Chapter IV:
Modern Theology

We have thus established that a special elite exists in this country which is given the special privilege in law of creating money. And you have seen how this privilege enables them, and a larger group who benefit from their actions, to gain wealth at the expense of the vast majority of Americans.

But the elite faces a problem common to all aristocracies. How does a small minority exploit a large majority? If the exploiters were a majority, their portion would not be large enough to be of much value. But if physical force is the criterion, then the majority can easily overwhelm a small minority.

The way aristocracies have solved this problem in the past is by deception. They create a set of myths which justify their superior position and convince the majority to accept its own exploitation. The aristocracies of the Middle Ages preached the doctrine that some men were by birth superior to others and that God had established this as a natural order. Resistance to the aristocracy was resistance to God. Submission, even to unjust rulers, was required by the teachings of religion and would be rewarded in the afterlife.

So, too, our modern banker elite and its associated vested interests in big business preach a set of myths, a set of myths which is unquestioned in the social controversy of our time and which rationalizes and justifies their special position.

These are:

  1. A paper money expansion is not merely the good of a special interest. It is a general good which benefits everyone. Conversely, a contraction is an unmitigated evil with no good to anyone.
  2. The real reason policies of paper money expansion are advocated is out of a sense of altruism. This is done for the benefit of the poor and unfortunate.
  3. Paper money has the magical effect of creating something out of nothing. This is why we are all better off from its use.

Myth 1. The myth of the general good.

In the 18th and 19th centuries when the proponents and opponents of paper money waged their battles, it was taken for granted that there were two contending classes — generally styled debtors and creditors (although as we have seen, the actual classes are more inclusive than that) — and that when one gained the other would lose. But today there is no such conception. Today, the effects of paper money expansion are called a business boom and are held to be good for all. The effects of contraction are called a depression and are held to be a universal evil. For this reason let us now turn to a more careful examination of the business boom. (See Illustration 2 on page 33.)

The period 1965-1969 was a period of economic boom. By all the traditional indices the economy was expanding. Gross National Product was up. Industrial production was up. Unemployment was down. The large majority of business indicators were up. But during that period take-home pay of the average worker in terms of real buying power declined. Note that it is normal for real wages to rise. From the post WW 11 period to 1965, real wages increased by over 40%. In the great period of declining prices from 1865 to 1900, real wages of the average American worker more than doubled. (See Illustration 3 on page 43 for chart of real take-home pay.)

To one educated in our modern society, this is a startling fact. But fact it is and the surprise you feel is only a measure of the success of the banking aristocracy in having convinced virtually everyone of a falsehood. While we have been told that we are better off and are getting, richer, in fact we have been getting poorer!

In 1968, in the middle of the boom, dozens of fast buck operators weremaking money hand over fist. What was known on Wall Street as the new breed — men like Bernard Comfeld, Howard Levin and James Ling — were living high, wide and handsome; but the average American was finding that, by a process he did not quite understand, his paycheck bought less and less at the supermarket each week.

What is happening in the U.S. economy is that there are two groups, one of which is exploiting the other. These are the groups defined in the last chapter; the banks, big business and their entourage of gamblers and promoters on the one hand; and the middle class and working class, especially the elderly, on the other. This is the conflict recognized by Jefferson and characterized by him as the banks and the big corporations versus the common man. In general terms the characterization is accurate. The business statistics which define boom and recession are not indices which measure the general wealth of the economy as a whole., These indices go up when there is a transfer of wealth from the second group to the first. They go down when the transfer slows or stops or goes into reverse. They measure not the general good; but the exploitation of one social class by another.

For example, high corporate profits, a rising stock market a falling interest rates are all used by economists to indicate a booming economy. Yet all three of these indices measure the gain of paper money clique at the expense of others.

When a currency depreciation increases prices faster than then business profits will increase, and the stock market up, but this will not measure a gain for the whole society; merely measure gains made by business at the expense of worker-consumer. Similarly, when interest rates fall, then business profits will increase because one of business important costs (the cost of borrowing) will be lowered. But this does not represent gain for society as a whole. It simply represents a transfer of wealth from lender to borrower; business benefits at the expense of the thrifty.

