| |  | | | | Hard vs. soft money: the new politics |
| This is not the first moment in American history when inflation and monetary policy were among the key issues driving national politics. On July 9, 1896, Nebraska Congressman and Presidential Candidate William Jennings Bryan delivered his famous “Cross of Gold” speech at the Democratic National Convention in Chicago. |
| | Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold. - William Jennings Bryan |
|  | After delivering this historic speech, the populist firebrand won his party’s nomination at the of 36. He would go on to lose to the Republican candidate William McKinley in the 1896 general election by a fairly wide margin. (He would also lose as the Democrat candidate in 1900 and 1908 but ultimately became Secretary of State under Woodrow Wilson.)
While the Cross of Gold speech is most remembered for its religious imagery and emotional rhetoric, it happens to be extraordinarily relevant to today’s political environment and clashes over economic policy. We once again have populist politicians sharply criticizing establishment interests and claiming the monetary system is rigged for their benefit.
Except this time, in a fascinating twist, the positions are completely reversed.
The Silver Purchase Act
When Bryan delivered that speech, he was railing against the repeal a few years prior of the Sherman Silver Purchase Act. The Silver Purchase Act was originally passed following a severe deflation that inflicted serious harm on farmers. The act required the U.S. Treasury to purchase a certain amount of silver every month as part of a larger effort to move towards a bimetallic monetary system, in which dollars would be backed by both gold and silver.
During the Panic of 1893, President Grover Cleveland summoned Congress for an emergency session to repeal the act. It was believed that the way the silver purchase requirements were designed was contributing to the rapid depletion of the government’s gold reserves.
Bryan and his supporters felt the money supply, pegged as it was to the gold standard, was too restrictive. The argument was that the monied interests and East Coast establishment, who owned bonds, favored deflation. When those bonds matured, they wanted to be paid in dollars that were worth more, not less.
But populists like Bryan wanted to see more inflation, which would benefit farmers through higher crop prices. It was the folks in the middle of the country versus the coastal elites. Sound familiar?
The only difference today is that the roles are reversed. The argument from populists today is that the monied establishment wants easy monetary policy and is happy with inflation. Why? Because nowadays they are asset owners, rather than bondholders. |
| | Gentlemen prefer bonds. - Andrew Mellon |
| | At the turn of the 20th century, the American stock market was in its infancy. It was not until World War One and then the Roaring Twenties that the stock market would grow into a truly important factor in the investment landscape. For the most part, rich people invested in bonds.
Today, the total capitalization of U.S. stocks is approximately $50 trillion. For perspective, this figure 20 years ago was about $15 trillion. Rich people today own stocks, and to a large extent they are rich precisely because they have owned stocks. The S&P 500 has compounded at more than 10% per year over the past 20 years—a dollar invested 20 yeas ago into the S&P 500 is now worth approximately seven dollars.
According to the Federal Reserve, approximately half the stock market is owned by the wealthiest 1% of the population. Over the past several decades, this figure appears to have fluctuated between 40% and 50%. |
|  | We are now at the high end of the range, although the concentration of stock market wealth in the U.S. is nothing new. But stock market wealth is now more important than ever. In rough terms, we now have 1% of the population that owns $25 trillion of U.S. equities.
Two Americas? |
| Another one-time Presidential candidate with populist inclinations, Sen. John Edwards, often spoke of “two Americas.” To the extent this description is accurate, the post-pandemic inflation experience has only widened the divide.
We have seen cumulative inflation of more than 20% over the past four years, as measured by the Consumer Price Index (CPI). Inflation has hit different people differently.
Less wealthy Americans, who tend to be younger and have minimal stock market exposure and real estate assets, may have seen some wage growth. On balance, however, they have generally suffered as a result of the erosion of their purchasing power. As borrowers or would-be borrowers, they have been negatively affected by higher interest rates. Many, for example, now find buying a home impossible due to high mortgage rates.
Wealthy Americans, who have a great deal of exposure to stocks and real estate, and generally do not worry too much about the cost of groceries and gasoline, are potentially net beneficiaries of the inflation we have absorbed. They have benefited as inflation has driven up corporate earnings and asset prices almost across the board.
