Succeeding in Hard Times: Lessons From the 1890’s Deflation, and the Wonderful Wizard Of Oz.
For ordinary people to prevail in hard times we need to become net savers, and net producers. But to begin with we should lower our expectations of leaders and increase expectations of ourselves. At the very least this will reduce our disappointment and wasted energy — which we need for figuring out how to produce more than we consume and save some of what we earn.
First, a short back-story to the US Dollar, inflation and populism.
Although today the US dollar is the de-facto reserve currency of the world, this has not always been the case. The dollar was adopted in 1792 as a national currency after the United States declared independence from Great Britain in 1776. At the time the US economy was not the high-tech consumer economy it is now. It was a developing economy with tremendous development challenges ranging from the need to establish formal property rights to developing reliable public institutions, including reliable money.
As part of building confidence in the newly minted dollar, the currency was backed by gold and silver in a ‘bimetallic’ standard where the government essentially guaranteed that it would redeem dollars with a specific ratio of these metals. Through consistently living up to this promise, the dollar became a trusted currency and a strong foundation for economic development.
During the US Civil War, the government temporarily abolished the bimetallic standard so that it could print enough money to pay for the war effort. This money, tenderly known as the ‘Greenback dollar’, was not backed by either silver or gold because the government did not have enough of these metals to back the number of Greenbacks that they needed. This system worked for a while but led to a tremendous inflation problem which prejudiced trust in the dollar.
After the war, the government adopted the gold standard to improve confidence in the dollar and sort out the inflation problem. This plan worked, but it also created a new problem. Deflation. This deflation resulted in prices for some goods falling by as much as 30%, which put terrific pressure on the majority of people selling goods and services in the economy, especially indebted farmers. They of course were unhappy about this and expressed their unhappiness through a strong populist movement that has been a subject of great intellectual inspiration — including L. Frank Baum’s children’s novel The Wonderful Wizard of Oz.
Both the deflation and the Wizard of Oz have interesting lessons for us today.
If you need a recap, the story follows a Kansas farmgirl named Dorothy from an ordinary life on her parent’s farm to an extraordinary land called Oz. Her adventure begins when she and her dog Toto are whisked away to Oz by a powerful tornado that tears through their farm, scooping them up and dumping them in the enchanted land. In Oz, they discover a road paved with yellow bricks which they follow in the hope of finding a Wizard whom Dorothy thinks may be able to help her and Toto to return home. When they eventually reach the Wizard, he promises to help Dorothy only if she brings him the riding broom of a witch called the Wicked Witch of the East. On their journey, Dorothy and Toto encounter a brainless Scarecrow, a heartless Tin Man and a Cowardly Lion.
After a series of adventures with her companions, Dorothy ultimately discovers that the power to return home lies simply in tapping her silver slippers (which became ruby slippers in the Judy Garland film adaptation) together three times — a power that was within her grasp all along.
This story has been described by some literary scholars as an allegory for the 1890s populism and monetary dilemma. The Yellow Brick Road is perceived to be the ‘gold standard’ while Dorothy’s silver slippers are believed to represent the populist proposal to include silver in a re-adoption of the ‘bimetallic’ standard that had worked before the war. The Scarecrow represents the indebted farmer, the Tin Man the disempowered industrial worker, and the Cowardly Lion the political leaders lacking in courage and conviction to fight for their constituents. The Wicked Witch of the East represents the financial elite of the East Coast while the Wizard is a manipulative and deceptive politician. Oz is itself considered a reference to ‘ounce’.
So who is the Wizard of Oz today?
On a superficial reading, Dorothy’s quest may symbolize the hope that ordinary people place in political figures, especially during hard times, and the Wizard ultimately being found out as just a small man pulling levers from behind a curtain provides a metaphor for authority figures failing to have solutions to social problems.
Yet the deeper meaning of the story is an empowering one. Instead of placing their hopes in figures of authority, the story encourages individuals to look within themselves for the solutions that they desire, and the strength to confront their challenges.
The years that followed the populism of the late 1800s led to significant development of the US and global economies, two world wars, a great depression and the most powerful improvement in global human living conditions in history. The chart above shows that US real GDP per person is 11 times larger today than it was in the 1890s (that is after adjusting for inflation).
These achievements were built on a foundation provided by a US dollar that was supported by solid institutions and an economy that became a powerful net producer of goods and services. The proverbial ‘Dorothies’, Tin Men, Scarecrows and Cowardly Lions got it together to create more than they consumed, and this led to great prosperity.
Since then, the US economy has taken its dollar strength and used it to become a net consumer of goods and services from the rest of the world. This is possible because the dollar and the institutions underpinning it are still strong enough for the government to create vast quantities of money which it pumps into the economy to keep it strong. But this is not sustainable because ultimately it may lead to a long-term inflation problem.
Today we are already experiencing populism characterized by high prices after a strong bout of post-pandemic inflation. This time the powerful populist farming communities have been replaced by large and powerful urban communities who experience inflation differently. As producers, farming communities were hurt by deflation but as consumers urban communities are hurt by inflation. Now the largest share of the vote is urban, and these constituencies are not happy about the inflation and they want somebody to solve it.
The enduring message from the 1890s, and what followed, is that the solutions to our problems lie within ourselves and the strength to confront our challenges. There is simply no person or policy that can solve the inflation problem, it requires a collective effort.
So what does this mean for ordinary people, savers and investors? To begin with, it means we should lower our expectations of leaders and increase our expectations of ourselves. From there we need to embark on the tricky calculus of producing more than we consume, and saving some of what we earn. In their purest form, these are the solutions that we desire, and like Dorothy’s silver slippers, they are already within our grasp.
A few tips on where to start are covered here:
References
Baum, L. Frank. The Wonderful Wizard of Oz. Oxford University Press, 2010.
US Real GDP Per Capita Data: www.measuringworth.com.
