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THE Global Justice Movement Website
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Tuesday, April 20, 2010

Own the Fed — the Program, Part V: Differences

Despite the obvious similarities between the events and conditions prevalent in the 1930s and those of today, there are some significant differences. These differences are all the more important in that they magnify the errors of applying any solution based on the tenets of the British Currency School. At the same time, reliance on Currency School-based paradigms (most especially Keynesian economics) makes it less likely that a viable solution will be sought among the economic schools and theories based on the natural law principles of the British Banking School (notably Say's Law of Markets and the real bills doctrine), such as binary economics.

There are, of course, the obvious differences of which the more conspiracy-minded are well aware. The one that comes to mind immediately is that the U.S. currency is no longer convertible into gold or silver. Our currency has not been on the gold standard since 1933 domestically, and since 1973 internationally, while silver was removed in 1964. This, however, is misleading, for many people presume that "gold standard" means that legal tender consists exclusively of gold coin and banknotes backed 100% by gold bullion. This was, in fact, never the case. In the United States, "gold standard" (or even a bimetallic standard of gold and silver) from 1792 has meant that the official currency is measured in terms of its pegged value in gold, not that the currency itself is necessarily composed of gold — or silver, or any other metal or commodity.

As we have seen, the vast bulk of the money supply does not consist of gold and silver with subsidiary copper or bronze, or even paper certificates representing specie (gold and silver), but — as Congressman George Tucker attested in his 1839 book, The Theory of Money and Banks Investigated — of privately issued bills of exchange and promissory notes denominated in terms of the official currency. The portion of the money supply made up of such "private sector money" dwarfs the official, legal tender currency by a factor that reflects the degree of State intrusion into the economy. In our day this private sector money constitutes up to 60% of the money supply. In Tucker's day, the Jacksonian era described so well by Alexis de Tocqueville in Democracy in America, the proportion was more than 90%.

Citing official Congressional reports, Tucker observed that the circulating media of the United States was primarily paper representing credit extended by commercial banks of issue. While the net imports of gold from 1834 through 1838 seem enormous at nearly $50 million, this was dwarfed by the amount of bank paper in circulation meeting the needs of commerce. As Tucker stated, writing in 1838,
By far the largest proportion of this class of credits is in promissory notes, especially in the mutual dealings of mercantile men. We may form some idea of their vast amount, when we find those which were discounted at the several banks in the United States, amounting, on the 1st of January [1838] to $485,000,000, and on the 1st of January preceding [1837], to 40,000,000 more. These discounts, moreover, constitute but a part, and, perhaps, not the largest part, of this description of credits. (George Tucker, The Theory of Money and Banks Investigated. Boston: Charles C. Little and James Brown, 1839, 132.)
There are even more obvious differences between the situation in the 1930s and that of today. While there are doubtless many differences that we have failed to consider, and that may be of great significance, at least four seem to be in the first rank of importance. These are (in no particular order),
One, the authorities and policymakers of the 1930s could not look back on presumably halcyon days with the fixed belief that Keynesian economics got us out of the Great Depression.

Two, in the 1930s, America's capacity to produce was still intact.

Three, America's capacity to consume was similarly intact.

Four, the currency was sound and primarily asset-backed.
Let's look at these in the order given.

Keynesian Economics

There are ugly rumors that have been floating about for some time that Keynesian economics did not get the country out of the Great Depression. Instead, there are hints that it was the phenomenally increased demand that accompanied what may have been the single greatest human endeavor in history: the Second World War. There is even a growing suspicion that Keynesian economics was not the direct cause of the slowness of economic recovery or the ultimate ineffectiveness of the New Deal. While the remedies were, in fact, Keynesian, the theories of Lord Keynes may have been used post facto to justify what FDR and others had already decided to do. Keynes himself seems to have been convinced that he was the guiding economic philosopher behind the New Deal, but we cannot find any substantive difference in the New Deal before or after Keynes's meeting with Roosevelt.

In any event, the possibility that World War II ended the Great Depression is consistent with one of the more ludicrous statements made by Lord Keynes, when he was sarcastically suggesting ways to increase demand by producing goods and services for which no market existed, and which were meant solely for "non-use" or destruction. As he claimed in The General Theory, "Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better." (The General Theory of Employment, Interest, and Money, 1936,

Even if made sarcastically, such a statement reveals more about an orientation based on the tenets of the Currency School than Keynes, perhaps, intended to reveal. The idea that production is, to all intents and purposes, irrelevant is to go directly contrary to common sense. As Jean-Baptiste Say explained (and which we have already cited a number of times), we do not purchase what others produce with "money," but with what we ourselves produce and exchange through the medium of this symbol we call money.

