Chapter IV: Modern
Theology
We have thus established that a special elite exists
in this country which is given the special privilege in law of creating money.
And you have seen how this privilege enables them, and a larger group who
benefit from their actions, to gain wealth at the expense of the vast majority
of Americans.
But the elite faces a problem common to all
aristocracies. How does a small minority exploit a large majority? If the
exploiters were a majority, their portion would not be large enough to be of
much value. But if physical force is the criterion, then the majority can
easily overwhelm a small minority.
The way aristocracies have solved this problem in the
past is by deception. They create a set of myths which justify their superior
position and convince the majority to accept its own exploitation. The
aristocracies of the Middle Ages preached the doctrine that some men were by
birth superior to others and that God had established this as a natural order.
Resistance to the aristocracy was resistance to God. Submission, even to unjust
rulers, was required by the teachings of religion and would be rewarded in the
afterlife.
So, too, our modern banker elite and its associated
vested interests in big business preach a set of myths, a set of myths which is
unquestioned in the social controversy of our time and which rationalises and
justifies their special position.
These are:
A paper money expansion is not merely the good of a
special interest. It is a general good which benefits everyone. Conversely, a
contraction is an unmitigated evil with no good to anyone.
The real reason policies of paper money expansion are
advocated is out of a sense of altruism. This is done for the benefit of the
poor and unfortunate.
Paper money has the magical effect of creating
something out of nothing. This is why we are all better off from its use.
Myth 1. The myth of the
general good.
In the 18th and 19th centuries when the proponents
and opponents of paper money waged their battles, it was taken for granted that
there were two contending classes — generally styled debtors and creditors
(although as we have seen, the actual classes are more inclusive than that) —
and that when one gained the other would lose. But today there is no such
conception. Today, the effects of paper money expansion are called a business
boom and are held to be good for all. The effects of contraction are called a
depression and are held to be a universal evil. For this reason let us now turn
to a more careful examination of the business boom. (See Illustration 2 on page
33.)
The period 1965-1969 was a period of economic boom.
By all the traditional indices the economy was expanding. Gross National
Product was up. Industrial production was up. Unemployment was down. The large
majority of business indicators were up. But during that period take-home pay
of the average worker in terms of real buying power declined. Note that it is
normal for real wages to rise. From the post WW 11 period to 1965, real wages
increased by over 40%. In the great period of declining prices from 1865 to
1900, real wages of the average American worker more than doubled. (See
Illustration 3 on page 43 for chart of real take-home pay.)
To one educated in our modern society, this is a
startling fact. But fact it is and the surprise you feel is only a measure of
the success of the banking aristocracy in having convinced virtually everyone
of a falsehood. While we have been told that we are better off and are getting,
richer, in fact we have been getting poorer!
In 1968, in the middle of the boom, dozens of fast
buck operators were making money hand over fist. What was known on Wall Street
as the “new breed” — men like Bernard Comfeld, Howard Levin and James Ling —
were living high, wide and handsome; but the average American was finding that,
by a process he did not quite understand, his paycheck bought less and less at
the supermarket each week.
What is happening in the U.S. economy is that there
are two groups, one of which is exploiting the other. These are the groups defined
in the last chapter; the banks, big business and their entourage of gamblers
and promoters on the one hand; and the middle class and working class,
especially the elderly, on the other. This is the conflict recognised by
Jefferson and characterised by him as the banks and the big corporations versus
the common man. In general terms the characterization is accurate. The business
statistics which define boom and recession are not indices which measure the
general wealth of the economy as a whole., These indices go up when there is a
transfer of wealth from the second group to the first. They go down when the
transfer slows or stops or goes into reverse. They measure not the general
good; but the exploitation of one social class by another.
For example, high corporate profits, a rising stock
market a falling interest rates are all used by economists to indicate a
booming economy. Yet all three of these indices measure the gain of paper money
clique at the expense of others.
When a currency depreciation increases prices faster
than then business profits will increase, and the stock market up, but this
will not measure a gain for the whole society; merely measure gains made by
business at the expense of worker-consumer. Similarly, when interest rates fall,
then business profits will increase because one of business important costs
(the cost of borrowing) will be lowered. But this does not represent gain for
society as a whole. It simply represents a transfer of wealth from lender to
borrower; business benefits at the expense of the thrifty.
Many of the other commonly used indices of business
are merely other ways of looking at the above three statistics. For example, an
increase in housing starts is regarded as good for the economy, but an increase
in housing starts is caused by and largely correlative with a drop in interest
rates. Capital spending is caused by and follows rising profits and falling interest
rates. These are statistics which indirectly measure what the above three
directly measure that is, the transfer of wealth from the majority of working,
consuming, saving, Americans to the bankers and big business.
The most commonly used index on the economy is the
Gross National Product. For most students of the subject, GNP is the economy.
For this reason, you should give this index special attention.
Suppose a bright, young inventor develops a cheaper
way to produce electric power so that electric power can now be produced and
sold for half the previous cost. Unquestionably this is an increase in the wealth
of the community which is fortunate enough to have such a man. The people in
the community can now have the same amount of power as before with more
resources left over to buy other goods. But this increase in wealth in the
community will not show up as an increase in the Gross National Product. In
fact, since people will now spend less on electric power, the contribution to
GNP by electric power will be smaller! But it is clear that people are getting
the same amount of electric power as before. How then can electric power show
up as less in computing GNP? And if it does, does GNP really measure the
increase in wealth which has taken place? (For a
detailed examination of how GNP is computed, see Appendix A.)
In general, there are only two ways in which wealth
can be increased: Something which was done before can be done more effectively
or efficiently; or something new can be created.
