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Summary for the busy executive
Labor vitally depends on
the state of industrial capital. Wage rates cannot increase except in
consequence of an increase in the per capita quota of invested capital.
Conversely, a decrease in that quota means capital decumulation
that lowers wage rates, ultimately leading to unemployment.
The
regime of fiat currency has destabilized the interest-rate structure with the
result that bond speculators can siphon off capital from the balance sheet of
productive enterprise surreptitiously. There are laws against
computer-hacking. There are no laws against hackers entering the balance
sheet of industrial enterprise surreptitiously, and making off with illicit
gains through risk-free profits in bond speculation.
The
resulting insufficiency hurts labor even more than it hurts capital. Owners
of capital can protect themselves through exporting their remaining funds to
low-wage countries. The trouble is that well-paid industrial jobs are
exported along with capital, never to return. American labor is stuck with low-paid
service jobs such as flipping hamburgers. The outlook is even bleaker. As
interest rates keep falling, even hamburger-flipping may go the way of
steel-making. Mass unemployment, directly attributable to fiat currency
destabilizing the interest-rate structure, is a real threat.
Invisible arson
If a part of your
industrial plant burns down, you have to report the capital loss in the
balance sheet and charge the loss against future earnings. Intangible capital
loss is caused by falling interest rates, because it reveals that past
investment in physical capital has been made at too high a rate as shown by
lower rates now available. There is no way getting around the fact that the
cost of servicing debt, contracted earlier at a higher rate, is made more
onerous by the falling interest-rate structure. The present value of
outstanding debt rises, because capitalizing the same stream of payments at a
lower rate of interest results in a higher capital value. Yet nobody is
reporting a capital loss when falling interest rates decimate the value of
industrial capital, and nobody makes provision for replenishing impaired
capital by charging the loss to future earnings. Society lives in a
fool’s paradise thinking that it can eat into capital, no tightening
belts is necessary, and the day of reckoning will never dawn.
Why
is there no requirement to report capital losses due to falling interest rates,
and why is the firm allowed to get away without putting aside a loss reserve
to compensate for losses arising out of the falling of interest rate
structure? Why is a loss caused by real fire treated differently from a
loss caused by invisible fire? Could it be part of the “invisible
arson” to cover up the footprint of the central bank’s
counter-productive monetary policy, namely, open-market purchases of bonds?
To
be sure, the introduction of out-and-out fiat money in 1971 was invisible
arson, without flames and smoke, but all the greater devastation of the
capital of productive enterprise. Mainstream economists have
„forgotten” to investigate the untoward consequences of the
regime of fiat money, especially the damage it has caused through the
destabilization of interest rates.
It
is incumbent upon labor leaders to demand that damage caused by capital
losses be repaired whether they were caused by real fire or by the invisible
arson of falling interest rates. In either case capital supporting laborers
in production has been impaired and unless the loss is charged to future
earnings, wage rates will be squeezed and ultimately the economy will succumb
to unemployment. Owners of capital should not be allowed to bolt for greener
pastures, leaving labor behind in the lurch.
Silent textbooks
Textbooks on accounting
do not mention the need for setting aside loss reserves to repair capital in
the wake of falling interest rates. Hundreds of codes that have been written
since Luca Pacioli invented double-entry
book-keeping are silent on this subject as well. Why? The answer to this
question is found in the fact that a move in the rate of interest used to be
akin to continental drift: it would take decades before changes were
noticeable. There is an additional problem. The decline in interest rates, if
it ever occurred, was necessarily limited under the gold standard. Savers would
never let interest rates fall indefinitely. They would step in, sell the
overpriced government bond and would not buy them back until the trend in
interest rates were reversed.
A
rapid decline of interest rates that was unthinkable previously has been made
possible after the introduction of global fiat currency in 1971. Moreover,
beforehand the decline could not continue indefinitely as gold withdrawals
would sooner or later put an end to it. But this obstruction had been removed
by the global regime of fiat currency. Bondholders and depositors could no
longer withdraw gold. The lack of obstruction to stop the fall of interest
rates means that businessmen, once lethargic, stay lethargic. They understood
what the threat of interest rates falling further meant for them. No matter
how low interest rates were, they would not look attractive as further fall
would make their investment fail. This is the conundrum of the deflation in Japan,
where interest rates still keep falling from very low levels. Mainstream
economists say that it is a reflection of the high saving propensities of the
Japanese people. This is, of course, nonsense. It is the reflection of the
lethargy of the Japanese businessmen. They do not see the light at the end of
the tunnel. They do not see the end to the decline of interest rates.
