflation, all we have to do is to peg the currency to gold.

But the Gold Standard also has disadvantages. It limits the power of a government to stimulate the economy by manipulating the currency supply. If all currency issued has to be backed by actual gold, the government cannot just print money as it sees fit. The Gold Standard did not prevent the 1929 crash and Great Depression that followed, and it is no secret that countries that were on the Gold Standard at the time, including the U.S., took longer to recover from the crash than those that were not on it. The Gold Standard presumes that the price of gold itself is ideally stable which, of course, it isn't.

If the U.S. was on the Gold Standard today, the so-called quantitative easing done by the Federal Reserve Bank to bring about recovery from the crash of 2008 and the Great Recession would not have been possible. This refers to the government putting money into the economy by the purchasing of bonds to keep interest rates low by increasing the money supply so that business can more easily get loans to start or expand.

The Bretton Woods agreement of 1944 was to set up the postwar international economic structure by pegging various national currencies to the U.S. dollar, which was pegged to gold. This got the postwar world on track until the arrangement became outdated and countries began leaving it. 

In a landmark event, known as the "Nixon Shock", U.S. president Richard Nixon took the dollar off the Gold Standard on August 15, 1971, this effectively ended Bretton Woods and today no nation uses the Gold Standard. But the U.S. dollar still has the momentum of being the world's reserve currency.

Next, let's have a look at former U.S. president, Jimmy Carter.

Jimmy Carter, elected in 1976, was a Democrat and had nothing to do with the Gold Standard because Nixon had taken the dollar off it in 1971 and his vice president and successor, Gerald Ford, had redefined the dollar with gold not being part of the definition.

Carter has really been treated unfairly by history. The term associated with his presidency, in the late 1970s, is "stagflation", meaning a toxic mixture of stagnation and inflation. We usually see inflation in the economy when it is growing, but President Carter supposedly mismanaged the economy into a high rate of destructive inflation without the growth.

This is nonsense and is the result of Reagan-era Republican propaganda from the 1980 election. The high rate of inflation during Carter's presidency was the result of the exit from the Gold Standard, combined with a perfect storm of other events which took place before Carter took office.

First, there was the spending on the Great Society social programs of the 1960s. This produced prosperity at the time, although inflation afterward. There was massive government spending on the Vietnam War, and for programs like the Apollo Space Program. Then, after Nixon had taken the dollar off the Gold Standard, there was the Oil Embargo of 1973 followed by a steep climb in the price of fuel. As we know only too well, when fuel gets expensive it not only cuts into everyone's purchasing power, but it makes everything else more expensive because the transportation costs of products factor in with production costs.

When a currency is taken off the Gold Standard, the government is free to print currency at will and it's value "floats" with the total value of goods and services produced in the economy divided by the amount of currency printed. Printing money can thus be expected to bring about inflation.

Have you ever stopped to think how natural inflation is? It is self-perpetuating. Workers are given periodic pay raises or cost of living adjustments to keep up with inflation. But this is actually what causes inflation. The currency in circulation exactly matches in value the total of goods and services being produced. So if there is an increase in the money supply, brought about by pay raises, without a corresponding increase in production, the inevitable result is inflation.

A very moderate amount of inflation, maybe a couple of percent per year, is not necessarily a bad thing because it acts as a cushion against deflation, which is worse than inflation. If prices are deflating, it doesn't make sense to manufacture things because, by the time they can be sold, the manufacturer might have to sell the goods for less than it cost to make them.

The Gold Standard became outmoded in the modern world, but leaving the standard brings a certain amount of risk because it almost inevitably results in inflation when the currency supply is no longer constricted. The most notorious inflation that the world has ever seen is, of course, Germany in the 1930s. According to the article on the Gold Standard on Wikipedia, this was the result of the country being unable to return to the Gold Standard because of it's gold reserves being depleted by First World War reparations payments.

These factors all converged on Jimmy Carter's presidency, but in no way were they his fault. I am not faulting Nixon for taking the country off the Gold Standard in 1971, actually it should have been done sooner. Neither am I faulting Ronald Reagan for purposely inducing the recession of the early 1980s, because that was the only way to get the resulting inflation under control.

But blaming this on Jimmy Carter is like blaming the government for a hurricane. Reagan's rightward economics is what it took to stop the inflation that had been unleashed by the end of the Gold Standard, and it's convergence with the other spending factors, but he stayed too far right throughout the 1980s and it resulted in the Crash of 1987.

Let's remember Jimmy Carter while he is still with us.