Power of Story: Letters Between Keynes and FDR

It is difficult to grasp the rapid expansion of government programs in the early months of the Roosevelt administration. His advocacy and implementation of government social entities redefined the role of government in the U.S. for coming generations. He saw his New Deal policies not only central to his legacy but to his re-elections.

Franklin D. Roosevelt’s governmental activities, however, cannot be fully understood or appreciated without an understanding of his relationship with John Maynard Keynes. The rest of the world was intrigued and abuzz about the economic and political philosophies of Karl Marx and Vladimir Lenin. Hot new ideas of centralized governments and controlled economies were being touted across Europe and Great Britain. Scuttlebutt had it that capitalism, free market economies, and even democracy could be lumped together in a heap and considered failed relics of another day.

Keynes did not see himself as just another author of economic ideas. His writings portray himself as an historic individual who had the answers to the inadequate and seemingly failed economic systems especially of the UK and America. His confidence and insistence almost spilled over into an elitist position as he endeavored to guide and mentor Roosevelt through the social and economic changes in America.

Much of the Roosevelt and Keynes relationship for years had been left to conjecture. More recently, however, letters between Keynes and Roosevelt have surfaced and been made available to the viewing public. My response, as I study the era more closely, is that of surprise that the U.S. did not travel more quickly and farther down the road of progressive socialism than it did. FDR was never defeated in a presidential election. In history’s supermarket of dictators, eyebrows are usually raised when the Castros, Kim Il Sungs and Robert Mugabes approach that mark of continuous control.

When FDR ran into opposition over his programs of deficit spending, regulation, and unparalleled politics, he sought to enlarge the Supreme Court to guarantee theproper legal interpretations. He lost the battle of direct takeover but was still able to appoint eight of the nine Supreme Court Justices. What followed was a pattern of presidential Executive Orders and a constitutional law revolution that ultimately resulted in the government legally being able to regulate the economy.

I would encourage you to read some of the Keynes/Roosevelt correspondence for yourself. The personal letter, from which I will be quoting here as an example, can be located at www.fdrlibrary.marist.edu/about fdr/pdfs/smFDR-Keynes_1938.pdf. I love it because it was hand-typed on King’s College stationery, Cambridge, UK

In Keynes’ letters he does not hesitate to put pressure on FDR to take control and move America to a centralized, government controlled, economic system. Allow me to share some direct excerpts from the 1938 personal letter from John Maynard Keynes:

  • Can your administration escape criticism for the failure of these factors to mature? Take housing. When I was with you three and a half years ago the necessity for effective new measures was evident. I remember vividly my conversations with Riefler at that time. But what happened? Next to nothing. The handling of the housing problem has been really wicked . . . I should advise putting most of your eggs in this basket, caring about this more than about anything, and making absolutely sure they are hatched without delay . . . If a direct subsidy is required to get a move on . . . it should be given without delay or hesitation.
  • Next, utilities . . . Why not tackle the problems by insisting that the voting power should belong to the real owners of the equity, and leave the existing organizations undisturbed, so long as the voting power is so rearranged . . . that it cannot be controlled by the holders of a minority of the equity . . . Personally I think there is a great deal to be said for the ownership of all the utilities by publicly owned boards.
  • Finally, the railroads. The position there seems to be exactly what it was three or four years ago . . . Nationalize them if the time is ripe.
  • Businessmen have a different set of delusions from politicians, and need, therefore, different handling. They are, however, much milder than politicians, at the same time allured and terrified by the glare of publicity, easily persuaded to be “patriots,” perplexed, bemused, indeed terrified, yet only too anxious to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word. You could do anything you liked with them, if you would treat them (even the big ones) not as wolves and tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish . . . If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burden will not get carried to the market . . .
  • I accept the view that durable investment must come increasingly under state direction.
  • I regard the growth of collective bargaining as essential.
  • I approve minimum wage and hour regulation.
  • But I am terrified lest progressive causes in all the democratic countries should suffer injury because you have taken too lightly the risk to their prestige, which would result from a failure measured in terms of immediate prosperity. There need be no failure.

It is easy to see how Roosevelt needed Keynes to accomplish his political aspirations, and Keynes needed Roosevelt to accomplish his grand international economic dreams. It was almost as if Keynes was afraid that FDR would not act quickly and completely enough to allow Keynes’ grand ideas to be implemented into America’s economic and political system as true answers sufficient to save the economy and culture. Keynes was trying to establish the shining light of a controlling centralized government, and to extend across the ocean the new titillating socialist experiment.

It seems to me that Keynes saw himself as the economic maestro who was afraid that his pupil would not quite get the scope and importance of the performance and mess up the whole concert, thereby disallowing the maestro his deserved place in history. What a lucid example of cultural economics, where historic transformation was taking place at the intersection of culture and economics.

Next Week: So long, FDR and Keynes

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson  

Permissions granted by Winston-Crown Publishing House

Power of Story: Slippery Flaws of Keynes' Bathtub

Probably, you are a good detective and have already perceived that my love and concern for economics has less to do with graphs, axis points, or shifts and slopes of curves, and more to do with those things behavioral. The classical aspects are certainly important to the presentation of an economic concept, but I am more interested in the why and how everyday people choose to adopt certain economic concepts.

That is why I am a cultural economist, and why I continually repeat that all global transformation takes place at the intersection of culture and economics. In fact, I am coming to believe that all transformation, whether global, national, corporate, institutional, or personal, takes place at the intersection of culture and economics.

When the studies of economies and cultures are combined, it is an exciting and revealing adventure. It can open our eyes to the understanding of motives, methods, behaviors, successes, and failures. Religious beliefs, for example, and political persuasions even influence purchasing patterns. Our economic environment has the flexibility of metamorphosis in reaction to current events and the preferences of respective groups. That makes for an exciting study.

How does the economic system affect a culture? And how does a culture affect an economic system? Those were the questions I would ask myself as I traveled and visited more than 150 different countries of this world. When in Rwanda, I would try to learn about the inequities of the economic model, as well as try to understand the flash points of the culture that would cause strife violent enough to promote the genocide of over a million simple citizens in a thirty day period. In Cambodia, I would try to study why a leader like Pol Pot would torture and kill everyone who was educated and those outside the agrarian culture. During my many trips to Vietnam, I would try to find out why and how the Vietnamese people were becoming such budding entrepreneurs by 2004.

A similar curiosity has made me interested in the economic and cultural shifts that took place in Europe and America during the Great Depression period and the time leading up to World War II. John Maynard Keynes at one point had stated,

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (1) 

I guess I am still curious about what is happening even to this day concerning that insightful statement. As I see the present U.S. Senate and the Federal Reserve chairman (as of December, 2013) encouraging the full acceptance of alternative international currency systems, such as Bitcoin, PayPal, or an existing international credit/debit card, I can’t help but speculate on the effect the debauching of our present currency system would have on the international standard of value traditionally controlled and enjoyed by the U.S. dollar. What would you do for a currency if the dollar becomes a hyper- inflated relic of the past through monetization of uncontrolled deficit spending and debt?

