Monday, August 2, 2010

Howard Katz Takes Alan Abelson To Task

Howard Katz claims last Monday's rout was caused by Alan Abelson saying unkind things about gold in his Barron's column of last week. Katz make this point that's worth remembering: contrasting two periods of American history and the fate of real wages in each.
First, consider 1866-1896. During this period the U.S. was on (or returning to) the gold standard, stocks were flat, the real wages of the average worker rose by 90% and foreigners poured into this country because the streets were (in a very real sense) paved with gold. Second, consider 1980-2010. During this period the U.S. issued trillions of paper dollars (yes, trillions). Stocks went to the moon. The real wages of the American worker fell (the only generation to be poorer than its fathers) and foreigners are denigrated as “illegals,” and used as an object of hate. In which period were Americans rich and in which are they poor?
With regard to gold as an investment, Katz says it's time to sit tight; he cites a well-known quote from Jesse Livermore to that end.

Regarding real wages: remember Henry Ford's famous five-dollar day? Back in the time when he offered it, 1914, five dollars meant a quarter of an ounce of gold. Back then, no income tax was paid on wages of that size. So, a worker in Ford's plant would have gotten a quarter of an ounce of gold tax-free for a day's hard work. At today's prices, that's more than $350 per day take-home. A six-day week meant 1.5 ounces of gold per week, or about $1,700 at today's prices.

$1,700 per week, take-home. At current tax rates, that would be around $3,000 per week gross. If no vacation time, $3,000 a week is $156,000 per year before taxes. For skilled labour, albeit with a six-day week and eight-hour day. Yes, the five dollars was for eight hours of work.

Sounds a lot more impressive than the nominal value, doesn't it?


  1. Daniel, I enjoy your blog very much. I reckon Henry Ford had no opportunity to move production lines to China. Poor man...

  2. Thanks for the compliment; I'm glad you're here.

    Even nowadays, moving a car plant to mainland China is a bit daunting unless they're made for consumers in the area. The transporation and other logistical costs are too high to make it worth any car company's while to make 'em there and ship 'em here.

    Jeff Rubin is making the argument that higher oil prices will make a lot of present outsourcing unprofitable in the near future.

  3. As far as the ratio of wages after taxes to gold is concerned, have a look at

    The current value of the ratio suggests that we are not in a nascend bubble but rather in a full-blown bubble which is about to burst. The best time in the western world was 1970, which is supported by anecdotical evidence. I wasn't even born back then so can't tell for myself.

  4. Thanks for the link. The graph doesn't exactly point to a long-term improvement in the conditions of the American worker.

    I haven't shifted to your position on the gold-bubble matter because one of the signs of a bubble before take-off phase (what I call a nasent bubble) is overvaluations that act like they're permanent. Long-term bull markets typically end in a parabolic rise - a bubble - and gold hasn't been through one this decade except in the short term.

    From what I've read, there was a general view that things were good and would be getting better back in 1970. The '70s were a disappointing decade (except for goldbugs.)