Tag Archives: money

By George P. Brockway, originally published November 7, 1994

1994-11-7 Junk Mail from Concord title

I’M ON A NEW mailing list, and I suppose you are too. The soliciting organization calls itself the Concord Coalition, and it seems to be the plaything of former Senator Warren B. Rudman, Republican of New Hampshire, and former Senator Paul E. Tsongas, Democrat of Massachusetts.

If I didn’t know anything about the two ex-Senators and had to judge them solely by the mailing piece, I would have difficulty deciding whether they are extraordinarily stupid or extraordinarily slick. Either way, they are dangerous, and are likely to make the next few years less pleasant than we might have found otherwise.

Let’s talk about the slickness first, because that’s more fun. Their bag is deficit reduction. In his “Dear Friend” letter to me, Mr. Rudman writes, underlined, “Our goal is nothing short of changing public opinion to demand less, not more, deficit spending and force the elimination of the deficit.”

Now, if you read that quickly, you may get the idea the Coalition is out to lobby the President and Congress to do something about the deficit. But that can’t be its intention. The letter asks me for a “special tax-deductible dues contribution,” and so far as I know, you cannot get a tax exemption for your organization if you are planning to lobby the Legislature. Common Cause doesn’t have tax exemption, nor does the Council on Foreign Relations, nor the National Association of Manufacturers nor the National Organization for Women nor the National Rifle Association nor the Academy of American Poets nor the American Automobile Association.

Some of the organizations on my little list play pretty hard ball, but most of them do not back candidates, and it is impossible to say with a straight face that the Concord Coalition is less “political” than they are. Either the Coalition is led by a couple of mighty shrewd lawyers, or is encouraging violation of the law right off the bat. They are cute enough, however, to add in a postscript that “contributions are tax-deductible to the extent permitted by law.” (Personal subscriptions to THE NEW LEADER are also tax-deductible “to the extent permitted by law,” which, I regret to say, is not to any extent at all.)

And that’s not the worst of it. The bookkeeping reason for the deficit is that our expenditures are too high and our taxes are too low. The Coalition proposes that tax collections be reduced by the amounts otherwise payable on the contributions they receive. By its very existence it is increasing the deficit it is complaining about. If that isn’t cynicism, what is it?

It may be stupidity.

But I doubt it. Both Mr. Rudman and Mr. Tsongas are grown men, and they are both (I think) lawyers. They have both spent a lot of time thinking about taxes, and presumably they both can add and subtract. Rudman also makes a point of the fact that “the hundreds of hours that Paul and I are putting into the Concord Coalition are strictly on a volunteer basis.” Not to worry. They are both entitled (I think that’s the word) to comfortable government pensions, complete with cost-of living adjustments (aka COLAS), not to mention better health insurance than you will ever see. Besides, if theirs truly is a tax-exempt organization, their expenses of running hither and yon to appear on talk shows are deductible. But not otherwise, although the expenses might be legitimate charges against whatever contributions they manage to collect.

Well, that’s all good for a chuckle or two in this winter of our discontent[1]. But what will happen to the economy if the Concord Coalition gets its way won’t be very amusing. And given the results of the recent election, one would be ill-advised to bet it won’t succeed without even trying.

So let’s look at the deficit. The estimate for 1995 (the fiscal year that started last October 1) is $176.1 billion. That’s down substantially from the $220.1 billion deficit of fiscal year 1994. In relation to the Gross Domestic Product, it is the smallest deficit we have had since 1979. But it is still a lot of money.

Suppose that, by constitutional amendment or otherwise, the whole deficit could be wiped out. What would become of all that money? Would you and I get refunds for our share of it? Or would the government deposit it where it could earn interest – say, in a Texas savings and loan bank (if any survives)? Or would it be stashed away in Fort Knox? Or could we use it to pay off our trading debts to the Germans and the Japanese?  Or to buyback the bonds they have bought from us? Or would it be an advance payment on the following year’s budget?

The correct answer, of course, is, None of the Above. And the reason for the answer is that all those billions do not exist, because as I’ve said before, and say again here in a minute, money is debt. Not only does the money not exist, the goods and services the money was budgeted to buy do not exist, either. Maybe you and I did not want those goods and services, anyhow.

Maybe we thought it was wasteful to spend money on them. Even so, we had better stop a minute to consider what their nonexistence means to the economy – that is, to us.

First off, we can’t cut government expenditures by $176.1 billion without firing people. And they won’t all be lazy, faceless bureaucrats, because the Federal government is not only the nation’s largest employer, it is the nation’s largest purchaser of stuff produced by the private sector. (Where did you think the paper for the paperwork comes from?)

The point is that the people who will lose their jobs are fellow citizens; so when we talk about the number of them, we should never forget that they are ordinary people like you and me. The number is very large. I estimate it at 3,785,631, which I arrive at as follows: (1) The way the pie is cut in our economy today, labor gets about two thirds of it, and two thirds of$176.1 billion is $117.4 billion. (2) The median income of full-time workers in the United States is $31,012. (3) Divide (1) by (2) and you get 3,785,631 new recruits for the army of the unemployed, the great majority of them obviously from the private sector.

That should push our total unemployment over 10 million. In fact, when you consider the lost purchasing power of those 3.7 million people, and the lost business of those who used to sell to them, there is little doubt that trimming $176.1 billion from the Federal budget will enable us to set a new post-Depression unemployment record, not to mention anew record for relief expenses.

I know, of course, the answer Messrs. Rudman and Tsongas would make to the foregoing, because I have heard Newt Gingrich touting a balanced budget amendment that would codify the problem. They’d say cutting $176.1 billion out of the Federal budget would so stimulate the private sector, overjoyed to get all that government off its back, that it would forget it had ever coined the word “downsizing[2]” and would invest and expand its businesses to take up the slack and then some.

