Curiously, this essay appeared in the same journal edition as Beardsley Ruml's admission that taxes as revenue are obsolete for a fiat currency issuer. Ruml's article appears on p.35 of the same link, below.
Steel industry economist BB Smith doesn't see it, and argues the gold-standard paradigm. He also argues that production drives demand, rather than demand drives invention and production. You have to wonder if BB Smith ever saw Ruml's simultaneous essay, and if he ever updated his own, personal paradigm regarding sovereign currency operations.
This is a fascinating historical article that reveals the deep surprise and resentful anger still festering 13 years after the spectacularly, undeniably successful transition from a nonscalable, slow gold-std to a scalable fiat currency std. That national rapid, adaptive transition provided the policy agility and tempo to accelerate mobilization to end both the Great Depression and win WWII. Smith also devoutly outlines his belief that the Public Purpose aligned during a national war represents a different phase of national culture, and that similar return on coordination is neither normal or even desirable in non-wartime periods. He apparently never heard of events as disparate as the Louisiana Purchase, the Lewis& Clark expedition, transcontinental railroads and highways, the Panama Canal, nor the race to put a man on the moon. Or even the New Deal, to respond to the Great Depression, which he treats as another anomaly or "special" exception.
This essay, along with Ruml's, is worth reprinting and reading, just to see how far we've come in some regards. Simultaneously, however, it's clear that many aspects of public opinion have never progressed from Smith's views to Ruml's views on outcomes based adoption of newly scalable currency operations and fiscal policy.
[Hat tip to Eric Tymoigne, Lewis & Clark College for the link]
[Economist, United States Steel Corporation. The views expressed
are those of the author and are not to be taken as an expression of
the corporation's attitude or policy.]
'THE strategists of a planned economy know how to make beginnings look innocent. The first bill ever to be debated in the American Congress proposing to make the government directly responsible both for the size of the national income and the state of employment was the thin edge of a wedge. That it was so regarded by its active sponsors may be understood from their willingness to accept any kind of amendment that might be necessary to get it passed, even amendments that could be so construed as to make the bill seem to mean really nothing at all. At the same time everybody knew that if the bill was passed in any form it would have to be followed at once by more legislation, and that if it failed to pass the idea it represents would be with us still, to be revived at the first onset of unemployment or to become a slogan in the next campaign.
Let us concern ourselves, therefore, not with any particular form of a full employment bill, but with the idea that inhabits it in any form. What is the idea? It is new in American thought but as old as the hills of human history. In its oldest form it was the idea of a ruler who clothed and fed and housed his people. He gave them security. All that he required of them in return was obedience. In the modern form it is the idea that the state, or in our case the Federal Government, shall assume an unlimited ultimate responsibility to provide remunerative employment, or employment opportunity, for everybody who is able and wants to work. To "spend our way into endless prosperity"—that is the nub of the matter, and that is the idea now to be examined.
The first pitfall in the path of those who would examine the "full employment" proposition is the deceptive title. The words, "full employment," make a powerful emotional appeal to hope and fear. They do not describe the idea they cover.
"Whoever is against this idea is against full employment for honest workers" must be instantly recognized as a smear-type bid to "slip something over"
on the basis of emotion and ignorance rather than of knowledge and reason; and the charge should discredit those who make it. We should be more interested in actually making progress toward stabilized prosperity than in resolutions that we want it.
The second pitfall is our own fear. There is profound danger that in panicky search for postwar "security" the common sense, self-reliance and independence with which American men and women customarily make their decisions will be submerged.
II Three Ways To Find the Money
One: Taxes
If the pitfalls on the way to considering the idea of spending our way into prosperity are avoided, we are then face to face with the question that each must ask and answer for himself. It is an important question, if for no other reason than that the sponsors of the spending idea are for the most part strangely, even hopefully, silent about it. Yet it is a most obvious and common-sense question. It should be pulled out into the open, faced squarely and answered fairly. The question is: Where is the money to come from that the government proposes to spend? Money that is spent must come from somewhere even if it is only the counterfeiter's press. Perhaps the most familiar source of the money that government spends is the taxes it takes from the people.