If something is done more effectively, then there
will be a reduction in cost. Thus, the contribution to GNP from this source
will be less. Correspondingly, people will have more money left over (the
amount they saved by the reduction in cost) and will spend it on other things.
Since the amount of new spending on other things equals the reduction of
spending on the product in which the efficiency was discovered, the reduction
in GNP from the efficiency will just equal the gain in GNP from the extra
spending. Other things being equal, GNP will remain the same.
If a new product is created, then GNP will be
increased by the amount of money spent on this product. By the same token,
people will have to divert an equal amount of money from other goods and
services in order to buy the new product; thus GNP for all other goods and
services will fall byan equal amount. The increase in GNP from the new product
will just cancel out the decrease in GNP from all other products, and, other
things being equal, total GNP will remain the same.
In other words, of the two possible ways to create
wealth, neither of them will result in an increase in GNP.
But, if during the period under question, the banks
increase the supply of paper money, then people will spend more for all sorts
of things. (They will have more to spend.) Thus GNP will rise whether there is
an increase in the real wealth of the country or not. In short, an increase in
the real wealth of the country will not, other things being equal, cause an
increase in GNP. But an increase in the supply of money will cause an increase
in GNP whether there is an increase in real wealth or not.
If you question an economist about this, he will
answer that ordinary GNP is an unfortunate statistic which has been seised upon
by the public; he relies on what he calls real GNP, which is GNP minus a factor
to account for “inflation.” i.e., if GNP has risen by 8% and the depreciation
of the currency has boosted prices by 5%, then real GNP is said to have
advanced by 3%. Real GNP is a better concept than plain GNP, but it is still
subject to fallacies. The main fallacy is that our methods of measuring the
depreciation of the currency are inaccurate and tend to un the rate. (What if the rate of
depreciation is really 8% and not 5% as measured? Then in the above example the
whole increase GNP is due to statistical error.) (13)
The problem with the Consumer Price Index as a measure of currency depreciation
is that it is the only measure in terms of the actual goods people buy and so
is nothing against which to check it. The only time there has something against
which to check the Consumer Price Index was during the Civil War period when
gold (which had just been demonetised) was trading on the free market. The
price of gold served as one measure of the depreciation of the paper money, and
the Consumer Price Index served as another measure. By 1864, the price of gold
was up over 100% in terms of paper money, indicating a depreciation of over
half, and the Consumer Price Index was up 77%.
Since the Consumer Price Index is an index designed
to go up in accord with the depreciation of the currency and GNP is an index
which goes up in accord with the depreciation of the currency, it can
reasonably be asked: What does one get when one corrects GNP by subtracting the
CPI?
Go back to the case of the inventor who develops a
cheaper way to produce electric power. There is no rise in GNP from this gain
in wealth, but there will be a rise in real GNP. This is because with electric
power cheaper the Consumer Price Index will fall; hence real GNP will rise.
This is fairly straightforward; however, most inventions and improvements do
not simply make the same good cheaper; they introduce improvements in quality.
An attempt is made to compensate for this by estimating the value of the
improvement. Suppose the invention consists of an improvement in the quality of
sound on one’s hi-fi. The bureaucrats who compute the CPI say something like, “This
is a 5% improvement in sound quality for the same price; therefore, it is
equivalent to a 5% reduction in price for the same quality. Therefore, we treat
this as a 5% reduction in price when we compute CPI.”
Thus the major real factor which is affecting real
GNP is some obscure government official saying, “Well I think that Xerox
machines gave a better image now than they did last year; let’s use that fact
to offset the price increase for their product. I think cars are giving a
better ride than they did previously,” etc.
As Linda Jenness, Socialist Workers Party candidate
for President in 1972, pointed out in this regard: “Take automobiles, for
example. From the introduction of the 1959 models through the 1970 models, car
prices increased by hundreds and thousands of dollars in that period. But the
Consumer Price Index registered no increases in auto prices!” (14)
In short, when one penetrates all the complex
mathematics, what is at the bottom of real GNP is the scientific equivalent of
your Grandmother saying: “Well it seems to me that life is better now than it
was when I was a little girl. People have nicer homes and nicer cars, and they
seem to eat better and have more free time.” There is nothing wrong, as such,
with your grandmother’s judgements. The point is that, at best, our modern
economist can approach them in accuracy. And of course even real GNP does not
do that. If we remember the story of the enterprising farmer, we realise that,
during an issue of paper money, in money terms it appears as though everyone
has gained. And GNP, of course, is an attempt to measure the economy by
translating everything into terms of money. There are three specific factors —
side effects of the paper money expansion — which go to increase real GNP while
lowering the real wealth of the people in the society:
Inventory accumulation: Almost all businessmen hold
inventories. They wish to make these inventories large enough to economise on transportation
costs and to be able to satisfy customers’ wishes. But they also wish to keep
the inventories from getting too large because inventory ties up capital and
costs the businessman interest. Each businessman works out his own proper level
of inventories in consideration of these factors and the peculiarities of his
business.
However, when the process of money creation lowers
the rate of interest, it makes sense for the businessman to increase his
inventories. This is what happened from 1965 to 1970. The inventory/sales ratio
of all manufacturing and trade hit a low of 1.43 in early 1966 and rose to a
high of 1.64 in 1970 (First National City Bank of N.Y., “Monthly Economic
Letter,” Oct. 1971). During this period, workers worked overtime and some of
the unemployed were hired in order to overstock the warehouses of the nation.
This increased GNP, but it did not create goods for people’s use. So long as
the goods merely piled up in warehouses they could not be used by people. And
the only conditions under which they would be likely to come out of the
warehouses (i.e., A reduction in the inventory/sales ratio) are the conditions
of a declining GNP.
