Will the Buck Stop Passing?

By R.Z. Sheppard

PAPER MONEY by Adam Smith; Summit; 335 pages; $13.95

George Washington, the incredible shrinking man on the dollar bill, warned against entangling foreign alliances. What would George think today? The world is knotted with defense treaties, trade agreements, international monetary plans; and each year $100 billion leaves his country in a cloud of imported oil smoke. This thunderhead of new wealth floats around the globe, threatening inflationary chaos wherever it hovers. Will it descend on gold, Beverly Hills real estate, Kansas farm land, New York coops?

Says "Adam Smith," pen name of George J.W. Goodman: "We have seen the greatest transfer of wealth in the history of the world, practically without a shot being fired." Saudi Arabia alone takes in $166 million a day for its oil. After two jolting oil shortages in the '70s, faith in paper money is badly shaken.

In some respects, OPEC is to the dollar what Charles Darwin was to fundamental Christianity; practically overnight a cartel that controlled most of the planet's known oil reserves demonstrated that financial security was not necessarily descended from paper currency. "The store of value," writes Goodman, "had become oil. The yen, the marks, the dollars, the francs were spent; the oil was saved."

Paper Money is clear, succinct and consistently engaging about the evolution of this embarrassing and potentially bank-breaking situation. The book is quite simply the best exposition of the subject available to the general reader. This is not surprising since Goodman, a former magazine journalist, financial editor and investment manager, writes about economics as a lively art, not as a dismal science. Here he is pondering the Big Bang theory of real estate: "Why should bricks and mortar, wood and paint, increase in price even faster than inflation? It is because not only is the currency diminishing in its worth relative to fixed objects, but belief in the currency is diminishing even faster, at a geometric rate. Thus the conventional wisdom, that what goes up must come down, may be false physics." But who knows for sure? Says Goodman: "One of my old maxims runs: Financial genius is a rising market. Booms create heroes. Someone who can flip a coin to come up heads ten times in a row will be asked not only about his technique of flipping nickels but about his opinions on events in Washington."

The author goes there to see Arthur Burns, then chairman of the Board of Governors of the Federal Reserve, and discovers that events in Washington are part of the problem. In the first half of the '60s, U.S. inflation frolicked between 1% and 2%. Then Lyndon Johnson spent billions for war in Southeast Asia and his Great Society programs. This bequeathed to Richard Nixon a 5% inflation rate, which he tried to curb by tightening credit, raising taxes and instituting wage and price controls. When the controls came off, money under pressure shot into the marketplace, and now double-digit inflation is commonplace.

There were also what an economist friend of Goodman's calls "exogenous variables," unexpected occurrences that mess up neat computer models. During the '70s, for example, there was a big jump in the cost of grain after the Soviets had to buy in the U.S. to offset their own crop failure. Hamburgers went up too, when billions of fish that would have been ground up as cattle feed disappeared from the waters off Peru.

Behind all this, like a silent case of hypertension, was the huge climb in international oil consumption: 3.7 million bbl. a day in 1950, 34.2 million bbl. a day in 1973. Goodman's paper chase leads to Venezuela, where an intellectual oil minister named Juan Pablo Perez Alfonzo was having heretical ideas. First: oil, a finite resource, should be conserved.

Second: there was no reason why the producing nations should not regulate the price of their chief export. The rest is history, and very much part of the present.

OPEC was founded, modeled on the Texas Railroad Commission and shaped by oilmen who were educated in the U.S.

Goodman populates this basic plot with characters from Keynes to Khomeini; he simplifies economic theory without being condescending; he gracefully adjusts simplistic views to cohere with the complexities of a world in which things are rarely what they seem and where one must choose enemies more carefully than friends.

What of the future? Goodman does not indulge in hollow optimism or shrill pessimism. He is worried. If Saudi Arabia, which accounts for nearly one-third of OPEC's output, drastically cuts the flow, there will be economic depression in the West. On the brighter side: Saudi Arabian moderation may prevail in the Middle East; conservation and higher production in the West may curb the growth of petrodollars, increase confidence in currency and spur a greater sense of community. The bottom line of Paper Money is that, depending on those pesky exogenous variables, things could go either way. But before there is a run on the bank, there should be a jog to the bookstore.

Excerpt

"We ask, Can OPEC hold together? The economists have said no, it can't, it's a cartel, cartels don't survive, it says so right here in this book. The economists knew only numbers, not asibaya, not an Arab sense of community, not the Third World flexing its muscles. We ask, Where will the price go? Ten years ago not a single economist could foresee a tenfold increase in price. OPEC is a Club, not quite a cartel, not as well organized as the Texas Railroad Commission, sometimes more like a bunch of 18th century privateers waiting for the fat Spanish galleons to pass. It has survived a 35% drop in demand for its oil. in 1975; it has survived late-night screaming among its members at meetings; it has survived even a real shooting war between two of its major producers. For all its quarrels, it has held together better than the Mighty West. It will survive until the oil consumers develop energy independence and the diplomatic cohesion and skills that are appropriate to major powers."

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