Speaking of Mr. Keynes . . . for one more minute let’s again visit his aggregate expenditure economic model (the bathtub). Let me share here only two of the five historically recognized slippery limitations to Keynes’ theory:

  • Balancing the books or the budget is not a priority. It is simply not an issue to the bathtub folks. The idea is to spend your way into prosperity. Spend like you are rich, and the self- fulfilling prophesy will make you rich. Government is the true source of wealth and unending supply.
  • There is no way of measuring the real rate of inflation with the model. You have no basic idea of what is happening to the true value of your money because it doesn’t really matter. In our earlier discussions, we carefully examined how arbitrarily increasing the aggregate money supply without increasing products or services into the system simply devalued the currency and forced all prices to go up.

When the kings clipped or drilled out the gold in the coins to make new coins, and used the new coins as additional money, then the value of all the coins was reduced. If you double the supply of money in the system, you nearly cut the value of the present money in half. The Keynesian’s concern is to keep the bathtub full and let the stimulation of the new spending try to cover the gap.

Inflation has historically been measured by the Consumer Price Index (CPI), where the Feds pick a market basket of selected items and track the prices. If the prices go up during the period by 9%, then it is calculated that the inflation rate has increased by 9%. In the 1980s people reacted negatively to the high rates of inflation, so Congress and the Federal Reserve arbitrarily put a cap on how much inflation there could be in the system. They targeted the inflation rate not to exceed say 2.5%. And it didn’t.

We all empirically knew, however, that the prices we were paying were doubling even though the CPI was only increasing by 2.5%. How does a thing like that work? It requires tinkering with the yard stick. It requires changing the items in the market basket that you are pricing, (The Great Inflation Cover-up, Fortune: April 3, 2008). It is only necessary to go back into the market basket of measured products, pull out the expensive items like food, utilities, and housing and replace them with cheap imported goods like $2 shirts from Hong Kong and $1 sox from China. The CPI prices then tend to comply with the targeted percentages. No problem.

On January 25, 2012, the Federal Reserve took it one step farther. They announced that with regard to calculating inflation, the Federal Reserve would no longer be using the CPI, but, rather, a new index they labeled Personal Consumption Expenditures Price Index (PCEP). But the problem is still the ugly gorilla in the room . . . how do you hide or ignore the monetizing of seventeen trillion dollars of deficit spending and debt into our economic system without admitting to hyperinflation? What pin prick of the bubble will cause the loss of confidence in the present currency and economic system and tip over the bath tub? (3)

One of my ongoing concerns is the persistency of the call to keep the bathtub full even though the present level of debt has never before been so great. . When real people in real business situations pursue such lines of business reasoning, they end up in bankruptcy court. And yet, in the October 25, 2013 issue of The Week (p.36), Tim Koechlin pushes his demand, “. . . but, in a stagnant economy like ours, cutting spending is like ‘bloodletting an anemic patient.’ If we want to reduce the jobs deficit, the government needs to spend more . . . .” How will history judge and record this episode?
 

Next Week: Roosevelt and Keynes correspondence

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

Power of Story: Economics vs. Politics

We are a people who love to extol the truth. The problem is we deal mostly in half-truths, and the problem with that is that we almost always get hold of the wrong half. Maybe it’s a habit . . . maybe it’s strategy . . . maybe our strategy has become a habit. But we usually choose the part of truth that allows us to successfully defend what we really wanted to do in the first place.

The problem seems to be particularly rife within the disciplines of statistics and economics: “What would you like this to say?” A great example can be found in the discussion we have been having regarding Bathtub Economics. A gaggle of economists can be gathered around concentrating on trying to smooth out the gaps in production and employment. Why are there gaps and why do the short business cycles seem to go in a boom and then bust fashion? Simply because the owner invests his money in facilities, then invests in materials to make his product, and goes out and hires enough employees to produce the goods. That’s what he is supposed to do.

He is such a good manager and efficient businessman that his production runs smoothly, and soon he has made enough pieces of his product to fill his warehouses. He has also saturated the market, having sold his product to all who needed to buy it at that time. He now has to stop and let his sales catch up with what he has produced and put in his warehouses. So he stops buying material and sends his workers home until he needs them to crank the machinery back up and start producing his product for the market again.

So the gaggle of economists put together a matrix to help the owner manage his production better. “Pace yourself,” they tell the owner. “Don’t stock up on so much material all at once and don’t hire all the laborers to get the job done so fast that you have to keep sending them home and make them unemployed. Stretch out the gaps and the economy will run more smoothly.”

The economists, however, would have said it in jargon like, “workers and machinery will be idled when there are no markets for their goods and services. When aggregate expenditures fall, then total output and employment decreases. When aggregate expenditures rise, then total output and employment increases.” Don’t hold it against them because they talk funny. That’s what economists are supposed to do.

Well, economist Keynes from Cambridge, England, was in another gaggle of economists. They did not believe that the simple ups and downs and gaps of the business cycle could be worked out by themselves. He argued that the decline in the investment in materials and workers would result in insufficient total spending, and would result in serious reduction in output and massive unemployment. Keynes said that recessions and depressions would not likely correct themselves and argued that it was imperative that government must be in charge of stabilizing an economy.

The fact that the Great Depression did not cure itself made Keynes appear very brilliant and opened the door wide for the acceptance of outlandish government intervention. The depression was held up as evidence certain to prove that capitalism and the free market system were inherently defective and needed to be replaced by an efficient centralized economic system.

Up to this point in our story there have been a couple of opinions, and simple economic models have been presented to explain them. One model encourages the smoothing out of the boom and bust cycles in a slow, moderate, disciplined way. The other insists on immediate and radical intervention through the means of government involvement. That’s pretty straight- forward economic theory being presented. That’s what everybody is supposed to do. But now enter the game changers.

Why is it so difficult to choose and administer economic policy? Why do such straightforward economic concepts and models wreak such havoc on individual citizens, policies, governments, and cultures? Because, it has everything to do with the phenomenon of politics!

We are a people who love to extol the idea of truth. The problem is we deal mostly in half-truths, and the problem with that is that we almost always get hold of the wrong half. Maybe it’s a habit . . . maybe it’s strategy . . . maybe our strategy has become a habit. But we usually choose the part of truth that allows us to successfully defend what we really wanted to do in the first place. I refer to it as the political perversion of the practical principle of the apparent problem. I talk funny, too. But I am loveable.

As the little host mouse was narrating the imaginary story taking place in the Governor’s Mansion in Albany , New York, the future president wasn’t really concerned about how the boom and bust cycles of business could be worked out. He saw the magic of taking deficit spending of the government that could be transposed into real money and exchanging that for dependency and votes to secure the positions of control of both the political machinery of the nation and the vulnerable economy. As soon as he could manage to get fifty percent of the voters dependant on his subsidies, in exchange for their vote, there would be no need to negotiate with such concepts as capitalism, free market, or democracy as it had been known. All he had to do was keep the bathtub full.

