The Expanded Ownership Revolution

One of the many paradoxes involved in the Great Reset and similar proposals has to do with human nature and the natural law.  As we saw in the previous posting on this subject, despite centuries of failure adherents insist that the abolition of private property and redistribution will work if we just manage to change human nature, try harder, and commit sufficient resources to the effort.

The Formation of Capital

 

Today we start to give a brief look at an alternative to the Vast Keynesian Conspiracy that has wrecked global economies and left the world in a seemingly hopeless situation.  As we shall see, however, it doesn’t have to be this way, and it could be fixed quite easily . . . if only the powers that be didn’t gain so much power at everyone else’s expense from the present system.

Welding Irony, I: No Need to Bring In the State

We’ll not keep you in suspense.  The rather forced pun in the title of this blog comes from the fact that the article that suggested it, “When the Welders Came to Capitol Hill” (Wall Street Journal, A19) appeared on May 15, 2017, the one hundred and twenty sixth anniversary of the issuance of Rerum Novarum, Pope Leo XIII’s encyclical “On Labor and Capital.”

Hedging Your Bets

When we were taking principles of investment finance in college (centuries ago), we learned various ways of valuing shares on the stock market.  Mostly this was because (as we were taught) the easiest way to buy a company is to purchase its shares on the secondary market.  (It’s not.  The 100% S-Corp ESOP is, under current law, the best way, but it doesn’t apply to anyone who doesn’t work in that particular company. . . .)

How to Cause (and Cure) a Great Depression

The recent frenzy in the world’s stock markets had a number of people panicking about the possibility of (yet) another crash of the magnitude of October 1929, and the possibility of another Great Depression on the heels of the Great Depressions of 1873-1878, 1893-1898, 1930-1940, etc., etc., etc. . . . although we don’t call them “depressions” now, but “recessions” ‘cause “depression” is too scary and makes the government look bad.

Avoiding Monetary Meltdown, II: Salmon P. Chase and the Greenbacks

Last week we posted the first part of our “open letter” to Bob Marshall of the Virginia House of Delegates.  Since it seemed to be rather well-received (and even generated a couple of e-mails to let Mr. Marshall know people actually care about this sort of thing), we’re starting off the week with the second part, and should finish tomorrow with the third part.

Let’s Make a Deal, VII: Prelude to Panic

After the failure to undertake necessary reforms of the financial system revealed by the Panic of 1893 and the Great Depression of 1893-1898, the country went through a period of relative prosperity. There were a few negative voices raised, such as Judge Peter S. Grosscup’s concerns, expressed in a series of articles before World War I, but, by and large, most people focused on how to tinker with the system already in place — after all, events since the Civil War half a century before suggested that things would always return to normal.

The problem was that far too many people missed the warning signs that something was seriously wrong with the economy in the United States, and had been since 1863 and the institution of the National Bank system.  This became evident in 1893 when Frederick Jackson Turner declared that the end of “free” land under the Homestead Act meant the end of democracy — and the end of the uniquely American character. Americans would now tend to become increasingly European in their outlook, with the United States ultimately becoming a European style aristocratic republic.

True, the rapid expansion of capital ownership following the 1862 Homestead Act brought the U.S. out of the Great Depression of 1873-1878. Crop failures in Europe and bumper crops in the U.S. brought the U.S. out of the Great Depression of 1893-1898. World War II brought the U.S. out of the Great Depression of 1930-1939.

Perhaps not surprisingly, however, there was a declining effectiveness of each of these remedies. The Homestead Act resulted in increasing production and thus consumption income at just the right time to support the rapid expansion of industrial and commercial capital. The effect first had to build up following the Civil War, however (hence the temporary over-capacity in transportation facilities that triggered the Panic of 1873 in the United States — having caught the disease from Europe — and the ensuing depression), and then petered out as available land was taken, thereby providing the basis of the Panic of 1893 and that ensuing depression.

The period following the Great Depression of 1873-1878 was characterized by nearly full employment and rapid economic growth, but the opportunities for small ownership were disappearing. As Judge Grosscup noted, the period following the Great Depression of 1893-1898 was characterized by accelerating loss of small ownership itself, not just the loss of opportunity noted by Frederick Jackson Turner. The resulting concentration of financial and economic power brought on the Panic of 1907.

Where the recoveries in the 19th century were "natural," i.e., done without government manipulation of the currency or job creation, and succeeded, that of the 1930s was exclusively based on government manipulation of the currency and job creation — and failed. World War II brought the country out of the Great Depression of the 1930s, not Keynes or Roosevelt. The good credit of the United States financed the war — a credit that is now seriously threatened by the growing deficits that the Keynesians insist are not only good, they are essential to economic growth!

The Keynesian reliance on government deficits and control of the economy, of course, fails to explain why the U.S. went through its most rapid economic expansion at a time when the national debt was negligible, and capital ownership was widespread, giving many people control over their own lives. The outstanding debt was maintained only to back the National Bank Note currency of 1863-1913 and the Treasury Notes of 1890. The Keynesian claim that economic growth in an advanced economy cannot take place without concentrated ownership also fails to explain how concentrated capital ownership appears to inhibit economic growth.

Today we are still trying to force the failed solution of the 1930s (government manipulation of the currency and job creation) to work, when we should be implementing the only solution that really worked: the Homestead Act, only updated to include commercial and industrial capital as well as land.

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Let's Make a Deal, V: Stop Hitting the Snooze Button

The Panic of 1893 was a wake-up call for financial and economic system reform in America. Unfortunately, the country pressed the "snooze" button and got diverted by the Great Depression of 1893-1898, and the presidential campaign of 1896. Incidentally, we just heard an unverified rumor that, just as the Great Depression of the 1930s overshadowed the severity of the Great Depression of the 1890s in its severity, the Great Depression of the 1890s took the title away from the Great Depression of the 1870s.

Here's a sobering fact that should serve as a wake-up call if the academics and politicians would stop hitting the snooze button: the federal government has assumed a burden of debt in the trillions of dollars (that's a multiple of $1,000,000,000,000) in a failed effort to ameliorate the effects of the current Great Depression, say $15 trillion, just to make the calculation easier.

Yes, it's a depression. Get real. It's not a recession, much less a "recovery."

Add to that the potential hit of around $75 trillion for the Social Security and Medicare promises it's made suggests what could happen when the bill comes due and the government can no longer float more loans backed by empty promises. Another $10 trillion or so, and we've hit the $100 trillion mark.

That assumes that the U.S. currency doesn't succumb to the pressure of debt backing and kick off hyperinflation, i.e., the surreal condition in which the price level actually rises faster than the money supply can be increased. When the hyperinflation in Germany in the early 1920s was finally brought under control, the official exchange rate was 4.2 trillion Reichmarks to the U.S. dollar.

