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A Trip Down Monetary Lane

October 23, 2013 By Lee Egerstrom, Economic Development Fellow

It was 40 years ago right about now when the Arab oil producing states imposed an oil embargo against the United States in response to the October ’73 Middle East war. Gas prices quadrupled; lines formed for blocks around gas stations, especially on the East and West coasts, and this writer and researcher’s life would be changed forever.

Most everyone remembers big, headline grabbing political events. Few people remember or appreciate the intricate policy details that led to or were a response to those events—you know, things like Federal Reserve Board decisions that had major economic implications long after the headline grabbing event had been settled.

I have now spent more than 40 years trying to sneak information about monetary policy into journalistic and analytical reports and columns. Sneak is the operative word. Unless you are an economist or international banker, a mere mention of the Fed causes eyes to blur or roll up into sockets.

The sneaky message today is that we Minnesotans dodged a terrible bullet a week ago when Congress flirted with sanity and kept the government from defaulting on debt.

The 1970s

Modern monetary policy started in August 1971 when President Nixon withdrew the country from the Bretton Woods monetary agreement, a move justified in my opinion. This ended the “gold standard.” Currencies have since floated freely, finding their exchange value among commodity traders.

The unintended consequence then was the dollar fell through the floor. That made U.S. commodities and manufactured goods inexpensive to buyers converting gold or their own currencies into cheap U.S. dollars. It made agricultural trade and farm prices explode; the Soviet Union shocked the world by becoming a major importer.

Being a Washington reporter for Midwest newspapers, I was assigned to find out “what the Russians are doing.” Thus began a journalism career watching farm, trade and economic policies.

When the gas lines formed in Fall 1973, I was off to the Middle East to report on when the spigots would be turned back on. In an interview with Prince Fahd, who would later become king of Saudi Arabia, I was given an economics lesson that holds true to this day.

Oil prices denominated in U.S. dollars had quadrupled. But this had more to do with the devaluation of the dollar than it did OPEC’s supply and demand mechanisms. Iran, Nigeria, Mexico and Venezuela, for example, were ramping up production to fill supply shortages caused by the Arab oil embargo.

Fahd complained U.S. import taxes on oil were partly responsible for the high prices of gas in America. He echoed Midwest agricultural complaints against Japanese and other import taxes on American commodities. These mutual complaints contributed to international trade agreements that came later.

Presidents Nixon, Ford and Carter spent the entire decade battling inflation made worse by the cheap dollar and spurt in international trade. After everything else failed, Carter gave the financial markets what they wanted: Paul Volcker.


The tight money regime of the Volcker-led Fed stomped inflation flat. Interest rates soared. The dollar reached record highs against the German mark and Swiss franc. America went into a 1981-1982 recession. When the broader economy began a mild recovery, the commodity producing sectors went into a delayed tailspin remembered to this day as “the farm financial crisis” (1982-1987).

In data I assembled for a 1987 Great Lakes shipping conference in Duluth, I noted world agricultural trade declined 40 percent between 1981 and 1985; the U.S. share of the world wheat market fell from 48.2 million metric tons to 25 mmt and the U.S. share of world coarse grain (corn) trade fell from 70.7 mmt to 36.3 mmt.

Davis Helberg, the Duluth port director at that time, cited data showing 30 percent of the world’s shipping fleet was idled in that period. It wasn’t surprising. World commodity trade is denominated in dollars, and so is most international debt held by developing countries.

By 1983, Latin American debt reached 56 percent of combined Gross Domestic Product. Since this debt was being repaid with low-valued dollars, combined Latin American external debt was equal to 325 percent of the region’s export earnings.

All commodity producers suffered. “We are the front end of the economy,” said Craig Pagel, president of the Iron Mining Association of Minnesota. “If it isn’t grown, it’s mined.”

Minnesota Department of Revenue records show taconite production fell from a high of more than 55.3 million tons in 1979 to 23.4 million tons in 1982. That was the lowest output until 2009—the depth of the Great Recession—when production dropped to less than 17.1 million tons.

But there were winners in the inflation-busting 1980s. Retirees who had government bonds and other types of stashed cash received double-digit returns on their money … better financial rewards than most had seen in their working years. Country auctioneers also made money; more than 30,000 Minnesota farms changed hands - a glimpse of what would come with the housing bubble in 2006.


Inflation was gone. Centrist fiscal policies for most of the Clinton years combined with stable monetary policy to produce the longest period of sustained economic growth in U.S. history. We even had balanced U.S. budgets.


A new administration and a mostly new Congress adopted the motto, “If it ain’t broke, fix it.” We started two wars, and cut taxes! We continued movement towards more deregulation of financial industries, blurring distinctions between ponzi schemes and derivative markets.

To its credit, the Fed did try to keep the U.S. economy afloat but offsetting fiscal policy undermined its efforts. The Great Recession followed and is still dogging us.


Most of this decade is yet to be played. The Fed seems poised to try and keep the economy growing, albeit slowly. Congress, however, is less predictable and another showdown over federal budgets and debt ceilings is due in January and February. This much we now should know:

If Congress pushes the federal budget over the so-called "fiscal cliff," Minnesota's economy will fall like a rock. As Pagel noted, Minnesota has a huge stake in the "front end of the economy." Agriculture, forestry and mining need stable monetary and fiscal policies, and trade needs a stable U.S. dollar.

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