So if we assume that the money the government spends is taken, dollar for dollar, from the people in taxes, then we must deal with a specific question: Will government spending of taxes taken from the people provide any more buying of goods and employment of people than if the people were allowed to spend the money themselves?
The simple arithmetic of this would seem to supply a negative answer. If one has $100 to spend and the government takes $20 away from him in taxes, then he can spend only $80 in the markets. If the $20 taken by the government is given to a government employee or some other person, then that person can spend the $20 in the markets that the taxpayer was prevented from spending. But the total amount spent in the markets remains just the same as if the taxpayer had been allowed to keep and to spend his money himself. If the amount spent is unchanged, one can only suppose that the goods produced and the employment in producing them must remain substantially unaltered. Taking money from one person and giving it to another leaves the amount that the two spend unchanged. The simple arithmetic seems to be that minus one and plus one add up to zero.
There is, however, another matter which one might consider in answering the question. It is the effect that the taxes might have upon those who pay them. Is the owner of a business going to be inclined to work as hard as before and hire more people—and, for that matter, are the other workers in the shop going to work as hard—if they can't have for themselves what they earn but have to hand over a good part of it to the government as taxes? Anyone may answer that.
Two: Borrowing
If the tax collector isn't used, the government still has two other ways to get money to spend. It can borrow money and it can print money. So, the next logical question would appear to be: What is the effect of the government's borrowing and spending? The ordinary arithmetic would appear to be helpful in achieving an answer to this. When the government prints bonds and sells them, except to the commercial or reserve banks, there is a transfer of money from the people to the government. This money, which is given by the end buyer to the government in exchange for the bond it has printed, obviously cannot be spent by him in the markets.
It is also obvious that the government cannot send more money back to the market than has been diverted from the market into bonds. As in the case of the tax-and-spend idea, the borrow-and-spend alternative appears simply to take one away from the markets and then add one back to the markets. That would leave us exactly where we started.
There are two differences, however, between borrowing and spending and taxing and spending. The first is that the bond buyer presumably invests his money voluntarily in the bond the government has printed; the second is that the government must some time either pay back with interest what it borrowed or else repudiate its debt and leave the bond holder in possession of worthless paper. These two differences between borrowing money or getting it by taxation naturally raise some questions about the effect of the borrowing transaction upon employment: Does the buying of the bonds the government prints tend, like the taking of money in taxes, to prevent people from using their money in hiring workers to produce goods for sale?
The answer at first glance seems to be "no" because the bonds are bought voluntarily, an indication that the people who buy them have the money to spare over and beyond their other spending intentions. But this may not be the final answer. Before it can be considered final we must know whether people in general have enough faith in their government to believe that the money which is borrowed will be paid back with interest; and next, whether they expect the debt to be paid out of future taxes. If the people do believe they will be paid back out of future taxes, we are right back to where we were in considering the spending derived from taxation, except that in the minds of the people the taxation is deferred for a while.
The next question is: if the government did not print and sell bonds, would people just do nothing with their money and hoard it?
The answer to this question does not have to rest upon opinion, for the records of the past can be examined. There is no evidence whatsoever of significant hoarding before the depression of the Thirties.
This is so obvious that no one of repute has ever publicly attempted to prove by the facts that it was the hoarding of money which terminated the prosperity of the Twenties and initiated the depression of the Thirties. According to the records compiled by the Federal Reserve Board, the velocity of check deposits (the rapidity with which people drew out by check the money they deposited in bank check accounts) was greater in 1929 than it had been for twenty years before, or has been since.