By
1971 accounting was politicized. It was not in the interest of the powers
that be to alarm people about dangers threatening them by virtue of fiat
currency. Book-keeping rules were relaxed accordingly. The transition from
the gold standard to irredeemable currency was hailed as a positive
development, all benefits and no setbacks. The greatest con-job in all
history was to foist the fiat dollar on an unsuspecting world.
Anti-industrial revolution
Labor leaders should also
demand an answer to the broader question: in whose interest does the U.S.
government maintain a reactionary monetary regime, that of fiat currency with
a one-hundred percent mortality rate, as proved by history? The introduction
of this regime could be described, in the words of Ayn
Rand’s Atlas Shrugged, as the “anti-industrial
revolution,” the effect of which is the de-industrialization of America
as shown by the disappearance of the apparel industry, shoe industry, steel
industry, VCR and TV set manufacturing industry, with the auto industry not
too far behind.
It
is no use trying to explain the demise of these industries in America with
„progress” in the international division of labor. It is no use
trying to compare it to the demise of the horseshoe industry and
candle-making in the 19th century. When horseshoe production was
abandoned, no American jobs were exported. In the present instance steel jobs
are exported and now steel has to be imported. Why? Because the “paper
aristocracy” of America finds the export of paper (read: paper money)
more profitable than the export of steel.
The
government and politicians take credit for “job-creation”. But
the truth is that the jobs created are mostly make-believe jobs. What has been
hailed as a heroic job-creation program appears, in the present light, a
miserable effort at damage-control by the same government that has destroyed
well-paid industrial jobs in the first place through the introduction of an
unconstitutional and anti-labor monetary regime.
“Thou shalt not push this crown of thorns on the brow of
labor”
This regime was
originally promoted as a savior of labor. „Thou shalt not push down
this crown of thorns on the brow of labor; thou shalt not crucify mankind on
this cross of gold!” cried William Jennings Brian, condemning the gold
standard, during his failed presidential election campaign in 1896. These
words have reverberated until 1933 when F.D. Roosevelt hit the war-path to
knock out gold money for once and all. He sabotaged the constitutional
monetary regime of the United States by grabbing people’s gold. It is
important to understand why Roosevelt’s monetary tinkering was
anti-labor, in spite of it being promoted as a move to raise prices and to
restore full employment.
By
1932 there were signs that the severe recession was over. During the
presidential election campaign rumor-mongers spread the word that Roosevelt,
once elected, was planning „to go off gold”, following the 1931
example set by Britain. Roosevelt never issued a denial and, after elected,
he made himself unavailable for direct questioning. Apparently he was
relishing the prospect of a banking crisis that was developing in the wake of
those rumors. He could grab much dictatorial power if the country lay
prostrate financially on Inauguration Day, which is exactly what has
happened. Was it all planned? Be that as it may, after inauguration he
railroaded unconstitutional monetary legislation through a servile Congress,
including the incredible measure of confiscating the gold of the people and
writing up its value afterwards.
“Legal and moral chaos”
The ‘profit’
from the government’s arbitrary measure of marking up the value of
confiscated gold was taken right out of industrial capital. In 1935 Supreme
Court justices McReynolds, Van Devanter,
Sutherland, and Butler wrote their minority opinion criticizing the majority
in the case Nortz v. the United States, re: reneging on
the promise of gold certificates issued by the U.S. Treasury.
“These were contracts to return gold
left on deposit; otherwise to pay its value in currency… We conclude
that, if given effect, the enactments here challenged will bring about
confiscation of property rights and repudiation of national obligations.
Acquiescence in the decisions just announced is impossible; the circumstances
demand a statement of our views. To let oneself slide down the easy slope
offered by the course of events and to dull one’s mind against the
extent of danger… that is precisely to fail in one’s responsibility.