I would not be surprised if the private sector talked that way; but I would be astonished if it acted that way, because when business people forget about politics and mind their businesses, they are not quite so stupid as they sometimes sound. If they are not already investing and expanding, there would be no reason for them to change course if the deficit is cut. Taxes won’t be a reason; the deficit is caused because taxes do not cover expenditures now. Budget balancing won’t be accomplished by lightening up that side of the scales. Besides, the only taxes likely to be cut are capital gains taxes; that will be dandy for speculators, but it will do nothing good for producing entrepreneurs and will probably increase the interest they have to pay. (I forgot:

There is likely to be an attempt to get a cut for the middle class, too, meaning people with adjusted gross incomes over $250,000.)

No, I think we can expect downsizing to continue, no matter what is done with the budget.

AS CONSTANT readers know, I’m a mild-mannered chap; so I find it difficult to believe the Concord Coalition is just another Trojan Horse. If they are really naive instead of slick or stupid, their naiveté goes pretty deep into their misunderstanding of economics. They don’t begin to understand money and its role in the capitalist system.

They have possibly never wondered where the Federal Reserve notes in their pockets came from and what makes them worth more than the paper they are printed on. They have possibly never looked closely at a dollar bill. It says right on its face, “This note is legal tender for all debts, public and private.” What does that mean? It means that it was issued by the government in payment for some good or service, and that, in the end, the government will take it back in payment of some fee or tax. In the meantime, the government owes a dollar to whoever holds the note. It is an acknowledgment of debt.

In the capitalist system, not all debt is money, but all money is debt. If the Concord Coalition gets rid of the $176.1 billion deficit, that much of the money supply will be washed out. Now, if business is to continue merely at its present sluggish pace, the $176.1 billion will have to be replaced from somewhere. Since it seems unlikely that private business will kick its downsizing habit any time soon (why should it, with GATT on the horizon?), state and local governments will have to pick up the slack and go deeper into debt to the tune of $176.1 billion. Needless to say, slumping Federal services will force them to do some of that, anyhow. Deficit reduction turns out to be a scam shifting some Federal burdens to the states, probably (I regretfully suspect) in the expectation that the burdens will be either fumbled or financed with a regressive sales tax.

As you will no doubt remember from “In Pursuit of a Fiscal Fantasy” (NL, 6/14-28/93), the government can be in debt forever and ever, issuing new bonds to pay off those that come due. The only thing it has to be able to do is pay interest on the loans, and that would be no problem at all if the Federal Reserve Board were at least moderately committed to the national welfare. Most of the Fortune 500 companies, and indeed almost all companies of every size, are constantly rolling over their debt this way. Capitalism is a system based on borrowing and lending.

You and I could do the same if we were immortal. As it is, we don’t hesitate to go into debt to provide our family with a better place to live and to give our children the best education possible. Would we have done our children a favor if we had not made the commitment, even though some of the debt may still be unpaid at our death?

On reflection, you have to say that the Concord Coalition is not only slick but stupid.

The New Leader

[1] Ed. – Which raises the question, what did the Shakespearean data base administrator say when he found snow in his VTOC?

[2] Ed. – we recommend you read this when considering “downsizing”:

By George P. Brockway, originally published November 12, 1990

1990-11-12 A Road Eastern Europe Could Take Title

THE COUNTRIES of Eastern Europe have a unique opportunity to combine the virtues of capitalism and socialism. If they do not seize the opportunity-and Poland, for one, seems to be kicking it away-they will be in danger of combining the vices of both systems.

Capitalism’s virtues are the freedom and responsibility that come with being your own master. Its vice is class conflict. Only a small minority has so far enjoyed the capitalist virtues to the fullest, while a different and much larger minority suffers poverty and unemployment and hopelessness.

Socialism’s virtues are the ideal of classlessness and the practical abolition of unemployment. Its vice is totalitarianism-and too often has prevailed.

No nation has yet succeeded in combining the virtues and avoiding the vices. Perhaps it cannot be done, at least not on a large scale, or not for very long. Yet there is no doubt that some societies are vastly better places to live in than others, and that vast changes for the better are achievable in every society. It is sad when the road not taken is a better road.

Something like the imprinting of goslings seems to be happening in the nations of Eastern Europe. The collapse of the Communist order has occurred at a time when the most visible examples of capitalism are limping badly. The fledgling democracies (or some of them) seem determined to copy as well as follow the limpers.

The United States, Great Britain and Germany have shockingly high unemployment rates, and Japan’s is growing. In all these countries, the gap between the rich and the poor has always been great and has recently been widening. In all these countries, high or rising interest rates are regarded with complacency.

In all these countries, the general will is so corrupt that the growth of unemployment actually is greeted with cheers and a rising stock market. In all these countries, a hyper volatile stock market is considered an indicator of prosperity.

Nevertheless, those traits of the world’s most successful capitalist countries are regarded with envy by many of the new governments in Eastern Europe. Unemployment (previously unknown) is embraced as a necessity for free enterprise. Higher prices are somehow thought necessary to combat inflation (no doubt on the same theory that recommends higher interest rates to us), and lower wages are decreed (although in the future they will presumably be set by the free market).

Forward-looking Hungary has been trying for several years to get a stock market going and is ashamed that an average day’s trading is still only 40,000 shares. How can arbitragers and brokers and takeover experts get along on such slim pickings? Poland hopes to do better and has dispatched a commission to see how we run our admirable exchanges.

Such misdirections are bad enough, yet it seems likely that worse is in store. The newly liberated countries are being set up to recapitulate the disasters of Africa and Latin America. The setting up turns on a confusion of thought and may be only stupid, not deliberate. The disasters, though, will be real enough.

The confusion is of capital and money. They are both necessary, but they are not the same. With capital you can make things. With money you can buy things, including capital. You cannot make things with money, nor can you buy things with capital, except on an insignificant scale. These distinctions, although elementary, apparently are easy to forget; otherwise the privatization of Eastern Europe would be a cinch.

