These six "interesting features" are even more "interesting" today. This is especially so in that there appears to be a definite congruence between the condition of the United States in 1931-1936, and the prevailing economic, financial, and political environment today, albeit with some significant differences. In 1936 these "features" seemed to presage the sudden downturn in the economy that occurred a year later. The much greater degree to which a number of these factors influence conditions today can reasonably be taken as heralding something similar in our day, only with a much greater impact.
In the order in which Moulton presented them (though not necessarily their order of importance) the features are,
1. The extraordinary slowness of the recovery,Perhaps most "interesting" of all, however, is something that Moulton did not specifically mention. That is, there was and remains a stubborn refusal on the part of the Federal Reserve authorities and the federal government — to say nothing of the financial community — to recognize and act in accordance with financial and economic reality.
2. Recovery of international trade lagged behind the expansion of world production,
3. Continuance of unstable international monetary relations,
4. Failure of commodity prices to rise appreciably,
5. A lag in the recovery of durable goods industries, and
6. An extraordinary increase in public indebtedness.
In the previous posting in this series we discovered that even a rough calculation using data from 2008 suggests that the Federal Reserve — and thus government monetary policy — does not take into account more than 60% of total economic activity. Worse, the Federal Reserve (and thus the federal government) does not appear even to recognize the existence of an estimated $10 trillion in what we have for convenience termed "private sector money." That being so, the fixed belief that government and Federal Reserve fiscal and monetary policy can somehow either control the economy or provide the basis for developing a workable solution to economic crises sounds more than a little hollow. Approaching a problem by taking less than half of reality into account would seem to be a virtual guarantee of failure.
Nevertheless, this was the case in 1936 and continues to be the case today. This is so whether we are discussing the causes and cure of the Great Depression, or today's Great Recession. Only by taking into account an effort to describe reality in its fullness — as in the Just Third Way based on the binary economics of Louis Kelso and Mortimer Adler — can we hope to develop a workable and just solution to our economic and, increasingly, political problems. For this reason we need to take a closer look at the similarities between today's Great Recession and the Great Depression of the 1930s. It was during the 1930s that the monetary policy of the Federal Reserve (and thus of the federal government) abandoned the last vestiges of a rational system based on the principles of the British Banking School, especially Say's Law of Markets and the real bills doctrine, and shifted over completely to a system based on the misleading tenets of the British Currency School.
Seeking for the ultimate cause from a Just Third Way perspective, it appears that the Great Depression may have been the natural result of two coincident developments that, taken alone were bad enough, but together fed on each other like mutual parasites, bleeding the economy dry between them. They served only to increase the power of the political and financial elite at the expense of ordinary people, even though — ironically — frequently carried out with the enthusiastic approbation of the citizens. These two developments were 1) the prevalence of the erroneous understanding of money and credit on which the tenets of the Currency School are based, and 2) the fixed idea that necessarily developed out of any economic approach based on the Currency School that a wage system job is the only viable means whereby the great mass of people can gain an adequate and secure income.
The first of these we have already covered. Again, the Federal Reserve — the central bank of the United States — was designed to run in accordance with the principles of the Banking School, but was and is being run as if the tenets of the Currency School are valid. The financial chaos that has come about was the inevitable result of attempting to use a tool designed to operate on the basis of one set of principles, as if it were intended for a different system entirely.
The second of these also relates to reliance on the principles of the Currency School, but less directly than the virtual hijacking of the Federal Reserve. That is, the virtual disappearance of ownership income as a primary source of consumption power for the greater number of people. As Judge Peter S. Grosscup had noted in the generation prior to the Great Depression, ownership of farms and small shops was disappearing rapidly, being replaced by more and more people totally dependent on a wage system job for the totality of their subsistence.
The disappearance of ownership among the greater part of the population was and remains a cause for concern not only economically and politically, but morally as well. Forcing people to subsist exclusively on wages is a violation not only of the natural right of liberty — free association — (reliance on wages alone being the foundation stone of the Servile State), but also undermines the natural right of everyone to be an owner. This is due in large measure to the tendency of many people to make great leaps in what they believe to be logic. Seeing no other way under the tenets of the Currency School for most people to gain a living income than through the mechanism of wages, they conclude that everyone must be paid a wage. That being the case, the level of wages must be sufficient to provide a decent life for the worker and his or her dependents. Only wages are presumed to deliver justice to the worker.
