In the previous posting in this series we learned that the Keynesian dogma that new capital formation can only be financed by cutting consumption, saving, then investing is false. Even more dangerous than that assumption, however, is the idea that money and production should not be directly linked. This gives us the more damaging of Keynes' dogmas:
Keynesian Dogma Number 2: Money can be created for consumption and government spending without the necessity of first cutting consumption and saving, but not for investment in new capital.
Dr. Moulton's Finding: The periods of increased consumption that, in each and every case preceded periods of intensive capital formation in the United States from 1830 to 1930 meant that savings were necessarily depleted to finance the increases in consumption. The financing for new capital formation did not, as many economists still presume, come from England and the Continent. The financing came from the extension of credit by commercial banks.
Analysis: The belief that the financing for America's industrial, commercial, and agricultural expansion came from Europe is easily refuted. European economies needed all the financing they could get to develop their own growing industrial, agricultural, and commercial bases, in many cases pillaging their respective colonial empires to provide the necessary capital — the justification for the colonies in the first place. They had nothing to spare for investment in the United States, a competitor, the returns from which would necessarily be lower than what could be realized from colonies. The perceived need for sources of external financing is one of the ultimate causes of the "Seven Weeks War" between Prussia and Austria-Hungary in 1866, the Franco-Prussian War of 1870, and the otherwise unaccountable sudden acquisition of a colonial empire by the Second Reich once Bismarck consolidated German unification under Prussia.
The only possible source of financing for America's enormous expansion during the 19th century was extension of bank credit under the "Real Bills" doctrine. Rather than being inflationary, as Keynesians claim, the 19th century was a period in which productive capacity exceeded money creation at so tremendous a rate due to technological advances, that deflation (insufficient money supply) and falling prices, not inflation, were the chief problems. Contrary to Keynes' assertion in The Economic Consequences of the Peace (1919) that industrial, commercial, and agricultural development could only have proceeded at so great a rate when wealth and ownership of the means of production are concentrated, the United States outstripped all of Europe in the rate at which the country developed economically, and did so in a country in which, until the late 19th century, ownership of the means of production was relatively widespread.
Had ownership of the means of production in the United States been even more equitably distributed, the general lowering of prices throughout the 19th century would have been a great boon to everyone as their money became worth more. Instead, it was a curse to farmers and ranchers and anyone else (such as wage workers with no ownership stake) who owned no share in the industrial and commercial advancement as the industrial and commercial sectors of the economy became increasingly important and outstripped the agricultural sector.
The ownership of land was more or less widely distributed, but, as Judge Peter Stenger Grosscup was to note in a series of articles from 1905 to 1914, ownership of industry and commerce was becoming increasingly concentrated. This meant that the owners of vastly productive industrial and commercial capital could not possibly consume all of their income. This led to the situation Keynes attempted to fix by making it worse, trying to increase effective demand by redistribution and inflation, concentrating ownership further, and disconnecting the financial sector from the productive sector of the economy.
THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.