The unofficial exchange rate — what you actually had to pay on the black market since the legal exchanges didn't have dollars — was as high as 24 trillion Reichmarks to the U.S. Dollar. This was for a currency backed by nothing but worthless debt issued by a government that didn't even officially exist and thus couldn't collect taxes to redeem its own promises.

The exchange rate before the First World War was 4.2 Reichmarks to the U.S. dollar. The inflation rate was officially (and we all know what that means — e.g., "lies, damned lies, and official unemployment statistics") 100,000,000,000,000%. The unofficial (i.e., real) inflation rate was around 600,000,000,000,000%. And, giving the lie to the Keynesian dogma that there is an inevitable trade-off between employment and inflation, there was massive unemployment, social unrest, and a variety of other factors that ushered in the totalitarian regime of Adolf Hitler to restore order.

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Lies, Damned Lies, and Definitions, XXVI: The Depression

Given that the primary cause of the Great Depression was that lending for productive purposes virtually disappeared, it is a tribute to the strength of the U.S. economy at that time that unemployment only went to about a quarter of the workforce. Most business financing was coming from reinvesting profits instead of new debt or equity. Even so, the fall in consumption power that resulted from the drop in production reduced the profits that businesses needed to pay workers, many of which were laid off in consequence.

Had businesses been able to borrow for working capital to make up for the fall in profits, the economic downturn would likely have been of extremely short duration. The banks, however, weren't lending because businesses didn't have adequate collateral — if any at all. Kelso's concept of capital credit insurance would have tied the economy over the hump.

Capital credit insurance wouldn't have done anything to address the underlying problem, however, which was lack of widespread capital ownership. The stock market crash itself was (although this sounds shocking) a problem that affected what should have been a relatively minor market sector, the secondary market for equity and debt. This eroded the value of collateral and the creditworthiness of businesses, but did not affect the consumption income of ordinary people.

The most important factors affecting consumption income were the displacement of human labor from the production process and the lack of widespread capital ownership. Moulton noted that between 1919 and 1929 the number of people engaged in the direct production of marketable goods and services declined rapidly. At the same time the number of jobs mushroomed.

This was because the increasing productivity of capital and the greatly expanded market required an enormous increase in the need for logistical and administrative support — jobs from which people are now being displaced by technology at an even faster rate than they were from direct production.

The consequence was that every job involving direct manufacturing that disappeared involved a multiple of jobs lost in a ripple effect throughout the economy. You don't need typists or stenographers when there are no letters to write, nor do you need salesmen or even stores when there's nothing to sell. One farmer or factory worker provided jobs for more than just him- or herself. Without bank credit in the short run, and capital ownership in the long run, the impact on the economy was devastating.

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Lies, Damned Lies, and Definitions, XXV: The Crash

Irving Fisher, according to Milton Friedman the greatest economist America ever produced, believed in 1929 that the stock market would continue to go up, and that this was a sign that permanent prosperity had been achieved. A few years later (after being bailed out by Yale University to the tune of millions), Fisher was calling for "reflation," what today we call "quantitative easing." The idea was to get prices back up to their pre-1929 level. This would allow the rich to make more profits, which would allow them to save more. If the rich saved more, they would have more to invest, which would create jobs for the non-rich.

One of the main causes of the Crash of 1929 was massive money creation during the 1920s for speculation on Wall Street at the same time that new capital formation didn't seem to be suffering. This baffled the experts who looked at things from a past savings perspective. As far as they knew, the problem was that money that should have gone into genuine investment, that is, into financing the formation of new capital, was instead going into stock market speculation. At the same time, there didn't seem to be any dearth of money for new capital investment.

The thinking was that during the short term there is a fixed amount of production that can take place in an economy — the "production possibilities curve," determined by the amount of existing savings, the "supply of loanable funds." This is because many of the experts believed that new capital investment is impossible unless consumption is reduced first and money savings accumulated; you cannot invest unless you have first saved. If more money is created than there is wealth in the economy, the value of each unit of currency declines and prices rise to that degree.

In the late 1920s, however, while the money supply was increasing rapidly and prices on the stock market were definitely rising, the currency seemed to be maintaining its value. The price level as a whole was not rising. So, the experts concluded (just as they do today), the rise in stock prices means that real wealth is being created. This is how Irving Fisher, who developed the Quantity Theory of Money equation, M x V = P x Q, could conclude that the U.S. had reached economic utopia.

In reality, of course, real wealth was not being created. What was rising was not the present value of existing marketable goods and services, but the present value of future marketable goods and services. As long as people had confidence that stock prices would continue to rise, it would not matter for the general price level as long as the rate at which new money was being created did not exceed the rate at which stock prices increased. If more money had been created than gamblers were willing to put into the market, they would have spent it either on new capital directly (driving up the price of capital goods) or on consumption (driving up the price of consumption goods).

When people realized that stock market gains did not create any new wealth, prices plunged. This also caused massive and almost instantaneous deflation due to gamblers defaulting on the huge number of margin loans. There were demands that the Federal Reserve start printing money to bail out the gamblers, but the chairman refused to violate the system's charter and engage in open market operations in speculative or non-productive securities.

As the value of businesses dropped drastically, both their creditworthiness and the value of the existing assets also plunged. Bills of exchange (backed by the present value of future marketable goods and services) and mortgages (backed by the present value of existing marketable goods and services) lost most of their value. Collateral was wiped out, and banks stopped lending for productive purposes just as they had for speculative purposes. Workers were laid off, people stopped consuming, and the economy went into a tailspin.

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Lies, Damned Lies, and Definitions, XXIV: The Rise of Keynes

After World War I, it looked as if things could get back to normal. With the Second Liberty Loan issue and the Victory Loan issue successfully floated and funded by the Federal Reserve, the government could start collecting taxes to repay the loans, and the Federal Reserve could get back to its main purpose. That was to provide liquidity as the lender of last resort to the private sector by rediscounting bills from member commercial banks, and engaging in limited open market operations involving businesses and non-member banks, and retiring the government bonds backing the National Bank Notes and the Treasury Notes of 1890.

Swift action by the Federal Reserve is considered responsible for staving off a potential financial panic in the early 1920s when it announced it was ready to expand rediscounting of private sector bills to ensure an adequate money supply to meet the needs of commerce. What must astonish today's politicians faced with the ineffectiveness of endless rounds of "stimulus" and "quantitative easing" is that the Federal Reserve didn't actually have to increase rediscounts in order to restore confidence and avoid a financial panic. The simple announcement that the Federal Reserve stood ready to provide adequate private sector liquidity was sufficient to restore confidence in the system.

Today's politicians, however, being trained in the dogmas of Keynesian economics, don't understand the significance of the difference between the Federal Reserve's assurance in the early 1920s that it stood ready to provide adequate asset-backed currency to the private sector, and today's flooding the channels of commerce with massive amounts of currency backed only by government debt. The former is precisely what the Federal Reserve was designed to do, while the latter is what the institution has been corrupted into doing. For this we can put the blame squarely where it belongs: on the economics of John Maynard Keynes.