That being the case, the only natural way to increase demand is to increase production — precisely as Moulton pointed out in his analysis of the Great Depression. The two most important factors in economic recovery are employment — by means of which demand is distributed in a modern economy locked into the wage system — and production, by means of which demand is generated in accordance with Say's Law. Today we know that ownership of capital instruments is rapidly replacing human labor — "employment" — as the chief legitimate means of distributing demand, but the point remains the same. Production is at the heart of the economic equation, while distribution must be based on principles of justice. Keynes's solution ignored the importance of production, and of justice in distribution, as the work of Kelso and Adler made clear.

Instead, since 1916 the emphasis has been on creating money not to increase production — that is, to invest in the present value of existing or future marketable goods and services — but to increase demand artificially by redistributing existing purchasing power through inflation and confiscatory taxation. Since the New Deal virtually all mainstream economics has been based on the tenets of the Currency School. Keynesian economics is the most obvious example, but Monetarism and the Austrian School also accept Currency School assumptions.

Consequently, today's mainstream economics rejects the idea that anything other than M1 (coin, currency, and demand deposits) and M2 (M1 plus household holdings of savings deposits, small time deposits, and retail money market mutual funds) can be money. There is a careful and studied dismissal of Say's Law of Markets and the real bills doctrine — the basis of more than half the money supply.

This was not the case in the 1930s. Textbooks on economics gave serious consideration to both Say's Law and real bills as a vital part of the economy. As an example, Elements of Economics: A Textbook for Secondary Schools by Charles Ralph Fay (New York: The Macmillan Company, 1928) — a text for high schools that would challenge many of today's economics post-graduate students if not those with doctorates — topics are covered in depth that are completely absent from modern texts.

For instance, Fay, although he claims that credit instruments are not "money," clearly employs "money" in its common usage to mean "currency," i.e., coin and banknotes. He then goes on at great length describing how checks, promissory notes, bills and other negotiable instruments serve as "money" in a "credit economy" (278-393). Fay spends more than a hundred pages on something that modern texts pass over in silence. The real bills doctrine is described at length, while Say's Law is treated seriously. As the author stated, "We have learned that in the final analysis it is still true that all trade is barter. It is still true that you and I give what we have, services or goods, in exchange for what we want, be they services or goods" (375). He continued, "This fact is embodied in a law which takes its name from a famous French economist. Say's law is as follows: The total volume of trade depends upon the total volume of production." (Ibid.)

The emphasis on production rather than (re)distribution of existing wealth led Fay to make another claim that modern economists and policymakers reject: that the "law of reciprocity" (an application of the real bills doctrine and Say's Law) is valid. As the author stated,
We have learned that in the intercourse of nation with nation only a relatively small amount of specie changes hands. In 1924 specie shipments into this country and from here abroad amounted to less than five per cent of the other items comprising our exports and imports.

How is the remaining ninety-five per cent paid for? They cancel each other.

From this we can formulate the law of reciprocity as follows:

The exports of a nation (visible and invisible) [i.e., both goods and services] pay for its imports, and its imports (visible and invisible) are paid for by its exports; in the long run the two must be equal. (Ibid., 375-376.)
These astonishing statements are made as if they were simple common sense — as, indeed, they are, unless we are locked into the tenets of the mercantilist Currency School. Further, the observations apply not just to nations, but to individuals. The "law of reflux" — that excess banknotes will automatically flow back to the issuing bank for redemption until equilibrium is reached — on which classical economists of the banking school put so much emphasis, is simply a version of the law of reciprocity on the micro scale. (cf. John Fullarton, On the Regulation of Currencies of the Bank of England. London: John Murray, 1845.)

In any event, much of what people in the 1930s had been taught and took for granted — and which provides part of the theoretical basis for binary economics — has disappeared from today's radar. Moulton faced the task of convincing policymakers dazzled by the prospect offered by Keynesian economics of getting something for nothing (i.e., of people being able to realize effective demand without the necessity of producing marketable goods and services) that the common sense approach was still the best. (cf. Moulton, Income and Economic Progress. Washington, DC: The Brookings Institution, 1935.) Today we face the task of persuading a generation of policymakers and economists to give a fair hearing to the common sense they have already dismissed as nonsense.