As matters stand, enthusiasts for privatization want to consult investment bankers (if they’re not bankers themselves), print up a lot of stock certificates, hire a hall or a curbside for a stock market, plug in their computers, and let her rip. There are complications, however. Consider the Polish tractor industry.

The Poles make a pretty good tractor, but today they’re overflowing the factory yards. The factories used to be subsidized, and so were the farmers who bought them and the city folk who bought farm produce. Now none of them will be subsidized (this is the free market hope). A few city folk seem to have some money and are delighted to buy fresh produce off the tailgates of a few farmers’ trucks. The TV news programs report that a Harvard professor is pleased with this example of free enterprise. But it is pretty small potatoes and evidently does not build much of a demand for tractors.

So there’s this tractor industry with the ability to make a product it can’t sell. Who will buy the operation? You might take a flyer on it if you could pick it up for, say, a quarter of what it cost to build. It might eventually payout, especially if somehow the Polish economy recovered from its self-imposed austerity. Then you could float a stock issue, which might respond to the cries in the stock market hall and make you very rich indeed.

But we have not asked where you got the money to buy the business. Of course, you will have borrowed it. The new Bank for European Reconstruction and Development is being established for that very purpose-to underwrite privatization. Unfortunately the bank will have only about $12 billion to lend, and perhaps 30 or 40 times that will be needed. So commercial banks and investment banks around the world will be encouraged to participate, as they were encouraged to participate in the Great Recycling of OPEC’S winnings. The new financing will probably be structured more like a leveraged buyout, in that bonds will mostly be sold to “institutions” – pension plans, mutual funds, and so on. Needless to say, these junk bonds will be given a more high-sounding name.

High sounding or not, junk is junk, as we’re beginning to understand. A subsidized tractor factory that loses money is not likely to become profitable when the subsidy is withdrawn and is replaced by interest charges of 14 per cent or more. In short, the privatization of Eastern Europe bids fair to wind up in something like a combination of the recycling of OPEC’S profits and the junk-bonding of American business. The newly liberated countries will find themselves burdened by unmanageable debt, while our institutions are burdened by uncollectible loans. The citizens of Eastern Europe, who so bravely and joyfully threw off the chains of communism, will be cruelly deceived.

None of that is necessary. It will probably come about because the whole world seems to have confused finance with industry, or, as aforesaid, money with capital. Everyone assumes that what Poland and the rest need to do to become viable capitalist nations is sell their industry to entrepreneurs. What they actually need to do – and have the opportunity of doing – is transfer the ownership of capital, which is what they used to call “the means of production, to the workers, thus making them entrepreneurs[1].

Take that tractor factory. It is currently owned by the State – that is, by the people who work there and all the other people of Poland. The same is true of the farms that used to buy the tractors and the grocery stores that used to buy the farm produce and every other productive organization in the country. To privatize their industries, all the Poles have to do is transfer the ownership from the people collectively to the people who work in each separate business. No money has to change hands; the capital exists. The new Reconstruction and Development Bank’s money can be used to finance modernization of the infrastructure.

POLAND – and the rest of Eastern Europe – could become a land of producers’ cooperatives. It could combine the best features of capitalism and socialism (see “The Labor Theory of Right,” NL February 11-25, 1985, and “Faint Praise for Profit Sharing,” NL March 25, 1985).  Its capitalists and laborers would not be at each other’s throats, because they’d be the same people. Its industries would not stagnate for lack of incentive. And all this could-can-be done at no cost.

Contrast the situation in Eastern Europe with that of our unions trying to buyout United Air Lines. First, the unions have to offer an outrageous price for the company’s stock to save it from investment bankers who want to break up the company. Second, they have to issue junk bonds at usurious interest to pay for the stock. Third, they have to hire an executive for $9 million, not because he knows anything about running an airline, but because he has the confidence of the junk bond bankers.

No doubt you can easily think up dozens of objections to the employee-ownership scheme; and if you’ll stay after class I’ll try to answer them. In the meantime, let me suggest that most of your objections will be similar to one raised recently by Barry Bosworth of the Brookings Institution. He points out that those who work for poorly run businesses would not get a fair shake, to which I reply that the bankers’ alternative would give them no shake at all.

Others may object that the Polish tractor business, say, is hampered by obsolete machinery and a swollen payroll. What is to be done? The classic bankers’ solution would be to abandon the whole thing and start over, with a leaner work force and a meaner mountain of debt. The money would come partly from the new bank and partly from Ford or Honda or Mercedes. The new plant would be able to compete internationally. That is, it would cut into the sale of American or Japanese or German tractors, and naturally into American or Japanese or German employment.

As for the Poles, many or most of the tractor workers would be out of a job that’s the principal reason for the new plant. Those remaining would find that their pay had to be held down so the plant could handle its debt service and still compete internationally. The debt service would of course go abroad, and so would the profits, if any. As in Africa and Latin America, there would be no winners from this creative destruction, with the possible exception of some foreign bankers.

If Eastern Europe copies the mistakes of its Western models, the best it can hope for is that the suffering imposed on the present generation will be followed by a better life for the next generation. This, you will recall, was the promise of communism, too. Such promises are rarely fulfilled. A more likely fate is that of Africa and Latin America (and of the creditor countries as well)-being doomed to decades of what is politely called austerity because of the Great Recycling.

The road less traveled by might still be taken. As Jake said to Lady Brett, isn’t it pretty to think so?