As many of you know, my international travels of the past took me many times to the country of North Korea, where I had meetings with the top leaders. They don’t like to be referred to as North Korea. “We are DPRK. That stands for Democratic People’s Republic of Korea.” I would always thank them for the correction. They would continue, “We are more of a democracy than you are. We have more elections in our Republic in any given year than you do.” I would smile graciously and pat them on the arm and tell them that our words were descriptors of two different birds. At some time I would enjoy discussing the two different birds.” That would usually elicit a bit of a frown.

If democracy is viewed as a simple function to measure a one-vote-over-50% of those voting, then we are dealing with another half truth, and we will more than likely get hold of the wrong half.

There never was a mystery as to why it was important to lift the well-known English economist Keynes to a near position of divinity. An outside, once-removed authority had to be established and elevated to a position of the high moral and intellectual authority, who would add the sanctity to the action that the politicians wanted to pursue in the first place. Roosevelt needed Keynes and Keynes needed Roosevelt. Keynes’ reputation remained intact throughout the Roosevelt, Kennedy, Johnson, and part of the Nixon administrations, and is now back again. The economic and political agendas of the gaggles were so closely tied together that even sunlight could not reveal a crack.

Naturally, it would be enjoyable for a politician to be able to hand out benefits and subsidies to the citizens in exchange for their votes and support. That is especially true when included in the package would be the lessening of personal responsibility and industriousness of the citizens. One huge problem for the politician is if he should in the future ever try to take back or withhold anything that is promised, or perceived to be promised, in exchange for the constituent’s vote.

Another disadvantage to the politician is the pressure that comes along with needing to come up with massive projects worthy of justifying the massive amounts of deficit spending necessary to keep the bathtub full. 

John F. Kennedy was the son of Joseph P. Kennedy, a wealthy businessman and importer of liquor. Roosevelt appointed Joseph P. Kennedy to head the newly organized Securities and Exchange Commission. Kennedy had been very effective in raising campaign funds for the Roosevelt elections. When John F. Kennedy was eventually elected to the presidency of the U.S., he was faced with an even larger burden: to keep the bathtub full with deficit spending. What was the mind-and-heart-challenging project presented to the citizens that would gain approval to allow thebathtub to be filled with deficit spending money? It was NASA, of course. Why was it so necessary to beat the “Ruskies” to the moon? Ooops . . . here comes another half-truth.

During the Johnson administration it was the emotional and powerful War on Poverty,along with Lady Bird’s bottomless expense account to Beautify America. Carter and the Clintons, as well as the Bushes, almost lost the bathtub with healthcare, the Arabs, and in the final hours of George W. Bush’s presidency, the mailing out of checks to everyone to spend and stimulate the economy.

Have you recognized the fact that the simple economic model in the beginning was to smooth out the gaps in the sometimes bumpy business cycle? But politicizing, and the involving and promoting the government in the model, transferred the ballgame into a whole different stadium. Each occasion of filling the bathtub with deficit government spending required a larger and more complicated program, where the swing of the cycle got bigger, deeper, and more explosive. Also, have you noticed that at the completion of the particular cycle it has nearly always taken an international crisis or war to catch up on the deficit extravaganza?

The grand expenditures of the New Deal’s Federal Relief Administration, the CCC, the FTC, the RFC, the AAA, the NIRA, the SEC, the WPA, the TVA, the NRA, or the thousands of Presidential Executive Orders did not lift the nation out of the Great Depression. It took the massive ramping up for the winning of World War II, the equities of the lives of millions of young men, the spending of unmeasured natural resources, and the alteration of the nation’s culture and employment methods to break the back of the Great Depression.

In order for a society to enjoy a successful economy, it has to produce something. Conflict and wars have a way of focusing attention on nationalism and self-preservation of a culture. That emotional thinking has a way of justifying wars. Such concentration allows for massive war-time production and employment that eventually stabilizes the economy because the economy is forced to produce something. What a sad economic model.

Free food stamps, market baskets of subsidized everything, and a culture of unrealistic expectations in exchange for political votes will not produce the successful sustainability of a national economy. At some point someone has to pay the price. Voting for a living instead of working for a living won’t work forever. At some place someone has to be allowed to produce something that is real and of value to others. It seems that a better economic model would encourage the expression, investment, and management of the necessary production in a more sustainable way over a measured period of time.

In the over one hundred-fifty countries I have worked in the past thirty years, I have carefully observed examples of the short-lived dictators, the charlatans, and the unashamed and selfish politicos who have stripped nations of their rightful equities and dignities in order to personally enjoy the glitter and bright lights of privilege and control. It’s no wonder that so many people down through the dark ages of history fanned the flame of hope within their own minds and hearts that one day there could be an experiment played out in real life where personal initiative, personal integrity, personal responsibility, personal risk, personal reward, personal management, and personal peace, quiet, and fulfillment could be initiated and encouraged so that everyone in the system could be better off.

Closer to home, the present privileged zip codes in Washington, New York, Boston, and San Francisco of the established administration represent projects and spending behaviors that move way past even political comprehension and way past the truth, half-truth paradigm. How much is a trillion dollars? How much is seventeen trillion dollars? What is the meaning of phrases like “Just too big to fail?” How can you monetize that much debt into the system? How can you even think about applying justice to the government- privileged stalwarts of Fannie Mae and Freddie Mac, whose untoward actions harmed untold millions of the citizens?

The whole sub-prime rate debacle was designed to redistribute advantage in exchange for votes and support. Then, however, it was taken one ratchet notch higher in form of a counter redistribution of wealth by depositing the ill-gotten proceeds into the accounts of the inhabitants of those privileged zip code areas.

It appears that we have gotten hold of the wrong half of the half-truth paradigm. TheBathtub that once fit nicely in the little adjacent room has expanded until now the whole house, garage, and barn are expected to comfortably nestle into the Bathtub.

Next Week: Some slippery flaws of the Bathtub.

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)  

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

Power of Story: About Bathtub Economics

Come go with me on an imaginary trip to the New York Governor’s Mansion in Albany, New York. The year is 1932. By now most of the autumn leaves have fallen and the sky has taken on a crazy, hazy, grey of winter. It is a good time to be heading indoors. So, we will go indoors taking on the appearance of proverbial curious mice and retreating to a place of safety in the northwest corner of the well-appointed library. Franklin Delano Roosevelt is the governor in residence, but he won’t be living here much longer. In November he was elected to the presidency of the United States. He will be sworn in on March 4 of next year in Washington. That sounds farther away than it really is.

The governor was gone from the mansion a lot this past year campaigning for the president’s job. He sometimes says he thinks he was crazy to give up a gouda-cheesy job like governor of New York to take on the massive problems of the U.S. and its up-side-down economic mess. Millions of people are out of work. Some people lost all their money when the stock market crashed, and the banks all had to close because they didn’t have any money, either. It’s been three years of misery and there are no predictions of it ever getting better . . . maybe it never will. They seem to keep most of the beggars out of this part of Albany.