The financing of the First World War with government debt seemed to confirm the tenets of the Currency School, although the hyperinflation that subsequently hit Germany and Austria-Hungary still cannot be explained within that framework. It should therefore come as no surprise that Keynes, who viewed government debt as the only legitimate backing for the currency, was able to leverage his expertise at telling the politicians precisely what they want to hear into a position as the most influential economist of the 20th and 21st century, establishing his reputation in 1919 with the publication of The Economic Consequences of the Peace (1919).

This did not happen immediately, however. During the decade following the war, the Federal Reserve served as lender of last resort to the private sector, and worked to reduce outstanding government debt from the war. It also achieved its objective of replacing the National Bank Notes and the Treasury Notes of 1890 with Federal Reserve Bank Notes. The program was terminated in the late 1930s, by which time all remaining National Bank Notes and Treasury Notes of 1890 remaining in circulation were to be construed as Federal Reserve Bank Notes.

Unfortunately, given the remaining outstanding debt from World War I, the debt-backed Federal Reserve Bank Notes could not be replaced with asset-backed Federal Reserve Notes at the same rate. At the same time, while the Federal Reserve was reducing non-productive government debt and backing up the asset-backed lending of the commercial banking system, the commercial banking system was also creating massive amounts of money for speculation that was channeled into the stock market, creating the "bubble" of the 1920s.

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It Ain't Rocket Surgery, Part I: The Economic Dilemma

We suppose it's starting the year off right. Daniel Kurland over at "Poetic License" waxed, uh, poetic over the mounting problem of mountainous debt that is afflicting consumers and, increasingly, our perpetually purblind politicians. The fact is, the problem is not going away by ignoring it, although the economists predicting a "great 2011" don't seem to realize that simple fact. (If we understood the headline, employment will surge while unemployment stays the same. If you can figure that out, you, too, can be a highly paid economist in a growing and competitive field.)

Evidently, it's time for a reality check — and what better time than the New Year? Academic economists might want to take a second look at their assumptions, most particularly the idea that new capital formation can only be financed out of existing accumulations of savings. (Not so, as any reader of this blog should be able to tell you.)

With respect to consumer debt, the reliance on past savings has one very powerful, and extremely damaging effect. As Harold Moulton pointed out in The Formation of Capital (1935), the presumed Keynesian "economic dilemma" (which he proved does not, in fact, exist) consists of the paradox that new capital will not be financed until and unless consumer demand justifies it. (Well . . . consumer demand or delusional government and academic predictions of huge increases in consumer demand coming from who-knows-where.) Unfortunately, consumer demand will not exist at a level sufficient to justify new capital formation due to the fact that income was diverted from consumption to finance the new capital . . . thereby making it less likely that the new capital will pay for itself!

The Keynesian solution is 1) have the government print money and spend it to stimulate effective demand, thereby redistributing wealth through inflation and creating "forced savings" to finance new capital at the same time, 2) tax "excess" wealth (i.e., wealth not essential to finance new capital) and redistribute it through the tax system, and 3) encourage consumer borrowing to stimulate demand, thereby creating jobs that will generate the wage income to repay the consumer debt.

Unfortunately, while Moulton agreed that employment was a critical factor in a recovery, it was equally critical that the new jobs not be created in response to anything other than a real increase in demand for new production — the other critical factor in a recovery. Creating jobs by inflating the currency, redistributing existing wealth, or direct subsidy ignores the necessity of producing marketable goods and services.

It also doesn't work. Consumers are currently borrowed up to the hilt. Companies are producing — at least some of them are — but the average consumer still isn't buying. The much-touted "recovery" is an illusion, one that will come home to roost as soon as the credit card bills from Christmas start arriving in the mail.

We should probably explore this at greater length, but the weeping and gnashing of teeth from all the debtors is too distracting.

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Cold Comfort: No Double Dip Recession

Yesterday's 260 plus point plunge in the Dow was (according to news reports) caused by the fear that economic growth is slowing and that there will be a "double dip" recession. If the recent past is any indication, today's reports will be made with one eye on the stock market, one on the Federal Reserve and the financial system, and one on the politicians and academic economists frantically trying to come up with some rationale to justify more deficit spending.

Yes, we are fully aware that adds up to three eyes. It should, however, be completely obvious by now that those claiming to be in charge of things have got to be from another planet. Their actions and alleged reasons for those actions have little or nothing in common with reality as experienced on the third rock from the Sun.

Fortunately, we can assuage the fears that there will be a "double dip" recession. First, of course, we are not in a recession. This is a depression.

Second, there cannot be a double dip when we haven't gotten out of the single dip. As we saw in today's feature presentation on this blog relating the "South Sea Bubble," people have succumbed to the weird, probably extraterrestrial idea that you can get something for nothing. They have mistaken the partial recovery of the price level in the stock market not as evidence that Ming the Merciless is controlling people by means of a mysterious device emanating from the planet Mongo, but as an actual economic recovery.

Usually we attribute the belief that you can get something for nothing to the socialist doctrine that declares each should contribute according to his ability, and receive according to his needs. Not surprisingly under such an arrangement, no one seems to have the ability to contribute, but all have apparently endless and insatiable needs. Our friend, the inaptly named Little Red Hen (to say nothing of St. Paul), had a few pithy comments about people who think they should get all they need or want without bothering to produce anything.

Like all the other characteristics of its bastard stepchild socialism, however, the idea that you can — and should — get something for nothing is inherited from capitalism, and inscribed in the genetic code of both systems. As Robert Walpole pointed out in the early 18th century (see what you miss when you don't read the feature article?), "stock market jobbing" diverts people away from productive activity, focusing their efforts on gambling and speculation in the hope of getting something for nothing. The financial elite becomes the real and unaccountable ruler of the country.

Third and finally, just as Dr. Harold Moulton pointed out in his 1936 study, The Recovery Problem in the United States (Washington, DC: The Brookings Institution), basic systemic problems are not being addressed. There has been no real recovery, because the only changes introduced into the system (e.g., the full repeal of the Banking Act of 1933 — "Glass-Steagall") have only made matters worse. Semi-effective internal controls in the form of separation of function have been replaced by completely ineffective external controls in the form of increased government regulations and direct State control of money and credit.

What can be done about this surreal situation?

First, immediately rush out and purchase a tin pie plate to tie on your head to counter the effects of Ming's control ray. Send Flash Gordon to shut down the machine or destroy it . . . after arming Our Hero with a quick review of the Evil Overlord of the Universe List so he will know what to expect. After all, had the world's leaders taken Mein Kampf seriously in the 1920s, Hitler might never have come to power.

Second, see what can be done to convince the hordes of brainwashed policymakers, politicians, and academic economists (a.k.a., "The Legions of Terror") that, no, money is not "peculiarly a creation of the State." Rather, money is a private property-based symbol of the present value of existing and future marketable goods and services functioning as the medium of exchange. Money is illegitimate (i.e., "theft") without that essential private property link.

