The Time Machine

The year is 1985 and I stand here looking back over a decade of monetary and political history. It's funny. While we were living through the messes they somehow didn't seem nearly as bad as they now look in retrospect.

Gold never was revalued in terms of the dollar. Oh yes—it was revalued in terms of SDR's, which meant nobody really knew what that meant. The price of free gold relative to the dollar, the Swiss franc, the French franc, the pound, the deutsche mark (DM) and indeed every currency of every country where gold is traded now quotes the price of gold in its own currency. It happened slowly over the years. More and more exchanges stopped quoting the price of gold in anything but their own currency. So now we're back to more or less fixed exchange rates and a gold exchange standard, based on gold and the new SDR's and all currencies. Gold in terms of SDR's is now four times as high in price as it was 10 years ago, but then SDR's always were a bit arbitrary, like the DM after World War II. It took them till 1978 to really find their own level. SDR's have been changed to "IMU's" but they still aren't used much.

Gold in terms of the dollar is now officially $200. Americans can legally buy gold now but exchange control is so tight they can't buy much since that would involve sending money abroad. The value of the dollar on any international market is completely arbitrary; like the official exchange price of the ruble, the dollar/gold exchange rate only applies at home.

SOUND AS A DOLLAR?

Funny. In 1973 I predicted that the dollar would suffer many devaluations and become like a cruzeiro. It didn't happen. It was devalued by about 20 percent in 1974 as part of the monetary reform kick, when the world officially went off the dollar standard but didn't tell anybody it was doing so. But since then there has been no devaluation. Not for us these Latin four to five devaluations a year, said the U.S. Treasury. We are above that. Instead the Europeans have revalued constantly among themselves. No, it has never been official. Now when one goes to Switzerland from the U.S., the banks in New York give us one for one, i.e., one Swiss franc for one dollar, and we get 75 pfennigs for the dollar in N.Y., when we want to go to Germany. But it's different coming the other way. Nowhere in Europe will they give you more than half a Swiss franc or 40 pfennigs for your dollar. So the official rate is something that applies to Americans inside the U.S., on their travel allowance. This means the true dollar price of gold is about $400.

Really they don't need exchange control. Few Americans travel anymore anyway, except the handful who make killings on the fluctuating exchange rates. Yes, in this way we are very like South America; the rich get richer and the poor we try to hide away. When bread cost $5 a loaf what can you do?

But Europe has had her problems too and, indeed, Germany has become more like Finland than truly part of either East or West. Switzerland has lost much of her international banking status, partly because of the increasing inefficiency of her bank staff which frustrated foreigners too much, and partly because with increasing exchange controls around the world fewer and fewer people were ABLE to invest their money through Switzerland.

The Arabs still do well there, and Switzerland still is as international as anywhere, and efficient enough for its vastly diminished business—especially as everywhere else is a whole lot worse. Germany fights an increasing trend towards socialism, a brand of socialism peculiarly German, certainly nothing like Russian socialism, in fact perhaps more like Swedish socialism with an edge of violence. However the trend has isolated her. Then there were Germany's futile attempts to be nice to the East in hopes that one day the country might be united. To the Russians friendship has always meant weakness and they took advantage of it; so Germany now sits in a no-man's-land twixt East and West. And even though people still buy German products abroad, her currency, while technically strong, is suspect by foreigners, and much of her trading is done in Swiss francs or in the new European unit of exchange. Oh yes—that was a strange story too.

After much economic fighting, the Europeans and the Americans went their various ways monetarily, and the entire EEC produced this European franc (as it was nicknamed)—a currency unit in which gold and all European currencies were defined. The idea was that their currencies and gold would move as a unit. The first country to fall out of the system was Britain, to no one's surprise. The British pound these days trades at £2 to one dollar. Then the Common Market itself fell apart, with France creating the first real break when she had an abortive coup d'etat in 1977. It failed, but the shock of a possible military state in France badly weakened the French franc for the rest of the decade; and Belgium suffered because of France, her currency being closely tied.

The Scandanavians continued their spiral of relative prosperity and inflation hand in hand (I have never understood how they do that). So the European franc is now a Unit of Exchange basically for the Germanic countries—Switzerland, Austria and Germany, with the rest of Europe redefining their own currencies in terms of it from time to time.