(2) The Austrian effect: There is another way in
which the country can increase production without increasing the ultimate good
to people. This was demonstrated by Murray Rothbard of the Austrian school of
economics. It results from the fact that people must always make a choice
between consumption and investment. Either use your wealth now, enjoy it and consume
it, or invest it and use it to give you more wealth later. Common sense
dictates that a reasonable balance must be maintained between consumption and
investment. The man who consumes everything is the wastrel, always in debt. The
man who invests everything is the miser who never enjoys his wealth. Each
person in our society makes a decision on how much of his income he will
consume andhow much he will invest according to his own preference.
If businessmen see that people are consuming more,
they will shift to making more consumer goods-goods that will be used up
directly. If businessmen see that people are investing more, they will shift to
making more capital goods, machinery and things which cannot be consumed
themselves but which will be used to increase production to give a return on
the investment.
For example, if John Jones decides to consume his
wealth, he may buy a car. In this case he gives his money to General Motors,
and they produce a car for him. If he decides to invest his wealth, he may buy
a General Motors bond. In this case he has lent his money to GM, and they will
use it to build a new factory which, five years from now, will produce cars
more efficiently. GM’s decision to build cars or to build factories is
ultimately related to John Jones’ decision to consume or invest.
When the banks create money by making loans, these
loans typically are to businessmen who invest in capital goods. This leads to a
shift toward investment and away from consumption. From the point of view of
society as a whole, it is as if millions of John Joneses had simultaneously
decided to consume less and invest more. Several years from now, as the new
factories are built, production will rise and real GNP will increase. However,
if the John Joneses had wanted to postpone their consumption and get more
later, they would have done so; they would have chosen to invest. That they did
not indicates that they did not want to. The miser in his old age is very
wealthy, but how much has he enjoyed life? If we view wealth as the
satisfaction of human desires (which is a more humanistic concept of wealth)
rather than merely the production of more widgets, then once again paper money
has increased real GNP while decreasing the wealth of the country.
It is this aspect of a paper money expansion of
credit which has fooled many economists into defending the system and thinking
that it actually does create wealth. Viewing, this aspect and this aspect
alone, there are more “things” in existence because of the expansion. There are
more widgets and automobiles, etc. The effect here is to force the average
person to make the investment choice (as per the miser) rather than the
consumption choice.
You can see just how beneficial this would be if it
were done openly and directly. Suppose the Government were to pass a law which
forced people to save and invest 50% of their income. This would mean a drastic
curtailment of living standards in the present; but there would be an increase
in wealth in the future. The question is: Would people be better off from that
later increase in view of the hardships they would have to suffer in the
present?
I think it is clear that the answer is no. If a
person feels that he is better off by saving 50% of his income for the future,
then he is free to do so, but very few people make that choice. This open and
direct method will likewise increase GNP because, in the future, the capital
goods will allow increased production. But it is not to people’s economic
benefit. If it were, they would make the choice voluntarily.
(3) Waste due to overemotionalism of a boom: In the
euphoria which swept over the stock market in 1967-68, it was not only the
paper value of stocks which had a boom and bust. The rising value of those
stocks led directly to new construction of factories and outlets. Since this
new construction was based on artificially high stock prices and not on
reality, most of it was waste and was revealed as waste when the stocks
collapsed. A most notorious example was the fast food franchising business.
Certain unscrupulous operators were using accounting tricks which made their
companies appear far more profitable than they really were. One of these tricks
was to sell a franchise on time and then count all of the income from the sale
(not merely the down payment) as this year’s earnings (even though the company
would not receive all of the money for several years). Once this trick was
established, idea was to see who could sell the most franchises. But of course,
every time a franchise was sold so that this accounting trick could be worked,
a real live restaurant was constructed. The country was then flooded with fast
food places which could not justify their existence economically; much of the labour
and materials which went into building, them turned out to be waste. That labour
and those materials could have been used far more effectively to benefit
people. But they all counted as big pluses in GNP.
In 1968, in this country, there was a mood of
economic euphoria. Everyone was talking of millionaires, and celebrities were
endorsing quickie franchise operations. But my mood at this time was not
euphoric. When I would see a workman constructing a new Lums or a giant
officebuilding, I recognised this as waste. What is the fate of a society which
sets one group of men to building walls and another group to tearing them down?
The labour of those men, the bricks, the plumbing, the wiring and all the
materials that went into the building of those restaurants, office buildings
and other phony projects were waste. They added to GNP, but they subtracted
from the nation’s wealth.
It should also be pointed out that, if there are more
things in existence from the Austrian effect, this is more than counterbalanced
by the waste. The country is thus in the position of being forced to save in
order that it may have less in the future.
A point that should be made here is that there is a
tragic human consequence of this process. Factors 1, 2 and 3 not only involve
the misuse of resources, they involve the misuse of human labour. Put quite
simply, a boom creates a demand in the economy for different goods than would
be demanded if there had been no boom. When workers are hired to produce these
boom-type goods, their jobs are secure only so long as the boom continues. Any
diminution in the rate of paper money creation will throw these people out of
work. This is why in 1970 there was so much unemployment among scientists. The
shift to making more capital, described in factor 2, led to a demand for basic
research (which is a capital good) requiring more Ph.D.’s. The high demand for
these people led to high salaries for this group several years ago and induced
many young men with the requisite intelligence to get advanced degrees and
compete for jobs in these fields. But the reduction in the rate of money
creation in 1969 coincided with the graduation from school of large numbers of
these Ph-D.’s, and since their jobs were dependent on the boom, we had the
phenomenon of unemployed Ph.D.’s in 1970. Thus large numbers of the nation’s
brightest men were induced to spend crucial years of their lives preparing
themselves for jobs which were will-o’-the-WISPS, mirages, which would not
exist in a proper economy. The solution of the banking elite to this human
tragedy was not to prevent such misuse of labour. It was to recreate the jobs
by another round of paper money. Thus another generation is being drawn into
this cycle, who in turn will become the justification for another round of
paper money. This is the solution of the drunkard who combats the bad effects
of the hangover by getting drunk again.