“Just
men regard repudiation and spoilation of citizens
by their sovereign with abhorrence; but we are asked to affirm that the
Constitution has granted power to accomplish both. No definite delegation of
such power exists; and we cannot believe that the far-seeing framers, who
labored with hope of establishing justice and securing the blessings of
liberty, intended that the expected government should have authority to
annihilate its own obligations and destroy the very rights which they were
endeavoring to protect. Not only is there no permission for such actions;
they are inhibited. And no plentitude of words can conform them to our
charter.
“The
federal government is one of delegated and limited powers which derive from
the Constitution. It can exercise only the powers granted to it. Powers
claimed must be denied unless granted… The fundamental problem now
presented is whether recent statutes passed by Congress in respect of money
and credits were designed to attain a legitimate end. Or whether, under the
guise of pursuing a monetary policy, Congress really has inaugurated a plan
primarily designed to destroy private obligations, repudiate national debts,
and drive into the Treasury all gold within the country, in exchange for
inconvertible promises to pay, of much less value.
“Considering
all the circumstances, we must conclude they show that the plan disclosed is
of the latter description and its enforcement would deprive the parties
before us of their rights under the Constitution. Consequently the Court
should do what it can to afford adequate relief… The end or objective
of the Joint Resolution [of June 5, 1933] was not “legitimate”.
The real purpose was not ‘to assure uniform value to the coins and
currencies of the United States’, but to destroy certain valuable
contractual rights…
“It
was not intended to give Congress the power under the law to repudiate the
obligations in question… No such power was ever granted by the framers of
the Constitution. It was not there then. It was not there yesterday. It is
not there today. We are confronted with a condition in which the dollar may
be reduced to 50 cents today, to 30 cents tomorrow, to 10 cents the next day,
and to 1 cent the day after…
“Under
the challenged statutes it is said that the United States has realized
profits amounting to $2,800,000,000. But this assumes that gain may be
generated by legislative fiat. To such counterfeit profits there would be no limit;
with each new debasement of the dollar they would expand. Two billions might
be ballooned indefinitely ― to twenty, to thirty, or what you will.
“Loss of reputation for honorable dealing
will bring us unending humiliation. The impending legal and moral chaos is
appalling.”
Savior or saboteur?
Prophetic words! As a
consequence of gold confiscation the recovery of 1932 aborted and the economy
was plunged into the deepest depression ever. The value of government bonds
shot up and interest rates started plunging. Industrial capital was
decimated. The value of productive capital did not disappear without a trace.
It was illicitly transferred to financial capital in the form of risk-free
profits from bond speculation. It was arson that burnt down the industrial
landscape, and made laborers fugitives on their home ground. Roosevelt was
the invisible arsonist, as sentenced by the minority of dissenting justices
on the Supreme Court of the United States in 1935. Today the saboteur is
celebrated as the savior.
Roosevelt’s
duplicity is unprecedented. In a Memo he stated: “Speculation, where
[participants] could earn money without work, was the pipe dream… which
led to growth of special interest that did not coincide with the interest of
the nation as a whole. We cannot allow economic life to be controlled by a
small group of men… tinctured by the fact that they can make huge
profits, not from production but from lending money and marketing
securities… we cannot tolerate this opportunistic, selfish attitude…”
Risk free bond speculation
It would be a mistake to
believe that with the Great Depression behind us, the issue is settled. Far
from it. An even greater scourge is upon us. The interest-rate structure is
still acting as the wrecker’s ball on the economy. Falling interest
rates still make it possible for speculators to derive risk-free profits or,
in the words of the dissenting justices, ‘counterfeit profits’.
In
fact, Roosevelt’s monetary legislation is ultimately responsible for
making bond speculation risk free. Speculators take their clues from the open
market purchases of bonds by the Federal Reserve (Fed). They know the Fed has
to buy the bonds in the open market. All that bond speculators have to do is
to forestall Fed action. They buy just before the Fed does, and sell just
after. In this way they can consistently derive risk-free profits. Roosevelt
created a situation which is a thousand times worse than what he has
condemned. The “huge profits” to which Roosevelt referred to in
his Memo were at least not risk-free. Roosevelt’s confiscation of
people’s gold introduced an era of relentlessly rising bond prices,
offering risk-free profits to bond speculators.