A while back, when I was in here checking if this northwest corner of the library would be a good place to spend the winter, I overheard some odd conversations. I guess the governor has invited some of his university buds, mostly from over at Columbia, to come and discuss some of his new responsibilities as president. They referred to a brain trust, but I don’t know what that means. With old guys like this they may have said brain truss in case some of them were sagging a bit.

A guy by the name of Hoover from Washington said he would like to be part of the meetings, but the truss told him, “no thank you,” and he wasn’t invited.

I wish you could have been here with me about three weeks ago. I was sort of crouched down over here against these drapes. Most of the conversations I could understand. But I really wished you could have been here to shed a little light on what they were discussing. I needed someone else here to sort of compare notes.

At first they started out like they had before, talking about the misery and chaos and stuff. Next, they chatted about political stuff and what they called governance in Europe, Great Britain, Asia, and even South America. Then the talk switched to really philosophical and intellectual, high-brow words – like aggregate expenditure models, push-pull demand, obscene profits, unemployment cycles, and monetary control.One guy even got all excited and pounded that table over there and hollered something about revolutions.

Then something really funny happened. Some university professor started talking about a bathtub. Everybody cracked up and the naughty boys from Columbia started making jokes about committing economics in a bathtub. I’m sure you could have helped explain what all that meant, but I was having a hoot just listening to them laugh and carry on. But the bathtub guy wouldn’t shut off the subject. To get the attention of the others he resorted to drawing some pictures on a paper napkin. Things got pretty serious. He said he had it figured that running an economy was like adjusting the water in a bathtub. If you wanted to increase employment and more spendable wealth in the economy all that was required was to open the spigot and fill up the tub.

The professor then explained by writing a big letter G and another big letter I just above the spigot. That would be the source of the water that would fill the bathtub. The big letter G stood for Government Spending and the big letter I representedInvestment. He then drew in a drain at the bottom of the bathtub with the letters Trepresenting Taxes and S representing Savings next to the drain. He told the other guys that by increasing the G and I faster than the leakage of the T and S you could increase the level of income in an economic system and reduce unemployment. Most of the fellows in the library were stunned.

As the guys with the truss started catching their breath, they started firing questions at the professor about where would all the money for the government spending come from? His answer was nearly always the same, as he would confidently respond that it really didn’t make any difference because it would become a self-fulfilling prophecy. If you spend as if you are rich you will then become rich. Just keep the bathtub full. The government can spend its way into prosperity and lift us out of the deep depression and misery.

Then someone hammered him by asking him how you would balance the budget if you increased government spending and investment and shut off taxes? He was like little Johnny-one-note. “Balanced budgets don’t make any difference if you can keep the bathtub full.” Well, what about deficits? Same answer . . . it really doesn’t matter, just keep the bathtub full!

At the head of the library table the newly elected president sat staring at the cartoonish drawings. He, up to that point, had not entered into the emotional discussions. He just sat there staring.

Now, I have to make a bit of a confession to you. I hope you don’t think less of me because I make this confession. But this is not the first winter I have taken up my residence in this library. Just look around. Nice, warm fixings. People here are allergic to cats . . . as am I. Plenty of fancy crumbs. Recessions, depressions come and go. But while residing here I have seen lots of interesting happenings. The Governor’s Mansion has been a good place to observe the sophisticated behavior of human people. I’ve observed a lot.

For example, each governor has had a different group they call cronies to come over on occasions and play cards here in this secluded library. When they would come over I would try to secure a hidden place, usually over there on that mantle where I could tuck in behind that clock or vase. For the card games I always wanted to pick an elevated place where I was pretty much in direct eyeshot of their facial expressions. Most of those cronies are such sandbaggers!

After the cards were dealt was when the show began. I loved it. As soon as the cards were picked up and turned over, there was always this excruciating hush. The real sandbaggers were good at hiding any outside expression. But with my sharp eyes and clean whiskers I learned to read the best of them. If they had just been dealt a winning hand I would observe the rapid heart rate in the neck veins just below the ears. The adrenalin rush would usually make their eyes dance even if they kept total control over their muscles. If I kept watching carefully I could usually catch an eventual flicker of a smile at the corner of the mouth.

Well, I’ve told you all of this to give you an idea of what was going on inside my mouse head as this bathtub meeting (as I refer to it) was going on. You should have been here.

The newly elected president was just sitting there staring. Then, just as if he had picked up the playing cards that had been dealt to him and slowly turned them over, that same awkward hush fell over the room. The president wasn’t much of a sandbagger at that point. I heard a faint “tee-hee-hee” under his breath. Then the “tee-hee-hee” broke out into a muffled chortle, and eventually a full-fledged grin wrapped his face. I knew he was enjoying the cards he realized had just been dealt to him. It was a New Deal!

My guess was that he had not been hearing or understanding much of anything of the intellectual’s conversations about the economic model of the bathtub and how the boom and bust cycles of an economy could be smoothed out. And for sure he wasn’t taking any time to understand the letter T representing tax cuts. This was the guy who already planned to raise the marginal tax levels to 91% up to $25,000, and 100% of anything you earned over $25,000.

My betting money was on the fact he was solely concentrating on the image of the huge spigot of government spending and investment that could be turned on to fill the bathtub. He was not seeing the bathtub as an economic model, but rather, a political model. What he needed to do as the newly elected president was to somehow guarantee his election for a long, long time, because this much fundamental change was not going to happen overnight. He had a chance to change the very idea of democracy. Was the government to be better off or were the people to be better off . . . or neither . . . or both?

In order to accomplish what needed to happen would require the solid voting blocks of the Italian Americans, the Polish Americans, the African Americans, the Catholics, the Jews, the old, the young, the unemployed, the sick, the crippled, the Union workers, the non-union workers, the farmers, the railroad workers, the Solid South, the existing political machines, the common folks, and the intellectuals. Everybody!

Because of his handicap, the president did not jump to his feet. But he was already standing up on the inside. He was absolutely exuberant, almost giddy. He raised his hand and spoke: “Do you mean to tell me that we can spend our way into prosperity at such a time as this? The intellectual minds of this modern world agree that opening the spigot of national spending will result in a self-fulfilling prophesy of rebuilding our broken economy and lift us out of this Great Depression?

“Right now the people have nothing and have been without anything for three years. Just by their continued voting for me and voting to proceed on such a model as this would guarantee prosperity for them and for their families? What kind of a decision is that?

“Just look at the providential cards that have been dealt to us. Indeed, this is a new deal. These cards dealt to us are the cards Trotsky and Lenin had to take from the Czars by bloodshed. These cards are the ones Uncle Joe had to take by force away from the Bolsheviks. And we can do all this just by spending what we don’t have . . . just by keeping the bathtub full?”