 The New Leader

[1] Not a new thought to the author.  35 years earlier, while awaiting a return home after the end of WW II he wrote An Economic Bill of Rights

By George P. Brockway, originally published February 6, 1989

1989-2-6 The Truth About InflationTitle

1989-2-6 The Truth About Inflation Dollar Sign

THERE ARE supposed to be two kinds of inflation, cost-push and demand-pull.  A benevolent

Providence is supposed to have provided them with the same cure: raising the interest rate or – if you prefer to do things indirectly – restricting the money supply. Last time out (“Bankers Have the Classic COLA,”NL, January 9), we looked at the panacea macro-economically and came up with the heretical conclusion that it caused inflation, rather than cured it. This should have occasioned no surprise, since medicine is a lot older than economics, and it was not until about a hundred years ago that your odds were better if you consulted a doctor than if you didn’t. Neoclassical economics has about caught up with Paracelsus.

The interest-rate panacea is, nevertheless, so solidly fixed in everyone’s pharmacopoeia that we’d better look at it micro-economically to try to discover its supposed merits. I should confess, at the outset, though, that having once met a payroll, as they used to say, I can’t imagine how raising the interest rate is expected to inhibit or prevent businesses from raising prices in response to the increased cost.

Every business must have money, and it therefore has to consider the cost of money, which is interest, whether it is a borrower or not. If it needs to borrow, interest is obviously a cost of doing business. If it is cash rich and doesn’t need to borrow, interest is an opportunity cost. By investing in its own business, it passes up the opportunity of lending its money to someone else and thereby earning the going rate of interest without working; so unless its own business can earn at least that much, it’s not worth continuing.

Interest is thus an inescapable element in doing business, and hardly a trivial one. Moreover, raising the rate not only affects every business, it does so geometrically. An increase in the interest rate is continuously compounded; the push is to an upward slope that becomes steadily steeper. Consequently, if the problem is cost-push inflation, upping the rate makes it worse.

In contrast, an increase in the price of oil is a one-time affair: It pushes most costs (not all, but most) up to a higher plateau, because oil is essential for the contemporary economy. At any given moment – now, for example – a certain quantity of it is used in myriad ways. At another moment – tomorrow, for example – the price may be doubled, thus doubling the economy’s outlay for oil and of course the percentage of total costs devoted to it. Producers, faced with the new cost, will raise their prices. They could maintain their profits if they just covered the increased cost of oil. In all probability, however, they will have been brought up to set their prices as a percentage markup on costs, and workers will have been brought up to expect their wages to be a certain percentage of costs.

Whether or not the new prices are enough to restore the balance among the factors of industry, they pretty quick-1yr each a new level and settle down there. Some industries and companies and workers may make out better than others, especially in the short run, yet by and large business soon goes on about as before. Prices are somewhat higher, to the detriment of people living on fixed incomes and of people who have lent money-and to the benefit of people who have borrowed money. But there is no reason for prices to rise above the new plateau unless the interest rate is tampered with.

When the Organization of Petroleum Exporting Countries (OPEC) made its successful moves, the Federal Reserve Board characteristically reacted in precisely the wrong way. OPEC raised costs for almost all businesses, and they now needed more money to continue. The Reserve Board perversely tightened the money supply, hiking the interest rate. I suppose they thought that by hurting business they would reduce the need for oil and OPEC would then be forced to lower the price. If so, they forgot that we had, as Art Buchwald wrote, encouraged the sheiks to send their sons to Harvard Business School rather than to Bowling Green State to learn basketball. At any rate, OPEC’S response was the standard one of a modem business faced with falling demand. Instead of cutting the price (as a neoclassical economist would have done), they cut production (as a modern businessman would do).

To be sure, the Reserve Board did manage to induce a recession, and that did, after eight years of trying, eventually result in an oil glut and lower oil prices. Just as in Vietnam some of our more thoughtful military leaders occasionally destroyed a village in order to save it, the Reserve Board caused massive unemployment, widespread bankruptcies, a growing Federal deficit, disaster in Latin America and the Third World, and a loss of much of our overseas business – all in the effort to control the price of oil. It was not a rational trade-off; and micro-economically the fact remains that raising the cost of any of the factors of production, of which interest is one, is not the way to inhibit cost-push inflation.

Demand-pull inflation is described by the popular cliché of too much money chasing too few goods. What is in the back of everyone’s mind is either an auction where millions of dollars are unexpectedly bid for a painting, or the hyperinflation that occurred in Weimar Germany, or the bread riots of pre-Revolutionary France. Briefly let us note that modern business is nothing like an auction, that hyperinflation occurs only when a nation has un-payable debts denominated in a foreign currency, and that the failure of the bread supply caused, not general inflation, but a deflation of all other prices as desperate people sold whatever they could at distress prices in order to pay for bread.

Putting to one side the probability that there is no such thing as demand pull inflation, we may doubt whether raising the interest rate will prevent too much money from chasing too few goods. A high interest rate no doubt chills the ardor of borrowers and thus may be thought to hold down the amount of money in circulation. Not all borrowers, however, are chilled equally. Speculators find high rates stimulating. Of course, money that goes into speculating doesn’t go into consuming; it chases paper, not goods; as far as consumption (or production, for that matter) is concerned, it might as well not exist.

Consumers, for reasons thought important by Professor Franco Modigliani and others, are said to try to maintain their accustomed or desired standard of living. They will shoulder heavy debts at usurious rates to do so. Hence their readiness to assume mortgages at more than double the maximum legal interest rate of a few years ago; hence the cavalier expansion of credit-card borrowing; and hence the failure of high interest rates to impede the chase for goods. In fact, because high interest rates have proved acceptable to consumers, the consumer loan business, once left to frowned-upon outsiders, has become attractive to banks-with the paradoxical probability that high rates have resulted in more money chasing goods, not less.

The famed bottom line, on the other hand, forces a more circumspect demeanor on businesses; few of them find it profitable to expand when the cost of financing is well up in the double-digit range. Many find it impossible to go on (right now, in this supposedly prosperous time, corporations are going bankrupt at a greater rate than at any time since the Great Depression). So high interest rates, while having only a minor effect on demand, have a major effect on supply. Whether or not there is more money in the chase, there are fewer goods in the running. To put it more generally, there are fewer goods than there might have been otherwise.