Many of the other commonly used indices of business are merely other ways of looking at the above three statistics. For example, an increase in housing starts is regarded as good for the economy, but an increase in housing starts is caused by and largely correlative with a drop in interest rates. Capital spending is caused by and follows rising profits and fallinginterest rates. These are statistics which indirectly measure what the above three directly measure that is, the transfer of wealth from the majority of working, consuming, saving, Americans to the bankers and big business.

The most commonly used index on the economy is the Gross National Product. For most students of the subject, GNP is the economy. For this reason, you should give this index special attention.

Suppose a bright, young inventor develops a cheaper way to produce electric power so that electric power can now be produced and sold for half the previous cost. Unquestionably this is an increase in the wealth of the community which is fortunate enough to have such a man. The people in the community can now have the same amount of power as before with more resources left over to buy other goods. But this increase in wealth in the community will not show up as an increase in the Gross National Product. In fact, since people will now spend less on electric power, the contribution to GNP by electric power will be smaller! But it is clear that people are getting the same amount of electric power as before. How then can electric power show up as less in computing GNP? And if it does, does GNP really measure the increase in wealth which has taken place? (For a detailed examination of how GNP is computed, see Appendix A.)

In general, there are only two ways in which wealth can be increased: Something which was done before can be done more effectively or efficiently; or something new can be created.

If something is done more effectively, then there will be a reduction in cost. Thus, the contribution to GNP from this source will be less. Correspondingly, people will have more money left over (the amount they saved by the reduction in cost) and will spend it on other things. Since the amount of new spending on other things equals the reduction of spending on the product in which the efficiency was discovered, the reduction in GNP from the efficiency will just equal the gain in GNP from the extra spending. Other things being equal, GNP will remain the same.

If a new product is created, then GNP will be increased by the amount of money spent on this product. By the same token, people will have to divert an equal amount of money from other goods and services in order to buy the new product; thus GNP for all other goods and services will fall byan equal amount. The increase in GNP from the new product will just cancel out the decrease in GNP from all other products, and, other things being equal, total GNP will remain the same.

In other words, of the two possible ways to create wealth, neither of them will result in an increase in GNP.

But, if during the period under question, the banks increase the supply of paper money, then people will spend more for all sorts of things. (They will have more to spend.) Thus GNP will rise whether there is an increase in the real wealth of the country or not. In short, an increase in the real wealth of the country will not, other things being equal, cause an increase in GNP. But an increase in the supply of money will cause an increase in GNP whether there is an increase in real wealth or not.

If you question an economist about this, he will answer that ordinary GNP is an unfortunate statistic which has been seized upon by the public; he relies on what he calls real GNP, which is GNP minus a factor to account for inflation. I.e., if GNP has risen by 8% and the depreciation of the currency has boosted prices by 5%, then real GNP is said to have advanced by 3%. Real GNP is a better concept than plain GNP, but it is still subject to fallacies. The main fallacy is that our methods of measuring the depreciation of the currency are inaccurate and tend to un the rate. (What if the rate of depreciation is really 8% and not 5% as measured? Then in the above example the whole increase GNP is due to statistical error.)13 The problem with the Consumer Price Index as a measure of currency depreciation is that it is the only measure in terms of the actual goods people buy and so is nothing against which to check it. The only time there has something against which to check the Consumer Price Index was during the Civil War period when gold (which had just been demonetized) was trading on the free market. The price of gold served as one measure of the depreciation of the paper money, and the Consumer Price Index served as another measure. By 1864, the price of gold was up over 100% in terms of paper money, indicating a depreciation of over half, and the Consumer Price Index was up 77%.

Since the Consumer Price Index is an index designed to go up in accordwith the depreciation of the currency and GNP is an index which goes up in accord with the depreciation of the currency, it can reasonably be asked: What does one get when one corrects GNP by subtracting the CPI?

