Leadership versus Power
Good leaders are willing to pursue unpopular policies. They realize it’s necessary for long-term viability.
Many leaders don’t do the unpopular but necessary. Instead, they pursue popular but shortsighted policies. These policies sound good, but delay necessary reform. They enhance their personal power, but make long-term success more challenging.
Jimmy Carter appointed Paul Volcker as FED Chair. Carter gave him a mandate to deal with the terrible inflation of the late 1970s. Volcker did, and his actions exacted a high political price from Carter. At first, Volcker’s federal funds rate increased unemployment. Later, it resolved the inflation problem and employment recovered.
I finished college at the end of Carter’s first term. I didn’t like him. His policies were not making it easier for me to find a job. But Carter’s policies led to 35 years of low inflation, job growth, and prosperity. Carter lost the 1982 Presidential election. He also created the foundation for decades of economic prosperity.
Richard Nixon pursued a different path during his terms in office. He unilaterally reneged on the Bretton Woods agreement. This 1946 global policy made the dollar the world reserve currency. As part of Bretton Woods, the United States agreed to convert US dollars to Gold for any country. This promise lasted from 1946 till 1971.
The United States couldn’t afford to buy enough gold to continue this commitment. Nixon didn’t say that. He blamed the problem on bond traders. Nixon temporarily suspended the promise to convert USD to Gold at $32/ounce.
Nixon’s policy change has remained in place for 56 years. It became permanent. Decoupling the dollar from a hard asset, it removed constraints on spending and money creation. This enabled the United States to run up a $40 trillion debt at below-market interest rates. Debt is what backs the dollar today, and the United States’ promise to pay its debts.
In the short term, this was a political winner for Nixon. This policy has had long-term consequences.
High debt levels increase risk. Investors want higher compensation for taking on the added risk. This is why long-term Treasury bond interest rates are increasing. The United States government is now spending more on interest than on its military.
This is an unsustainable path.
The passing of time has enabled me to see Jimmy Carter’s actions as a personal sacrifice he made for the country. Carter made wise policy decisions for the long-term health of the United States. Richard Nixon was a power broker who served himself.