Such authorities and commentators therefore conclude — based on what they believe to be a fundamental and Divine law of nature, but what is in reality a delusion based on false economic premises — that the right to a wage (and thus a wage in an amount sufficient to provide a decent life consistent with the demands of human dignity for the worker and his or her dependents) is a primary right. On the contrary, as John Ryan explained in his 1906 work, A Living Wage, the right to a wage of any kind is a secondary or derived right. Ironically, Ryan's book is often cited to support wages as the only source of income, and is frequently treated as virtual holy writ by moral authorities anxious to maintain ordinary people in a condition of utter dependency — and therefore subject to the complete control of the State. The suspicion grows, however, that many of the authorities and commentators citing Ryan's work have not actually read it, especially in light of his admonition that,
[The Living Wage] is not an original and universal right; for the receiving of wages supposes that form of industrial organization known as the wage system, which has not always existed and is not essential to human welfare. Even to-day there are millions of men who get their living otherwise than by wages, and who, therefore, have no juridical title to wages of any kind or amount. The right to a Living Wage is evidently a derived right which is measured and determined by existing social and industrial institutions. (John A. Ryan, S.T.D., A Living Wage: Its Ethical and Economic Aspects. New York: Grosset & Dunlap, Publishers, 1906, 68.)It comes as an extremely unwelcome surprise to a number of modern commentators that Ryan, presumed to be the high priest of the wage system, could affirm the absolute and sacred nature of private property. Nevertheless, that is the case:
Man's natural rights are absolute, not in the sense that they are subject to no limitations — which would be absurd — but in the sense that their validity is not dependent on the will of anyone except the person in whom they inhere. They are absolute in existence but not in extent. Within reasonable limits their sacredness and binding force can never cease. Outside of these limits, they may in certain contingencies disappear. If they were not absolute to this extent, if there were no circumstances in which they were secure against all attacks, they would not deserve the name of rights. . . . The most important of these are the rights to life, to liberty, to property, to a livelihood, to marriage, to religious worship, to intellectual and moral education. (Ibid., 45-47.)Both wages and the wage system itself are determined not by nature or the inscrutable workings of the laws of economics, but by the structuring of the institutions of the common good — which, as Ferree explained, are under our direct control. The wage system is not a law of nature or of nature's God, but the result of human beliefs and decisions that can be modified and corrected in order to arrive at a more just arrangement of society. This is especially true with financial institutions such as money, credit, and banking that give form to the economy. Under the tenets of the Currency School, the abolition of private property for the great mass of people and their eternal dependency on the wage system seems inevitable, even natural. Under the principles of the Banking School, however, the concentration of ownership and the enforcement of the wage system is clearly the result of raising and maintaining artificial barriers to full participation in the economic common good.
Obviously, the question becomes how dependency on the wage system — effective slavery — was forced on a presumably free people. Briefly (for we intend to relate the story at some length in a future series of postings), with the federal government operating under the assumptions of the Currency School and with the institution of the system of national banks following the American Civil War, monetary and fiscal policies were implemented that assumed as a given that capital formation could only be financed out of existing accumulations of savings. This necessarily led to the imposition of the wage system on the great mass of people. This is because accumulating sufficient savings to finance new capital formation requires that the earnings of capital flow to people who will not use the earnings for consumption, but reinvest them. Most people, therefore, must gain a living income only by selling their labor, for most people need to spend their income on consumption, not reinvestment.
That the system does not really work this way is irrelevant. (See The Formation of Capital, 1935.) People, especially policymakers and academics, believe that it operates in this way. That belief is sufficient to ensure that the institutions of the economic common good under their control will be structured or rebuilt to conform to these assumptions, right or wrong. Consequently, as the industrialization of the United States advanced and its commercial power grew at a tremendous rate in the latter half of the 19th century, the loss of private property in the means of production for the great mass of people proceeded apace. As Grosscup noted, people in the early 20th century were rapidly losing ownership of the means of production, especially small shops and farms, and were being forced to subsist exclusively on wages.