Go back to the case of the inventor who develops a cheaper way to produce electric power. There is no rise in GNP from this gain in wealth, but there will be a rise in real GNP. This is because with electric power cheaper the Consumer Price Index will fall; hence real GNP will rise. This is fairly straightforward; however, most inventions and improvements do not simply make the same good cheaper; they introduce improvements in quality. An attempt is made to compensate for this by estimating the value of the improvement. Suppose the invention consists of an improvement in the quality of sound on one's hi-fi. The bureaucrats who compute the CPI say something like, This is a 5% improvement in sound quality for the same price; therefore, it is equivalent to a 5% reduction in price for the same quality. Therefore, we treat this as a 5% reduction in price when we compute CPI.

Thus the major real factor which is affecting real GNP is some obscure government official saying, Well I think that Xerox machines gave a better image now than they did last year; let's use that fact to offset the price increase for their product. I think cars are giving a better ride than they did previously, etc.

As Linda Jenness, Socialist Workers Party candidate for President in 1972, pointed out in this regard: Take automobiles, for example. From the introduction of the 1959 models through the 1970 models, car prices increased by hundreds and thousands of dollars in that period. But the Consumer Price Index registered no increases in auto prices!14

In short, when one penetrates all the complex mathematics, what is at the bottom of real GNP is the scientific equivalent of your Grandmother saying: Well it seems to me that life is better now than it was when I was a little girl. People have nicer homes and nicer cars, and they seem to eat better and have more free time. There is nothing wrong, as such, with your grandmother’s judgments. The point is that, at best, our modern economist can approach them in accuracy. And of course even real GNPdoes not do that. If we remember the story of the enterprising farmer, we realize that, during an issue of paper money, in money terms it appears as though everyone has gained. And GNP, of course, is an attempt to measure the economy by translating everything into terms of money. There are three specific factors — side effects of the paper money expansion — which go to increase real GNP while lowering the real wealth of the people in the society:

(1) Inventory accumulation: Almost all businessmen hold inventories. They wish to make these inventories large enough to economize on transportation costs and to be able to satisfy customers' wishes. But they also wish to keep the inventories from getting too large because inventory ties up capital and costs the businessman interest. Each businessman works out his own proper level of inventories in consideration of these factors and the peculiarities of his business.

However, when the process of money creation lowers the rate of interest, it makes sense for the businessman to increase his inventories. This is what happened from 1965 to 1970. The inventory/sales ratio of all manufacturing and trade hit a low of 1.43 in early 1966 and rose to a high of 1.64 in 1970 (First National City Bank of N.Y., Monthly Economic Letter, Oct. 1971). During this period, workers worked overtime and some of the unemployed were hired in order to overstock the warehouses of the nation. This increased GNP, but it did not create goods for people's use. So long as the goods merely piled up in warehouses they could not be used by people. And the only conditions under which they would be likely to come out of the warehouses (i.e., A reduction in the inventory/sales ratio) are the conditions of a declining GNP.

(2) The Austrian effect: There is another way in which the country can increase production without increasing the ultimate good to people. This was demonstrated by Murray Rothbard of the Austrian school of economics. It results from the fact that people must always make a choice between consumption and investment. Either use your wealth now, enjoy it and consume it, or invest it and use it to give you more wealth later. Common sense dictates that a reasonable balance must be maintained between consumption and investment. The man who consumes everything is the wastrel, always in debt. The man who invests everything is the miser who never enjoys his wealth. Each person in our society makes a decision on how much of his income he will consume andhow much he will invest according to his own preference.

If businessmen see that people are consuming more, they will shift to making more consumer goods — goods that will be used up directly. If businessmen see that people are investing more, they will shift to making more capital goods, machinery and things which cannot be consumed themselves but which will be used to increase production to give a return on the investment.

For example, if John Jones decides to consume his wealth, he may buy a car. In this case he gives his money to General Motors, and they produce a car for him. If he decides to invest his wealth, he may buy a General Motors bond. In this case he has lent his money to GM, and they will use it to build a new factory which, five years from now, will produce cars more efficiently. GM's decision to build cars or to build factories is ultimately related to John Jones' decision to consume or invest.

When the banks create money by making loans, these loans typically are to businessmen who invest in capital goods. This leads to a shift toward investment and away from consumption. From the point of view of society as a whole, it is as if millions of John Joneses had simultaneously decided to consume less and invest more. Several years from now, as the new factories are built, production will rise and real GNP will increase. However, if the John Joneses had wanted to postpone their consumption and get more later, they would have done so; they would have chosen to invest. That they did not indicates that they did not want to. The miser in his old age is very wealthy, but how much has he enjoyed life? If we view wealth as the satisfaction of human desires (which is a more humanistic concept of wealth) rather than merely the production of more widgets, then once again paper money has increased real GNP while decreasing the wealth of the country.