The
worst part of the arson is that it is self-perpetuating. The fall in interest
rates is open-ended. No matter how low they go, the threat that interest
rates may go even lower acts as a deterrent to businessmen to take out the
loan. Every attempt at recovery is nipped in the bud. By contrast under a
gold standard a fall in interest rates is self-limiting. It is resisted by
the savers who will progressively withdraw gold as rates fall. For this
reason under a gold standard there is no bond speculation. Bond prices and
interest rates are stable.
Gold, the protector of the people
We must understand that
gold is the only competitor that government bonds have. Savers, if not
satisfied with the rate of interest offered by the government on its bonds,
can hold on to the gold coin of the realm. Once gold is confiscated, the
safest place to park one’s savings is the government bond. People are
at the mercy of the government (and adventurers in government). Gold is the
protector of the people against financial dictatorship.
Similarly,
if the rate of interest is pushed too far down by the banks, savers can
register their protest by putting their savings into gold with the resulting
squeeze on bank reserves. Paper
currency is no substitute for gold
coins in this regard. If dissatisfied savers had withdrawn their money
from the bank and parked their savings in paper money, they would have been
jumping from the frying pan into the fire: exchanging a low rate for zero
rate. They would have acted contrary to purpose. The only effective way to protest
low interest rates is to sell the overpriced bond and keep the proceeds in
gold coins until interest rates rise. At that time savers could buy back
their bonds at a lower price. Therein we find the rationale for gold. This is
what gold coins are for: to give savers clout so that they may not be at the
mercy of the banks and the government.
Grabbing
the gold coin of the savers is highway robbery. What the Roosevelt
administration did to them was even worse. It made people helpless in the
face of the banks’ design to plunge them into permanent debt slavery.
As Roosevelt forcibly removed the gold coin, there was an additional effect:
destabilizing the rate of interest. Freed from competition, the price of
government bonds soared and interest rates plunged. As explained above,
plunging interest rates eroded capital values across the board. The weakening
capital structure meant that firms lost pricing power. Prices fell together
with interest rates. Falling prices caused interest rates to fall more. A vicious
circle was set in motion. The effect was cumulative. The devastation of their
capital by falling interest rates bankrupted firms, exacerbated by the
domino-effect. Financially healthy firms were knocked down by the fall of the
financially weak. The Great Depression hit the nation and the world.
The World in the Grip of a Mistake
Keynes was ready with an
explanation: the Great Depression was caused by the “contractionist bias” of the gold standard.
Government propagandists took over from him and wore down upright monetary
economists who made a case for maintaining the constitutional monetary
standard. Through bribe, blackmail, and attrition upright monetary economists
were eliminated from the scene. If allowed to write ‘without fear and
favor’, they would have alerted the world that permanently falling
interest rates not only plunge the economy into deep depression, but also
kill any recovery attempt in the bud. No matter how low interest rates are,
the prospect of a further fall will prevent businessmen to take the loans. That is why a permanently falling
interest rate structure must be avoided at all hazards. Under the regime of
fiat currency there is no guarantee that the fall will hit bottom, precisely
because of the presence of risk-free bond speculation. By contrast under a
gold standard rising bond prices invite profit-taking. Bondholders will sell,
and stay invested in the gold coin of the realm. They will not buy back the
bonds until interest rates come back to acceptable levels. The ‘black
hole of zero interest’ is cordoned off. The gold coin in the hands of
the people is a sine qua non of a
durable monetary system. Without it both runaway inflations and deflations
are possible.
The
world has been in the grip of a colossal mistake, the belief that the gold
standard was the cause of deflation and that gold is the enemy of labor. The
economic damage caused by this mistake has been enormous. But it has also
served as camouflage for the real culprit: the regime of fiat currency. The
amount of taxpayer money wasted on the altar of Moloch defies counting. There
is no way to calculate the cost of all the counter-productive and
self-defeating government measures inflicted on the nation and on the world.
The damage caused by the consequences of destabilizing foreign exchange and
interest rates is incalculable. The chief loser was labor. In order to see
this clearly we must look at their effect on the marginal productivity of
labor.