Paradoxically, the number of farms increased during the Great Depression. As Moulton pointed out, however, this was a temporary phenomenon. The increase in farms was in response to much worse conditions in urban areas as wage system jobs disappeared. (The Recovery Problem in the United States, op. cit., 146-147). This was driven by the fact that even on a marginal farm producing at a bare subsistence level an individual had a better chance of survival than in the city where nothing could be produced.
Moulton noted an even greater paradox with respect to wage/salary workers employed in industry, an inconsistency that contradicts more than a century of socialist and union propaganda. That is, the number of workers engaged in direct production in manufacturing was in decline long before the Crash of 1929 — yet during the same period production of manufactured goods increased at an astounding rate. As Moulton related,
Since the World War there has been a marked tendency toward contraction in the volume of employment furnished by manufacturing. Despite the increase in population, the number of wage earners in 1929 was lower than in 1919. The decrease cannot be explained by cyclical differences in economic activity between the two years for in 1929 manufacturing production was the highest ever attained and was, in fact, almost 50 per cent higher than in 1919. (Ibid., 153-154.)There is probably no better proof of the binary concept of relative productiveness of labor and capital as opposed to productivity of labor alone. The latter half of the 20th century saw a great decline in union membership, only being reversed to a degree by a tremendous drive to include occupations not traditionally associated with participation in the organized labor movement, such as teachers and government workers.
The decline, of course, was not related to disinterest or replacement of the principal role of unions by the State. Union support was and remains an important political force in the United States. It makes no sense for the State to replace unions and thereby undermine its own political support. The fact is that the decline in union membership and the replacement of lost membership by people in new occupations was clearly due to the decline in the number of people directly involved in manufacturing. This explains the necessity the "labor" movement sees in increasing its membership among bureaucrats and administrative personnel, to say nothing of professionals and semi-professionals instead of its traditional base among laborers who produce directly. Direct labor is simply not as productive, relatively speaking, as formerly, and the bulk of income is distributed through indirect labor wage system jobs.
What all this means is that the productive sector — that is, the sector that directly produces marketable goods and services — has increasingly been "subsidizing" massive employment that does not engage directly in production of marketable goods and services. This was true in the 1930s and is true today. It was also true in the late 1950s and early 1960s when Kelso and Adler did their work. The fact is that "job creation" is essential under the assumptions of the Currency School, and has become increasingly critical as technology advances and replaces direct human labor as a primary input to the production process. Indirect administrative labor — managerial and technical labor — has rapidly been replacing direct human labor as a factor of production. As Kelso and Adler explain,
In the industrial production of wealth, i.e., in machine production, there are, as we have seen, three main types of human workers: (1) mechanical workers; (2) technical workers; and (3) managerial workers. Of these three, the first perform purely mechanical tasks. The last two perform tasks most of which are not mechanical and cannot be mechanized.As Kelso and Adler conclude, "It is clear that the actual physical contribution of labor to the production of wealth is now extremely small as compared with that of capital instruments. It is, if anything, an underestimation rather than an exaggeration to say that the aggregate physical contribution to the production of wealth by workers in the United States today accounts for less than 10 percent of the wealth produced, and that the contribution by the owners of capital instruments, through their capital instruments, accounts in physical terms for more than 90 percent of the wealth produced." (Ibid., 41.)
Just as the individual productive contribution of mechanical workers accounts for less of the total wealth produced in a highly industrialized economy than it does in a nonindustrialized economy or in one which represents a primitive stage of industrialization, so the individual productive contribution of technical and managerial workers accounts for more of the total wealth produced in a highly industrialized society than it does under primitive industrial conditions. Proportionately more technical and managerial man-hours are required, and more highly-developed managerial and technical skills are called for, as industrialization becomes technologically more advanced. The available evidence further indicates that the economic productivity of managerial and technical workers — at least under conditions of relatively full employment — is higher today than at any previous time in our economic history.