America's Productive Capacity

In the 1930s, the productive capacity of the United States was still largely intact. This was attested to in Moulton's study released in 1934, America's Capacity to Produce (Washington, DC: The Brookings Institution). As a result of the unwillingness or inability of the banking system to extend credit, the productive sector ground to a halt, just as Charles Morrison predicted in 1854:
Confidence and credit are only moral elements in society; they may be said to be, to a great extent, mere matters of opinion; yet their importance in the production and distribution of wealth is so great, that the whole machinery of material production is kept at work, disordered, or paralyzed, according as these principles act in a healthy manner, irregularly, or not at all. They are to our industrial community what the nervous system is to the body, a slight and sensitive substance in itself, but the indispensable cause of all the life and motion of the system. A great nation may possess in abundance all the means of producing wealth, — population, intelligence, capital, natural and artificial instruments of production; and yet, if credit and confidence should be from any cause destroyed, all these resources seem to have lost their virtue, and general distress prevails. Let confidence and credit be restored, and the whole system is immediately set in motion again, and in a very short time general prosperity returns. (Charles Morrison, An Essay on the Relations Between Labour and Capital. London: Longman, Brown, Green, and Longmans, 1854, 200.)
If that were not enough, the drastic decline in the market value of equity shares on Wall Street meant that the collateral that could be offered even by otherwise sound businesses was worth significantly less than before the Crash of 1929. All that was really necessary to get business started again was reasonably priced credit and a substitute for traditional collateral.

Today, however, under the illusion that the United States has evolved from a "production economy" to a "service economy" to an "information economy" (of which the most important datum seems to be whether or not someone has a job or can secure sufficient government transfer payments), America's productive capacity, especially in basic industries, has either been shifted overseas, or is concentrated in the hands of an increasingly tiny financial elite.

America's Capacity to Consume

In the 1930s, the capacity to consume in the United States was still intact. By that we mean that consumer debt was minimal. All that was needed was a broader and more effective distribution of income, and — more importantly — an end to the diversion of consumption income into investment channels. Of course, by focusing on the need to increase effective demand to the exclusion of all else, especially production, Keynes came up with the wrong solution — redistribute purchasing power through inflation or taxation.

Today, the increasing burden of consumer debt has eroded the capacity to consume to such an extent that, not counting home mortgages, per capita consumer revolving debt is a little under $9,000. This works out to a little short of $36,000 per "average" household of two adults and two children.

Consequently, the economy is kept running only by increasing consumer debt. This is true to such an extent that when a decrease in consumer borrowing was announced in April of 2010, the authorities went into a panic. (Martin Crutsinger, "Consumer Borrowing Falls $11.5 Billion in February," Associated Press, 04/07/10.) Obviously, the powers-that-be assume that unless consumers can live beyond their means as a matter of course, the economy will never experience a sustainable recovery. Unfortunately for such hopes, the evidence suggests that consumers are tapped out. Consider the facts. (These calculations are necessarily very rough, but we are after the trend, not scientific precision.)

According to the U.S. Census Bureau, in 2002 the median net wealth of American households was $58,905 ( "Net," of course, means that "revolving debt" (mostly credit card balances) of $858.1 billion and non-revolving debt (mostly home mortgages and auto loans) of $2,447.9 billion ( — a total personal debt burden of $3,306.0 billion, or $10,695.57 per capita — is factored into the calculation. We're using figures from the U.S. Census Bureau on April 19, 2010, which gave the population of the U.S. as 309,099,518 (

Not factored into the equation is the national debt, backed by the ability of the federal government to collect taxes from citizens. According to the "National Debt Clock" (, the national debt on April 19, 2010 was $12.855 trillion, or $41,589 per capita. Total per capita debt, personal and federal government, is thus $52,284.57. Net wealth is net personal wealth less government debt, or $17,316.

Net per capita wealth of a little over $17,000 doesn't sound all that bad, especially when we consider that it doesn't include vested pension benefits or government entitlements and transfer payments. Of course, vested pension benefits are no longer all that secure with the bankruptcy of a number of defined benefit plans over the past couple of years. Nor are government entitlements such as Social Security and Medicare funded with hard assets, but have a projected shortfall of more than $70 trillion.

Then, of course, we have to realize that the per capita wealth figure consists principally of equity in a home, since the 1930s considered a way of building wealth for retirement, not of funding consumption. We also need to consider the fact that our median net wealth figure dates from 2002 — before the home mortgage crisis wiped out billions in home equity.

Our conclusion is that, far from being intact, America's capacity to consume in the first two decades of the 21st century is in ruins, and is virtually non-existent. Consumption without production cannot continue forever, any more than we can increase or carry on without end redistribution of existing wealth directly or through money creation for non-productive purposes such as consumption and government spending.