Third and finally, immediately set in motion the steps necessary to implement Capital Homesteading so that ordinary people can,

a) Gain democratic access to the means of acquiring and possessing private property in the means of production,

b) Enjoy the benefits of producing marketable goods and services as the primary source of consumption income instead of relying on increasing unserviceable consumer and government debt to generate effective demand with pointless gambling and speculation seen as the only way out, and

c) Have a basic security that the money supply is both stable and sufficient for the role that money is designed to play without manipulation by the State or any other division of the Legions of Terror.

Or, we can all just sit back and hope somebody else does something — who knows who or what — to straighten things out and bring the system back into closer conformity with reality.

I think I hear the echo of a Supervillain's maniacal laughter.

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Own the Fed — the Program, Part VI: Hitting the Pavement

There's an old joke about a man who fell off of a skyscraper. As he passed each story on the way down, people asked him how things were going. Being someone who could clearly put the best spin on the situation, he replied, "Doing all right so far." We assume that these optimistic utterances stopped when his head met the pavement.

That response pretty much describes the "cautious optimism" we see exuded by economists and policymakers regarding the current alleged recovery from the Great Recession. Grossly inflated share values, short selling, and manipulation of derivatives provided the trigger for both the Great Depression as well as today's economic downturn. In response, the whole thrust of the Federal Reserve and the federal government in union with Wall Street has been to re-inflate share values, short sell toxic mortgage-backed securities to the Federal Reserve, and manipulate derivatives.

Consequently, despite all the hype over the announced "end of the recession" in July of 2009, there has been a rapid growth in distrust of the federal government (Liz Sidoti, "Poll: 4 out of 5 American's Don't Trust Washington," Associated Press, 04/19/10), and widespread rejection (Meghan Barr, "Recession is Ending? Some Americans Don't Buy It," Associated Press, 04/19/10) of claims that the country has turned itself around (Daniel Gross, "The Comeback Country," Newsweek, 04/09/10). Apparently, mindless faith in the word of the elites, whether political, economic, or academic, isn't what it used to be. People are starting to demand substance — and they are evidently becoming convinced that the State is not the institution to deliver it. The experts and the politicians who rely on them may finally have hit the pavement.

Nor is this an unexpected development from within the framework of the Just Third Way. As we have already seen in this series, many of the assumptions used by economists and policymakers contradict "the economics of reality." (Louis Kelso, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967.) With the State claiming the power to change reality ("re-edit the dictionary," as Keynes called it in his Theory of Money), to say nothing of the alleged right to control all financial transactions and determine the terms of all contracts (ibid.), common sense, to say nothing of rational self-interest, was apparently relegated to the dustbin of history long ago. That being the case, it becomes almost a holy duty — and some would delete "almost" — on the part of the economic and political elites to violate every one of the "four pillars of an economically just society," based as these pillars are on the inherent dignity of every human being:

• A limited economic role for the State,

• Free and open markets as the best means for determining just wages, just prices, and just profits,

• Restoration of the rights of private property, especially in corporate equity, and (the "fatal omission" of every major economic system in the world),

• Widespread direct ownership of the means of production, individually or in free association with others.

The institutions of society have been distorted and the barriers have been raised against the great mass of people participating in the vast network of institutions that we call the common good. This is especially true for those institutions relating to the financing of capital formation. Nor is this an unexpected development. The State's role in the economy and in everyday life has increased dramatically since the end of the American Civil War. Ironically, this accelerated with the virtual government takeover of the Federal Reserve System in the early 20th century. The Federal Reserve is an institution specifically designed to de-concentrate economic power in the private sector without recourse to State control. (U.S. Congressional House Committee on Banking and Currency, Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit, February 28, 1913. Washington, DC: U.S. Government Printing Office, 1913.) The Great Depression provided the State with the leverage it needed to extend its control even further through the New Deal.

The Great Recession has provided the opportunity to complete a State takeover of virtually every aspect of human life, so that "no one can breathe against their will." (Quadragesimo Anno, 1931, § 106.) Ostensibly this has been to protect the free market and capitalism by saving companies and industries "too big to fail." This is a claim tantamount to an admission of socialism. The result has been to concentrate control over both economic and political power in a bizarre union of the federal government and an economic elite composed of experts in gambling, speculation, and manipulation of the financial markets.

Not surprisingly, this arrangement bears a striking resemblance to the situation Walter Bagehot described in The English Constitution (1867) and Lombard Street (1873), and which was philosophically aligned with the totalitarianism described by Thomas Hobbes in Leviathan (1651). As far as Hobbes and Bagehot were concerned, the State in the person of the sovereign may be the ultimate owner of everything (Leviathan, op. cit., XXIV), but the financial and commercial elite control the country (The English Constitution, Chapter II: "The Monarchy"). The situation is analogous to that described by Pope Pius XI in 1931 when he noted that wealth and power are greatly concentrated, so much so that the financial elite can be termed an "economic dictatorship." (Quadragesimo Anno, op. cit., § 105.)

The aims of a free people, and those of a financial and political elite unaccountable to anyone are necessarily different, if not inevitably at permanent loggerheads. By controlling the Federal Reserve and diverting its money creation powers from meeting the needs of the private sector, to financing government, the federal government — the political elite — has become unaccountable to the people. This is as Henry C. Adams predicted. (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)

By controlling the federal government and persuading the political elite (to say nothing of the incestuous relationship that has developed between the financial elite and that of the State), the "economic dictatorship" has become virtually unaccountable to anyone. This is best exemplified by the repeal of the Banking Act of 1933 ("Glass-Steagall"). Repealing Glass-Steagall substituted subjective opinion and expedience in the determination of whether ethics had been violated or even a crime committed, for the objective facts ascertainable from circumventing systemic internal controls of the financial system.

The effect was to take away the ability of the financial system to regulate itself, with the State stepping in only when individual violations occurred or the system itself needed reform that it could not handle itself. Removal of internal controls put in its stead direct State oversight and control, and the opinion of bureaucrats with extremely interested motives as to whether something was "wrong," or must be tolerated in order to maintain the current elite in its wealth and power at the expense of ostensible owners and the taxpayer.

Private property in the form of share ownership, or even the quasi- or secondary ownership of a creditor was rendered meaningless. Private property was abolished to preserve capitalism, while "freedom" is an effective nullity. As William Cobbett noted, "Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (William Cobbett, A History of the Protestant Reformation in England and Ireland, 1827, §456.)

In consequence, while many authorities today presume the increasing wealth and power gap to be of great benefit to society (John Maynard Keynes, The Economic Consequences of the Peace, 1919, 2.III), it is actually a symptom of serious social, economic, and political disorder. That is why we have seen the "American Dream" shift from owning an adequate if modest stake of productive assets — usually in the form of a farm or small shop or factory — to having a good wage system job and owning a house, to, finally, having a claim on State assistance with ownership of nothing. Nowhere is this more evident than in the recent spate of articles calling home ownership into question, highlighting the "dangers" of home ownership and extolling the condition of dependency — economic slavery (e.g., Paul R. La Monica, "Renting: The New American Dream?" CNNMoney.com, 04/15/10).