People were spending the money they had more rapidly than at any time within the period examined by the Board, while government debt had been decreased rather than increased in the late Twenties. There are theories that unemployment has been produced by hoarding money but no facts to prove them. It is more probable that unemployment causes money hoarding than that hoarding causes unemployment. The hoarding theories have the cart before the horse.
Three: The Printing Press
When business is depressed and there is unemployment, many people quickly associate that depression and unemployment with nonspending of money. They say that if people had more money to spend then other people would start producing to supply the spenders' demands. This is the simple reasoning that has been the invitation to financial disaster time after time in the monetary history of the world. It is the invitation to the printing and free distribution of money. Each time the invitation has been accepted, there have been those who said that previous history could be disregarded because "this time things are different" (for example, "We now have a mature economy") and "we now know how to manage money without getting hurt." Indeed, there have always been those who have been able to make their neighbors believe it was wise and safe to monkey with money.
So we must investigate what happens when government gets the money it spends not by taking it in taxes and not by borrowing it from individuals on the promise of paying it back but by just printing it and passing it out. We must first make two brief but important digressions in order that we may honestly satisfy ourselves of the consequences of printing money. One of the digressions has to do with the modern and hidden technique of printing money. The other has to do with what happens to money which consumers spend.
If the government should print money wholesale it would scare people, for too many of them have heard about "continentals," "greenbacks," the "trillion-to-one" depreciation of the German mark. So, just to print money in too obvious a fashion would require a great deal of explaining and reassuring, and this could well prove rather inconvenient. There is a less obvious way of achieving the same results that not so many people know about, and which, incidentally, was practiced in the "trillion-to-one" German mark inflation. It is to print government bonds instead of money, and then to use the commercial banks to turn them into "deposit money"; or else to give the printed bonds to the Reserve Banks, which then print Federal Reserve Notes against them. This process could be termed the "double-print" method of inflating money. It may be good or bad according to how one looks at it, and each must judge for himself. The first thing to do is to pull out into the open and look at it. Two realizations should result from this digression into the nature of modern money-printing presses.
The first realization is that we have a hidden device which is the approximate monetary (if not, as yet, psychological) equivalent of printing-press money which has been vigorously and almost uninterruptedly employed by the government since 1933, and which has already inflated our money six times over.
The second realization is that "printing" money in this way involves printing the bonds first; the spendthrift system seeks free money to spend in which the taint of the press is buried in the public's lack of knowledge. But the rise in the debt cannot be suppressed. It is not surprising, therefore, that those of the spendthrift school of thought should try to persuade people that a public debt is a good thing after all—that we owe it to ourselves—that though every baby is born with a debt on his head, he is born with a bond in his fist, and so on.
Attend the Dollar
The second brief digression, to establish a setting in which each may examine to his own satisfaction the effects of government spending of "printed" money is about what happens to the dollar that is spent. There is no mystery about how these things work that anyone cannot readily pierce by walking down Main Street, using his eyes, ears and head, and using his common sense to fill in the gaps. He will find customers walking into stores with money and walking out with goods, and will soon discover, of course, that the customers are the storekeeper's only continuing source of money. The storekeeper pays out virtually all the money the customers pay in. He pays it out to cover his costs of conducting the business or as an expenditure for himself of the part that is his own wage. He is too smart to keep much money idle around the place—it is better to invest it in goods he can sell at a profit (he hopes) or to lend it to someone to earn interest.
Production Creates Buying Power
Since the owner of the business disposes of as much money as he gets from customers then the reverse is true: Customers in general receive from all business enough to buy—if they want to—what it offers for sale. When A equals B, then B equals A.
The thing balances out with need neither for increase nor decrease in money, both of which disturb rather than promote the balance. This is a fact of great importance. Nothing can be produced without buying power, mostly in the form of wages, being distributed adequate to buy it. The very act of getting things produced automatically provides the buying power to get them sold. The production in itself produces the necessary buying power. In fact, there is no other kind of buying power that is any good for augmenting total buying power.
