“Furthermore, from what we defined money to be and from our examination of the production-consumption cycle, we reach the important conclusion that there is no necessary one-to-one relationship between taxes and government expenditure. If a country is expanding industrially as the United States has since it was founded, the government is obliged to put out more money than it receives in amount equal to new capital investment in order to avoid deflation. This is new money never received in taxes. In fact the Federal government need not tax at all, except as a regulatory measure. It needs no taxes for revenue. It must never tax as much as it spends or gives away, as long as production is rising. This gives the government remarkable freedom. If a new battleship or a new highway was needed in your day, the economically sound thing to do would have been to go ahead and build, paying for it with new currency. Congress should consider only two things: ‘Does the country need this battleship, or road.’ And ‘Is the country rich enough in manpower and materials to produce it?’ If both answers are yes, go ahead and issue new money to do it.”
“Just a moment, Master Davis. What is this new money worth, if anything?”
“How do you mean that?”
“Well, in my day money could be exchanged for gold, not very easily, but it could be done. How can one be sure that this new money is anything but pieces of paper?”
“As I told you before, the government will accept it for taxes, and for services such as the postal service. But you want to know what it is worth in terms of real wealth, just as the old style dollar was worth so many grains of gold. Very well. If you present a draft for a thousand credit units or dollar bills to any one of several government warehouses, the bursar will give you an assorted group of basic commodities of weights and standards specified by law.”
“Where does the government get these commodities?”
“Grows or makes them, buys them in the open market, and may occasionally accept some of them as taxes.”
“That seems awfully cumbersome compared with the gold standard.”
“It is cumbersome, but it’s worthwhile for it gives a much more nearly stable medium of exchange than gold. As a matter of practice the government keeps very small stocks of commodities because with a stable standard for money the public prefers cash or credit at the Bank of the United States to the trouble of handling bulk in commodities. They are satisfied to know that they can get real wealth in specified amounts, if they choose.”
“How about foreign trade? This sort of money would be a nuisance there.”
“Gold, as well as platinum, silver, and other convenient commodities, is still used in foreign trade exchange. The government buys and sells these commodities in the open market as a convenience to its citizens.”
“I guess that clears it up. It still seems complicated.”
“It is, Perry, more or less. But it isn’t anything to the anarchistic maze that your old money system was. Let’s get back the tax problem. The fact that there is no necessary one-to-one relationship between taxes and government expenditure is startling at first, but is evident from the nature of money. Money in the hands of an individual is a token of a debt to one of us owed by all of us. This token in the hands of the government states that all of us, i.e. the government, owe a debt to all of us, i.e. the government—an absurdity. One cannot owe oneself a debt in any but a poetical sense. Money in the hands of the Federal government is a scrap of paper and ink. It is significant only when held by individuals or groups of individuals.
“We recognize nowdays that Federal taxation is a deflating process, and that Federal government spending is an inflating process. Each process has important secondary effects through which it can be used to regulate for the general welfare. Taxation may be used to prevent unwholesome concentration of wealth. It may also be used to prevent too great a difference in the net income of individuals. The issue of new money is an even more powerful instrument in shaping our economic life to suit our wishes. It is a means of ensuring social security for the entire population through the dividend or inheritance checks. It can stimulate production and prevent inflation of prices through the use of the discount. It is used to assure an equal start for every child. In fact the knowledge of how to use money enables us to inhibit or encourage almost anything without coercion. If we desired, we could institute as near complete a socialism in the United States as we wished, without confiscation and taking over the tools of production. The present set up suits us now. We can change it if we like, when we like, for we understand the economic mechanism. The economic determinism of Marx is an exploded bugaboo, and the American people are the masters, not the slaves, of their economic system.”
Davis took a sip of sherry, and looked slightly giddy. “You’ll forgive my enthusiasm, I trust. This is my subject and I am sometimes carried away by it.”
“I am not surprised,” replied Perry. “You have reason. I confess I don’t see all those implications just yet, but it sounds amazing.”
“You will see,” returned Davis, “and by the very method we used. You can set up this game with the chessmen to cover every possible case. For example, throw in some professional men and observe that the cycle is unchanged. Provide a foreign trade with a balance in our favor and see how the cycle can be made to balance. Then a foreign trade in which goods are dumped on us and see how it dislocates our system. Then change the supply to balance it anyhow and observe how we can benefit. Play two tables and let trade flow between the tables. Set up a farm production cycle on one and factory on the other. Throw in corporate organization, trust funds, re-discounted paper, and so forth. Have a labor leader organize the workers and stage a strike. Get a lot of bank credit passed around and then make a run on the bank. Issue stock and watch it fluctuate in market price. Declare war and put industry on a war basis. Inflate the currency. Deflate it. Save your profits to expand your business. Cut prices to meet competition. Get squeezed on your lease. Start out from primitive barter, work up the present system with the dividend, the discount, and the National Account. Do all of those things, but be sure to observe the rule of duplicating the structure of the real world. It’s fascinating and you will teach yourself more about money and economics than anyone else can possibly teach you. Bear in mind the fundamental theorem that we formulated about the necessity for new money for capital expansion. If you find any situation which appears to contradict it, or any of our other conclusions, go back and do it over, writing down each step in detail. If you don’t find your error, give me a call. But I’m sure you will.7
4 The reader need not accept this without proof. Fortunately the records of the period are available in the Washington Archives. See statistics of the Department of Commerce, et al., for those years.