Over the past eighty years or so, home ownership has been considered the chief means by which ordinary Americans build a moderate stake of wealth. This is largely psychological, for a home does not generate a stream of income, while the gains realized from the sale of a home are usually due either to inflation or speculation. Home ownership is not a substitute for direct ownership of capital assets that generate a stream of income for the owner. Nevertheless, direct ownership of a valuable asset that can be liquidated as a last resort is infinitely preferable to a pile of rent receipts.

Even this, however, is under attack. The elites with their increasing concentration of wealth and power in fewer and fewer hands cannot seem to abide anyone else having anything. The great mass of people exists not even to serve, for human labor has been diminishing in value relative to technology for some time. Instead, "consumers" exist only to spend and (within acceptable limits) consume — and to spend by any means necessary to increase the wealth and power of the elites.

The ideal situation, of course, is for "consumers" (rarely "people") to spend without consuming, and for savers to invest without producing, an arrangement implicit in Keynesian economics. Keynes ignored production, the purpose of which is consumption, as Adam Smith pointed out in somewhat obvious fashion more than two centuries ago. Instead, Keynes concentrated on stimulating "effective demand." In the special language of economists, "effective demand" does not mean the wants and needs of people for marketable goods and services, but the ability to buy marketable goods and services — purchasing power. Whether people receive value for their purchases is irrelevant, as long as they spend.

Behind the triggers of the Great Recession as well as the Great Depression was this desire to get something for nothing. Speculation on Wall Street in the 1920s produced nothing, and yet seemed to yield tremendous profits — for a while. More recently we had the sub-prime mortgage bubble and the "collateralized debt obligations" that, combined with hedge funds, allowed investment banks joined with commercial banks and insurance companies to profit from both gains and losses. This arrangement ensured that investors would lose billions no matter what happened — to expend enormous amounts of "effective demand" without receiving any benefit in return. The "economic dictators" were able to make immense profits without having to go through the drudgery of actually having to produce a marketable good or service. (Rick Newman, "How Goldman Sachs Might Help Democrats in November," U.S. News and World Report, 04/16/10.)

The problems associated with what we can only regard as an unholy union of private and public sector elites are becoming obvious to some commentators, even in the halls of those normally dedicated to the maintenance of the new status quo. In the Wall Street Journal, Gerald P. O'Driscoll, Jr., relates the collusion of private sector interests and the State elite that has resulted in a phenomenal growth of State power, and all to support the interests of an extremely small economic dictatorship. As O'Driscoll reports,

On April 5 of this year [2010], The Wall Street Journal chronicled the revolving door between industry and regulator in "Staffer One Day, Opponent the Next."

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. ("An Economy of Liars," WSJ, 04/20/10, A21)

Nevertheless, a significant part of the problem is not regulation itself, but the type of regulation. The free market requires not endless lists of rules and regulations promulgated by bureaucrats and politicians with an eye toward their eventual profit, but limited State involvement directed toward establishing and maintaining a "level playing field." That necessarily means an anti-monopoly and pro-competition stance on the part of the State. The free market must structure itself, even if limited State assistance is required, not be "structured" by arbitrary and sometimes incomprehensible State action. The goal is to maintain adequate internal controls that prevent, not simply forbid, collusion between institutions and departments with incompatible functions such as investment banks, commercial banks, and insurance companies. As O'Driscoll points out in a passage that could have come straight out of a textbook on auditing,

The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately — not withstanding what any rule might otherwise allow. (Ibid.)

Fair and accurate presentation of the financial position of an entity, of course, relies absolutely on a sound and effective system of internal control, as any second year accounting student can tell you. It's not enough to order the receivables clerk not to authorize or make disbursements. You must separate receivables from payables — period. There is, as O'Driscoll states, always a way to circumvent even the most strongly expressed and stern rule or regulation, even one with horrifying penalties attached. The temptation is simply too great for some people, especially in our morally ambiguous society, not to write out that check to him- or herself (or in payment of a false invoice sent from a P. O. Box owned by a fictitious company with all receipts automatically transferred from a lockbox to a numbered bank account in the Cayman Islands or Lichtenstein).

Nor is enforcing external rules the answer. From experience, this writer knows that often a company will quietly let a criminal go free rather than expose itself to the bad publicity a scandal would bring. The loss of a few hundred thousand, or even millions of dollars is nothing to the cost of the damaged image and the expense of an effective prosecution — something of which clever criminals are well aware.

Of course, eventually such slackness catches up with you. The Catholic Church, for example, is now reaping what it has sown for trying to protect itself by putting a false mercy and a very real expedience before justice and truth. This says nothing about the validity of the teachings of the Catholic Church, of course — the Church's "system." It does, however, say a great deal about the frailty and need for correction of its human agents, as Pope Benedict would be the first to admit.

The State and the financial community have no such out. Revolving door opportunists cannot claim to be protecting a divinely established, if human-maintained institution, regardless what political, social, and economic theories they may have imbibed through Sir Robert Filmer (Patriarcha, or, The Natural Power of Kings, 1680) and his disciple Hobbes. On the contrary, not only has it become painfully obvious that the economic dictators known as crony capitalists — "an economy of liars" — are running the system for their own private advantage, they have manipulated a system that started out with some serious flaws in the first place. Instead of removing barriers that inhibit or prevent people from entering the market and carrying out economic activity on a level playing field with the same (and, hopefully, minimal) rules for everyone within a system that makes sense, they have industriously erected more barriers, and invented increasingly complex and baffling "financial vehicles" to obscure what they are doing.

It is simplicity itself to restructure the system to your own advantage when you control the State and have a population that labors under the delusion that the State can do anything, even change reality. You need merely pass a law. If that doesn't work, pass more laws. If that doesn't work (and it won't), have the State take over . . . under the direction of the financial experts, of course, who can be counted on to advise their future and past associates to benefit themselves as much as possible.

Nor is any of this mess offset by the presumed "good news" of the end of the Great Recession, or (as it might be termed), the Gospel of Greed. Even the prosecution of Goldman Sachs has the air of political opportunism and lust for power rather than an action taken in respond to a demand that justice be done:

The Goldman case potentially gives the Obama administration and the Democrats running Congress a much-needed scalp — and a very rich one, at that. From a purely political perspective, Goldman is a great target: A recent Gallup poll shows that confidence in banks is near historic lows, and many Americans feel bottomless resentment toward financiers who make deals that generate lavish commissions, but don't really produce anything of value. (Newman, op. cit.)