Thus, to get a little ahead of ourselves, let us suppose that a counterfeiter with large sums of fresh new money comes into the market and buys things. His buying puts prices up. Therefore the wages of workers will buy less than the equivalent of what the workers contribute to production. The total buying power is after the episode exactly as it was before the episode; namely, just enough to buy what was produced. The counterfeiter's apparent buying power represents real buying power stolen.
Or, if the counterfeiter should happen to have the authority to tell the people that they could not spend all their money, as through price and ration laws, then there is still no addition to buying power.
What happens then is that the counterfeiter merely makes active his counterfeit dollars in substitution of the producers' dollars, which, by edict, are rendered nonexchangeable for goods the workers have produced.
Thus, attaining and maintaining "full employment" is far more a matter of enlarging and maintaining the profit incentive to hire people to produce than of seeking artificially to maintain or expand so-called buying power. Adequate real buying power is the certain and automatic by-product of production (assuming that it will not be extinguished by money and credit contraction), whereas supplying new money in the absence of incentive to employ may perpetuate rather than correct unemployment. Left alone, unemployment would be self-curing, if it were not aggravated by misguided wage policy.
There is only one way for a new, self-sustaining job to come into existence. Let anyone who disputes it define any other way. A new, self-sustaining job comes into existence when, and only when, an employer in the hope of profit spends his money to buy tools of production so that people can be hired to go to work and produce the marketable values that will cover their wages and employer's profit.
If to cure unemployment it is essential to improve the prospective profit in hiring people, and if the maintenance of employment requires the maintenance of profitability in hiring people, then we know how to go about determining whether government spending of "printed" money can be effective.
The earlier question can now be rephrased: Will spending of "printed" money improve or maintain the prospect of profit in hiring people?
At the outset it should be recalled that keeping the "printing" process obscure by first printing bonds that are later to be turned into money by the banks instead of printing money directly must raise a good deal of doubt about the process.
Secondly, whoever gets the first spending of the "printed" money, whether it be the government or someone upon whom the money is bestowed, gets something for nothing from the rest of the community. At best, "printing" money is but hidden and deceptive taxation. The morals of the matter are for each to decide for himself. The "printing" of money is far more certainly a device for dividing what is produced between those who produce and those who do not than for multiplying production. The division is effected either by denying to productive workers the free expenditure of their wages in markets by price controls and rationing, or by the bidding up of prices so that the worker's wage cannot buy the equivalent of what he contributes to production, while the spender of the new money takes the rest. Who Shall Get It?
Thirdly, it must be readily apparent that the only real hope of expanding employment in the production of goods for sale is that the last-named effect does in fact occur: that the dollars of sales by employers increase more than the dollars they pay in wages (and other costs), so that the widening margin restores a lost prospect of profit to compensate the employer in buying tools, hiring people and producing goods for sale—in short, that prices be relatively advanced over real wages.
Finally, there is a fifth matter that those who would "print" money to cure or prevent unemployment must carefully consider. To whom and for what purpose will the government disburse the money it "prints?" It is important also because of a distinction between wartime and peacetime spending which must be clearly discerned lest the innocent be harmed and the trusting be betrayed. Spending in wartime is undertaken only in compensation for working to produce the war goods that are needed. It is not undertaken as compensation to people for not working. Here is the first great distinction between wartime spending of "printed" money and peacetime spending of "printed" money as it was practiced in the years before the war.
Wartime versus Peacetime
Again, war requires that the peacetime arrangement of production be destroyed and a new program of wartime production be initiated. Spending in wartime occurs only in aid of that transition rather than in resistance to it. When guns were to replace butter in our program of production, the money was paid first to the enterprises which produced guns and relatively denied to the enterprises producing butter, thus expanding employment opportunity in gun production at the expense of other production. And it was only as people shifted in response to the changing patterns of the nation's war demands that they received "printed" money. Spending in wartime provides profits for conforming to national need; spending in peacetime tends to siphon profits off from those who are conforming to national need for the benefit of those who are not. In peacetime the almost inevitable consequence of spending "printed" money—certainly as evidenced in the record of the past—is to resist rather than to assist the production shifts that customers and consumers dictate in the way they expend their dollars.