DEATH OF THE DOW

I regret the passing of the Dow Jones Average. With so much fluctuating of currencies, and with more and more socialism at home, the stock market ceased to be the main arm of capitalism and became the tool of the few opportunists with money, to preserve a constant value in an age of inflation. The names or balance sheets of the companies didn't really matter anymore. They were doctored anyway. Yes the SEC and IRS try to keep up with offenders, but no policing or revenue service can operate efficiently when inflation continues so fast as to outpace the value of taxes as well as income. So in 1979 it seemed only logical to create just one index of 1000 stocks. Now we have the "Wall Street Stock Average." It has been dull in the last five years, moving completely sideways.

Americans who have a speculator's bent put their money in offshore companies, traded land, financed ships, or even traded the constantly changing exchange rates around the world. Sure these things are illegal with exchange control, but Americans are historically good at "angles" and loopholes—still do it with complicated tax structures and excuses to start businesses abroad when special permission is then granted to take money out. And of course the bright ones got their money out of the country before the controls began. It is impossible to make anybody say what he has abroad. With so many controls the sheer mechanics of government, like South America, has become too cumbersome to properly enforce. Thank God it is also very inefficient.

Oh yes, business functions, but nobody talks about growth rates anymore. People tend to make financial killings or go broke; they don't often grow healthily and slowly in business ventures.

SUBTLE TYRANNY

Funny how I also thought America could very easily become a police state with a dictator when I looked forward in 1973. That didn't happen either. Well, not exactly. It takes a certain energy of idealism to create dictatorship, and somehow the death of the American way of life was so slow and penetrating that few people had any idealism left that could be stirred into revolutionary fervor. Sure, people tried but they failed. The U.S. is a police state in 1985 and yet it is not. Americans are free to travel and yet have no way of legally getting enough money out to travel freely. Politicians didn't erect an Iron Curtain; they merely made it impossible to arrange the air or boat fare to leave, or stay abroad. Nobody comes for you in the night, but you can die of sheer harassment from the IRS, especially if you say something against the President. They never enforced curfews but go out after dark and your life is as much in danger as it would be if the Army were on the streets with machine guns and orders to shoot on sight.

England has had her problems too. The IRA finally got the British Army out of Northern Ireland. But only because they created virtual civil war in England, requiring the Army on the streets of London and Manchester!

In these last 12 years much has happened in other parts of the world. Japan took over the entire Pacific basin. Her 1940 dream of a coprosperity sphere is now a reality. The yen is now 50 percent backed by gold. She has become the strongest trading nation in the world and is the major voice at all monetary meetings.

Latin America is finally emerging out of underdeveloped status, thanks to the proper use of raw materials. Currencies are improved in most cases.

Canada has become much more independent of the U.S.A., through diversifying her trading patterns. A political leader was elected in the late 1970's on a platform of breaking the umbilical cord with the U.S. It has been healthy, for no country should be so dependent on any other nation for so much of its trade. It has made for a friendlier feeling on both sides of the border.

Australia somehow survived its Labor government, which set it back dramatically. The new Conservative government has reversed all the old policies and the land down-under is booming again. Over one million Americans live there now.

Africa was the most war torn continent in the world in the past 12 years. Civil wars and small border wars have been unending. South Africa has modified her separate development rules, softened the rigid class barriers and has established good relations with several of her all-black neighbors.

China has emerged increasingly as a trading nation and her voice is heard more politically. But it will be several more decades before she is fully integrated into the outside world.

India continues to be a write-off, both financially and politically.

Russia is slowly becoming more capitalistic, as the U.S. has become less so. Both are gradual processes with much farther to go before they can be said to be completely altered. Russian military might is easily now the dominant one in the world. This is causing considerable worry in Europe and China. A China-Russia war seems inevitable. Europe has finally begun to re-arm in earnest.

IS THIS PROGRESS?

If we had foreseen all this in 1973 I think some would have committed suicide, and yet life goes on, and really isn't as bad as it might have sounded as a prediction. A very elderly friend of mine just before he died in 1973 said to me "When I was a boy in 1890 and America was free and capitalist, and the American ideal was still eagerly pursued, if somebody could have shown me the havoc socialism would have wrought on the country I would never have wanted to see manhood." I wondered what he meant, for while I saw impending money disaster, I had to admit that the world had never been more materially prosperous, and there were a number of good things about the prior two decades. Now I know what he meant. The world goes on and values change, and nothing is wholly bad. Man is an incurable optimist, and he has to believe that each year is in some ways better than the last, otherwise he would not reach for the stars and make progress which somehow on balance he does.