Marginal productivity
Each worker has his or
her productivity measured by the annualized percentage of value added to the
product as it is passing through the production process. If we rank all
workers in the labor force according to increasing productivity, we find that
those at the low end of the spectrum may be left idle. For example, some
pensioners still wanting to earn wages may be too old to qualify. Similarly,
people with physical or mental handicap could be judged unfit for industrial
employment.
At
the same time it should be pointed out that many handicapped people can still
find industrial employment, provided that they are productive enough.
However, it is not heartlessness to observe that the responsibility to
provide meaningful occupation for handicapped people without means of
self-support, in order to help them to become useful members of their
community, rests with charity rather than industry. For example, charitable
foundations could be established that created public parks and employed
wardens, or to train handicapped people to become self-supporting as street
vendors, etc. At any rate there is a marginal
worker in the labor force who is still employed but others with a lower
productivity are not because the opportunity cost of employing them is too
high.
The
productivity of the marginal worker is called the rate of marginal productivity of labor (for short, marginal
productivity of labor). The person playing the role of the marginal worker
may of course change, even change frequently and with it changes the rate of
marginal productivity of labor. Contrary to popular misconception, an
increase in the marginal productivity of labor is not a blessing. It means
that that some productive workers have been reclassified as submarginal and lost their jobs. This happens routinely
whenever industrial capital is eroded, plants and equipment are taken out of
production as a result of insufficient capital maintenance and inadequate
depreciation quotas.
Obstruction to capital accumulation
The opposite case is that
of falling marginal productivity of labor. Generally it is a welcome
development as it is beneficial to society. It has the effect of making submarginal labor productive. We could describe it as
equipping laborers with optimal tools so that their contribution to the
social product is maximized. It is important to understand that to make the
beneficial decline in the rate of marginal productivity possible, further
accumulation of capital is necessary. Hitherto submarginal
workers can then find employment, thanks to more or better tools made
available to help them become more productive. As a byproduct, more
physically or mentally handicapped people, along with many others, could find
meaningful industrial employment as unskilled or semi-skilled laborers.
As
long as no obstacles are erected in the way of capital accumulation, there
will be no unemployment. The presence of unemployment in society necessarily
implies that obstructions to capital accumulation exist, as not all workers
eager to earn wages are given the tools needed to make their work productive.
In a free labor market there is a tendency to make the marginal worker and
the least productive worker to be one and the same person.
Capital accumulation pilloried
In the real world there
are many obstacles in the way of capital accumulation, which prevent the
least productive workers from finding employment. The reason for this
unfortunate state of affairs is mainly ignorance and envy. Capital
accumulation is pilloried as proof of the uncontrolled “acquisitiveness
of the capitalists”. It is hardly ever looked at from the point of view
of its beneficial effects on labor. Virtually
all these obstacles have been created by a misguided effort to help the
indigenous through the wrong means, with the result of leaving them worse off
than they would be without the “help”. Taxing enterprise and
industry to raise revenues in order to fund direct payments to the
able-bodied unemployed is the worst offender. This also includes the
so-called “unemployment insurance” whereby the industrious is
being taxed to subsidize the indolent. In so far as it is an obstruction to
capital accumulation, unemployment insurance has the effect of increasing
unemployment. In the absence of these schemes capital would be accumulated
and suitable tools would be put in the hands of the unemployed. Similar
arguments can be made to condemn a host of misguided labor laws and payroll
taxes, including compulsory health insurance schemes. However, this is not
the problem we want to discuss presently. It must be left as a topic for
another occasion. Here we want to discuss the problem what happens when
capital already accumulated is being eroded and necessary repair is not made
in time. In particular, we want to investigate the problem of falling
interest rates causing the marginal productivity of capital to rise.
Devastation caused by falling interest rates
Why do falling interest
rates make the marginal productivity of capital rise? As we have seen above,
falling interest rates reveal that the capital in place has been financed at too
high a rate of interest, in view of lower rates now available. The present
value of debt rises. Firms with no debt are not exempt either. Falling
interest rates decimate the value of all industrial capital already in place,
in view of the lower cost of installing new capital.