It is this aspect of a paper money expansion of credit which has fooled many economists into defending the system and thinking that it actually does create wealth. Viewing, this aspect and this aspect alone, there are more things in existence because of the expansion. There are more widgets and automobiles, etc. The effect here is to force the average person to make the investment choice (as per the miser) rather than the consumption choice.

You can see just how beneficial this would be if it were done openly and directly. Suppose the Government were to pass a law which forced people to save and invest 50% of their income. This would mean a drastic curtailment of living standards in the present; but there would be an increase in wealth in the future. The question is: Would people be better off from that later increase in view of the hardships they would have to suffer in the present?

I think it is clear that the answer is no. If a person feels that he is better off by saving 50% of his income for the future, then he is free to do so, but very few people make that choice. This open and direct method will likewise increase GNP because, in the future, the capital goods will allow increased production. But it is not to people's economic benefit. If it were, they would make the choice voluntarily.

(3) Waste due to overemotionalism of a boom: In the euphoria which swept over the stock market in 1967-68, it was not only the paper value of stocks which had a boom and bust. The rising value of those stocks led directly to new construction of factories and outlets. Since this new construction was based on artificially high stock prices and not on reality, most of it was waste and was revealed as waste when the stocks collapsed. A most notorious example was the fast food franchising business. Certain unscrupulous operators were using accounting tricks which made their companies appear far more profitable than they really were. One of these tricks was to sell a franchise on time and then count all of the income from the sale (not merely the down payment) as this year’s earnings (even though the company would not receive all of the money for several years). Once this trick was established, idea was to see who could sell the most franchises. But of course, every time a franchise was sold so that this accounting trick could be worked, a real live restaurant was constructed. The country was then flooded with fast food places which could not justify their existence economically; much of the labor and materials which went into building, them turned out to be waste. That labor and those materials could have been used far more effectively to benefit people. But they all counted as big pluses in GNP.

In 1968, in this country, there was a mood of economic euphoria. Everyone was talking of millionaires, and celebrities were endorsing quickie franchise operations. But my mood at this time was not euphoric. When I would see a workman constructing a new Lums or a giant officebuilding, I recognized this as waste. What is the fate of a society which sets one group of men to building walls and another group to tearing them down? The labor of those men, the bricks, the plumbing, the wiring and all the materials that went into the building of those restaurants, office buildings and other phony projects were waste. They added to GNP, but they subtracted from the nation's wealth.

It should also be pointed out that, if there are more things in existence from the Austrian effect, this is more than counterbalanced by the waste. The country is thus in the position of being forced to save in order that it may have less in the future.

A point that should be made here is that there is a tragic human consequence of this process. Factors 1, 2, and 3 not only involve the misuse of resources, they involve the misuse of human labor. Put quite simply, a boom creates a demand in the economy for different goods than would be demanded if there had been no boom. When workers are hired to produce these boom-type goods, their jobs are secure only so long as the boom continues. Any diminution in the rate of paper money creation will throw these people out of work. This is why in 1970 there was so much unemployment among scientists. The shift to making more capital, described in factor 2, led to a demand for basic research (which is a capital good) requiring more Ph.D.s. The high demand for these people led to high salaries for this group several years ago and induced many young men with the requisite intelligence to get advanced degrees and compete for jobs in these fields. But the reduction in the rate of money creation in 1969 coincided with the graduation from school of large numbers of these Ph-D.s, and since their jobs were dependent on the boom, we had the phenomenon of unemployed Ph.D.s in 1970. Thus large numbers of the nation's brightest men were induced to spend crucial years of their lives preparing themselves for jobs which were will-o’-the-WISPS, mirages, which would not exist in a proper economy. The solution of the banking elite to this human tragedy was not to prevent such misuse of labor. It was to recreate the jobs by another round of paper money. Thus another generation is being drawn into this cycle, who in turn will become the justification for another round of paper money. This is the solution of the drunkard who combats the bad effects of the hangover by getting drunk again.