The primary reason for the latter fact is undoubtedly that technical and managerial skills are responsible for the invention, improvement, and efficient operation of the machinery which, relative to other factors, has become more and more productive with progressive industrialization.
It follows, therefore, that with progressive industrialization and with the increasing productiveness of the economy as a whole, the relative productiveness of technical and managerial work increases, as measured by the contribution each makes to the total wealth produced. (Louis O. Kelso and Mortimer J. Adler, The Capitalist Manifesto. New York: Random House, 1958, 39-40.)
Direct labor jobs are usually classified as variable costs and more subject to cutting. Indirect labor jobs, on the other hand, are usually considered fixed costs, and not subject to cutting, at least in the short run. A single direct labor job typically supports several indirect labor jobs. When faced with an economic downturn, however, companies generally first cut direct labor jobs. This makes it more difficult to subsidize the indirect labor jobs, which are harder to reduce, even though the indirect labor jobs depend on the direct labor jobs to justify even a marginal existence. This paradox increases the magnitude of the economic "hit" suffered when companies cut jobs and thus reduce production. The labor that actually produces marketable goods and services is reduced, while the labor that is not directly engaged in producing marketable goods and services is retained. (This assumes a constant level of technology. As technology advances, or direct labor jobs can be shifted to lower cost wage areas, a company can subsidize more indirect labor jobs at the expense of domestic direct labor jobs as well as GDP.)
Obviously, the main problem when addressing the recovery problem in the 1930s is the same as the main problem today: employment and production. Where the authorities in the 1930s were concerned with employment and hardly at all with production, however, the authorities today are more concerned with supporting the price level on the secondary market for debt and equity — "Wall Street" — than with the real (as opposed to "official") unemployment rate or production.
All of this leads inevitably to the conclusion that the present so-called recovery is nothing more than the calm before a very violent storm. This is consistent with the conclusion by Harold G. Moulton. As he wrote in 1936,
It is apparent from this analysis of the extent and character of the recovery movement that, great and widespread as the improvement has been, the economic condition of the world is still far from stable. The problem of unemployment with its social and political implications remains everywhere grave. The position of agricultural populations has been somewhat improved as a result of more favorable price ratios, but farm incomes still remain well below the levels of 1929. The problem of maintaining fiscal and monetary stability has been seriously complicated by the universal expansion of public indebtedness; and heavier tax burdens are in store for the future. World trade and financial relations are still profoundly abnormal, and, although the surge of economic nationalism appears definitely on the wane, extraordinary barriers to international commerce remain. We are still endeavoring in substantial measure to operate an international economic system on principles of national independence.With minor changes in specific details, Moulton's analysis very closely resembles the global situation today. The bottom line, of course, is that no more than the State controls the whole of society does the central bank control the whole of the economy. Each fills a specific and necessarily limited role in its proper sphere. When either — or both together — strays outside its legitimate sphere, the situation progresses by degrees from incompetence, to overweening arrogance, to functional overload and, finally, to chaos as the social and economic order implode.
Moreover, a new development — arising largely from disturbances incident to the depression itself — has come to menace the resumption of international trade, the stability of public finance, and the whole process of economic recovery. Vast military programs threaten the peace of the world. While currently contributing to the expansion of industrial activity and employment, military outlays make no permanent contribution to recovery. They do, however, imperil the foundations of the economic system. (The Recovery Problem in the United States, op. cit., 90-91.)
Still, the authorities today are correct in at least one respect. The situation today, while it strongly resembles the predicament of the United States during the Great Depression, is different — and not just because they insist on manipulating statistics and terminology to confuse matters. This, of course, begs the question as to why the authorities insist on applying the same failed remedies as led to the series of economic downturns that constituted the Great Depression. It only remains to examine in what specific ways the situation today differs from that of eighty years ago, and how we may use this knowledge to develop a viable solution not only to the present crisis, but to the task of restructuring and rebuilding the social order in a manner that respects the dignity of each human being.