JFK Would Have Staved Off Bitcoin

The designers of the policy mix, Kennedy and Dillon.

Bettmann Archive

Why did Bitcoin come to be? The computer science revolution gave us the possibility of a blockchain. All sorts of neat things can be done with the blockchain, including trading unique pieces of online property that keep their nature after the trade—currency, in a word. Technological development gave us Bitcoin, in an important sense.

In just as important a sense, not having a gold standard gave us Bitcoin. In 1971, the United States, having just about for all time defined the dollar as a unit of precious metal, gold or silver, ended this convention. President Richard Nixon said he was suspending, for good as it turned out, the exchange of the dollar at $35 per ounce of gold, the price that the United States had guaranteed since 1934 (before that, it was $19-$20). The economy and the public loathed this move. How do we know? Look at the before and after.

Postwar prosperity, the legendarily successful era of the American economy over the generation after World War II, bloomed as the United States was on the gold standard. Stagflation, the ugly dozen-year combination of constant recession and enormous increases in consumer prices happened with 1971. America became the greatest economy in the history of the world in the century-plus after it mandated precious-metal-defined currency in the Coinage Act of 1792. Since 1971, the economy has had its moments, but true mass prosperity has proven elusive in the 2000s especially.

The exceptions in American economic history to comprehensive success, pre-1971, were when taxes suddenly got enormous, such as in the Great Depression.

Details on American monetary history from the perspective of Bitcoin is the theme of our new book Free Money: Bitcoin and the American Monetary Tradition. One set of details concerns the 1960s. As the decade got underway, President John F. Kennedy made it clear he was not going to deviate one bit from redeeming the dollar on demand for $35 per ounce of gold.

The economy responded with mega-growth.

A recent book on Kennedy’s remarkable secretary of the Treasury, C. Douglas Dillion, takes us back to these gold old days. It is particularly gratifying to see how Richard Aldous’ The Dillion Era (2023) corroborates the theses Larry Kudlow and I advanced in JFK and the Reagan Revolution (2016). Aldous shows that Dillon was in charge of gold and tax policy under JFK—and that policy was to keep the gold standard and cut tax rates. As tax rates were cut, the incentive to make and hold dollars grew, decreasing demand for gold and leaving the $35 price no less than what the markets preferred. In economies in which commitments of marginal dollars yield more after tax, the preference for dollars over gold rises. Tax-rate cuts solidify the gold standard.

Lower tax rates, sound classical money—this was the JFK policy mix. Crazy economic boom happened. As it was getting going, Kennedy died, accursedly by assassination, and everybody started to get everything wrong.

First, Dillon’s competitors in the White House, the academic economists led by Walter Heller at the Council of Economic Advisers, became chatterboxes, as Dillon went on to other pursuits. These academics said that the JFK tax cut was supposed to be temporary. Heller, Paul Samuelson, James Tobin and company had been opposed to Dillion’s across-the-board cut in tax rates, finding marginal reductions insufficient on Keynesian grounds. Marginal tax cuts make more valuable the next dollar of income as opposed to ensuring that those with the greatest “propensity to consume” (the lower earners) get more money. This, rather, is the specialty of non-marginal tax cuts, which were not the ones that Dillon and JFK chose.

Second, President Johnson raised marginal tax rates, all of them, up ten percent. The gold market shot up like a rocket. High tax rates again in the United States? I’ll take gold for my dollars now.

And then third, Nixon, who had lost to Kennedy in the 1960 election, by the early 1970s, as president, was not about to ape and imitate the man who had bested him. He was not going to call on the JFK policy mix, namely save the gold standard by lowering tax rates. In 1969, Nixon put on the Alternative Minimum Tax, upped the capital gains rate by ten points, and kept LBJ’s income tax surcharge. More banging on the doors of the gold markets. By 1971, the demand for the dollar drying up and gold soaring privately, Nixon acted. He ended the gold standard.

The problem is that the public hates fiat money. The experts think fiat money is mature and serious and the gold standard cranky, weird, and atavistic. Experts prevailed, for a while. They could have bowed to the reality that the public hates fiat money and adores the gold standard.

In the 1980s and 1990s, we had a chance of accommodation when huge tax-rate cuts sent the private gold price tumbling and stable at a low level, about ten times $35, or $350 per ounce for the better part of those two decades. Yet no reform happened. The dollar remained fiat. And then we became un-enamored of marginal tax cuts in the 2000s. Gold took off like a rocket. Up not ten times $35, but ten times $350. A hundred times $35.

So Bitcoin had to muster itself into being in 2009 to begin the process of establishing a credible, competitive alternative to fiat money. It all could have been avoided had we stuck with gold, which would have been easy enough had we stuck with marginal tax cuts. This was JFK’s proper legacy, including as it would have ever-expanding mass prosperity, that never came to pass.