To summarise, GNP, like stock prices, corporate
profits, housingstarts, etc., goes up because of the same process which
enriches the bankers and business at the expense of the rest of the community —
the printing of paper money. The claim that these common modes of measuring the
growth of the economy actually do that is false. What they measure is not the
public interest but the interest of the banks and big business. When these
latter gain, the great majority of Americans lose. It is a fall in GNP which is
to the economic interest of most of the American people.
Myth 2. The myth of
altruism.
Surely our age is blessed with the most beneficient
leaders. All of them possess the greatest degree of heartfelt concern for the
poor and unfortunate souls who cannot find employment. Have: we not enacted
into law the Employment Act of 1946, which makes it a policy of the government
to reduce unemployment? Is this not a prime concern of politicians of both
parties, of labour leaders, and have not even businessmen become enlightened to
recognise their obligations along this line?
All this is by way of contrast to that evil age of 70
years ago when politicians were unconcerned with unemployment, unions were
almost powerless to protect jobs and business leaders could say, “The public be
damned.” So no one will be surprised to see the rates of unemployment for our
recent history and for 70 years ago. (See Illustration 4 on page 43.)
Average unemployment in the first decade of the
century was 3.7% per year. (This figure is from the Bureau of Labour
Statistics; the National Industrial Conference Board’s “Economic Record” of
3/20/40 estimated it as 3.4%.) Average unemployment in the decade of the ‘60s
was 4.8% per year. The first decade was a time of mild currency depreciation
(the price level rose by 10% over the ten years) and a time of a huge influx of
foreign labour which underbid American workers for their jobs. The decade of
the 1960s was a decade of rampant currency depreciation when foreign labour was
kept out by strict immigration laws. By all of the myths which we have been
taught, the decade of the 1960s should have been a decade of lower unemployment
than the first decade of the century.
An important point to note is that the unemployment
rate was more volatile 70 years ago than it is now. It went higher in periods
of depression and lower in periods of boom. The unemployment rate of .8% in
1906 is simply unachievable in modern times. The significance of this is that
the real hardship of unemployment does not fall on those who are just
temporarily between jobs; it falls on the hard-core unemployed-those who remain
out of work for long periods of time. It is hard to see how unemployment could
have gotten down to .8% in 1906 and 1.8% in 1907 if there were any significant
number of hard-core unemployed. This indicates that even the unemployment that
did exist at that time was more of the between-jobs type of unemployment and
far less of them,..., hard-core type. Permanent, hard-core unemployment is a
modern phenomenon, and it arrived on the scene after the air became filled with
platitudes expressing sympathy for the plight of the unemployed. Perhaps the
point of this section can best be made by a story told to me by a friend in the
securities business.
My friend worked for the proprietor of a small mutual
fund; call him Mr. X. Mr. X’s fund had done well in the wild stock market of
1967 and 1968. The policy of paper money expansion followed during those years
helped to create an emotion which put all kinds of low-priced cats and dogs
(low quality, risk stocks) up far beyond any rational estimate of their value. In
the process, Mr. X’s low-priced stocks went up, enriching him and drawing many
more people into his fund. By the time of my story, he was quite wealthy and
also a large contributor to the campaign funds of certain prominent politicians.
But the attempt to stop “inflation” which began in
December 1968 (and ultimately had its effect in a significantly lower rate of
price increase by early 1971) was not good for Mr. X. It sent the stock market
into a tailspin and pulled the support out from under the over-priced cats and
dogs. By June of 1969, Mr. X’s fund was losing money hand over fist.
Mr. X did not attempt to save his clients’ money by
selling off stocks and staying, out of the market until the decline was over.
Instead he wrote a letter to one of the politicians dependent on him for
financial support. ‘Speak out,’ he said ‘against the economic policies of the
Nixon administration. I am indignant at the terrible suffering which is being
caused to the unemployed of this nation. In the name of these people, there
must be a return to the policies of 1967-68. 15
In contrast to the other myths perpetrated by the
banking establishment, it is correct to say that the unemployed are helped by a
business boom (i.e., a paper money expansion) — at least in the short run.
During periods of boom, the unemployment rate goes down (a little); during
periods of recession, it goes up. In short, while the instant millionaires of
the late 1960s were wheeling and dealing in their conglomerates, while Howard
Levin was ordering his $900 attache case and Bernard Comfeld was throwing his
wild parties, a small percentage of the working force was picking up its
$1.60-$1.70/hr., whereas it otherwise would not have been able to do so.
Thus perhaps it would be justified to say that out of
all this evil comes a little good. Someone at least benefits from the paper
money besides the establishment which brings it about. Unfortunately not even
this is the case. This view is valid for the short run but not for the long run.
Paper money does reduce the rate of unemployment for a two to five year period,
but viewed on a scale of 10 to 20 years, the effect is just the opposite.
Consider the following argument: What if our society
succeeded in putting an end to unemployment? What if the percentage of
unemployed dropped to the level it had maintained during the first decade of
this century, with that level consisting of People who were clearly between
jobs and who would be employed again within a few months? What then would the
banking establishment use as a reason to promote policies of “stimulation of
the economy?” Would they say, “Simulate the economy so that I can make a bundle
of money?” No, coming, from the mouth of Mr. X and people like him, this
argument would fall flat on its face. These people need the unemployed; they
need them badly. They need them to mask the self-interest underlying their
demands and cloak it in an aura of altruism. If the unemployed did not exist,
they would have to create them.