OUR HALF-CENTURY-LONG preoccupation with inflation is a sign of a profound confusion of American-even of global mind and will. Since World War II, inflation has been regarded as a pandemic disease, and a panacea has been sought. But social ills are specific, not universal, and corrective policies must be similarly specific.

If inflation were all prices going up together, a few people would be befuddled, but no one would be hurt much. As early as David Hume it was recognized that moderately rising prices stimulate the vital juices of entrepreneurs. As recently as the current “prosperity” it has been evident that business can readily accommodate itself to pretty steep inflation if it is fairly steady.

The trouble is that even moderately rising prices can be devastating to people living on fixed incomes, because they have no way of protecting themselves. This is a specific ill (there are others). Specific treatments are available, and some of them have been successfully applied. In 1966 Medicare began to protect the aged from one of the most crushing burdens of old age, and at the same time to provide millions with health care that otherwise would have been denied them. Since 1972 the Social Security COLAS have done much to prevent many of the retired from falling into poverty.

Some now say that the aged have it too good. This is a dubious proposition, but it is not to the point. The point is that the mentioned policies have had an effect. A specific ill was perceived, a specific treatment was devised, specific cures were effected, the cures may be judged, and specific improvements in them can be made. In contrast, the conventional theory of inflation that regards it as a pandemic ailment can propose only the panacea of a growing underclass of the chronically unemployed, and a narrowing overclass of those who have been able to make the Bankers’ COLA work for them.

Because interest payments are made pursuant to contract and continue years, often decades, into the future, the heavy hand of the Bankers’ COLA will be upon us, no matter what we do, for years to come. In the meantime our urgent task is to free ourselves, our politicians and our bankers from thralldom to the most dismal view of this dismal science.

The New Leader

Originally published October 15, 1984

I SEE by the papers that the New York State Education Department is preparing a new social studies curriculum that will include a year’s course in economics in the 12th grade. They did not have anything like that when I was in high school, so my initial reaction to the news is that it can’t be a very good idea. On second thought, I will allow that it might be all right if they ran the course my way (which they probably won’t, I reflect sourly). And that thought leads me to wonder how I would go about it if I had my druthers.

I should perhaps say at the outset that I come by my sourness in the line of duty. I once had to edit a text on educational psychology, and it almost turned my brain to oatmeal. Somewhat later I wasted several years attempting to put together a series of secondary-school literary anthologies. I’d had some experience with college-level anthologies; but professional educators, it developed, were unanimously of the opinion that what succeeded with 18-year-olds was quite different from what 17-year olds could or should be interested in. I didn’t believe it then, and I still don’t. That there is a difference, I recognize. That it is as great as pretended by those who call themselves educationists, I doubt. In any event, I think it should be an objective of an educational program to narrow the difference.

In the year boys and girls are graduated from high school, they become young men and women old enough to vote.  Not old enough to drink (who is?), but old enough to vote and bear arms.  About half of them will go to work at on now embroil myself in the question of whether some familiarity with our literary heritage would make them better citizens leading fuller lives.  Certainly, however, it does seem altogether fitting that some effort should be made to teach them how the world of work works.

The difficulty, of course, is that we grownups don’t agree on how the world of work works.  There is scant chance of satisfying both the Democracy Project and the American Enterprise Institute.  What pleases the AFL-CIO doesn’t always please the Business Roundtable.  It is happily no longer fashionable for us to call each other Communists (I was astonished to learn the other day that the John Birch Society still exists[1]), but we nevertheless generate a good many British Thermal Units in charging each other with operating a front for special interests.

On the record, the schools are entitled to anticipate a lot of trouble when they start to teach economics.  It will not be surprising if they try to avoid this by reducing the whole enterprise to the lowest common denominator of their students’ capabilities and fancies.  Such solutions are not unheard of.  Yet in the case of economics the lowest common denominator is likely to be that of our grownup prejudices, and the resulting pablum[2] is liable to be not merely non-nourishing but positively poisonous.  The world of work is not an uncomplicated, noncontroversial place, and it is dangerous for citizens to think that it is.

The first problem in any course is to decide what the emphasis is to be.  As it happens, I can lay my hands on the opening sentence of a book I’ve been writing, which goes like this:  “We will define economics as the study of the principles whereby people exchange money for goods and services.”  Although I go on to say that “people” is the most important word in the definition, I think that with 12th-graders I would choose to concentrate on another word: “money.”

No one should object to talking about money in a class on economics, and that’s what I would focus on.  Money is, in fact, an ideal subject to talk about with kids.  It is something everyone deals with every day; people discuss it all the time; and it provokes the most extraordinary notions.  In sum, it is both familiar and full of surprises.

Money is, moreover, the absolutely essential idea in economics.  Try to avoid it and all the other aspects of the course fall away of disappear.  What can you say about prices without mentioning money?  Obviously nothing, because prices must be stated in terms of some monetary unit.  Without money, what becomes of production or supply?  It reduces to agriculture or engineering.  Without money, what becomes of consumption or demand?  It reduces to physiology and psychology.  If you don’t have money, you don’t have economics.  You have all those other disciplines that are good in their own right, and are often confused with economics, but are not economics.

My first units (that’s educationese for chapters) would be on what happens when you go to work. You do what the job requires for a day or a week or (if it’s a classy job) a month, and then you get paid for what you’ve done. Nothing mysterious about that. But you have in effect lent your employer your earnings for the period. In the rare cases when you get paid in advance, your employer lends money to you. There is no way you can get paid instantaneously for the work you do each instant; so you and your employer have to trust each other.