If that were not enough, we have the spectacle of revolving door opportunists carefully preparing their defenses. Possibly in response to his reading of public opinion as well as the outrage he knew would ensue once the SEC's action against Goldman Sachs became public, Timothy Geithner earlier announced that he considered the manner in which the presumed recovery had been handled "deeply unfair." ("Geithner: Disparity in recovery 'deeply unfair'," The Washington Post, 04/01/10.) The article was essentially a "pre-excuse" in order to divert the blame when the so-called recovery turns sour — as indeed it must, as it is not backed up either by sustainable production or an increase in productive capacity in which more people can participate as owners.

Yes, business has been "growing" over the past ten months or so, but 1) it's only replacing inventory, and 2) America's industrial base, even if it reached full output, is a shadow of its former self. There are few people alive today who remember that in 1933 — generally considered the worst year of the Great Depression — industrial output was "recovering," showing gains in a number of months. Of course, the economy suffered another serious downturn three years later when the Federal Reserve raised its rates to dampen down the overheated economy because the authorities decided that the recovery was proceeding too fast.

Adding to the problem is the anticipated cost of the new health care mandate. The Obama administration appears to have failed to take into account that ordering employers to pay for workers' health care is a tremendous incentive to get rid of workers and replace them with cheaper foreign workers or more efficient (or at least cheaper and more tractable) technology. The "write down" controversy pales in comparison with the uproar that will ensue when workers find themselves priced out of the labor market.

If that were not enough, business folk as well as the speculators on Wall Street are desperately trying to predict when Federal Reserve Chairman Benjamin Bernanke is going to raise interest rates. (This may also account for the reported rise in business activity, as businesses rush to borrow now at low interest rates in anticipation of a raise in rates, hoping that they will be able to sell what they have produced.) Raising interest rates is the standard tool the Federal Reserve uses to reduce lending for speculative purposes, presumably preventing bubbles from forming. The problem is that putting on the brakes by raising all interest rates means starving the productive private sector for credit in order to inhibit or prevent speculation.

Financial institutions are then forced into an "Asset-Liability Mismatch." They seek out places to put their money that have higher (and increasingly speculative) returns in order to cover the higher cost of that money. This, in part, is what led to the savings and loan crisis of the 1980s. As that experience demonstrated, raising interest rates to inhibit or prevent speculation actually encourages speculation — and, as happened in the mid-1930s and early 1990s, precipitates an economic downturn . . . at a time when we are still in the process of trying to recover from the last one.

We might be tempted to say that the "mini-depression" of the mid-1930s and the recession of 1990-91 weren't all that bad. After all, the economy recovered, didn't it?

Yes and no. The monetary and fiscal policies of the New Deal didn't bring the country out of the downturn of the mid-1930s. World War Two did that. As for the savings and loan debacle, that directly affected only a relatively limited sub-sector of the financial markets. While the final bill was large, in the neighborhood of $160 billion, and is blamed for precipitating the recession of '90-91, most of the economy remained more or less sound, making for a relatively rapid recovery.

That is not the case today. We do not have an Adolph Hitler to start a genocidal war that requires full mobilization of all resources to give us a fighting chance to survive. Neither do we have a basically sound economy to cushion us from the failure of a relatively limited portion of the financial sector. What we do have is an economy, such as it is, from which a large measure of productive capacity has been taken away, and which the State seems intent on undermining further. Perhaps that is what Geithner sees, and why he appears to be so intent on excusing himself and trying to fix the blame elsewhere for the United States pursuing its current suicidal economic policies. He doesn't want to be strung up from a lamppost when the economy hits the pavement.

What is the solution? Obviously, we need to rebuild what Moulton termed "America's Capacity to Produce" (Washington, DC: The Brookings Institution, 1934). That, however, is not enough. We also have to rebuild "America's Capacity to Consume" (Washington, DC: The Brookings Institution, 1934). This will require a full mobilization of resources such as we have not seen since World War Two — but it can be done. Both of the goals can be accomplished at the same time by implementing Kelso and Adler's "Proposal to Free Economic Growth from the Slavery of Savings." Every man, woman, and child must be given the opportunity to produce through direct ownership of both labor and capital, thereby supporting the consumption from which the demand for capital is derived.

Consistent with Say's Law of Markets, producing in a way in which everybody participates through ownership in and of itself, not artificial State action, inflation, or direct redistribution restores consumption to the necessary sustainable level, building and maintaining a sound economy.

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Own the Fed — the Program, Part IV: Similarities

Just prior to the Crisis of 1937, when the Federal Reserve shattered the fragile recovery by raising interest rates, Dr. Harold Moulton published The Recovery Problem in the United States (Washington, DC: The Brookings Institution, 1936). The purpose of the book (at a little over 700 pages, perhaps Moulton's longest and most intensely researched work) was to provide "a general analysis focused strictly upon the problems of recovery in the United States at the present juncture." (Ibid., vii.) Early in the book, Moulton observed that there appeared to be a number of "interesting features" that made recovery from the Great Depression apparently unique in the annals of economic and financial history.

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,

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.

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.

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.

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.)

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.)

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.

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.)

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.

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.

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Own the Fed, Part XII: The Crisis of 1937 and the Second World War

As we have seen, the Great Depression confirmed that the general policy of the Federal Reserve System had changed from the original intent of the framers of the Federal Reserve Act of 1913. The policy of the central bank of the United States was now and remains based on the tenets of the Currency School. Despite assertions to the contrary that continue to this day (see, e.g., Tim Todd, The Balance of Power: The Political Fight for an Independent Central Bank, 1790-Present. Kansas City, MO: Public Affairs Department of the Federal Reserve Bank of Kansas City, 2009), the increasing degree of political control accompanying the New Deal removed the last effective remnants of the Federal Reserve's claim to independence.

The central bank's loss of what remained of its independence signaled the final shift in monetary policy away from the principles of the Banking School, principally Say's Law of Markets and the real bills doctrine, and made the Federal Reserve System to all intents and purposes an unaccountable branch of the federal government. Its mission was changed into serving political ends of the State, rather than economic and financial ends of the private sector. As Harold G. Moulton observed,

Under the new organization, as we have seen, the powers of the Board of Governors have been greatly expanded, thereby circumscribing the independence of action of the member banks; and at the same time the Board of Governors has been place more definitely under political control. This is accomplished through that provision of the law which makes the governor of the Board removable at the will of the President.

This shift is a reflection of the philosophy that not only is it a proper function of the Government to assume control over the entire credit system, but that only the Government can be depended upon to exercise such control in the interest of the public welfare as a whole. This conception appears to be the result of two factors — the failure of the former system of control to prevent financial crises, and the greatly increased importance of government fiscal and financial operations in the larger scheme of things. Whether the new alignment will be able to avoid the weaknesses disclosed in former periods of political control, time will demonstrate. As will be noted in the following chapter a similar trend is strongly in evidence in other countries. (Financial Organization and the Economic System, op. cit., 417.)