And create them is what they do. For unemployment in
our society is not a natural phenomenon. Unemployment is deliberately
manufactured by the policies of the aristocracy; it is created in order that
they may posture as the friends of the unemployed and, by throwing a few crumbs
to these unfortunates, rob billions of dollars from the people of America.
It should be noted that the phenomenon of long term,
hardcore unemployment is far worse than is registered by the unemployment rate
of 5-6%. When a man cannot find work for too long a time, he may become
discouraged and give up — thus dropping out of the labour force so that he is
no longer counted in the unemployment statistics. Approximately 15% of the
population of New York City is on welfare. How many of these could or would be
willing to work if they could find jobs is a matter for conjecture, but to say
that the human tragedy of inability to find work is accurately recorded by an
unemployment rate of 5-6% is an error. If all 15% of those on welfare in New
York City represent people driven from the labour force by policies of the
aristocracy$ then the true rate of unemployment for New York City is of the
order of magnitude of 20%, which is to say that we have a long term, hard-core
unemployment problem as bad as it was during the worst days of the depression.
These policies work by the following means:
Labour union unemployment: Some unions, in order to
raise wages, limit the number of jobs in their field. They believe (correctly),
that if there are fewer workers, the law of supply demand will make it easier
for them to get high wages. For example, the taxi union in New York City has
pressured the Mayor into restricting the number of hack licenses. Many people
who otherwise would be employable as taxi drivers in New York therefore remain
unemployed. Similarly, construction unions severely limit the number of
apprentices they allow. This creates a shortage of skilled construction
workers. The Teamsters Union, together with their employers, the trucking
companies, pressure the ICC to limit the number of interstate truckers. This
forces truckers’ fees and teamsters’ wages up and keeps the unemployed from
finding jobs driving trucks.
It is easy to see why these unions do this; their
members want higher wages, and they are perfectly willing to climb up to
greater heights of prosperity on the backs of their fellows whom they kick down
into the ranks of the unemployed. It is less easy to see why laws are passed
allowing them to do these things. The mayor of New York claims to be a liberal
and to have sympathy for the unemployed. Why, then, does he not allow them the
opportunity to earn their own living? Does one man have the right to forbid
another man to work?
Many of these practices have led to serious racial
disturbances. The restrictive practices of the New York taxi union seem to be
related to color as most of the people who are prevented from obtaining taxi
jobs are black. These blacks operate illegal gypsy cabs, earning their living
in defiance of the law. The racial animosity engendered by this situation has
made it extremely dangerous for white cab drivers to enter the black areas of
the city. The restrictive practices of the construction unions are well known,
and civil rights groups have made attempts to break the color bar — with little
success.
Note that the prime evil is not the action of the
unions. They are simply acting in the interests of their members. The prime
evil is the legislation which enables them to achieve this benefit by forcing
other people into the ranks of the unemployed.
(2) Minimum wage law unemployment: The minimum wage
compels employers to pay their workers a minimum of a certain amount (now
$2.30/hour 16). This law has no application to the great majority of workers,
who are worth far more than $2.30/hour and are paid wages well above that
amount. However, it does have application to workers who are not worth
$2.30/hour to their employers. If a man produces goods worth $2.00 in an hour,
his employer will find it profitable to employ him at $1.95/hour, but not at
$2.05/hour. Because of the minimum wage law, therefore, his employer has an
economic inducement to fire this man (or not to hire him in the first place),
to replace him with a machine, if possible, or not to go into an area of
business where he will have to hire many of such kinds of people. Such
unfortunates fill the ranks of the unemployed. (Unemployment rates for minority
youth run in the range of 25-40%.)
It is evident that, if the unemployed were given the
choice, they would choose to have the minimum wage abolished. Since they cannot
get jobs at $2.30/hour, they would prefer to have a chance to get them at $2.20
or $2.00. At the very worst they could reject these inferior jobs and be in the
same situation they are in today. But at least they would have the freedom of
choice. How then can such a law be justified as being for the benefit of the
poor?
Proponents of the minimum wage argue that without it
the wages of the lower level of workers would be driven down to subsistence.
But, of course, there is no lower wage than the wage one receives when one is
unemployed. The wages of workers worth $3.00/hour are not driven down to $2.00.
The wages of workers worth $4.00/hour are not driven down to $3.00. Why should
the wages of workers worth $2.00/hour be driven down to $1.00?
Any worker has a bargaining power depending on the
value of his labour. If his employer does not want to pay him what he is worth,
he can always go to another employer. A worker receiving $3.00/hour who is
really worth $4.00/hour will be able to find an employer willing to pay him
close to $4.00. This is simply in the self-interest of the employer. The wages
of the lower level of workers were not driven down to subsistence prior to the
enactment of the minimum wage (Karl Marx, to the contrary, notwithstanding). In
fact, wages have increased steadily in this country in terms of real buying
power ever since the Pilgrims landed in the Mayflower (with minor setbacks
during periods of currency depreciation), and there is no reason to think
things would be different now.
The members of the aristocracy who support the
minimum wage law do not do so out of sympathy for the lower level of workers.
They do so to help create a class of unemployed for whom they can feign
sympathy.
Increases in the minimum wage are generally gradual
enough so that the unemployment they cause is obscured by other economic
factors at the time of the increase. But the initial establishment of the
minimum wage in 1938 had an especially marked effect in Puerto Rico because of
the large number of workers in that territory worth less than the minimum wage.
Unemployment rose so rapidly that in 1940 the Roosevelt administration felt
obligated to amend the minimum wage law to make an exception of Puerto Rico.