A Sound Currency

Before FDR's New Deal, the U.S. currency was sound. Most of the currency was asset-backed, although there was a substantial amount of government debt — approximately $19 billion, according to Moulton. (The Recovery Problem in the United States, op. cit.) By far the greater part of GDP, however, consisted of transactions carried out by means of private sector money.

Nowadays the private sector still accounts for most of GDP, but the government's share is much greater and is increasing rapidly. Before the New Deal, M1 and M2 were largely asset-backed by gold and qualified industrial, commercial, and agricultural paper. At present, M1 and M2 are backed by more than $2 trillion in government debt and "toxic" assets, and a token amount of gold. The debt- and toxic asset-backed portion of M1 plus M2 is more than double the amount outstanding before August of 2007.

Consequently, the country owes its survival to business and the soundness of the non-M1 and M2 money supply: privately issued commercial paper, bills of exchange, promissory notes, and so on. Oddly, however, the State, by trying to take over the private sector, and by manipulating money and credit and destroying the checks and balances built into the financial system, has seriously undermined the soundness of this private sector money supply. At the same time, as we have seen, the Federal Reserve authorities and government policymakers act as if this more than $10 trillion in private sector money doesn't event exist, even though it accounts for approximately 60% of GDP.

These are the obvious differences between the situation in the 1930s and that of today. Of these, perhaps the most immediately damaging, and the one that leads to the others, is the belief that the principles of Keynesian economics offer a viable solution. Consequently, the State is obsessed with the idea that it can control the economy by manipulating discount rates and reserve requirements as well as by creating money for bailouts and redistribution.

The assumption that the State controls the economy is rooted in the tenets of the Currency School. Primary among these is that M1 and M2 are the only M (money supply). This delusion also afflicts the monetarists and the Austrians to a lesser degree. The only effective difference is that the Monetarists and Austrians demand less or no government manipulation of M1 and M2 — all the while maintaining the basic principles of the Currency School that require increasing levels of government intervention.

All schools of economics ignore the "elephant in the icebox," or if you prefer, the 800-pound gorilla in the room. That is the enormous amount of private sector money created between businesses and individuals that constitute most of GDP. The economists and policymakers, because they define money incorrectly and assume the necessity of existing accumulations of savings to finance capital formation, are not dealing with reality. They are, in fact, rejecting reality, and so will only do the right thing by chance. There is an adamant refusal to come to terms with "the economics of reality." This accounts in large measure for the massive confusion we see regarding economic and financial policy and actual practice.

In effect what we have is a Procrustean Economy — economists and policymakers keep trying to hammer the economy into a pre-determined shape or obtain a desired result. Unfortunately, what we end up with is a dead economy in the shape of a corpse. The economy is much bigger than the "bed," so the Federal Reserve at the behest of the State works to cut off anything that does not fit their limited understanding, whatever is "beyond the bed" or outside the box, so of course the economy is seriously endangered and can even die.

This leads us to a further, unwelcome conclusion — that reliance on Keynesian economics to provide the theoretical framework for today's recovery efforts is predicated on the truth of something that never actually happened. That is, today's academics and policymakers assert that President Hoover failed miserably to promote recovery, and it was not until FDR implemented a recovery program based on Keynesian economics that the country came out of the depression.

The facts suggest otherwise. Hoover's proposals were, in the main, substantively no different from what FDR implemented. When the New Deal began faltering, Keynes was brought in to provide theoretical justification for what was already being done. Keynes even complained in his notorious letter to the New York Times that the reason the country suffered a serious downturn in the mid-1930s was because Roosevelt never really implemented Keynes's solutions.

Thus, claiming that "Keynesian economics" was responsible for getting us out of the depression is wrong on two counts. 1) Keynes didn't bring the U.S. out of the depression. Hitler did. 2) The New Deal wasn't based on Keynesian economics. Keynesian economics managed to receive validation from being used to justify the New Deal, not from being the basis of the New Deal. If anything, Keynesian economics is based on the presumed effectiveness of the New Deal, not the other way around.

Today's politicians who try to emulate FDR's presumed success by implementing Keynesian programs are, at the very least, putting the cart firmly before the horse and committing an egregious post hoc, ergo propter hoc (after this, therefore because of this) logical fallacy. All that Keynesian economics or other economic theories based on the tenets of the Currency School manage to do is increase the concentration of economic and political power in an increasingly small elite.