Well, there have been quite a few other high-powered meetings in this library since that bathtub meeting. I hear that now other international intellectuals and politicians want to join in the planning sessions. Some really influential guy from King’s College in Cambridge, England, named Keynes wants to meet the new president. I suppose that there will be lots more meetings here before the March 4th inauguration.

I’ve got plenty of space over here in the northwest corner of the library if you would like to stay until they all go to Washington. As much as I would like to crawl in a packing box and trip along, I think I’ll just settle here in Albany.

As you can see, it would be helpful if I had someone like you to stick around and help me with some of the conversations. It’s a little hard to try to hold all of them in my mouse brain and then re-tell them with absolute accuracy. Oh, by the way, look across the room at where the afternoon sunlight is coming in through the west window. See how the imperfection of the glass gives kind of a rippled effect? In the future that glass will be referred to as “depression era glass” and will be very valuable. You might think about picking up some of it and holding it as an investment!”

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

Power of Story: Roosevelt and Keynes

Herbert Hoover was president when the stock market crashed in 1929. Franklin Delano Roosevelt, the charismatic governor of the state of New York was elected president in November, 1932, and inaugurated March 4, 1933. For three years the country had been traumatized by the worst economic crisis imaginable. The international scramble over gold supplies and debt repayments had involved and embroiled the economies of most of the world.

Roosevelt was a new face with a voice of hope. He was the only man to ever be elected president of the U.S. for four consecutive four-year terms. The irony of his election campaign in 1932 is worth a short review. Looking back over what transpired in the past seventy years it would almost seem as though Hoover and Roosevelt had somehow switched their campaign speeches and each delivered the lines of the other.

During the campaign it was Roosevelt who reiterated the old line party speeches promising reductions of all public expenditures, doing away with useless commissions and offices, consolidating departments and bureaus, and eliminating extravagances. Roosevelt even promised to balance the budget. Hoover was castigated for running huge deficits, his inability to halt the effects of the depression, or restore any semblance of prosperity. Roosevelt at one point even stated, “Our industrial plant is built; the problem just now is whether under existing conditions it is not overbuilt. Our last frontier has long since been reached.” Strange philosophical words when compared to what was set into motion over the dozen years that followed the election. (1)

Roosevelt spent the time between his election and inauguration at his Governor’s Mansion in Albany, New York with his Brain Trust, a group of intellectuals gathered from the universities, primarily Columbia University. Big change was on its way. The intellectual atmosphere on campuses around the world had changed over recent years. Now, we can look back and measure just how big that change was to become. From 1860 until Roosevelt’s election in 1932 the Republicans had held the presidency fifty-six of the seventy-two years. Democrats held for sixteen years. From 1932 to 1980 it was reversed: Democrats held the presidency for thirty-two years and the Republicans for sixteen.

Running against both the Democrats and Republicans in the 1928 election was the Socialist Party. Following is a listing of planks in their political platform:

  • Nationalization of our natural resources beginning with coal mines
  • A publicly owned giant power system (Tennessee Valley Authority)
  • National ownership and management of railroads and other means of transportation and communication
  • An adequate national program for food control, food relief, reforestation, irrigation, and reclamation
  • Immediate relief of the unemployed by the extension and program of all public works
  • Loans to states and municipalities without interest
  • A system of unemployment insurance (part one of Social Security system)
  • Nation-wide extension of public employment agencies (U.S. Employment Service)
  • A system of health and accident insurance and of old age pensions (Social Security 2)
  • Shortening the workday and forty- hour work per week
  • Federal anti-child labor amendment
  • Abolition of brutal exploitation of convicts
  • Increase of taxation on high income levels, corporation taxes, and inheritance taxes
  • Appropriation by taxation of all land held for speculation

The economic and cultural pendulum had internationally swung and was nationally swinging from belief in individual responsibility and a decentralized and limited government to a model of social outcome equality and a centralized and powerful government. The model relied on the government to protect the citizens from misfortune and to control the operation of the economy, even if that meant the government’s ownership and operation of the means of production.

Behind those closed doors of the Albany, New York Governor’s Mansion, between Roosevelt’s election and inauguration, a philosophical coalition had formed. TheBrain Trust was ready to view the depression as a failure of capitalism, and to believe that active intervention by centralized government was the appropriate prescription for rapid remedy. Relief, recovery, and reform would be the theme of the game plan.

By March 4, 1933, Roosevelt was fired up and ready to lead the charge with his inaugural speech. He began by blaming the crash, depression, and economic crisis on bankers and financiers and their quest for profit, and the greedy self-interest of capitalism, never allowing once that the problem had also been the responsibility of the U.S. government itself and the inaction of the empowered Federal Reserve System:

Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence . . . The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit. (2)

The new president then called for a Bank Holiday and closed all the banks that still remained open. They would be reopened after the Emergency Banking Act and the Federal Deposit Insurance Corporation (FDIC) bills were passed by Congress. It was understood that successful economic systems must be based on confidence and convenience. There wasn’t a lot of confidence left in the system. The tacit message was that no longer would the depositors have to depend on the reliability of the bank, but could rest on the assurance of the government to protect their deposits. “The only thing we have to fear is fear itself.”

President Roosevelt’s First 100 Days witnessed a record number of bills being sent to Congress for approval during a special emergency session. Soon there were so many Relief, Recovery and Reform bills in existence it was hard to keep track of the action. Any programs that failed to pass or were held up for some reason were re-instituted by the President’s Executive Orders. Congress would then have to override the orders or it would be necessary for the Supreme Court to strike them down as unconstitutional. Especially in Roosevelt’s second term, the conflict with the Supreme Court led to their unanimously ruling that the National Recovery Act (NRA) was an unconstitutional delegation of legislative power to the president.

In response, Roosevelt proposed a shocking law that would allow him to appoint up to six new justices of the Supreme Court so that he could have a “persistent infusion of new blood.” Even his own Vice President Garner led an intense protest, claiming that he was violating the very separation of powers that would give Roosevelt absolute control over the Supreme Court by Court Packing. Eventually, however, Roosevelt appointed eight of the nine justices of the Supreme Court. They began to ratify his policies with ease.

On other issues, it was ranking members of his own Democratic party that began taking issue with Roosevelt’s power and policies. Democrats led by Al Smith organized the American Liberty League and vociferously attacked Roosevelt by equating him with Karl Marx and Vladimir Lenin. But, people were going back to work, and once again businesses were beginning to reopen their doors. No one had expected that the depression would have lasted for ten years.

Next Week: More about Bathtub economics

(Research ideas from Dr. Jackson's new writing project on Cultural Economics) 

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

Power of Story: Is John Maynard Keynes Really a God?

From the ivy-covered cloisters of Harvard, Yale, and Princeton to the T-shirt- clad students of your local junior college, wherever the subject of economics is studied and discussed, one name is preeminent: John Maynard Keynes. A sacred hush falls over the classroom when his name is spoken. All jokes must cease about economists with wire-rimmed glasses holing up in their cubicles trying to see if what they just observed in real life can be massaged around to fit their pet economic theory. It is expected that if a professor or student utters his name they must do so in soft, reverent tones, and then place their fingers to their pursed lips and gently touch the printed name on the page of their classical textbook. Just who is this John Maynard Keynes?

