A Not So Happy Labor Day
Labor Day in the US has been celebrated since 1894 when Grover Cleveland, in an effort to appease labor unions in a mid-term election year, signed the bill making it an official holiday. His administration had put down a number of strikes in the first two years of his second term, most notably the Pullman strike, and was facing an angry electorate. Cleveland was known as a pro-business President who opposed tariffs and subsidies and supported the gold standard. He was known for fighting corruption and supporting the principles of classical liberalism (although he was opposed to women’s suffrage). He was known as the guardian president and exercised the veto 584 times over two terms (the only President elected to non-consecutive terms by the way). In short, Cleveland was a conservative icon. Alas, his signing of the Labor Day legislation didn’t save his party in the mid-terms, a Republican landslide. Yes, Grover Cleveland, conservative icon, was a Democrat.
What is more interesting perhaps than this short history lesson are the parallels between those times and today. The strikes that bedeviled the Cleveland administration grew out of the Panic of 1893, a full fledged banking crisis precipitated by an Argentine default and the collapse of Baring Brothers in London. It was, to put it in modern terms, an emerging market crisis. Even back then, the world was interconnected and a liquidity crisis in London soon became a credit contraction and depression in the US. The national banks – primarily in NYC – called loans and strengthened their gold holdings and the money supply contracted. In May of 1893 Chemical Bank of Chicago closed its doors and the bank run was on. The stock market collapsed as the money supply contracted by about 6% in 1892-93. 600 banks ultimately closed their doors for good, 15,000 businesses failed, numerous railroads went bankrupt and unemployment rose to an estimated 19%.
Another parallel with modern times was the bubble that preceded the Panic of 1893. The object of investors affection at the time was railroads and thanks to the Sherman Silver Purchase Act there was plenty of money and credit to fuel the boom. Silver prices had been falling due to overproduction in new western mines and the Act required the government to purchase millions of ounces. This monetary expansion fed the railroad bubble which was primarily financed by debt. The crisis arose when gold reserves fell and Cleveland was forced to borrow gold from JP Morgan to support the gold standard. The free silver movement, championed by William Jennings Bryan, was basically a call to resume the inflation that preceded the crisis. While Bryan and the free silver movement was defeated another boom soon followed after the Yukon gold strike. That boom ended with the Panic of 1907 and another JP Morgan rescue of the banking system.
So, a boom, a bust and another boom followed by yet another bust in 1907. Monetary expansion followed by contraction, then expansion and another contraction. Substitute internet and real estate for railroads, the ebb and flow of gold and silver with rising and falling interest rates and you get the last 15 years of the US experience. Booms and busts are not something that just happen out of the blue. They are precipitated by monetary mischief and both periods featured plenty even though the earlier period had us on a gold standard (although undermined by the Sherman Silver Act) and the latter on a Greenspan/Bernanke standard. The periods after the booms are depressions and while this one hasn’t had the visual impact of soup lines, it does have its modern day equivalent in the form of a rapid rise in the use of food stamps.
The two periods, not coincidentally, also share a widening gap between rich and poor with the late 1800s known as the Gilded Age and our time so rhetorically impoverished we can’t come up with a proper name for it. Monetary machinations always favor the rich and our time is not much different. Wages as a percentage of GDP have been falling since the early 70s when we ended all connections of the dollar to gold and now stands at a paltry 42% versus the roughly 50/50 split that prevailed prior to the end of Bretton Woods. Corporate profits, by contrast, as a percentage of GDP are at an all time high. It should surprise no one that when the cost of capital is artificially suppressed that businesses find ways to substitute capital for labor.
Those who call for the continuation of Quantitative Easing today are the modern day equivalents of the free silver movement in the late 1800s. They advocate more inflation to cure the ills caused by previous inflations. They see the consequences of the deflations that inevitably follow as the cause of our problems when in reality they are merely a symptom of the underlying disease. President Obama has said repeatedly that we must break this cycle of boom and bust but his prescriptions – unless Larry Summers is a hard money man in disguise – are mere nostrums that will work as well as the patent medicines of Cleveland’s time. I don’t doubt the President’s desire to break the cycle but his proposed policies will only make things worse for the working class he claims to champion.
Restoring middle class prosperity and improving the plight of the working class cannot be accomplished by raising the minimum wage or increasing taxes. The strikes by fast food workers last week and their plea for higher wages are evidence enough of the inflation that the Fed and all mainstream economists so fervently deny. Further inflation through QE is not the answer and raising the minimum wage will just further tilt the field in favor of capital to the benefit of those who have some. There are a wide range of policies that could improve our economy, the distribution of income and wealth and make future labor days real celebrations. But none of them will be effective without a return to sound money. Inflation, no matter its cause or form, is the enemy of the working man and woman. Until we end the cycle of boom and bust by reforming our monetary system Labor Day will mean nothing beyond the symbolism for which it was originally established.
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