Whether the change in the understanding of money and credit under the Currency School resulted, as John Maynard Keynes asserted, from the growth of State authoritarianism (A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4), or whether State authoritarianism gained its foothold as a result of the change in the understanding of money and credit (while an issue of immense importance) is not our interest in this survey. Our concern is not why what happened, happened, but what happened, and, later, how best to correct the situation. Identification, pursuit, and punishment of ignorant individuals and groups guilty only of a lack of understanding and consequent egregious misuse of the system is not our concern, and is a waste of time in any event.

What happened has become increasingly clear as we examine the history of the Federal Reserve. By the time the Crisis of 1920 occurred, the Federal Reserve System had already undergone a major shift in direction. In order to finance the entry of the United States into the First World War without recourse to taxation, the federal government found a way to finance government operations through borrowing and money creation. This was in spite of the strenuous attempts that the framers of the Federal Reserve Act of 1913 made to prevent this very thing from happening, and the decades of misery caused by Salmon Chase's decision to finance the Union war effort in the Civil War the same way.

Almost immediately after the First World War, in 1920, money creation for speculative purposes threatened the health of the economy and the financial system. At that time, the simple announcement that the Federal Reserve was planning on raising the discount rate and reserve ratios to dampen down the "overheated" economy was enough to restore confidence and redirect money creation toward sound investment and away from speculation. Even though the Federal Reserve didn't actually do anything, the announced plan to manipulate the discount rate and reserve ratios gave the appearance that the Federal Reserve had effective tools at its command to control the economy. Confidence was restored and the economy returned to an apparently healthy condition.

The immediate cause of the Crash of 1929 was the creation of massive amounts of money for speculative purposes, principally the purchase and bidding up the price of unsound share issuances on the secondary market. The Federal Reserve attempted to reduce the loans made by commercial banks for speculative purposes (over which it had no real control) by taking punitive action against loans made by commercial banks for productive purposes — over which it did have control. Efforts by the Federal Reserve were completely ineffectual in reducing the loans made for speculative purposes and commercial banks avidly took up the slack. The only result of the Federal Reserve's action was to ensure that productive businesses assumed a burden of debt that they would be unable to service in the ordinary course of events.

Still under the illusion that it could control the money supply indirectly by controlling interest rates and manipulating reserve ratios instead of directly through applications of Say's Law of Markets and the real bills doctrine, the Federal Reserve attempted to stimulate the revival of business following the Crash of 1929 by — as we might expect — controlling interest rates and manipulating reserve ratios. This had, to all appearances, been successful in averting a serious business downturn in the Crisis of 1920, although closer examination of the situation would have revealed that the policy had not actually been implemented. Consequently, the presumably effective yet untested techniques were applied following the Crash, but with disastrous results. Banks stopped lending, and the economy went into a tailspin.

Federal Reserve authorities clearly believed that money and credit would behave in the same manner as a commodity or any other marketable good or service. The Federal Reserve therefore continued to act contrary to the true nature of money and credit, and lowered the discount rate in order to stimulate the economy. Since the problem was not the "price" of money, but the fact that businesses lacked sufficient or adequate collateral to qualify for loans, banks could not justify making loans to business. Consequently, loans were not made.

To explain the failure of banks to make loans, Keynesian economics asserted that the economy was in a "liquidity trap" due to the infinite elasticity of money. The problem with the Keynesian explanation is that money is not a marketable good or service. Money is a derivative of marketable goods and services, dependent on the present value of existing and future marketable goods and services for its legitimacy. Accordingly, the laws of supply and demand do not apply directly to money and credit.

Even given the ineffective remedies implemented by the Federal Reserve to stimulate business combined with the apparent anti-business orientation of much of the New Deal, by the mid-1930s the country was beginning to recover, at least slowly. The Dow Jones Industrial Average would nearly quadruple by August of 1937, although unemployment remained at high, almost intolerable levels, given the potential of America to produce in quantities sufficient both to meet demand and to provide jobs for anybody that wanted one. (See Harold Moulton, America's Capacity to Produce. Washington, DC: The Brookings Institutions, 1934; Harold Moulton, America's Capacity to Consume. Washington, DC: The Brookings Institution, 1934; Harold Moulton, Capital Expansion, Employment, and Economic Stability. Washington, DC: The Brookings Institution, 1940.)

Policymakers and Federal Reserve authorities were, however, still unable either to distinguish between good and bad uses of credit, or develop and implement an effective means of curbing speculative money creation without harming the genuinely productive sector. As a result, Moulton observed that, "Business and financial trends since the reorganization of the Reserve system have afforded opportunity to test the new process of control through a period of expansion culminating in a new depression." (Financial Organization and the Economic System, op. cit., 411.) Language of this sort was a departure from Moulton's usual extremely diplomatic phrasing. It puts the blame for the "new depression" squarely on the shoulders of the inept new policies implemented by the Federal Reserve authorities at the behest of New Deal politicians — which is where it clearly belonged.

Specifically, concerned that the economy was growing faster than was warranted — or (more accurately) that it might grow faster than it should, Federal Reserve authorities began applying brakes to the economy by increasing reserve ratios. The Treasury cooperated by implementing a policy designed to inhibit or prevent additional acquisition of gold to use as reserves, a process that became known as "gold sterilization." (Financial Organization and the Economic System, op. cit., 412.) As Moulton commented, "The Treasury and Federal Reserve measures taken together largely eliminated the basis of potential credit expansion." [Emphasis in original.] (Ibid., 413.)

In other words, because the people in authority who fancied themselves in charge of the economy decided that economic growth might become (in today's terminology) "overheated," they ensured that many of the gains that had recently been achieved against almost insurmountable odds were wiped out. Amity Shlaes blames the undistributed profits tax for the sudden downturn, although it is evident that, like the speculative frenzy that preceded the Crash of 1929, the undistributed profits tax was only the trigger that exposed and took advantage of serious weaknesses in the system. As she comments in her "New History of the Great Depression," exhibiting her own adherence to chief tenet of the Currency School (that existing accumulations of savings are essential to new capital formation),

The same day that it reported Mellon's death, the New York Times carried a story on the consequences of the undistributed profits tax. Companies that had formerly sought to retain employees through downturns now no longer had the reserves to do so. They had likewise ceased to invest in new equipment, normally a traditional move in slow periods. The headline on the story was: "Levy on Profits Halts Expansion." What would happen to the meager recovery? Stocks had begun dropping in mid-August. Now they accelerated their decline. . . . By the next Monday the worriers had their answer. Bond prices plummeted farther than they had on any single day in three years. Businesses and investors did not want to buy money anymore because they did not want to use it. . . . As for stock shares, they were down between $2 and $15, the greatest drop in six years. In recent times, before this panic, the market had been "thin" — relatively few shares had traded, at least when compared with pre-Depression days. This panic, though, was so broad and trading so furious that the ticker closed seventeen minutes late. The traders were finally awakening, just as everyone had hoped they would. But they were awakening only to run. (The Forgotten Man: A New History of the Great Depression, op. cit., 334-335.)

