A Message To American Labor Leaders
The "crime of 1873"
My title is a paraphrase of the 1896
battle-cry of William Jennings Bryan during his presidential bid. He was
talking about 'crucifying mankind on a cross of gold'. Bryan was protesting
against the unconstitutional closing of the U.S. Mint to silver. Congress
inadvertently suspended the unlimited coinage of the standard silver dollar,
which it had no authority to do under the Constitution. Bryan called it
"the crime of 1873".
No battle-cry was issued during this
year's presidential campaign by the finalists in protest against our present
unconstitutional paper money system, even though it has started a wave of
unprecedented unemployment that would sweep through the land in the wake of
the current financial crisis and the official response to it: further serial
cuttings of the rate of interest.
Politicians have long ago vacated the
field of warning people about the danger caused by violations of the monetary
provisions of the Constitution. It is now incumbent on the leadership of
American labor to call the workers to rise in
protest against the job-destroying policies of the government. Please take a
few moments and bear with me as I go through a simple monetary explanation of
the job-destruction process that has been going on in America for the past thirty
years through serial cuttings of the rate of interest, that
will reach fever-pitch next year.
Serial rate-cuts destroy the wage fund
Suppose you are a worker taking home
$50,000 a year in wages. When your income-flow is capitalized at the current
rate of interest of, say, 5 percent, you arrive at
the figure of $1,000,000. The sum of one million dollars or its equivalent in
physical capital must exist somewhere, in some form, the yield of which will
continue paying your wages. Capital has been accumulated and turned into
plant and equipment to support you at work. Part of your employer's capital
is the wage fund that backs your employment. Assuming, of course, that no
one is allowed to tamper with the rate of interest.
Suppose for the sake of argument that
the rate of interest is cut in half to 2½ percent.
Nothing could be clearer than the fact that the $1,000,000 wage fund is no
longer adequate to support your payroll, as its annual yield has been reduced
to $25,000. This can be described by saying that every time the rate of
interest is cut by half, capital is being destroyed,
wiping out half of the wage fund. Unless compensation is made by adding more
capital, your employment is no longer supported by a full slate of capital as
before. Since productivity is nothing but the result of combining labor and capital, the productivity of your job has been
impaired. You are in danger of being laid off -- or forced to take a wage cut
Lemming-like rush into certain disaster
I have news for you. Employers are not
in the habit of compensating for the destruction of capital caused by falling
interest rates. Rather, they welcome the cut as manna sent from heaven. They
are kissing the hand that is strangling them. They are as badly misinformed
about the lethal effects of a falling interest rate structure as the rest of
society. They confuse a low interest rate structure with a falling
one. No less than employees, employers are hurt by the destruction of capital
caused by serial rate cuts. After all, it is their capital, too, that is
being destroyed. Nevertheless, they accept at face value the official
propaganda line that "falling interest rates are good for you".
Employers are like lemmings running to their own certain disaster.
The "crime of 1971"
In the euphoria of celebrating the
advent of the irredeemable dollar in 1971, politicians and economists have
'forgotten' to look at the untoward consequences of the New Brave World of
synthetic credit. Not only was the dollar destabilized by the 'crime of
1971'; interest rates were cut adrift as well. The U.S. Treasury was soon
forced to print 16 percent coupons on its 30 year
bonds which would not otherwise sell.
This did not present much of a problem
to the Treasury, since interest on bonds was now payable in irredeemable
dollars. The same paper, the same amount of ink, and the same printing press
would produce the coupon at the same cost, whether it carried the figure 4 or
16, with which the obligation would be discharged.
However, bringing down the rate of
interest from 16 percent to its normal level of 4 percent was a different story altogether. It meant that
the rate had to be halved twice from 16 to 8 and from 8 to 4 percent, destroying three quarters of the wage fund. Is
there any wonder why so many well-paid American industrial jobs were driven
offshore in the intervening years, as production was being outsourced?
Academia and media were silent on the
real cause of the de-industrialization of America: the destruction of capital
through serial rate-cutting. They are still silent as they expect that the
Federal Reserve will do more money magic and pump still more money into the
economy, causing rates to fall still more. They are oblivious to the fact
that this will destroy still more capital in the process, pulling more rug
from underneath employment.
The problem is vanishing capital. During
the past thirty years capital was destroyed across the board as the long-term
rate was pushed down from 16 to 4 percent, and the
short-term rate from 22 to 1 percent. The process
is insidious: only one in a million can identify the causal relation between
vanishing interest and vanishing capital. As a result the captains of
industry are not aware of what is happening to the capital of their
enterprise until it is too late and they are forced to fold tent. Even then,
they have no idea what has hit them. It would never cross their mind to blame
irredeemable currency and the serial cutting of interest rates for the
disaster. Hat in hand, they go to Washington to beg for bailout money with
which they can shore up their capital structure. They don't realize that
Washington will claw it all back just as soon as the next round
of rate cuts are announced.
