“Let the Yankees Freeze in the Dark” read the bumper stickers in Texas in February 1982, the month I flew back from West Germany, mustered out of the U.S. Army at Fort Dix, New Jersey, and returned to my hometown of Wayne, Michigan.  Oil had soared from $3.60 per barrel in 1972 to $37.42 in 1980.  It dropped a little in 1982, to $31.83.  All this occurred despite the federal imposition of price controls, which President Reagan lifted in 1981.

Unemployment in Michigan was 16 percent, which was technically at a depression level.  I drove everywhere, pounding on doors to get a job.  Nothing.  Friends and relatives decamped for Texas.  I flew to Washington, D.C., and again took up opinion journalism.

In 1987 it was the opposite.  The Michigan bumper stickers read, “Let the Texans Drown in Oil.”  The auto industry was humming.  Great Lakes State unemployment had been halved, to 8.2 percent.  But oil prices had dropped way down, to $14.44 per barrel—less than half of the 1982 figure.  Texas unemployment more than doubled, from 4.2 percent in December 1980 to 8.8 percent in April 1987.

We are led to believe that the wild fluctuations in oil prices are always the fault of Persian Gulf sheiks.  But the main problem in the 1970’s “oil crisis” was the shenanigans of our own Federal Reserve Board.  This problem is not just historical; it is happening today.  And it is important that we address this problem now, because oil prices, the value of the dollar, and the jobs market are all related.

Inflation hurts the economy, as higher prices erode purchasing power, especially for families and small businesses.  But so does deflation, as prices fall not naturally but because of faulty monetary policy.  We have seen this over the past two years.  During that time, most of us have enjoyed the collapse in oil prices and the subsequent cheap gas at the pump.  Others, however, have been hurt.

Item 1: Dan Molinski writes in the Wall Street Journal (April 14),

Direct employment in oil and gas extraction, which had grown by more than 50,000 jobs since 2007, has fallen by about 3,000 jobs since it peaked in October at 201,500, according to the Bureau of Labor Statistics; 12,000 jobs have disappeared from the larger category of energy support since it reached 337,600 jobs in September.


And the layoffs are continuing. . . .

While layoffs in the industry have hit office workers and high-skilled employees such as geologists and petroleum engineers, it is the roughnecks who are feeling the brunt of the cuts.

Item 2: On January 7, President Obama visited my old hometown, Wayne, one sixth of which is the Ford Motor Company’s Michigan Assembly Plant.  Since opening in 1957, it has seldom been idled, even during the worst recessions.  It usually employs 1,200 people, while giving business to numerous local small manufacturing plants.  The plant’s middle-class workers support local businesses as varied as construction, food, entertainment, and bars.

“Saving the American auto industry was the right thing to do,” the President intoned at the plant—even though Ford didn’t get a government bailout, only GM and Chrysler.  “Betting on you was the right thing to do.  The American auto industry is back.”

Yet the Detroit News reported on the day of the President’s visit that “the Wayne factory that makes the Focus gas-powered car and C-Max hybrid gasoline-electric car is shuttered this week because of falling demand caused in part by plummeting fuel prices.”  In April, the plant announced it would lay off 700 workers between June and September.  According to the AP, “For the quarter, the C-Max hybrid is down a whopping 31 percent. . . . Low gasoline prices have hurt small vehicle sales industry-wide.”

This recent deflation distortion was the flip side of the inflation that caused the auto industry’s collapse during the Great Recession of 2007-09.  Recall the fun-in-the-sun everybody enjoyed in the late 1990’s, when gas dropped below one dollar per gallon across the country, and sales of gigantic trucks and SUVs soared.  Gas gradually doubled in price to two dollars per gallon by 2006, which was somewhat tolerable as the economy was cranking.  But then gas doubled again to above four dollars in late 2007 even as the economy was weakening, before crashing in 2008.

According to WardsAuto, total vehicle sales dropped like a Chevy Silverado flying off a cliff, from more than 16 million each year from 1999 to 2007, down to 10.6 million in 2009.  Truck sales dropped even faster, from more than 8.7 million per year from 1999 to 2007, down to 5.2 million in 2009.

Inevitably, today’s deflation will end, when the Fed brings back inflation, helping the oil and other commodities industries, while hurting the auto and other manufacturing industries.  This has happened before, with every deflation leading to a deflationary recession, then leading to inflation, which produces an inflationary recession.  Such a deflationary recession occurred with the dot-com bust of 1999-01, when gas dropped below one dollar per gallon, even in expensive California.

The vicious cycle of inflation and deflation, and the related loss of jobs, will not end until prices are stabilized—not by government wage and price controls, but by getting the government out of the price business altogether through returning to a stable, gold-backed dollar.

Gold—not the dollar or any other fiat currency—is the essential money.  It is misleading for financial analysts and writers to say that gold rose (or declined) so many dollars today.  It would be better to say that the dollar rose (or declined) so much against gold.

The overall volume of gold is fairly stable, rising at about two percent per year, which is also the average increase in global economic output.  Occasionally, gold discoveries have caused monetary inflation, such as the Spanish looting of the gold of the New World in the 16th century, which financed the Spanish Crown’s wars but also ruined its economy—Keynesianism avant la lettre.  But modern industrial methods have kept gold production stable since World War II.

Because gold is so plentiful now, it is difficult to manipulate, especially by governments; and it is malleable, durable, and portable.

The dollar, euro, and yen certainly are currency.  But currencies also lose value, even die.  Except for numismatists, no one finds value today in Confederate dollars, Reichsmarks, or the Zimbabwean dollar.