The weaknesses in this analysis are immediately evident to anyone familiar with the principles of binary economics, especially as detailed in The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings (op. cit.), but that is not the point. What is clear is that government policy and the move toward economic central planning, to say nothing of the not-unexpected results of basing a recovery of confidence in the economy not on the strength of the system itself, but in the admittedly strong personality of FDR, had a result that should have been anticipated.

Ignoring the natural law basis for the principles of the Banking School, notably Say's Law of Markets and the real bills doctrine, could only lead to disaster — and it did. As Horace reminded us, "You can chase Nature out with a pitchfork, but she always comes back." (Naturam expelles furca, tamen usque recurret. Epistulae I.x.24) You cannot separate money — a derivative of production — from the production from which it naturally derives without undermining the stability of the system that relies (as does every economy) on production, not on redistributing what exists, whether marketable goods and services, or claims on marketable goods and services in the form of money.

The only thing worse is separating currency — a derivative of money — from production, and allowing the State to manipulate the "money" supply (narrowly defined) at will for dubious political ends. Perhaps not unexpectedly, to offset the correction, the Federal Reserve decided to reverse its policy, and institute a policy of "easy" credit. Of course, the problem remained: an inability or refusal to differentiate between "bad" uses of credit (speculation, consumption, and government spending), and "good" uses of credit: financing financially feasible new capital formation. The result was only to be expected. As Moulton explained,

In the spring of 1938 it was deemed wise to ease the reserve position again in the hope of promoting a new credit expansion. Hence, on April 14, 1938, reserve requirements were reduced to 12, 17 1/2, and 22 3/4, per cent respectively for the three classes of member banks.

That these policies did not prove effective in controlling the general business situation is all too evident. Since the spring of 1937 we have had a stock market collapse and an acute business depression. As may be observed by referring again to the movement of stock prices in the chart on page 226, and to the general trend of business as shown in the chart on page 342. The current fluctuations have been quite as sharp as those of former times. The inability of the Board of Governors of the Federal Reserve system to control the business situation is simply evidence that many of the forces, which account for business fluctuations, lie beyond the control of monetary policy. (Financial Organization and the Economic System, op. cit., 416.)

It would be more accurate to say that "the inability of the Board of Governors of the Federal Reserve system to control the business situation" lies "beyond the control of monetary policy" — as currently understood. Again, this is an important point that is frequently overlooked. Federal Reserve policy, as well as virtually all academic economics and government policy, is predicated on the assumption that the disproved principles of the Currency School are, in fact, as absolute and unquestioned as any religious dogma. Aside from the obvious problems that result from attempting to base a matter of science on faith rather than reason, the fact remains that, try as you will, you will never get an acceptable result from your efforts if you insist on going contrary to reality.

Keynes, in his famed chiding "open letter" to Roosevelt in the New York Times of December 31, 1933 had attempted to convince the president that all would be well if only FDR would engage in greater redistribution through inflation, which Keynes claimed is not real inflation until full employment is reached: "When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e. we shall have reached a state of true inflation. Up to this point, however, rising prices will be associated with an increasing aggregate real income." (The General Theory of Employment, Interest, and Money, 1936, III.ii; see also V.21.v.) Since many economists define inflation as "rising prices," while others define it as any increase in the money supply, with or without an increase in the price level, we conclude that these different definitions are useful only insofar as they demonstrate a significant problem with basing economic analysis or (worse) government monetary and fiscal policy on the tenets of the Currency School.

Keynes's definition of "true inflation" is extremely valuable in one respect. We can blame Keynes quite properly for validating the New Deal and justifying increasing State intrusion into the economy, but he was not personally responsible for implementing his theories, whether in whole or in part. The blame for that must rest squarely on the shoulders of the politicians who first began using the central bank and distorting its mission to increase the power of the State. When the decision was made to finance yet another war by borrowing, Keynes objected strenuously.

Consistent with his theory that "true inflation" was only possible once full employment had been reached, Keynes was adamant that the United States should have financed its entry into the Second World War solely by increasing taxes (How to Pay for the War, 1940). According to Keynes, this would have prevented "true inflation," the buildup of unnecessary debt (already greatly enlarged as a result of the New Deal), and the imposition of rationing or wage and price controls. "Excess" income would have been taxed away, preventing an increase in the price level — rationing to prevent inflation is unnecessary if people don't have the money to spend and bid up prices.

As many writers have observed, increased spending by the government on New Deal programs did not get the United States out of the "mini-depression" of the mid-1930s. Instead, it was the increased demand for war production that created conditions of full employment.

Whatever actually brought about the full employment of the Second World War, the decision to finance America's entry into the conflict through borrowing rather than taxation was purely political. In this, the Congress simply followed the precedent established by Salmon P. Chase, Lincoln's Secretary of the Treasury, who sought to use his position to lever himself into the presidency (even to the extent of putting his own face on the $1 note to familiarize people with his appearance). The First World War provided a more efficient mechanism for funding government debt, one that (as we have seen) has become established as the normal mode of operation of most of the world's central banks and the means by which the State attempts to assert control over the economy, with increasingly disastrous results, as recent events have shown.

While Eisenhower warned of the dangers of "the military-industrial complex," Ike should rather have directed the attention of the people to the real and present danger inherent in the financial-political complex, the subversion of the financial system to serve the ends of the State rather than the needs of the private sector, as Henry C. Adams pointed out in his 1898 Public Debts: An Essay in the Science of Finance. As Moulton summed up his discussion in 1938 of the evolution of the Federal Reserve System up to that time,

In concluding this discussion of the Federal Reserve system attention should be called to a point of view embodied in the new legislation, which marks a profound departure from the conception that had prevailed during the long period from the Civil War to 1933. As a result of the experience of the early nineteenth century in connection with the First and Second national banks and in the light of banking history in other countries, the opinion had crystallized that an efficient monetary and banking system, responsive to the requirements of business, necessitated detachment from political control. This conviction was responsible for the Independent Treasury system; for the segregation of the monetary from the fiscal functions of the Government in the Currency Act of 1900; for vesting in the National Banking system the power to issue notes; and for the democratic organization of the Federal Reserve system and the independent political position accorded the members of the governing board. While the Secretary of the Treasury was ex officio a member of the Board, the view prevailed that the Treasury should not be permitted to dominate Reserve policies in the interests of government fiscal requirements. (Financial Organization of the Economic System, op. cit., 416-417.)

We can argue whether the Great Depression or the Second World War were avoidable. Doubtless there is a great deal that could have been done to prevent either from happening or to ameliorate the scope of the disasters. What this survey has shown, however, is that, regardless whether the lack of a Just Third Way understanding of and approach to economic problems could have prevented them from happening (certainly true in the case of the Great Depression, and possibly true with respect to the Second World War), how recovery was financed in the first case, and victory in the second case had serious repercussions that have continued to haunt us down to the present day.

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