The Author
5
ax2 + bx + c=0 x= -b ± √b2-4ac
2a
The full solution of this general problem of the second degree can be found in any textbook of primary algebra.
The Author
6 The reader is urged to make this set up and play it through as he reads. Otherwise the value of the demonstration will be lost. If chessmen are not available; bottles of ink, spools, tin soldiers, and so forth, will serve. Beans, dominoes, or marbles will serve as counters.
The Author
7 Several typical problems have been worked out for the benefit of the reader and appear as an appendix at the end of the book. A typical modern cycle is given showing the dividend and discount in operation. Especially interesting are examples of twentieth century economics showing the ridiculous impasses into which our forefathers fell simply through failure to understand the nature of money.
The Author
X
Perry followed Master Davis’ advice and spent several days making up problems to play out with his economic tin soldiers. He drafted Olga and Diana into the game, and they solemnly played through various combinations of financial and economic situations. At first the women played simply to be agreeable, but they became fasci
nated by the strange possibilities of early day finance. Olga developed remarkable skill in stock market and commodity manipulation, and amassed fabulous fortunes on paper. Diana protested this and maintained that it obviously would be illegal for anyone to do such wicked things with the necessities of life. References to history left her only partly convinced. Diana liked to run factories but was a failure as a banker, as she could not see any sense in interest and was reluctant to clamp down on a debtor. Both of them admitted that they had not understood the operations of finance and industry before, and had rather taken the economic regime for granted. Perry found himself in the pleasant position of being able to instruct natives of the new America in the workings of their own environment.
In due course he felt that he understood fully the workings of both economic systems, the old and the new, and felt capable of analyzing correctly any possible economic system. Nevertheless he found growing up inside a curious distaste for the modern system. He now understood the mechanics of it, true, and realized that its mathematical theory was correct, but notwithstanding it did not suit his taste. He decided to call Davis and discuss it with him.
After a decent interval of drink and smoke, Davis opened the conversation.
“What is it, my boy? Found a black swan?”
“Why a black swan?”
“That’s the classic example of the fallaciousness of the deductive method. The syllogism ran ‘All swans are white. This bird is a swan. Therefore this bird is white.’ Along in the nineteenth century somebody found a black swan and the perfect syllogism was wrecked.”
“No, I haven’t found a black swan, but I do have a problem.”
“I don’t think you will find a black swan in the conclusions we have reached. You’ll find many problems not covered by the Law of Capital Investment. But the law itself is simply a statement of the workings of an invented mathematical entity, money. Sometimes we get into dilemmas through a failure to distinguish between mathematical necessity and objective realism. Marx fell into that error and it vitiated his whole work. For example and in particular, his definition of value. Did you happen to notice that we spoke of cost in money and price in money and never once mentioned value?”
“Now that you speak of it, yes.”
“Can you define value?”
“Well, perhaps not. I seem to know what it means.”
“Marx defined it as a measure of the number of work-hours required to produce a given article. His definition was meaningless in the real world, and he ran into all sorts of difficulties, which he tried to avoid by patching the definition. But the definition was wrong and his beautiful, monumental, logical structure was invalid. He was important only as an agitator against social injustice and he contributed more error than truth to the art of economics. He made a similar mistake in assuming that a man lives in his belly rather than in his head. Animals do, but not men. They must serve their bellies, it is true, but aside from that, their motives may have nothing to do with economic considerations. Consequently Marx’s Economic Determinism was not valid. But I’ve digressed again. Value in economics is a relationship between an individual and a thing or a service. It is a personal relationship which expresses how much a particular individual desires a thing or a service. Economic value of a thing or a service approximates the average of the summation of the personal values placed on the thing or service by the individuals who constitute the consuming public. Value plus purchasing power in the hands of the consuming public constitutes effective demand. Price is a function of supply and demand. Value may be expressed in dollars and cents through this complex functional relationship, but value is not price, and is not a measure of work-hours, it is a word used to express the desire of an individual to possess a thing or a service. I am not giving the word a new definition; I am simply stating explicitly the observed fact that such is what people mean when they speak of value. Sale takes place when the value to the prospective buyer is greater than the value to the owner. Note the difference between Marx’s idea of value and that which I have expressed. Marx attempts to measure value by the amount of labor expended. Yet it is an obvious fact in the real world that an inefficient, careless, or unimaginative worker can slave for hours to produce an article practically worthless, that the public won’t buy, valueless. An intelligent skillful inventive worker may turn out in a short time an article that the public will snap up at once at a high price. Which has the greater value?”