Make no mistake about it: vanishing
capital does not disappear without a trace. It is being siphoned away
clandestinely from the capital account of businesses, to benefit the issuers
of irredeemable dollars and their cohorts. These honorable
gentlemen cut rates with their right hand and grab the obscene profits thus
generated on their bond portfolio with their left hand. It is legalized
embezzlement. Keynesians say that the government can turn the stone into
bread through driving down the rate of interest to zero. It would be more
accurate to say that the government, in a vampire-like fashion, sucks the
blood of labor through the bleeding of their wage
The fate of the auto industry
As a result of vanishing capital the
American auto industry, not so long ago the envy of the world, is tottering
at the brink. The statistical likelihood of the three giant auto-makers
running out of capital at the same time is nil. The fact that they do is the
evidence of outside interference. The capital of the auto industry has been
eroded and ultimately destroyed by the serial rate cuts of the Federal
Reserve. It is true that the industry has been adding new capital in the form
of state-of-the-art technology. But it could not keep up with the relentless
serial rate-cutting. The Fed can cut rates faster than the auto industry can
build and equip new factories.
The blame for the suffering should be
put squarely on the criminal check-kiting conspiracy between the Treasury and
the Federal Reserve. They issue and swap liabilities which they are neither
willing nor able to meet. It is a charade, pretending to serve the interest
of the national economy when, in fact, they are destroying the nation's
The destruction is not visible to the
naked eye. The details are in the book-keeping. That's why the sabotage is so
hard to detect. As the rate of interest is being pushed down, it makes
inroads on the wage fund. Employers are unable to meet their payroll because
the falling interest-rate structure calls for ever larger capital to fund it.
Unemployment is the result, which is becoming widespread and chronic.
Under a stable interest rate structure
none of this would happen. The auto industry and its workers would have a
bright future, as they did before the 'crime of 1971' hit them. Every worker
who is being laid off should be reminded of that fact. They should know that
they are being sacrificed on the altar of Mammon. They should understand that
they are being crucified on the cross of paper money.
Capital destruction at an ever faster
Please also note that the rate of
capital destruction is accelerating as we are getting closer to the black
hole of zero interest. In principle halving the rate can continue indefinitely.
In reality, ever smaller absolute cuts will have ever greater destructive
effect on the wage fund. While in the 1980's it took an 8 percent
decline to wipe out half of the wage fund, right now a 2 percent,
and thereafter a mere 1 percent cut will do the
trick, causing the same amount of damage to employment. This means that the
level of economic pain increases ever faster, soon reaching the point where
it will become unbearable.
The situation is more than desperate.
The political process has failed. The president-elect has committed himself
to the status-quo. He will not challenge the unlimited power usurped by
the Fed, as his nomination of the president of the Federal Reserve Bank
of New York to the post of Treasury Secretary indicates. This nomination
evoked the comment, echoed in the New York Times on November 25, that "Geithner deserves retirement, not
promotion". (He is 47.) Obama's utterances during the election campaign
seem to suggest that he believes in Keynesian prestidigitation, turning the
stone into bread through serial cuts in the rate of interest, and in Friedmanite money magic of the printing press.
Labor's finest hour
The only remaining hope the country has
is that labor will not tolerate the ongoing destruction of capital. It will not take it lying
down any more. It will take to the streets and confront the small reactionary
elite running our monetary regime, including Geithner. This is the most
destructive system ever devised: the regime of irredeemable currency. Every
time it has been tried in history it failed miserably. As the current crisis
clearly shows, this time is no different. What is different is that this time
the entire world is on irredeemable paper money. That has never happened
before. Accordingly, the stakes are immeasurably higher as irredeemable
currency is getting ready to self-destruct.
Labor must take the initiative and demand that Congress put an immediate
end to the mindless destruction of capital. Congress should stop the Federal
Reserve from pursuing a monetary policy of open-ended deliberate
interest-rate cuts. The economy is now like a runaway train with brakes
disabled, entering a downhill section of tracks. Crash is certain. At the end
of the run the country could be completely denuded of capital, with a large
part of its labor force idled.
Labor could be the savior of the country in
forcing a return to constitutional money at the eleventh hour, by demanding
that the Obama administration open the U.S. Mint to gold and silver. That
measure would enable the brakes on the money-train. It would stabilize
foreign exchange and interest rates and stop the shredding machine, now
spinning out of control, from destroying capital. This would be labor's finest hour: saving the United States from
financial ruin and ignominy.
This country has an intelligent,
dedicated, and industrious labor force. The best in
the world. It should step into the breach. Time for street action has come,
if we want to prevent blood from flowing in the streets later.
By the same author:
Revisionist View of the Great
Depression, May 11, 2002
The Central Banker, Quartermaster General of Deflation, January 1, 2003
Gold Is the Cure for the Job-Drain, September 23, 2003
Real Bills and Unemployment, September 26, 2005
Unemployment: Human Sacrifice on the Altar of Mammon, September 30, 2005
Is Our Accounting System Flawed? June 16, 2008
Revisionist Theories of Depressions: Can It Happen Again? November 4, 2008
Antal E. Fekete
Professor, Intermountain Institute of
Science and Applied Mathematics, Missoula, MT 59806, U.S.A.
DISCLAIMER AND CONFLICTS
DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
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IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
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