The S&P 500 over the last four years (from May 2020 to May 2024) has delivered annualized returns of approximately 17% and nearly doubled. Residential real estate has also appreciated over the last four years. From October 2019 to October 2023 (the most recently available data point), the House Price Index climbed approximately 48%, significantly outpacing CPI growth. |
|  | The uptick in real estate prices can translate into a significant expansion of home equity value for a homeowner. Consider the example of a $1 million home, where the homeowner four years ago had $200,000 of home equity and $800,000 of mortgage debt. If the home is now worth 48% more ($1.48 million), home equity has increased by 240%. And the homeowner’s mortgage, if long-dated, may still be locked in at low rates.
Meanwhile, an aspiring homeowner, who might want to purchase that same home for $1.48 million with a 20% down payment, would now need to come up with an additional $96,000. To make matters worse, the interest rate on the mortgage will be significantly higher than it was several year ago.
The new populism
The federal government’s response to the pandemic was to flood the economy with dollars. This took place through multi-trillion dollar stimulus packages and very easy monetary policy that persisted all the way into 2022, even as the inflation wave was becoming obvious.
Democrat turned third party candidate and potential election spoiler, Robert F. Kennedy Jr., has taken note of the way monetary policy has benefited owners of assets and injured those who are not. Like William Jennings Bryan over a century ago, RFK is specifically targeting monetary policy in a populist appeal to voters.
One problem with building a political campaign around criticism of the banking system is that the intricacies of monetary economics are hard to comprehend. They do not easily lend themselves to inspirational political messaging. But like William Jennings Bryan, RFK seems to be getting traction.
In an interview with Ben Shapiro, RFK did not mince words in describing the Fed. We played and then discussed RFK’s critique of the Fed in a recent video discussion. |
|  | | We’ve adopted a lot of policies and particularly the way the Fed is operated which is a criminal agency, right? It’s just a vacuum cleaner for Wall Street to shift wealth upward to this kleptocracy. And it’s a captured agency. - Robert F. Kennedy, Jr. |
| | In another interesting parallel with William Jennings Bryan, RFK has a solution that involves the introduction of another form of currency as a basis for our monetary system.
Bryan favored having the dollar backed by silver as well as gold. His belief was the the gold supply was too limited, which made monetary policy built around the gold standard too restrictive. Adding silver to the mix would, in his view, translate into easier monetary conditions. (Unsurprisingly, this was a position shared by many silver miners who supported him.)
Similarly, RFK wants to add Bitcoin to the equation. His motivation, however, is precisely the opposite of Bryan’s. He believes that by making the dollar partly backed by Bitcoin, along with certain precious metals, we could inject discipline into the Fed and discourage its inflation-promoting tendencies. |
| | We need to fix the Fed. Rather than manipulating monetary policy to shift wealth upward, I propose the Fed genuinely try to reduce inflation by backing the U.S. dollar with hard currencies, including platinum, gold, and possibly Bitcoin. - Robert F. Kennedy, Jr. |
| | RFK is not alone in his advocacy of Bitcoin as a monetary solution. In his keynote address at Bitcoin2023, former Presidential candidate Vivek Ramaswamy declared a similar intention to bring Bitcoin into the fold of U.S. monetary policy as a strategy to restore stability.
Implications for the future
It is a bit difficult to process how “hard money” is now becoming the mantra of politicians who have positioned themselves as populists advancing the interests of voters who have been left behind by the economy. Conventional thinking holds that those on the lower rungs of the economic ladder prefer a large federal government that spends profligately.
But the economy is not what it was circa 1900. Inflation has made life extremely difficult for a large swath of the American population, especially the asset-poor young. While some younger voters may be swayed by promises of student loan forgiveness, clearly others seem to be coming to the view that inflationary tax, spend and print policies will not help them in the long-run.
Neither RFK nor Vivek are going to be in the Oval Office come next January, but their messages have resonated with voters. Investors in both Bitcoin and gold should take some comfort in the political momentum favoring these alternative forms of money.
It would be an unprecedented development in American history if fiscal sanity and hard money were to become the new rallying cries of the young and working class. With the entitlement crisis looming, this could be a very fortunate development. |
| |  | | | FOR SUBSCRIBER USE ONLY. DO NOT FORWARD OR SHARE. |
| | | | |  | | |
|
|
|
|
|