Referring to this amendment, Senor Bolivar Pagan, Resident Commissioner for
Puerto Rico said: “It has been said that the application to the islands of the
minimum wage rates prescribed by the Fair Labour Standards Act for the mainland
of the United States has threatened to cause serious dislocation in some island
industries and great curtail of employment. The amendment signed today will
permit separate study of this problem and the fixing of wage rates for these
islands which are high enough to protect industries on the mainland from unfair
competition but which are low enough to encourage industrial development and to
provide employment opportunities in the islands. 17
The Roosevelt administration knew that the measures they offered would throw
people out of work. In areas where this caused a significant social problem
which would have political implications (such as Puerto Rico), they quietly
backed down. But in areas where the unemployed would be scattered and voiceless
and have no political power, then no one gave a damn.
Pro-bank economists continue to deny the effect of
the minimum wage in throwing the less valuable workers out of work. They admit
the operation of the law of supply and demand in other areas. They admit that
overpricing of wheat leads to a surplus of unused wheat. But they will not
admit that overpricing of labour leads to a surplus of unused labour. These
economists cannot approach their subject on the basis of reason. They must
defend the myths of the aristocracy which supports them.
Since WW II, the minimum wage has gone up, both in
real terms and in money terms. Labour unions have become more rigid. The effect
is to throw ever larger numbers of people into the ranks of the hard-core unemployed.
In this manner, the hard-core unemployed gradually move out of the unemployment
statistics and onto the welfare rolls. (Only a small fraction of the total
unemployed are unemployed for more than 26 weeks.)
Notice that it is the concept of unemployment which
gets so much concern, not the concept of unemployable, which would include
those on welfare who have given up seeking, work because they are so
discouraged. Even in times of recession, only one-fifth to one-third of the
unemployed (that is, 2-3% of the total labour force) represent people who have
been unemployed for over 15 weeks. The rest surely represent people who are
merely between jobs. The real social tragedy consists of those people who
cannot find jobs and so drop out of the labour force (i.e., stop looking for
work). Why is our concern not focused on them? The answer to this question is
that the unemployment rate is subject to short term influences. Few people
remain on the unemployment rolls for over a year. Thus the short-term influences
of paper money, which are to reduce unemployment, are clearly reflected in this
statistic. But the long-term influences of paper money, which are to increase
unemployment (in the larger sense), are most clearly shown by looking at the
welfare statistics.
The deliberate creation of unemployment in order to
justify a policy of paper money has further consequences. A man who has sunk
into the ranks of the permanently unemployed suffers a loss, not only of
income, but of a part of his dignity. This is a spiritual loss; it cannot be
measured by the means of economics. But it has a real effect. It is such people
who turn to drugs and crime.
There is no social or cultural reason for the large
class of welfare dependent people, breeding crime and drug abuse, which has
grown up in America during the past generation. Neither is there any genetic or
environmental reason. The ancestors of our modern welfare class prior to 1933 were
capable of dignity and self-sufficiency; they did not turn to drugs and crime.
But they had the same cultural milieu, the same genetic background, and, if
anything, an even poorer environment.
If a 16-year-old black youth who has dropped out of
school is employed for $2.00/hour, then he can earn spending money and contribute
to the income of his family. More important, he has a chance to learn some
skills and develop habits conducive to work. By the time he is 25, he has a
reasonable chance at earning a living. But, if this same boy remains
unemployed, then he never receives the training which will make him employable
at a higher wage. Rather, he develops the habits of a life of idleness and
becomes less employable, not more.
In Harlem, there are large numbers of blacks driving
gypsy cabs. Their operations are illegal, and white cab drivers do not dare to
enter their territory. The establishment has forbidden these men from earning a
living. They have the character to fight back, to retain their dignity by
breaking the law. These men have experienced the realities of power in America
today and know how to evaluate it when phony liberals mouth pretty platitudes
to the establishment press about their concern for blacks.
Not everyone has this much character. There are
morally weak people in every group; these are the ones who give up, go on
welfare and turn to crime and drugs. The black generation of 1865-1900, far
more disadvantaged in every way in comparison to our present blacks (except
that they lived in a society in which there were no minimum wage laws and in
which unions did not have the power to keep people from working), did not do
this but were by and large religious people who lived moral lives. These social
problems are the consequence of our paper money system, and when that is ended,
they will go away.
A few years ago, a British economist named Phillips
came up with the idea that there is a trade-off between “inflation” and
unemployment. That is, to reduce unemployment we must put up with more “inflation,”
and to reduce “inflation” we must suffer an increase in unemployment. He even
plotted curves showing the amount of “inflation” which is associated with a
given amount of unemployment.
Of course the statistics of 70 years ago refute Mr.
Phillips’ notion. At that time there was very little unemployment with only a
mild rise in prices. And since the Phillips curve first became popular among
economists, it seems to have shifted. For example it seemed to require more
depreciation of the currency to reduce unemployment to the 4 1/2% level in 1973
than it did to reduce it to the 31/2% level in the mid-1960s.
The conventional economists flounder about and
pretend they do not know what is happening. But it is very simple. The banker
aristocracy, which benefits from paper money, has an interest in creating
unemployment. It helps to increase the minimum wage; it helps labour unions to
tighten their strangleholds on their various industries. The more unemployment
which results from these policies, the more persuasive a case can be made for a
further dose of paper money to temporarily reduce the unemployment. Thus
structural unemployment is increased, and it requires ever greater rates of
currency depreciation to reduce it to the same level.
In addition to serving as the motive for structural
unemployment, paper money also causes cyclical unemployment because it leads to
the malemployment of human labour as described in the discussion of Myth 1.
Paper money distorts the economy so that jobs are created which can only exist
as long as the paper money continues. People working in these jobs are
malemployed.