Now, the interesting thing is that this mutual trust is creative. By working you have increased the goods in the economy, and by lending your employer your earnings you have increased the capital in the economy. This could not have happened unless your employer made the job possible; and if you had to be paid in advance, your employer would have less money to spend on machinery and materials.

There is a further role for trust. Not only do you and your employer have to trust each other, but you both have to have faith in the economy and in the nation that sponsors it. Your employer would not hire you unless he (or she) was confident (fides = faith) that there was a market that would pay good money for what the two of you are producing together; and you wouldn’t work unless you were confident the economy would let you enjoy the money you earn. The money you receive has no worth except as you are able to credit it as worthy of your trust.

In the other direction, money is what makes it possible for you and your employer to agree. You will do so much work for so much money. Without money, your relationship would at best be sharecropping and at worst slavery.

The stress in the initial part of the course would therefore be that money is faith, trust, credit. It is not paper or silver or gold. And the moral of the first part might be stated by paraphrasing Baron Heyst of Victory: “Woe to the [nation] that has not learned to hope, to love – and to put its trust in life.”

This moral, I am afraid, would be the hardest point to get across. I took my World War II basic training with a lot of kids from the Lower East Side of New York and from South Philadelphia (whites had of course been separated from blacks at the reception centers), and I was bewildered by the difficulty many of them had in even imagining the possibility of a disinterested action. They possessed what has since come to be called street smarts, and they suspected an angle to everything. Intellectuals, too, find trust a difficult idea, for intellectual smarts are a facility in uncovering unconscious motivations and special interests. And conservative smarts are a passion for gold that bespeaks a sentimental longing for something more trustworthy than the national economy and our fellow citizens.

So establishing the nature and need of trustworthiness would take time, especially since street, intellectual and conservative smarts are sadly often right in clinging to their suspicions in specific situations. For the sake of the economy, and for the sake of the individuals who participate in the economy, however, it is more important to do right than to be right.

By now we would probably be well into January or possibly February, and the next group of units would take some time, too. The subject would be fractional reserve banking and how it works. This is comparatively simple, though I doubt that even two of the next 20 people you meet could explain it to you. With time running out, the last group would be on private debt and public debt, and how they’re alike and unalike, plus maybe a hint or two about their connection with inflation and employment. This could be highly controversial, but mercifully the school year would be almost over.

Do you think it would be next to impossible to get these ideas over to 17-year-olds? I do, too. Yet I also think that if the next generation doesn’t understand money any better than the present generation, it won’t matter too much what else they learn about the economy. They’d be much better off reading those anthologies I never published.

The New Leader

[1] One wonders, reading such observations in 2012 what was considered, at least by the author, settled in 1984, what he would say were he here…

[2] Since Microsoft Word didn’t recognize the word a link seemed appropriate

Originally published February 20, 1984








IT IS ASSUMED that a lender is entitled to get his money back when a loan he has made matures. It is further assumed that he is entitled to get not only his money but his purchasing power back; so if inflation is anticipated, he is entitled to charge extra-high interest on an account.

These assumptions are certainly understandable. Why should I lend money if I do not expect to have it returned? Why should I temporarily forgo the use of my money unless I am suitably paid for my abstinence? Yet understandable or not, these entitlements have curious consequences.

Let us begin by examining what capital is (for our purposes here we will not bother to distinguish between cash and producer’s goods). Capital, regardless of how you define it otherwise, is saved labor. It is past labor, as opposed to current labor. No capital ever came into existence except as the result of labor, and no capital ever did any work except in conjunction with labor. Not even land, in the economic sense, exists except as a consequence of labor. At the most primitive level, someone has to go to the labor of discovering the land, occupying it and exploiting it in some way.

Whatever right capital has to earnings is based on the fact that it is saved labor. As an object, capital has no rights. No object has rights (except in the cuckooland of some now fashionable philosophers), because objects can discharge no duties.

Now, if capital is saved labor, it would seem that it should be treated the same way as labor. A laborer is worthy of his hire. A week’s labor brings a week’s wages. But the laborer does not expect to have his labor, or any part of it, returned to him at the end of the week, nor does the laborer expect to continue to draw wages for that week’s work after it is done. (He may, when he retires, receive Social Security benefits, but they are not wages.)

It should be immediately obvious that capital, though it is saved labor, is different from current labor. It can earn interest forever; and at the end of one job, it is expected to be returned intact, whereupon it can be let out again. There is another difference: Capital can be bought and sold, can change hands indefinitely. But with the exception of slavery and possibly certain sports and entertainment contracts, labor can be “sold” only once. To paraphrase Yogi Berra, when it’s over, it’s over.

These differences provide the ground for a far more important one. Since capital is long-lived – sometimes almost immortal – and since it is interchangeable – sometimes as nondescript as putty – it is not bound, at least to the extent labor is bound, to a particular time and place. And being less restricted than labor, capital is more agile and more powerful in any contest between them.

Very likely the original capital was a hunter’s club or stick that proved as effective in controlling other men and women as in killing game. Perhaps, as Marx claimed, the state with its police performs the same service for today’s capitalists. The law, in its determination to protect a man’s home, which is one form of property, has drifted into absolute protection for all forms. This situation, though, obtains also under communism. For control of the means of production, what Communists call capital, enables the state to decide how the people shall work and live. Even without weapons and enforcers, however, capital is stronger than labor.

This is very strange because as we have said, capital is nothing if not past labor. Thus what is past, what is no longer, turns out to be more powerful than what is. Yet we cannot help feeling that Jefferson was right in saying that life is for the living. How can it be for the dead and gone?

Interest has always been a problem for thoughtful men. Although St. Thomas Aquinas lived long ago, he was not a fool, and his opposition to usury was not without reason. Banking was originally money-changing; this was inappropriate in a Temple, but it was and is a necessary service and worth modest fees. Interest, St. Thomas thought, was something else. “The proper and principal use of money,” he held, “is its consumption or alienation, whereby it is sunk in exchange. Hence it is by its very nature unlawful to take money for the use of money lent.” He is evidently thinking of the use of money to buy consumption goods.