The sacred legend holds that in the hours of deepest distress, when the United States was not just reeling from the bludgeoning blows of the Great Depression, but was down and out for the final count, never to arise again from the smoldering ashes of dissipated wealth and shattered culture, John Maynard Keynes came riding to the rescue. It was Keynesian economic philosophy, emanating like a bright beacon light from the halls of King’s College in Cambridge, England, that saved the culture and probably the universe.

As the legend goes, John Maynard Keynes assembled his exclusive teachings into a printed book, The General Theory of Employment, Interest, and Money, that was printed in 1936. Miraculously, the newly elected president of the United States, Franklin D. Roosevelt, stumbled across the book just in time, read the magic words, arduously and meticulously implemented the teachings, and the floundering nation was transformed into the economic super-power that held sway over the entire world like no other nation in history. How could anyone with half a brain and one eye ever dispute or even question those sacred writings that were passed down to this favored nation so many years ago? Blessed is the name of John Maynard Keynes.

So, just what were those original teachings? My major professor in economics, Dr. Paul Ballantyne of the University of Colorado, one day told me, “Jim, if you want to easily remember the economic philosophy of Professor Keynes, just visualize in your mind a bathtub. It is about one-third full of water. Above the bath tub is a spigot with a handle to regulate the inflow of water. Above the spigot are the letters “G” and “I.” Those letters stand for Government and Investment.

As with all bathtubs, there is a drain at the bottom of the tub. Over the drain are the letters “T” and “S.” They stand for Taxes and Savings.

If you want to fill up and regulate the economy you turn on the “G” and “I” spigot and plug the “T” and “S” drain pipe. By increasing the Government Spending and Investment faster than the leakage of Taxes and Savings out of the economy, you can increase the level of income and reduce unemployment.

“But,” I protested to Dr. Ballantyne, “what’s so brilliant and new about that? Explicit provisions were made for that clear back in 1913 when the U.S. passed the Federal Reserve Act. The Federal Reserve was given certain rights:

  • The Feds were given the right to raise or lower the percentage of reserves that the banks must keep on hand. If they lowered the amount of required reserves, then the banks would have more money to lend out to customers to invest in their projects. The higher the reserves imposed on the banks, the less money could go into the system.
  • The Feds have the right to raise or lower the Discount Rate of the money they can lend to the banks to lend to their customers. The higher the discount interest rate, the less the banks will borrow from the Feds, and the less will be available to the customers, and the less money will be introduced into the system. The lower the discount rate, the more likely the banks will borrow from them and lend the money out to their customers, and more money will find its way into the system, and there will be an increase in employment.
  • The Feds have the right to sell and buy back notes and securities to citizens and foreigners to cover the debts the government creates because of their desire to spend more than they have in their account.

How much more could they want? What’s new about Keynes?”

John Maynard Keynes had the advantage of watching Great Britain go through an earlier depression of its own. He was in England and only twenty-nine years old when the U.S. passed the Federal Reserve Act. He was also able to watch what had happened during the recessions of the U.S. and the early years (1929 – 1935) of the Great Depression before he wrote his book. He was convinced that the severe bumps of the boom and bust economic cycles could be flattened out with his aggregate expenditures model. He declared that Say’s Law was not dependable, and if the economy were left to correct itself it would not happen. He pointed to the Great Depression as his needed proof.

But why the God-like treatment for Keynesian economics? All of the tinkering with aggregate expenditures did not lift the U.S. out of the Great Depression. Successful economies are built on production. They have to produce something, and it was not until the U.S. began production for the buildup for World War II that employment and incomes began to rise. Indeed, World War II was a horrible price to pay to end the Great Depression.

John Maynard Keynes did not leave any question as to government’s economic involvement. He felt it was the government’s responsibility to be in control of the stability of the national economy and play an active role in the policies and procedures. He also was a strong advocate of the government’s control of housing and ownership of utilities and transportation. Recent polls indicate that 70% to 80% of today’s economists subscribe to the ideas associated with the Keynesian approach that business cycles should be managed by the Fed. That comes close to divinity. 

Next week we will look at Franklin D. Roosevelt.

(Research ideas from Dr. Jackson's new writing project on Cultural Economics)

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

Power of Story: Depressions and Panic

Once upon a time to a fabled piece of real estate came individuals and small clusters of sincere, hard working people. Their intentions were to carve out a place of peaceful and prosperous existence on the prized piece of land that miraculously stretched all the way from the Atlantic Ocean to the Pacific Ocean. They dreamed of their desires and opportunities one day materializing into feelings of security, satisfaction, and happiness. Their economic endeavors eventually found them building thousands of individual businesses and employing tens of thousands of their neighbors as laborers.

Their simple economy included the practice of barter and a currency of metal coins and commodities such as tobacco. By the late 1700s, their economy had begun to mature and even show signs of sophistication. A business observer by the name of J. B. Say wrote that it appeared the very act of producing goods seemed to generate income equal to the value of the goods produced. That idea became known as Say’s Law, where supply creates its own demand. In other words, there will be sufficient spending to purchase all that is produced.

When times were good the business owners would invest in purchasing goods and materials to build their enterprises. They would also buy raw materials in order to produce the items they were going to sell. If they did not have enough money of their own, they would invite investors to share in their business venture. Their hard work and diligence ended up with successful production of goods. Many times their successful endeavors resulted in producing more of the items than the present market could purchase.

Once a businessman’s warehouses were full and he had saturated the marketplace with his goods, he would have to put a bookmark in his production until the customers’ purchases would catch up to his production. He would have to lay off his workers until the demand for his products emptied out his warehouse. That allowed him to start up his business again. The lack of continued investment in production resulted in a temporary recession of business and the occurrence of unemployment. The reoccurring cycle gave the appearance of a boom and bust economic pattern.

Observers, also in the late 1700s, like David Ricardo and John Stuart Mill recognized these bumps in the business experience, along with other interruptions like wars, gold rushes, and droughts, and concluded that over the long haul of time all the bumps would tend to even out, and full employment and production would work out just fine, and that eventually demand must equal supply. There would eventually be sufficient spending to purchase all the supply.

But some of the recessions were worse than others. During the seventy-five years in the U.S. prior to 1929, there had been nineteen business recessions with some gaps that even lasted as long as two years. Then came the Great Depression! TheRoaring 1920s had produced a period of easy money, abuse of credit, speculation in risky ventures, and high expectations driven by greed and lack of discipline.

The 1929 crash of the stock market opened the door to panic, and the people waited in lines at their banks to withdraw their money. But, as we learned earlier, when people deposit their funds in a bank it is unjustifiable to think that everyone can demand their money back all at once. Their money that was deposited was not in the banks at all, but had been loaned out to someone else. The new borrowers were not expected to repay those loans for another ten, perhaps twenty years.

