The Food-Shortage Myth
Writing in the New York Times in the aftermath of President Nixon’s August 1971 decision to sever the dollar’s link to gold, author John Brooks observed, “that the president and his advisers, in making their Draconian move, did not understand what they were doing.” Truer words have rarely been written.
Given the absence of policy that must coincide with the notion of a “floating” currency, the dollar, previously defined as 1/35th of an ounce of gold, suddenly had no market definition. With U.S. monetary authorities lacking a benchmark whereby they could manage the greenback, the latter’s value quickly eroded.
Though the oil “shocks” that followed are to this day described in establishment economic quarters as a function of OPEC’s largely symbolic "embargo," the real answer lay in a currency that was quickly losing value. This materialized first in the form of a rising gold price, and it soon led to broad increases in the prices of all manner of commodities.
OPEC, previously toothless due to the stability of the oil price under a world-currency regime centered around a stable dollar, had its heyday amidst a period of rising petroleum prices that shifted enormous amounts of increasingly worthless paper currency to the Middle East. In concert with inflation’s rise, so did OPEC’s stature grow; its power every bit as inflated as the cheap dollars sent over in exchange for oil.
Had OPEC’s newfound heft been merely coincidental, this would have been made quickly apparent by non-oil commodities that would have remained inexpensive alongside oil’s rise. In fact, the exact opposite situation materialized.
While the dollar price of oil rose 300% during the dollar’s first major devaluation, other commodities not impacted by OPEC machinations similarly became dear. In 1973, meat prices were rising at a 75 percent annual rate. From 1972 to 1973 the cost of a bushel of wheat rose 240 percent. Soybeans rose from $3.50 a bushel in 1972 to $12.00 in 1973.
With commodities priced in dollars, a change in the dollar’s value has a near instantaneous impact on the spot price of those same commodities. The greenback’s fall post-Bretton Woods in a sense made a broad commodity rally inevitable.
And perhaps foreshadowing the bipartisan hysteria concerning food prices today, the doomsayers of thirty years ago had their day in the sun. In 1972, the Club of Rome released The Limits to Growth, which said if economic growth were allowed to continue, the world would run out of food and commodities; oil disappearing from the earth by 1992.
Ever eager to latch on to any crackpot notion embraced by the intelligentsia, President Jimmy Carter commissioned a study from Gerald Barney at the Rockefeller Foundation titled Global 2000. The report predicted rising commodity prices thanks to declining food and oil production wrought by falling supplies of both. It is said that the report greatly impacted our 39th president, and partially explained his dour countenance throughout the 1980 election.
Moving to the present, a number of commentators from both sides of the political spectrum have called attention to rising food and commodity prices. Parroting the “visionaries” from the Club of Rome, New York Times columnist Paul Krugman recently asked whether, “limited supplies of natural resources pose an obstacle to future world economic growth?”
Kevin Hassett of the American Enterprise Institute has bemoaned a World Bank study showing global food prices have risen 83 percent over the last three years; a period in which “almost all of the increase in global maize production from 2004 to 2007 went for biofuels production in the U.S.'' Hassett’s stance becomes more interesting when we consider the long-held view of many right-of-center think tanks that U.S. farmers produce too much food.
The often insightful Ambrose Evans-Pritchard of London’s Daily Telegraph recently wrote of a “Malthusian crunch [that] has been building for a long time,” thanks to the world’s addition of 73 million mouths per year. Evans-Pritchard channels Hassett in his proclamation that the “mass diversion of the North American grain harvest into ethanol plants for fuel is reaching its political and moral limits.”
Not defending the hoax that is ethanol for one second, the fears expressed by Hassett and Evans-Pritchard are somewhat overdone. No doubt the dollar price of wheat, corn and soybeans has increased respectively 136, 203 and 205 percent since 2001. It seems like a lot, and in isolation would make their worries (along with those of Krugman) understandable.
But what all three left out of their analysis is the dollar’s near singular role in the above. Indeed, over the same timeframe the objective benchmark that is gold is up 244 percent in dollar terms. Rather than expensive, food in real terms hasn’t kept pace with a severe dollar devaluation that has spread to currencies around the world.
When inflation outside the U.S. is considered, it’s seemingly hidden owing to the desire of currency experts to compare the interplay of paper currencies lacking any market definition. But in truth, dollar devaluations going back to 1971 have historically occurred in concert with inflationary outbreaks worldwide. And that’s what’s happened over the last several years.
Since the summer of 2001 when the dollar started to fall, we’ve heard persistent chatter about the strength of foreign currencies relative to the greenback. The strength, however, has been highly illusory in that it’s merely shown that currencies not our own have been stronger than the even weaker U.S. dollar. Measured in gold, it would be hard to find any currency that hasn’t lost value in this decade; hence the worldwide inflationary outbreak that has spread to food prices, and that’s shown up in government measures of inflation that have reached multi-year highs.
So rather than a tragedy of too much growth, too much ethanol production or too little moral fiber, the food “shortage” story is as it’s always been: a dollar story. Going back to 1971 and our mistaken decision to float the dollar, periods of weakness since then have regularly led to commodity shortages of all kinds, including corn.
A simple solution to the present food problem would involve the Bush Treasury making plain that it would not just prefer a stronger dollar, but a stable one defined in terms of something real like gold. Food shortages and the alleged power of OPEC would quickly become historical relics if Treasury made such a move, but in considering our present monetary authorities, it seems that they, much like their predecessors in the Nixon Administration, do not know what they’re doing.