What chiefly distinguishes our economy from his is the shift of banking from money-changing to money-lending, and the further shift from lending money to support the consumption of kings and dukes to lending money to support production. The discovery of the enormous power of compound interest, which is using money to support production, dates only from the 16th century. Keynes once calculated that every £1 Sir Francis Drake brought home in 1580 had by 1930 become £100,000.

Oddly enough, philosophers have not been bothered by rent (aside from Henry George, who objected to landowning). It seems reasonable and proper for a landowner to charge another for the use of his land. Once you take that step, you are on a slippery slope, though the slide has taken centuries. If you can charge for the use of your land, you can charge for the use of your shovel or boat or whatever. The principle seems the same, and furthermore you can sell your land and buy shovels to rent out, and vice versa. If real estate (remembering my column on “Appearance and Reality in Economics,” NL, December 26, 1983, note that word “real”) is alienable (see “Life, Liberty and Property,” NL, July 11-25, 1983) then practically all kinds of property are, as the lawyers say, fungible; that is, they can be exchanged for each other.

The next step is a big one. In modern societies it rarely happens that one exchanges land directly for shovels or boats or other forms of capital. The exchange is indirect. One sells one’s land, gets money for it, and uses the money to buy the shovels. The land, the shovels and the money are interchangeable. Consequently, it would seem only right that if it is just to charge for the use of land or of shovels, it is also just to charge for the use of the money that can be exchanged for land or shovels.

THE NEXT STEP is an even bigger one. If in a free market the price of shovels depends on the supply of and demand for shovels, it would seem reasonable that interest depends in the same way on the supply of and demand for money. But, reasonable as it may seem, we are at this point off the slope and into the soup. For contrary to what is widely thought, money is different from ordinary commodities such as potatoes, shovels to dig them with, or ships to transport them in.

The difference was unknown to Aristotle, St. Thomas’ mentor, and it is unrecognized by today’s hard-money men, but it can be quickly illustrated. If potatoes are overpriced, for whatever reason, only the potato business languishes. One can always eat cake. If, however, money is overpriced, bankers (who have the money to lend) may not suffer at all, but the entire economy languishes.

And this is what we have seen happen. Our bankers, led by Walter Wriston of the sleepless Citibank, managed to shrug off many of the New Deal regulations that were based, albeit unconsciously, on the fact that money is different. In particular, bankers outwitted so-called Regulation Q, limiting the interest they could pay. This, at first blush, appeared to be an act of generosity on their part. People with money to lend were charmed by the high rates that banks urged upon them. Competing with each other in the good old free market fashion, even reluctant banks (notably the savings-and-loan associations) had to run up their rates or lose their depositors to more aggressive neighbors. To pay their depositors increased rates, they had to charge their borrowers increased rates. The Federal Reserve Board cooperated by restricting the supply of money, thus magnifying the demand.

After a bit, the demand diminished. Businesses (who do most of the borrowing) couldn’t afford the high rates and cut back on production or went out of business altogether. Individuals did not buy new homes, and many lost the ones they had. Recovery or not, there are now over 735,000 bankruptcies before the courts, the most ever; and a record 4 per cent of the nation’s banks are on the Federal Deposit Insurance Corporation’s “problem list.

In a free money market, the only way the banks can be kept from ruining each other is by allowing them to ruin the economy. In the process, those with money to lend (in general, the rich) are enriched, and those with a need to borrow (in general, the almost-poor) are impoverished. This is a Reaganomic result probably even greater than that achieved by the Trojan Horse budgets and tax laws. The entitlements mentioned at the outset may not now seem so absolute – and indeed far less absolute than the entitlement of every citizen to food, clothing, shelter, and care in his old age.

The New Leader

Originally published April 5, 1982

THE REAGAN Administration is finally taking a sensible and practical (though partial) step toward solving the inflation-and maybe even the stagflation-problem. Work is under way on revision of the Consumer Price Index. It would be better to abolish the CPI altogether, and the Wholesale Price Index and the GNP Deflator along with it; but I’m pleased as Punch to be able to say that at least one step of Reaganomics is pointed in the right direction.

Democrats, of course, will regard the maneuver bitterly, for it is another example of Republicans changing the rules of the game, and getting away with it. Nixon was a master of the trick. He built his political career around claiming the Democrats had lost China, and then triumphantly discovered that Mao and Brezhnev weren’t the same fellow after all. And in the field of economics he trumpeted the old-time laissez-faire line until August 15, 1971, when he bowed to the public opinion polls and suddenly imposed wage and price controls. (Characteristically, he muddied discussion from that day to this by proclaiming, “We are all Keynesians,” though you will search The General Theory in vain for recommendations for wage and price controls.)

Jimmy Carter has reason to be especially bitter. For it was the CPI-and what he did about it-that did him in (if it hadn’t been for Iran, he wouldn’t even have been renominated). Possessing a touching engineer’s faith in statistics and an upwardly mobile boy’s awe of the wisdom of rich men, Carter thought the CPI was real, and that “business confidence” (actually bankers’  and brokers’ greed-induced blindness) required the appointment of a hard-core monetarist as Federal Reserve Board chairman.

To “control” inflation, the Fed promptly sent the interest rate through the roof. But the interest rate is a large factor in the CPI; consequently that, too, went through the roof, dragging all indexed wage scales and transfer payments along with it in a self-sustaining escalation. That wasn’t all, but it was enough to send Carter back to Plains, where, if he is given to second thoughts as well as second birth, he must marvel at the Reagan magic of controlling the rate of inflation by changing the way the rate is calculated.

As I say, however, revising the CPI isn’t quite enough to satisfy me. I want to abolish it, because the whole business of indexing rests on confusion as to what measuring-any measuring-is.