All economic systems depend upon the factors of confidence and convenience. When depositors cannot withdraw the money at will that was deposited, they get quite nervous. When, after standing in lines for a long time, they still cannot withdraw their money, they panic. That panic spreads like a wildfire to all other depositors.

It takes such a tiny pin to prick the balloon of confidence. Early in the Great Depression over one third of all the banks in the U.S. failed and closed their doors. The depositors’ funds evaporated into thin air. The confidence in the system was likewise gone.

More than twelve million people lost their jobs. Production dropped 30% and per capita income shrank 40%. Unemployment jumped to 25%, 85,000 businesses failed, hundreds of thousands of families lost their homes, and over half of home mortgages were in default. The financial constriction did not just solve itself. The Great Depression lasted over ten miserable years with no apparent hope in sight.

The local, county, state, and federal governments likewise panicked. They embarked on harsh plans to quickly increase taxes to cover their losses. But there was no money to pay the taxes. The Federal Reserve Bank failed miserably. It had been empowered to move cash early on to the first banks experiencing runs on their accounts in order to stave off such panics. That probably would have stopped the panic, as the people realized that others were getting their money back. Instead, however, the Fed officials applauded in some cases, saying it was all working to weed out the weak banks and those with bad management practices.

What had gone wrong? Was it possible that Say’s Law was wrong? Why were the safeguards of the Federal Reserve System never implemented? What would pull the economy and the people up and out of the Great Depression?

Next week we will look at Franklin D. Roosevelt and John Maynard Keynes.

(Research ideas from Dr. Jackson's new writing project on Cultural Economics)

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

Power of Story: Monetizing the Federal Debt

So, just how does the U.S government magically turn the federal debt into an asset of spendable money?

As we discussed earlier, the U.S. Treasury Department keeps most of its money in the Federal Reserve Bank. Checks are written for every government expenditure from this account. Upon occasion, however, those in the government have a very interesting problem: they spend more than they have in their account.

If your personal bank account were overdrawn, you basically would have two ways of covering the deficit. Either you would hurry around and earn enough to cover the amount, or you would find someone who would make you a quick loan. The federal government does not earn money, so it is left with the choice of either quickly levying a new tax to raise the money, or going to the marketplace to get a loan. Taxing is part of the government’s fiscal policy, while adjusting the money supply is part of the Federal Reserve’s Monetary Policy.

But, think about it for a minute: who could lend the government several trillion dollars just to cover the extravagant spending desires of the administration and Congress? Lots of people . . . together, that is! The government does not go to just one source and borrow the money; they make thousands and thousands of little loans in the form of U.S. Treasury bills (T-bills), notes, and security bonds. They are essentially government I.O.U.s given in return for the borrowed money.

In order to assimilate the debt into our system we use a function called monetizing. Many less sophisticated countries simply print the money to pay for the cost of overspending by their governments, finding that form of taxation to be a simpler method. But, as you will recall, increasing the supply of money in the system causes inflation.

We sell the security bonds and treasury notes to our citizens, and also to foreign countries. But that transaction does not inject new money into the system. It would be as if there were 10 dollars and 10 cherry pies in the system. The government wanted one of the cherry pies, but did not have 10 dollars to pay for it. So, it would offer a bond, presuming that there would be one person in the system who would rather have an interest-bearing bond than a cherry pie. So now you have 10 dollars, 10 cherry pies, and 1 bond in the system.

When it comes time to pay back the borrowed money plus the agreed interest on the secured bond or T-bill, the Federal Open Market Committee of the Federal Reserve Bank calls in the note and pays it off. How do they do that? You guessed it . . . with newly created money!

The monetizing process is accomplished by the Federal Reserve Bank issuing a check to the bond dealer, who in turn deposits that check into his bank account. The check, when it is deposited, is credited by the Federal Reserve Bank to that bank’s reserves, and that bank is then entitled to make loans against that new reserve or exchange it for cash.

Why did the Federal Reserve Bank have the right to issue the check? Because it was backed up by the U.S. Treasury I.O.U. that it had just purchased! In essence, what happens in the transaction is that the federal debt—a liability—is transformed into an asset of spendable cash by the U.S. Treasury’s signing of a note! The note is an asset of the Federal Reserve Bank. In other words, the debt of the government has been miraculously turned into spendable money. That’s called Monetizing the Federal Debt!

Monetizing the national debt, by using the intermediate step of issuing bonds, stalls the impact on the economy for at least a year . . . perhaps much longer. But it has exactly the same ultimate effect as if the government did not issue the bonds in the first place, but simply paid its debt with printing-press money or entering strange numbers into a computer. Instead of having 10 dollars and 10 cherry pies and 1 bond in the system, there would now be 11 dollars, 10 cherry pies, and no bond. The outcome is the same as the irresponsible actions of Germany in paying off the war reparations. There is new money injected into the monetary supply that lowers the value of the rest of the money and causes a sustained increase in the general level of all prices . . . Inflation!

When a government overspends, goes into debt, sells bonds and T-bills, it is not a slick process of smoke and mirrors whereby that government creates free money. That government has just set into motion the devaluing of their money and economic system through inflation. The people do not vote on having the value of their money taken away from them, their earnings and equities stripped from them, and their savings stolen from them. The Congress doesn’t even have to vote to raise a tax to accomplish such results. But the silent consequences of extreme and rapid inflation (hyperinflation) are set into motion, as sure as the sunset.

So, just what gave rise to the notion that the federal government could manufacture debt and new money to satisfy the lust of over spending? Next week we will take a look at the interesting paper trail. 

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson

Permission granted by Winston-Crown Publishing House

Power of Story: Intuition

Why have we taken the past several sessions discussing such concepts as enterprise, production, the history of money, the Federal Reserve System, fractional reserve banking, and inflation? Is all this discussion necessary? Is it important at all? Yes, it is! Oh, yes, it certainly is.

Most people living in our present culture have never been given the basic rudiments of simple economics. We don’t understand what is happening or the rapid changes we are experiencing. We can’t see why the big fuss is made about balanced budgets, debt limits, or deficit spending. Just this week I had a young lady say to me, “I live by one simple motto: go with whatever is free and opt out of participating in the consequences.” I had to have her repeat her motto to me!

Our discussions over the past several weeks regarding some of the basic concepts of our economic system have been very important because intuitively we feel and know that something strange is happening in our economy, but we can’t put our finger on it or articulate what we feel. We all seem to be waiting for the other shoe to fall.

When we go shopping at the supermarket and experience the prices doubling or tripling, and then are reassured that our inflation rate is successfully running at a meager 2.1 percent, we are confused. When we pay $60 thousand for a like-kind automobile that just a couple of years ago we bought for $20 thousand, and the same house that our uncle bought in the ‘80s for $19 thousand just sold for $321 thousand, with three backup contracts waiting in the wings to purchase it, we are confused. But we are shown facts that the Consumer Price Index guarantees that inflation has not increased in any given year over 3.4 percent since 1992.