To summarize, GNP, like stock prices, corporate profits, housingstarts, etc., goes up because of the same process which enriches the bankers and business at the expense of the rest of the community — the printing of paper money. The claim that these common modes of measuring the growth of the economy actually do that is false. What they measure is not the public interest but the interest of the banks and big business. When these latter gain, the great majority of Americans lose. It is a fall in GNP which is to the economic interest of most of the American people.

Myth 2. The myth of altruism.

Surely our age is blessed with the most beneficient leaders. All of them possess the greatest degree of heartfelt concern for the poor and unfortunate souls who cannot find employment. Have: we not enacted into law the Employment Act of 1946, which makes it a policy of the government to reduce unemployment? Is this not a prime concern of politicians of both parties, of labor leaders, and have not even businessmen become enlightened to recognize their obligations along this line?

All this is by way of contrast to that evil age of 70 years ago when politicians were unconcerned with unemployment, unions were almost powerless to protect jobs and business leaders could say, The public be damned. So no one will be surprised to see the rates of unemployment for our recent history and for 70 years ago. (See Illustration 4 on page 43.)

Average unemployment in the first decade of the century was 3.7% per year. (This figure is from the Bureau of Labor Statistics; the National Industrial Conference Board's Economic Record of 3/20/40 estimated it as 3.4%.) Average unemployment in the decade of the ‘60s was 4.8% per year. The first decade was a time of mild currency depreciation (the price level rose by 10% over the ten years) and a time of a huge influx of foreign labor which underbid American workers for their jobs. The decade of the 1960s was a decade of rampant currency depreciation when foreign labor was kept out by strict immigration laws. By all of the myths which we have been taught, the decade of the 1960s should have been a decade of lower unemployment than the first decade of the century.

An important point to note is that the unemployment rate was morevolatile 70 years ago than it is now. It went higher in periods of depression and lower in periods of boom. The unemployment rate of 0.8% in 1906 is simply unachievable in modern times. The significance of this is that the real hardship of unemployment does not fall on those who are just temporarily between jobs; it falls on the hard-core unemployed-those who remain out of work for long periods of time. It is hard to see how unemployment could have gotten down to 0.8% in 1906 and 1.8% in 1907 if there were any significant number of hard-core unemployed. This indicates that even the unemployment that did exist at that time was more of the between-jobs type of unemployment and far less of them, … hard-core type. Permanent, hard-core unemployment is a modern phenomenon, and it arrived on the scene after the air became filled with platitudes expressing sympathy for the plight of the unemployed. Perhaps the point of this section can best be made by a story told to me by a friend in the securities business.

My friend worked for the proprietor of a small mutual fund; call him Mr. X. Mr. X’s fund had done well in the wild stock market of 1967 and 1968. The policy of paper money expansion followed during those years helped to create an emotion which put all kinds of low-priced cats and dogs (low quality, risk stocks) up far beyond any rational estimate of their value. In the process, Mr. X’s low-priced stocks went up, enriching him and drawing many more people into his fund. By the time of my story, he was quite wealthy and also a large contributor to the campaign funds of certain prominent politicians.

But the attempt to stop inflation which began in December 1968 (and ultimately had its effect in a significantly lower rate of price increase by early 1971) was not good for Mr. X. It sent the stock market into a tailspin and pulled the support out from under the over-priced cats and dogs. By June of 1969, Mr. X’s fund was losing money hand over fist.

Mr. X did not attempt to save his clients’ money by selling off stocks and staying, out of the market until the decline was over. Instead he wrote a letter to one of the politicians dependent on him for financial support. Speak out, he said against the economic policies of the Nixon administration. I am indignant at the terrible suffering which is being caused to the unemployed of this nation. In the name of these people, there must be a return to the policies of 1967-68.15

In contrast to the other myths perpetrated by the banking establishment, it is correct to say that the unemployed are helped by a business boom (i.e., a paper money expansion) — at least in the short run. During periods of boom, the unemployment rate goes down (a little); during periods of recession, it goes up. In short, while the instant millionaires of the late 1960s were wheeling and dealing in their conglomerates, while Howard Levin was ordering his $900 attache case and Bernard Comfeld was throwing his wild parties, a small percentage of the working force was picking up its $1.60-$1.70/hour, whereas it otherwise would not have been able to do so.