Measuring is a comparing of something with some standard. For example, by laying a metric ruler across this magazine you determine that the page is about 21.6 cm. wide. But how long is a centimeter? Well, a centimeter is 1/100 of a meter, which is 1/1000 of a kilometer, which is 1/10000 of the surface distance from either pole to the Equator or one-quarter of the vertical circumference of the earth. What is the circumference of the earth? This distance is calculated from various observations, which themselves depend on measuring, not only of angles but of distances, so that the meaning of a centimeter is ultimately a function of whatever units of measurement are used as the basis of the calculation. When the calculation was first made with reasonable accuracy, by Eratosthenes in the third century B.C., the basic unit was the stadium, which may or may not have been equal to 600 of somebody’s feet. More recently, before the introduction of the metric system, the unit was the yard, or the length of some king’s stride.

In short, the precision of the length of a centimeter depends on a foot or a yard, or cubit or rod or league or something, and that something has to be absolute. The relation between measuring stick and thing measured is not reciprocal. You can’t use the metric system to calculate the circumference of the earth, for your argument would be truly circular. You might just as well start right out and say-as we actually do say that the distance between two scratches on a certain platinum bar in the Bureau of Standards is a yard, and no fooling.

Although the measuring unit is absolute, it is not a convention. The scoring systems of sports are conventions. Davis Cup tennis doesn’t use the tiebreaker; my friends and I play the nine point sudden-death tie-breaker; most tournaments use-lingering death. These are all conventions. There is nothing necessary about them, because (painful as it is for me to admit it) there is nothing necessary about tennis. Spatial measuring, however, is necessary. Spatial units define space; without them the physical world is formless, and everything we make is impossible. It does not matter whether we measure in yards or meters or cubits; we must measure, or rely on the measuring of others, if we are to have a physical world.

It is the same with money; without it we have no economical world. It is common to talk as though we had a  functioning economic system-complete with land, labor, capital, trade, commercial law, liquidity preferences, and the rest of civilization-and then, just to make this system work a bit more smoothly, we added money to it as a sort of lubricant. Yet this is not the case at all. Our civilization cannot exist without money. It did not merely happen to come into existence with money. It does not exist without money, because it depends upon measuring, and economic measuring is done with money.

Nevertheless, people speak of the purchasing power of money and call attention to the declining value of the dollar. These ways of speaking seem to assume that money has value, like any good or service, and that this value can be measured.

Measuring the value of the dollar means comparing it with the “market basket” of the Consumer Price Index or something similar. Despite the fact that the contents of the market basket can be changed by executive or legislative or merely professional fiat, the basket seems real, while money seems only nominal, or, as Marx called it, “a purely ideal or mental” form of value. But if the value of money is in terms of a market basket, the basket becomes the standard of measurement, and money becomes a commodity [Editor’s italics].

Now, there is no objection in principle to making the market basket, or any part of it, our unit of account. As everyone who has had a little Latin or Anglo-Saxon knows, many ancient peoples counted wealth in terms of cattle, as the Masai still do. This may be clumsy and imprecise, it is not impossible. But if we take that approach, we should not kid ourselves-as I fear our econometricians do-into thinking we have established a “constant dollar.” No market basket is the same to different individuals at any given time (my wife and I set up housekeeping a number of years ago; so we are now relatively unconcerned with the price of furniture). Nor is the basket the same in different historical situations.

Of all the things in the basket, the price of bread is sometimes urged as basic, and it was indeed central in the French Revolution. But today food is so much smaller a part of the family budget, and bread so indifferent a part of the diet, that all the bakeries in the land could shut down tomorrow without causing much more inconvenience than the air controllers’ strike. The same holds true for the GNP Deflator: The price of steel is far less important to me, a book publisher, than it is to a builder of office buildings; and it is more important to a builder at present than it was before the elevator and the electric light made skyscrapers possible.

SUCH DIFFERENCES and changes are occurring all the time. Money measures them. Money is not and cannot be “constant,” because the economic world is not and cannot be constant. The natural world is and must be constant; the normal temperature of the human body is 98.6°F. today and will be the same next year or next century. The world of economics is not natural; it is historical. It is not physical; it is ethical. In it things are done; they don’t simply happen.

Indexing-like so many other things economists have done from Adam Smith onward-is an attempt to reduce economics to an automatic happening. It is also in direct conflict with the system it pretends to serve.

Most economists say that the subject matter of economics is the allocation of scarce resources. (Please note that I don’t say that.) And most go on to say that a market economy, through constant shifts in the relative prices of goods and services, is the most efficient way of accomplishing the allocation. (I’ll assent to that). But the sole purpose of the CPI-and of all the other attempts to measure with “constant” – is to nullify market price shifts. If all prices went up (or down) in precise lockstep, there would be no point to trying to freeze them with an index. Inflation is not every price going up simultaneously; it is some going up much faster than others, with the result that last year’s values are not this year’s, to the delight of some people and some countries, and to the dismay, or even the distress, of others.

Am I saying that inflation is not really a problem that we wouldn’t even be aware of it if we didn’t have indices, and that it would go away if we abolished indices? Well, I am saying something pretty close to that. I’m far from saying that there are no distortions in the economy or that we can do nothing about them; but I am saying that these distortions don’t just happen, and that indexing only makes them worse. And I do make the empirical observation that the three modern economies with the worst inflation experience-Weimar Germany, Brazil and Israel-have all been comprehensively indexed.

Attend with humility to the 1923 lament of Hans von Raumer, Minister of Economics in the second Reich: “The root of the evil is the depreciation adjustment [that is, the index]. Inflation goes on unchecked because one must add enormous increments for depreciation onto wages and prices alike, and these in their turn work in such a manner that the depreciation provided for actually occurs through the inflation thus caused.”

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