For example, when major issues of paper money were
issued in 1971and 1972, it created a boom in the housing industry, and housing
starts ran up to a 2.5 million annual rate. Because interest rates had dropped,
people found it cheaper to get mortgages and so did more building. When the
rate of money expansion was reduced in 1973 and 1974, interest rates rose and
housing starts fell below a one million annual rate. Thus many people in the
construction field were thrown out of work. They were unemployed in 1974
because they had been malemployed in 1972.
It is true that the paper money issued in 1975 will
cause these people to be reemployed. But they will not be properly employed;
they will be malemployed in artificial jobs. When the politicians decide it is
time to fight “inflation” again, these people win be thrown out of work. They
face a lifetime alternating between “inflation” and unemployment.
The Loco-Foco movement (a left-wing splinter of the
Democratic Party which appeared in the 1830s and advocated an end to all bank
issues of paper money in excess of their gold and silver) used to say in
explanation of this 53 dilemma: When the currency expands, the loaf contracts;
when the currency contracts, the loaf disappears. That is, when more paper
money is issued, the worker is cheated by the fall in his real wages; when the
paper money is restricted, the artificial jobs cease to exist, and he is
unemployed.
When faced with the problem of cyclical unemployment,
the proper course of action is to allow the unemployed workers to find real
jobs, not to create artificial jobs by new issues of paper money. That will not
feed the unearned profits of the bankers, but in the long run it is best for
the working man.
Myth 3. The myth of
something for nothing.
In Chapter III, we discussed economists who believed
that paper money was the magic road to wealth, that it enabled society to
create something for nothing. This theory began when paper money first started,
in the late 17th century, and some of its infamous practitioners are William
Paterson (previously mentioned founder of the Bank of England), John Law
(originator of the Mississippi bubble in France) and Dan Shays.
With the development of economic science in the late
18th century, these ideas were rejected and the United States entered a long
period of relatively sound money. However, early in the 20th century the
something-for-nothing ideas were reestablished, chiefly due to the work of John
M. Keynes.
What Keynes did was to take the old mercantilist
economic viewpoint, dress it up in modern language and present it as the latest
scientific word in economics. Much of Keynesian economics has already been
discredited. For example, no one today believes — as Keynes argued — that by
breaking a window one increases society’s wealth. (Not only was this believed
in the 1930s, but in the middle of the depression, the Roosevelt administration
adopted a deliberate program of killing hogs in the belief that this would
increase the nation’s wealth.) However, there is one aspect of Keynesianism
which still survives and is widely accepted. Keynes introduced a new argument
to prove that paper money creates something out of nothing. What he said was
the following:
There exists a portion of the working force which is
normally unemployed. These are not merely people who are in a transitional
period between jobs. They are people who are actively seeking work and cannot
find it.
Paper money reduces unemployment. (Actually Keynes
would have said that government deficit spending, reduces unemployment. But
government deficit spending would not reduce unemployment if the deficits were
not financed through paper money. If government deficits had to be financed by
borrowing from the people, then the extra money spent by the government would
be exactly counter balanced by the lesser amount of money spent by those who
had lent to it.) As we have seen in the previous sections, the effect of a
depreciation of the currency is to lower the workingman’s real wages. When all
is said and done, this is how paper money reduces unemployment. Paper money
leads to a depreciation of the currency; this lowers the real value of wages.
Employers see that wages are lower and thus find it expedient to hire more
workers.
Paradoxically, it is just when wages are suffering
the most that public opinion thinks that they are going up. When prices are
rising and working men demand a wage boost to keep pace with the cost of
living, the newspapers scream headlines about the demands of the greedy unions.
Conversely, in a depression, when the real value of wages is going up (because
prices drop more rapidly than wages) but money wages are going down, the public
is filled with sympathy for the worker. The public is fooled by money wages and
does not look at real wages.
(3) Since some of the unemployed are now working,
more goods are being produced.
(4) Conclusion: Paper money has created something out
of nothing.
Jefferson commented on this
point of view almost 160 years ago:
Like a dropsical man calling
out for water, water, our deluded citisens are clamoring for more banks, more
banks. The American mind is now in that state of fever which the world has so
often seen in the story of other nations. We are under the bank bubble, as
England was under the South Sea bubble, France under the Mississippi bubble,
and as every nation is liable to be under whatever bubble, design, or delusion
may puff up in moments when off their guard. We are now taught to believe that
legerdemain tricks upon paper can produce as solid wealth as hard labour in the
earth. It is vain for common sense to urge that nothing can produce but
nothing, that it is an idle dream to believe in a philosopher’s stone which is
to turn everything, into gold, and to redeem man from the original sentence of
his Maker, “in the sweat of his brow shall he eat his bread. (18)
Keynes indeed did teach that legerdemain tricks upon
paper (manipulation of the Federal budget) can produce solid wealth. If this
process works, it is certainly a wonderful thing. If we can create something
out of nothing, then we should surely do it. Why not print up billions and
billions of paper dollars until there is no unemployment at all? This would
give us the maximum effect of something for nothing and would fill the
humanitarian goal of ending unemployment.
In fact, Keynes argued that when paper money was used
in this way, it would not lead to a depreciation of the currency (i.e., arise
in prices). He claimed that, since more goods are being produced, this balances
off the fact that there is more money in existence; therefore, a given amount
of money will still buy the same quantity of goods.
The Keynesians thus believe that, as long as there is
unemployment in the society, you can safely issue paper money without causing “inflation.”
If there is unemployment, you have not issued enough paper money. If there is “inflation,”
you have issued too much. According to this theory there cannot be both
unemployment and “inflation” at the same time. But there is, in America today,
both unemployment and “inflation.” There has been both unemployment and “inflation”
for most of the last 42 years.