Born before the U.S. entered into World War II, and living during the latter years of the Great Depression, I grew up with the memories of international economic experiments and their consequences. Following World War I, Germany was demanded to pay for the damages they had caused while blowing up the countries they had invaded. They refused to pay for the war reparations until the pressure of the rest of the world forced them to pay. They paid the debts by simply going to theirFiat printing presses and rolling out newly printed German marks. That seemed to take care of the situation. The world was happy, the individually damaged countries were satisfied, and Germany was off the hook.

They were off the hook and unaffected until the other damaged countries decided tospend the newly created money. They began buying German goods and services with the phony German marks. Suddenly, there were all the new marks buying up all the German goods and services. Since there was nothing to back up the newly created money, all the prices began to double and quadruple because the value of the real marks plummeted.

In the end there were four quintillion marks in existence, and it was not unusual for a German shopper to pay as much as 750,000 marks for a few groceries. That is where we get the stories of the shoppers needing to take a wheelbarrow to the store to transport the necessary marks for the purchase of a few goods . . . and where someone along the route would accost the shopper, dump the currency, and steal the wheelbarrow.

In the very recent past, the U.S. has tallied upward of $17 trillion in debt (refer to our recent article on the amount of a trillion). When I wrote the book, What’cha Gonna Do with What’cha Got?, following the Carter administration we had just topped the incredible amount of $1 trillion dollars in debt. It had taken us well over 200 years to accumulate that amount. Now the debt number is in excess of $17 trillion. Our method of acquiring and assimilating that debt is far more sophisticated than the German’s method that was used after World War I.

Next week we will discuss how the Federal Reserve monetizes the federal debt and transforms it into spendable money.

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

Power of Story: Tends and Tiger Teeth

Earlier we had an opportunity to agree or disagree regarding certain economic factors that we felt were the cause of inflation. We will begin our investigation by considering the fact that inflation is not caused by individual producers raising their prices. This is true whether we are talking about oil cartels, individual merchants, labor unions, or particular industries. I think the power of story can help us see this more clearly. Let's return again to our primitive friends: Two-Toes Tom, Scarface-Salesman Sam, Wanda[P1] Wonder-Weaver, and Healthy-Hunter Harold.

                                                           *Remember*

INFLATION is a sustained increase in the general level of ALL prices.

One evening all of our friends were sitting by the campfire discussing an interesting new idea. Scarface-Salesman Sam had just returned from visiting a faraway tribe. He said that everybody there was involved in a new concept called inflation. It appeared that it was benefiting everyone in the tribe. The idea was that if they all raised their prices by twice, then they would all have twice as much. Who wouldn't like that? Why hadn't they thought of that sooner? Just think of all the wealth they could have accumulated by now!

Our friends decided that it was high time they adopt this concept for their own tribe. They all rushed back to their tents to get some of their products to trade; there was no sense letting any more time get by.

On the way back to his tent, Healthy-Hunter Harold was just beaming. "Think of it . . . from now on, I'll only have to trade four packages of fresh meat for two stone axes instead of the usual eight. I can put twice as many trades together." Wanda Wonder-Weaver was also excited, since she would now be getting twice as much for her blankets. Two-Toes Tom, who had been tired a lot lately, was glad that now he could finally slow down a little, since he would be getting the same amount, but only having to produce half as many stone plows.

Excitedly, they all returned to the campfire to get started with their trading. Healthy-Hunter Harold wanted to go first with his fresh meat. Instead of the usual eightpackages, he only brought four to trade with Sam for two of his stone axes. But alas! Sam was standing there with only one axe that he intended to trade with Harold for the regular eight packages of meat. Sam argued that since it was his idea, he should be able to go first, i.e., one axe for eight packages of meat. Harold informed him that would be fine, but the eight packages of meat would come off Sam's body!

It began to dawn on Wanda Wonder-Weaver what was happening. Whether Sam raised his prices and Harold paid it, or Harold raised his price and Sam paid it, you still haven't caused inflation. For if one price goes up, then the other price must come down. She realized that it wouldn't make any difference how many people were involved, or how many products were involved, or for what reasons they wanted to raise the price, they could not cause inflation, i.e., a sustained increase in the level of all prices, simply by raising their individual prices. For if one product goes up in price, then one, or a combination of other prices, must fall by precisely the same amount. Even if there is a scarcity of a product due to poor crops, strikes, or exports, the increase in the price paid for the scarce product will only result in your having less money left over with which to make other purchases.

If an oil cartel, e.g., OPEC, raises its price of oil by $50 billion, there should be $50 billion less in the system for consumers to purchase other goods. These other goods would then sit on the shelves and go unpurchased, thus causing a recession in business.

Wanda Wonder-Weaver gathered her blankets together and headed back to her tent. Ol' Two-Toes Tom sadly went to sleep, dreaming of how close they had all come to being wealthy!

You now can see that for whatever reasons prices are raised, e.g., scarcity, monopolies, wage and price fights, you cannot cause inflation . . . a sustained increase in the general level of all prices. You will see later that the raising of prices is a necessary result of inflation, not the cause.

That night Scarface-Salesman Sam went to bed troubled. What had he forgotten? Why didn't inflation work around the campfire that night with his friends? Then he remembered that the other tribe wasn't trying to make it work with the barter system. They were using a medium of exchange-"money." In fact, they were using gold coins. Sam knew that his tribe had used tiger teeth as money before. Why wouldn't inflationwork with tiger teeth just as well as with coins?

The next morning he was up early to explain his new idea to the others. He told them that he had finally figured it out. First of all, they must go off the barter system and exclusively use tiger teeth as money. Secondly, if they would bring together all of their tiger teeth that they had used as money they could then count them. Thirdly, if they would double the number of tiger teeth that they were using as money, it would then be possible to charge twice as much for the same number of products.

At that point Wanda Wonder-Weaver stopped her weaving on her blanket and laughed out loud!

           With that kind of thinking . . . it's no wonder you guys are still primitive! 
           Can't you see? . . . When you double the money supply and the supply of                goodsstays the same,  you cut the purchasing power of the money in half . . .
           that is . . . it takes twice as much to purchase the same product.
 

On the surface it might appear that everything would be going up in value. But it is not. The only way to have a sustained increase in the general level of all prices is to have a sustained decrease in the general value of the money.

Another way of stating that all prices are rising at the same time would be to say that the money system is falling in value.

The reason for Scarface-Salesman Sam's misunderstanding of the concept of inflation was due to his misunderstanding of the motive behind the concept. All he observed was that the merchants were getting higher prices for their products, but failed to see that the real value they were receiving was less. He didn't know that the king of the tribe was extracting from his people a silent tax through inflation to pay off the debt of his last spending spree, knowing full well that if the people understood what he was doing, they would revolt or elect a new tribal chief. You can't ultimately play games with smoke and mirrors or tents and tiger teeth.

(Research ideas from Dr. Jackson's new writing project on Cultural Economics)

© Dr. James W. Jackson

Permission granted by Winston-Crown Publishing House