Thus, today, when wartime production is subsiding and peacetime production is the will of the people, there are proposals for public spending in the forms of public works, various sorts of bonuses, enlarged unemployment compensation, and foreign gifts disguised as loans. These all constitute compensations to people for not shifting their productive effort to what is demanded by the public.
No one should ever allow himself to be deceived into believing that because the government spent money in wartime to pay for production that was desperately wanted, we can in peacetime gain full employment by paying "printed" money to people for not working and so to prevent them from producing what is wanted at wages dictated by the whole community as a customer.
When people become unemployed it is their selling power, not their buying power, that has failed. They are unemployed because they are out of the market, and they are out of the market because they would charge more for the product of their labor than others will pay. This becomes a vicious circle. It is strange reasoning which would cure the situation by subsidizing their buying power when it is their selling power that is at fault. The commonsense way to break the spiral would be to acknowledge and obey the market-place decision by reducing the cost and price, instead of spending public funds to fortify the high cost and high prices and thus to perpetuate the unemployment.
Ill The Spiral to Statism
There is good reason to believe that the adoption of unlimited government spending to promote economic welfare would constitute a major victory for totalitarianism in America. By totalitarianism, collectivism, statism or whatever name one may choose, what is meant is a system in which government decides what is to be produced, by whom, when, where and in what amount and at what price or wage—in short, a system in which a bureaucrat, armed with power to fine and imprison, decides what men are to do for a living and how much living they are to get or not get for doing it.
For those who want that kind of country—and there may be many who think it is preferable to a country in which the worker's freedom to work is protected by the presence of numerous independent employers competing for his services—enactment of such legislation may properly be regarded as a major milestone. It is also possible that there are many who do not want that kind of country but who, nevertheless, think the idea of seeking full employment by government spending is a good thing to play with and to whom the step into statism it represents is not clear.
Let us suppose that in accordance with popular misconceptions we establish laws which provide a very few simple things, to wit:
(a) Profits from production are to be severely taxed.
(b) Hiring people is to be made expensive.
(c) Labor organizations shall have monopoly power to demand higher than market-place wages.
(d) Ceiling prices for all the things workers and their tools produce.
With these simple provisions, chronic unemployment is guaranteed and that is all that is required to start and to maintain the spiral into statism.
For once substantial unemployment is guaranteed, the unemployment itself constitutes the reason for the government to spend money to support the unemployed. But if the government spends money then that in turn constitutes the reason to increase the very taxes diminishing the incentive to hire people. Thus, further unemployment and bigger public spending to alleviate it is self-generated and the vicious-spiral is closed.
Under statism most people can finally be put to work by the government and the rest of them be permanently supported in not working. But most people would be forced to work for real wages which are less than the value of what they produce. If the government takes the responsibility to see that everybody gets an income it must take also the authority to make people work for compensation dictated by bureaucracy. Responsibility and authority ever go together. If the government assumes the responsibility to see to it that labor is continuously employed then labor is no longer free. Why not? Because the government assume also the authority necessary to fulfill that responsibility, and this will mean authority over labor. The assumption of authority is certain; the fulfillment of responsibility is not. Such a state of affairs may be what is wanted and each must counsel with himself as to whether it is what he wants. But no one should be such a fool as blindly to assume that he can be guaranteed a job doing what he wants to do at wages he wants. One who asks the government to guarantee him a job must sacrifice his freedom to select his job and his employer, ano^ the freedom to work or not to work at the wage the employer can pay him, which would be the full value of his services as determined by the community as a whole when functioning under voluntary, competitive markets.'
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