In the summer of 1971, Arthur Burns, the Chairman of
the Federal Reserve Board, said, “The old laws of economics aren’t working like
they used to.” Mr. Burns was disturbed by the existence of a 6% rate of
unemployment together with substantial “inflation.” The “old laws” to which he
was referring were the, “laws” of Keynesian economics, to which Mr. Burns
subscribes.
The error in the Keynes argument is in Step 1. This
step appears plausible because there is, in fact, unemployment in our society.
But as we have seen in the previous section, this unemployment is caused by
artificial government acts which prevent people from working. Take away these
artificial government restrictions on employment, and aside from the minimal
amount of unemployment which is due to people who are temporarily between jobs,
unemployment in our society would be zero.
Every person’s labour has a value. That value
consists of the value of the goods he is capable of producing. It is always
profitable for an employer to hire a worker for less than the value of his labour.
It is never profitable for an employer to hire a worker for more than the value
of his labour. Most people are hired for approximately the value of their labour.
If someone is unemployed, the reason is that he is
asking more for his labour than any employer thinks he is worth. It may be
painful to a man’s self concept, but what he must do is to lower Ms demands.
Then he can find employment.
It stands to reason that there will always be some
people who ask more than they are worth and some people who never quite succeed
in persuading employers to give them what they are worth or who have a hard
time finding their exact niche. But these people will not represent permanent
unemployment. The man will have to lower his wage demands or search a little
harder; but it is scarcely credible that he will sit like a dummy and not do
what is required to find work.
This is the reason that unemployment rises rapidly in
a period of declining prices (appreciation of the dollar). If a man’s salary is
$10,000 and if prices in that society then decline in half, then the dollar has
appreciated to twice its value; his $ 10,000 in wages is really worth $20,000.
In such circumstances it is not a surprise that his employer fires him. The
employer cannot afford to pay him So much. This man may not want to believe
that in terms of the new, appreciated currency his salary ought to be $5,000.
He may spend a long time looking for a new job at his old salary. It does not
occur to him that, because of the appreciation of the currency, a salary of
$5,000 would be equivalent to his old salary of $10,000. Thus he continues to
turn down job offers which he thinks are beneath him. This phenomenon was
responsible for much of the unemployment during the depression.
If you take the Keynesian viewpoint and think what it
means in personal terms, then what Keynes was saying was that a, man would
choose to remain unemployed permanently rather than adjust his wage demands to
a realistic level that would get him a job. This is absurd on the face of it.
Some people may be slow in adjusting their wage demands. Some people may hold
unreasonable expectations. But to say that people will simply sit, like blocks
of wood, with unreasonable wage demands for ever and ever does not correspond
to the actions of real people in the real world.
This is why the Keynesian theory on “inflation” and
unemployment does not work. The unemployed in our society are not those who sit
with unreasonable wage demands. They are those who are made unemployable by the
minimum wage and by restrictive labour union practices and those who have been
malemployed.
It is true that a currency depreciation will
temporarily reduce unemployment. The reason for this is that the excess profits
of business are so big that there is competition to expand, and this spurs the
demand for workers (such as the demand for scientists previously described). It
is as though you allow a man to rob you throughout the week because you get a
little bit of the money back by working for him on Saturday. But in viewing
this as an argument for paper money, the following must be kept in mind:
The reduction in unemployment is temporary. As we
have seen, over the long term there is a tendency for unemployment to rise
under paper money.
The greatest unemployment occurs in a depression when
prices are declining. The reason for this is, as we have seen above, that
people are slow to adjust their wage demands to the rise in value of the
dollar. But of course the principal reason for a depression is the boom which
preceded it. That is, during the boom the banks issued paper money until they
were overexpanded and were forced to contract. The contraction caused a decline
in prices with resulting unemployment.
It is therefore not valid to argue for paper money
expansion as a cure for unemployment. The contraction is the result of the
previous expansion. Had there been no paper money expansion, there would be no
contraction and no unemployment.
(3) The ideal state is a condition where there is no
expansion of paper money and no contraction. If we had such an economy and
there were no minimum wage law and the labour unions could not use their
coercive power to reduce employment opportunities in their fields, then there
would be effectively no unemployment. That is, the only unemployed would be
those people who are between jobs and whose period of unemployment lasts only a
few weeks or a couple of months.
At the end of WW II there occurred what was almost a labouratory
test of Keynesian economics. Keynesians believe that the number of employers in
a society is, relatively speaking, a fixed quantity. They do not understand
that many employers will spring up if wages are low, and few will appear if
wages are high. They did not recognise that the large scale unemployment of the
Depression was caused by high real wages. They thought it was a feature of the
American economy. Their explanation for the low unemployment in the early ‘40s
was that the war had siphoned off 10,000,000 men from the labour force. When
these 10,000,000 ex-servicemen hit the civilian economy, they predicted,
unemployment would rise to the neighborhood of 10,000,000. We would be back in
the Depression.
However, what happened was that during WW II there had
been a severe depreciation of the currency. Prices had risen sharply from their
1940 levels. This had the effect of reducing real wages. Thus when the
servicemen returned to work in 1946 and 1947, they found it easy to get jobs.
When the unemployment did not appear, the Keynesian
economists looked around for an excuse. They found it in the concept of
consumer demand. No one can measure consumer demand and no one can define too
precisely what it is. Therefore, no one can ever know whether it is present in
greater or lesser quantities. When a Keynesian economist is wrong in his
predictions, he does not question his theories; he merely postulates a quantity
of consumer demand sufficient to explain the difference between his prediction
and reality. He then explains that he was unable to read the mind of the
consumer. This is a pretty explanation. It means that his theories never have
to face the test of reality. If his predictions are right, well and good. If
they are wrong, postulate a consumer demand. This procedure flies in the face
both of scientific method and common sense. A theory which cannot be put to any
test against reality cannot claim the status of a truth.
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