The U.S. dollar will not go that way.  Despite what some gold bugs fear, the dollar will not even suffer hyperinflation.  Except for the Reichsmark in the 1920’s, when the Weimar Republic was sloughing off war-reparations debt, no Northern European currency, or any currency of their descendants in former colonies, has ever been in hyperinflation.

Nonetheless, the U.S. dollar has suffered inflation of a milder sort, as well as periodic deflations of shorter duration.  The buck once was tied to gold at $22.67 per ounce from 1834 to 1934 (excepting the Civil War greenbacks); and at $35 from 1934 until 1971.  Since then the price has fluctuated—upward to $850 per ounce in 1980, then dropping down to an average of $350 per ounce from 1981 until 1997.  Fed Chairman Alan Greenspan foolishly increased the dollar’s value to $255 per ounce by 2001, hence the deflation—including the low oil and gas prices—of that period.

A strong currency is one that has a stable value, neither decreasing nor increasing against gold.

After the September 11 terrorist attacks, Greenspan panicked and inflated the currency, to $566 per ounce of gold by the time he left office in January 2006.  His successor, Ben Bernanke, continued the inflation up to $1,775 in September 2012.  But then Bernanke backtracked, deflating the dollar’s value into the $1,200 to $1,300 range in June 2013, where it has remained since, including under his successor, Janet Yellen, who became Fed boss in February 2014.

Long-term price changes—inflation or deflation—take about 15 years to work through the economy.  If you go to your boss and say, “The dollar just lost half its value against gold; please double my salary,” he will laugh.  Inflation often happens right under our noses because companies try to prevent pushing higher prices on their customers by resorting to efficiencies and even tricks.  The cheese I used to buy in eight-ounce packs still looks the same, but each block is now seven ounces—a 14-percent price increase.

Today, we are still seeing prices go up as a result of the inflationary period that occurred from 2001 to 2012.  Oil and gas prices are still higher than in 2001.  But those prices have dropped in recent months because commodities quickly react to changes in the price of gold.

There are three things that shape overall price changes for goods and services, which cause confusion when they occur simultaneously.  First, there are improvements in technology that happen as a result of invention and innovation.  This is the key factor in falling computer prices and in the decline in U.S. farming employment in the last century from more than half of American workers to less than two percent.

Second, as I mentioned above, are changes in monetary policy; central banks can greatly influence long-term price changes.

And finally, there is political manipulation.  This certainly is what drove down the price of oil in the mid-1980’s.  The Reagan administration convinced the Saudis to increase oil production, in order to “break the back” of the Soviet Union’s energy-based economy during the latter days of the Cold War.

Something similar may be happening now, as Fed policy is driving up the value of the dollar against gold and the Saudis are increasing production.  The federal government may intend to punish Russia for her annexation of Crimea and for thwarting NATO in Ukraine, and Iran for her nuclear program.  Others wonder whether the Saudis are striking back at the United States because of the recent boom in U.S. shale oil production.

However, as in the mid-1980’s, any political manipulation of the price of oil cannot last long; oil and gas are now a vast global industry, and any increase in production will simply shut down higher-cost wells and refineries until prices rebound.  Moreover, the Saudis can’t keep prices artificially low for too long because doing so cuts royal revenues, reducing welfare payoffs to their restive, growing population.

The global oil price is closely tied to the price of gold, with some variations.  Since the end of World War II, on average an ounce of gold has bought 15 barrels of oil.  Indeed, instead of just a “gold standard,” we might talk of a “gold-oil standard.”  The variations occur because of events like wars, embargoes, and refinery explosions.  But the ratio always returns.

Here are some recent gold-oil ratios (the price of gold per ounce/the price of oil per barrel): July 1, 2012: 18.8; January 1, 2013: 18; July 1, 2013: 13.1; January 1, 2014: 12.2; July 1, 2014: 12.4; January 1, 2015: 22.5; May 15, 2015: 20.4.

As you can see, the average ratio from July 1, 2012, to July 1, 2014, was 14.9—nearly the same ratio (15) as that of the past 70 years.  In a political economy, it’s hard to find any metric as stable as that over so long a period of time.

The last two ratios are the anomalies: 22.5 and 20.4, a result of the recent drop in oil prices.  However, the metric suggests the price of oil again is moving up, even if the price of gold remains between $1,200 and $1,300 per ounce.  Such a rise will, in turn, scramble American manufacturing, with my hometown Wayne plant again gearing up, takin’ care of business, and workin’ overtime to produce fuel-efficient cars, while plants producing the big gas-guzzling trucks and SUVs will slow or shut down.

Gold observers have also noticed some other ratios that seem to have held for centuries.  For example, an ounce of gold equals a man’s suit.  And an ounce of gold buys 600 loaves of bread.  In late May, a typical Brooks Brothers suit was going for $1,100.  And bread at the local Albertson’s was $1.99 for a 20 oz. loaf of white, or $1,194 for 600.  At the time, gold was $1,209 per ounce.

America, which receives great benefits from the dollar’s status as the world’s reserve currency, should knock off the inflation and deflation.  A stable dollar—maintained at, say, $1,200 per ounce in perpetuity—would give our manufacturers a “unit of account,” or a “Gold Polaris,” as Jude Wanniski called it, by which to measure their current output and plan for future production.  This would mean fewer jobs shipped to China, and a greater stability for the American middle class.

By some measures, China recently surpassed the United States in economic output.  In the past, China’s emperors maintained a gold standard, sometimes over long periods of time.  Why not beat them to the punch this time?