As
the rate of marginal productivity of capital rises, plant and equipment are
idled. Their labor complement is idled, too. This is tantamount to an
increase in rate of marginal productivity of labor. The conclusion is that
falling interest rates make the marginal productivity of both capital and
labor rise, with the unemployment of capital and labor as the obvious
results.
The
Great Depression was not caused by “vanishing consumer demand”.
It was caused by a fatal weakening of the capital structure of industry,
which can be traced back to the confiscation of the gold coin of the realm by
Roosevelt. The capital from the balance sheet of productive enterprise did
not disappear without a trace. It was siphoned off by financial enterprise:
it showed up as the illicit capital gains of the bond speculators.
Exactly
the same process can be observed today. Bond prices have been increasing
since the early 1980’s, rewarding bond speculators with obscene
profits. These profits did not come out of nowhere. They were siphoned off
the balance sheets of productive enterprise. As measured by the yield of
30-year Treasury bonds, interest rates fell from 16 to 4 percent. Many
observers say that the fall is over and we are in for a steep rise, in view
of the falling international value of the dollar. However, there is reason to
be cautious with jumping to conclusions. It is possible for the value of the
dollar to fall while the value of dollar bonds rises. The fall in the rate of
interest as measured by the yield of T-bonds may well continue, following the
example of Japan. Worse still, the rate of decline may accelerate. This would
mean more precipitous destruction of capital, more bankruptcies, more
deflation, even a fully blown depression is not impossible.
The finest hour of American labor
This presidential
election year presents a unique opportunity for American labor leaders. If
they rallied to the plank of Dr. Ron Paul, advocating Constitutional money
and the rehabilitation of the gold standard, they would make history. It
would be the finest hour of American labor to put an end to this reactionary,
unconstitutional, anti-labor experimentation with the regime of fiat money.
History is littered with the debris of fiat currencies. All of them were
hailed in their time as the wave of future. To no avail: they have all found
their resting place in the garbage heap of history. But not before they have
inflicted enormous economic pain, especially on working people. The present
experiment is no exception.
The
government of the United States has apparently abandoned its traditional role
of protecting labor. Its insane experiment with fiat currency has a higher
priority than the welfare of labor. The government has abdicated its
Constitutional responsibility to retain a system of checks and balances. In
delegating unlimited power to the Fed, it undermined the ideal of limited
government. Remember, the power to create money out of nothing is unlimited
power. The government ignores the economic dangers that go with the
experiment of fiat currency. The Fed has a bag of tricks to combat deflation
and depression, but they are all counter-productive: they make the economic
malady worse, not better. In particular, the Fed seems to be blissfully
unaware of the extreme danger lurking behind a falling interest-rate
structure: the danger of depression as the capital of productive industry is
being plundered by scavengers, speculating risk free on the further rise in
the price of government bonds. Every dollar of profit made by bond
speculators comes out of capital values supporting industrial labor.
Academia
and financial journalism have embraced a servile attitude of Fed worshipping.
“Don’t bite the hand that feeds you.” The public is
completely unprepared for the coming depression caused by the collision
between the falling interest-rate structure and industrial capital, and its
effect on the economy in general, and labor in particular.
Labor
leaders should issue a Mayday call: the boat of industrial capital is
sinking, captain and crew bailing out. America is being de-industrialized
through the corrosive fiat money regime, and is in danger of disappearing as
an economic and financial world power. Labor leaders should support the only
presidential candidate, Ron Paul, who understands the problem and has the
right plan to deal with it. The de-industrialization of America must stop at
once. This means a return to the regime of stable interest rates and
constitutional money.
References
By the same author:
Fiat
Currency: Destroyer of Capital, December, 2007
Gold
Is the Cure for the Job-Drain, September, 2002
The
Root Cause of Unemployment, I-II, January, 2007
These and other articles of the same
author can be accessed at: www.professorfekete.com
Memo
from F.D. Roosevelt to Trade Commissioner Landis, Nov. 14, 1933, as quoted in
Blog #28,
comment on Floyd Norris’ column in The
New York Times entitled “Fear at the Fed”,
December 12, 2007.
Antal E. Fekete
Gold Standard University
aefekete@hotmail.com
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