This current situation could go on for decades more. Sure, many of the things we were afraid of a decade ago HAVE been solved and the world is a better place. The fear of pollution is gone, though not because it became an ideological issue that everybody rallied behind. Much more practical than that. Car manufacturers couldn't be forced to make a nongasoline car for humanity's sake, but they very soon came up with it when the Arabs made the gas engine cease to be viable on an economic basis. When they rationed gasoline and oil and the price rose out of everybody's reach, then suddenly the car manufacturers HAD to come up with an alternative or go out of business—and they did, in 12 months flat. So the Arabs, not the conservationists, solved our pollution problem for us, and the other aspects of pollution are also well on the way to being solved. After that awful cholera epidemic that killed so many people in 1978, which was simply caused through inefficiently recycled water, suddenly something had to be done. When 2000 people died in New York City in four days then action WAS taken, just as London kicked its smog problem after a bad smog which killed thousands back in the 1950's.

We aren't getting overpopulated either. People don't seem to be having children anymore. In fact the latest government discussions are on whether to up the family allowances plan which was brought in, in 1980, to persuade people to have families. They want to double the allowance of Social Security paid to families with more than two children. In 1973 I never would have believed that America would pay people to have children, and pay them no matter what their income level was. But the world changes and we adjust.

VOTING WITH THEIR FEET

The exodus of Americans out of the U.S. continued its speed-up and today there are an estimated 10 million Americans living abroad. You see lots of ads trying to entice Americans back to the U.S. to accept high paying jobs, the same as one used to see from underdeveloped countries 10 to 15 years ago. The people to leave an eroding country are always, throughout history, the most skilled: the doctors, intellectuals, artists, writers, etc.

Oh, and Mike Oliver finally got a new nation started. It began humbly in 1975 and now has a population of 175,000. Yet it has issued 4,000,000 passports to its mostly nonresident citizens, none of whom need pay tax of any kind. The new nation has the hardest currency in the world.

By the way, Paul Adolf Volcker was asked in 1974 to move from the Treasury to the U.S. Department of Agriculture, because, it is rumored, of tremendous pressure from Congressmen and conservatives throughout the U.S.A. He is now in charge of compiling international statistics on insecticides and fertilizers.

Silver, by the way, also rose, pretty much in proportion to gold, in terms of the dollar.

Yes, overall life is tolerable. More so in some parts of the world than others, to be sure. I worry a bit about France. Since her attempted coup and the collapse of her currency, her government has taken on more and more power. She is the nearest thing to a dictatorship on the continent of Europe. If things ever blew up, they could start there. France also has funny alliances with Russia, China and the Middle-East. But this is speculation. I would say, as I stand in 1985, World War III is possibly five years away, at least, if it ever happens. Wars don't explode from nothing; they start as a trickle, and then get bigger. The world is full of small streams that could increase, but these take time, and I am not predicting, merely looking back.

THE MORE THINGS CHANGE…

Looking back over the past 12 years I'd say as I did in 1960, "plus ca change, plus c'est la meme chose." The more things change, the more they stay the same. We thought in 1973 that if we could get over this hurdle, get a good money system going, then the whole world would break forth in stability and prosperity. But typically man compromises. We got a better system in part of the world, in Europe, but a worse one in North and South America. It seems that after all, the main philosophy which I used to preach that has best stood the test of time is that you must look out for yourself. You must create your own world so to speak, and to do so requires the absence of preconceived notions, prejudices, bias, patriotic chains, or over-confidence.

I believe cynicism is the wisdom that comes with age. I'm 12 years older now, 12 years more cynical and I feel 50 years wiser for it. It's a mixed blessing perhaps, but still a blessing, to reach the conclusion one is alone in the world. It was comforting when one trusted to luck or faith or government or system. But it's far safer to know that you stand or fall from your own two feet and this way you face the problem squarely and deal with it realistically and are much more secure as a result of the effort you make. If happiness is a blanket of security then happiness comes from making one's future secure through being an island, self-sustaining, strong, confident, and relatively safe.

In English we have the phrase "every man for himself." In French they say "sauve qui peut" which translates into "save himself who can."

I hope this trip in my time machine will help someone save himself after seeing the potential of the future.

Dr. Harry D. Schultz is president of the International Investment Letter Association, and publisher of the INTERNATIONAL HARRY SCHULTZ LETTER. He is the author of a number of books, including PANICS AND CRASHES AND HOW YOU CAN MAKE MONEY OUT OF THEM, and WHAT THE PRUDENT INVESTOR SHOULD KNOW ABOUT SWITZERLAND AND OTHER FOREIGN MONEY HAVENS. The text of this article is an address by Dr. Schultz to the International Monetary Seminar in Montreal last November.