“The one made by the better workman, of course.”
“Of course. There is an old maxim which states it neatly: ‘The value of a thing is what that thing will bring.’ Even in our present system in which the government ensures the maintenance of sufficient purchasing power, if an entrepreneur is so inefficient that he produces articles of value less than cost, he goes broke. However, I’ve digressed again. I’m a garrulous old man. What was it you wanted to talk about?”
“Oh no, I enjoyed your digression and it cleared up another point. As to what is bothering me, I believe I understand the present financial system and I see that it works more smoothly than the one in my day, but there are still things about it that I just can’t see the justification for. Especially this dividend or inheritance check. Why in the world should everybody in the country be handed money to spend whether they work or not? I concede that it is all right for widows and orphans, the sick and the blind and crippled, but why support in idleness some big overgrown lunk who is too lazy to support himself? Why put a premium on laziness? Here is my idea: let’s increase the discount if necessary, and give a big dividend to those who need it but can’t support themselves, but if a drone won’t work, let him starve. Don’t let him live off the rest of us.”
“I see your point. It irks you to see anyone at all who is able to work permitted to live without working. But why do you consider work a virtue?”
“Well, these idle persons use up goods that the workers might otherwise enjoy.”
“Do you know of anyone who doesn’t have everything he wants of the good things of the world?”
“Well, no.”
“Then how can you say that the idle are consuming things that rightfully belong to workers?”
“Well, it seems obvious.”
“You mean that it seems logical to you. But if you can’t find a case in the real world, can your logic be correct? I’m afraid you’ve encountered a black swan.”
“Maybe so. But how can you justify able-bodied men living in idleness?”
Davis pursed his lips. “Ethics is more a matter of opinion than a science. Morals are customs rather than natural law. However if you want a moral argument to justify the situation, I’ll give it to you. Did anyone live without working in your day?”
“Oh, those on relief did.”
“I’m not speaking of them. They were presumed to be people who wanted to work but couldn’t get work, and we have proved mathematically that they couldn’t. I mean others who might have worked, but wouldn’t, yet lived well.”
“Why, no.”
“Positive? How about coupon clippers, land owners, owners of capital who were not in management? Idle sons and daughters of the rich? Were there none of those?”
“Oh yes, of course. A few thousand perhaps. But they were entitled to be idle if they chose. Either they or their fathers had earned the money. A man is certainly entitled to provide for his children.”
“All the idle today are the rich sons of hard working fathers.”
“Are you trying to kid me?”
“I didn’t jest, but I did use a figure of speech. Tell me, what are the factors that enter into production of real wealth?”
“Well, there is labor, of course—and raw materials and land.”
“What were the factors when we set up our game of production and consumption?”
“Oh yes—and capital, and enterprise or management, and invention or technique, government came in there too, but I am not sure that it is a factor in production.”
“I
t is, as you will see. Let’s examine these factors and attempt to make a rough estimate of their importance. Work is basic, certainly. In any but the most Elysian of South Sea islands, man must work to live. Marx made the mistake of thinking that because it came first, it was the only factor worthy of consideration, even though his writings implied the existence of others. Enterprise is more important than work. Without enterprise, management, directive ability, and imagination, our present highly productive culture would be impossible. It is a form of creative work, more difficult than the imitative work of the laboring men, and absolutely necessary to a high rate of production. Capital or rather capitalization is essentially the willingness of the owner of accumulated wealth to risk it in the hope of acquiring more. Its return is interest. We don’t think very highly of it anymore. Capital is plentiful and by direct competition through the Bank of the United States we have driven interest down to a point where the return is commensurate with the risk. Franklin Roosevelt taught us that lesson with the Reconstruction Finance Corporation and the Federal Housing Administration.
“I said that government is a factor. It is, if for no other reason than through its police powers it makes the environment safe to work in. Without it no one could accumulate wealth and the creation of wealth on a large scale would not be feasible. Which is another way of saying that individuals acquire wealth only at the sufferance of the community and the community may require any tribute necessary to promote the general welfare. The government performs many other useful services too numerous to mention, but you see my point.
“Land and raw materials are obvious factors in the production of wealth. In the simplest economy labor must have something to fabricate and some place to stand on in order to produce wealth.
For Us, the Living Page 19
