When the United
States began gearing up for entry into the First World War, one of the first
things the politicians did was decide how to finance the war effort. Politicians being what they are, of course,
they chose to finance the war using debt as much as possible instead of raising
taxes . . . which might harm their chances of reelection.
Unfortunately,
the First Liberty Loan Drive drained virtually all liquidity out of the
system. For the Second Liberty Loan
Drive, banks patriotically purchased the bonds . . . and then realized they had
no one to buy them. At the behest of
Congress — and over the protests of the Federal Reserve — the provision in the
Federal Reserve Act that allowed banks to sell government debt to the Federal
Reserve to retire the debt-backed United States Notes, National Bank Notes, and
Treasury Notes of 1890 was used to sell the Liberty Loan bonds to the Federal
Reserve to replenish bank reserves . . . which were then used to purchase more
war bonds.
Fortunately,
after the war every effort was made to start paying down the debt. Using the Federal Reserve in a way that was,
frankly, in violation of the Constitution — to allow the federal government to
emit bills of credit for which they did not have the authority under the
enumerated powers — was generally recognized as not a wise use of the central
bank. Only the emergency of the war (and
the reluctance of the politicians to raise taxes) had rendered it acceptable.
Unfortunately
(notice the “unfortunately/fortunately” thing we have going here), the Crash of
1929 unsettled matters again. Similar to
what had happened in the Panics of 1873 and 1893 and what caused the subsequent
Great Depressions, bank reserves shrank radically, and collateral lost its
value. Loans were called, and companies
went into bankruptcy.
Even so, had
matters been left alone, the Great Depression would have been over by 1936 at
the latest, at least according to Dr. Harold G. Moulton, then president of the
Brookings Institution. All that was
needed was something to guarantee loans so that businesses could produce
marketable goods and services, and a means of ensuring that consumers received
enough of the results of production in the form of income that could be spent
to purchase the goods and services produced.
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| Jean-Baptiste Say |
In other words,
the only thing needed to bring the U.S. and global economy out of the tailspin
of the Great Depression was to link production and consumption together so that
producers were able to consume, and consumers were able to produce. This would restore Say’s Law of Markets,
which is based on the first principle of economics: “Consumption is the sole
end and purpose of all production.”
The problem was
that Moulton had three-fourths of the answer, but not the final piece of the
puzzle. As Judge Peter Grosscup had
noted less than twenty years before, small ownership in America was
disappearing rapidly, being replaced with wage system jobs. The solution — according to Grosscup — was
for ordinary people to own corporations, something that G.K. Chesterton also
recommended.
But Moulton never
considered ownership for some reason. He
knew that for America to produce it needed credit, and to get credit it needed
consumer demand, and that the commercial banking system backed up with a
central bank could “manufacture” all the credit needed by industry, commerce,
and agriculture . . . but — the missing fourth piece of the puzzle — how do you
get income (demand) into the hands of consumers?
All Moulton could
suggest was to keep prices low to avoid raising wages and increasing costs, and
possibly explore profit sharing. His
fatal mistake was to admit that he did not have a specific program to get
consumption income to people.
Unfortunately,
someone named John Maynard Keynes did.
His solution?
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| John Maynard Keynes |
·
Get rid of the gold standard. As long as a currency is pegged to some
objective standard, politicians cannot simply print up the money they
want. This means that the government
will not be able to redistribute at will by inflating the currency and
manipulating its value.
·
Get rid of small ownership. Small owners use their ownership income for
consumption. According to Keynes, all
ownership income, except what is essential to redistribute to maintain demand
and engage in social engineering by making people dependent on the State, must
be used to finance new capital to create jobs to furnish people with
consumption income.
·
Use the tax system to raise money for
investment, and the banking system to create money for government.
·
Socialize the economy by having the State
control the rate of investment and the return on investment.
·
Mandate a wage system job as the only means
whereby people gain income (cf. Hilaire Belloc's The Servile State).
·
Massive public works to put people to work.
All of these recommendations were, one way or
another, embodied in the New Deal so beloved of Msgr. John A. Ryan and other
reformers of a socialist bent. It was,
after all, in essence what Jacob Sechler Coxey, the socialist and theosophist
who headed up “Coxey’s Army” during the Great Depression of 1893-1894, had
demanded.
And what was
wrong with the New Deal?
#30#