Thus perhaps it would be justified to say that out of all this evil comes a little good. Someone at least benefits from the paper money besides the establishment which brings it about. Unfortunately not even this is the case. This view is valid for the short run but not for the long run. Paper money does reduce the rate of unemployment for a two to five year period, but viewed on a scale of 10 to 20 years, the effect is just the opposite.

Consider the following argument: What if our society succeeded in putting an end to unemployment? What if the percentage of unemployed dropped to the level it had maintained during the first decade of this century, with that level consisting of People who were clearly between jobs and who would be employed again within a few months? What then would the banking establishment use as a reason to promote policies of stimulation of the economy? Would they say, Simulate the economy so that I can make a bundle of money? No, coming, from the mouth of Mr. X and people like him, this argument would fall flat on its face. These people need the unemployed; they need them badly. They need them to mask the self-interest underlying their demands and cloak it in an aura of altruism. If the unemployed did not exist, they would have to create them.

And create them is what they do. For unemployment in our society is not a natural phenomenon. Unemployment is deliberately manufactured by the policies of the aristocracy; it is created in order that they may posture asthe friends of the unemployed and, by throwing a few crumbs to these unfortunates, rob billions of dollars from the people of America.

It should be noted that the phenomenon of long term, hardcore unemployment is far worse than is registered by the unemployment rate of 5-6%. When a man cannot find work for too long a time, he may become discouraged and give up — thus dropping out of the labor force so that he is no longer counted in the unemployment statistics. Approximately 15% of the population of New York City is on welfare. How many of these could or would be willing to work if they could find jobs is a matter for conjecture, but to say that the human tragedy of inability to find work is accurately recorded by an unemployment rate of 5-6% is an error. If all 15% of those on welfare in New York City represent people driven from the labor force by policies of the aristocracy, then the true rate of unemployment for New York City is of the order of magnitude of 20%, which is to say that we have a long term, hard-core unemployment problem as bad as it was during the worst days of the depression. These policies work by the following means:

(1) Labor union unemployment: Some unions, in order to raise wages, limit the number of jobs in their field. They believe (correctly), that if there are fewer workers, the law of supply demand will make it easier for them to get high wages. For example, the taxi union in New York City has pressured the Mayor into restricting the number of hack licenses. Many people who otherwise would be employable as taxi drivers in New York therefore remain unemployed. Similarly, construction unions severely limit the number of apprentices they allow. This creates a shortage of skilled construction workers. The Teamsters Union, together with their employers, the trucking companies, pressure the ICC to limit the number of interstate truckers. This forces truckers’ fees and teamsters’ wages up and keeps the unemployed from finding jobs driving trucks.

It is easy to see why these unions do this; their members want higher wages, and they are perfectly willing to climb up to greater heights of prosperity on the backs of their fellows whom they kick down into the ranks of the unemployed. It is less easy to see why laws are passed allowing them to do these things. The mayor of New York claims to be a liberal and to have sympathy for the unemployed. Why, then, does he not allow them the opportunity to earn their own living? Does one man have the right to forbid another man to work?

Many of these practices have led to serious racial disturbances. The restrictive practices of the New York taxi union seem to be related to color as most of the people who are prevented from obtaining taxi jobs are black. These blacks operate illegal gypsy cabs, earning their living in defiance of the law. The racial animosity engendered by this situation has made it extremely dangerous for white cab drivers to enter the black areas of the city. The restrictive practices of the construction unions are well known, and civil rights groups have made attempts to break the color bar — with little success.

Note that the prime evil is not the action of the unions. They are simply acting in the interests of their members. The prime evil is the legislation which enables them to achieve this benefit by forcing other people into the ranks of the unemployed.

(2) Minimum wage law unemployment: The minimum wage compels employers to pay their workers a minimum of a certain amount (now $2.30/hour16). This law has no application to the great majority of workers, who are worth far more than $2.30/hour and are paid wages well above that amount. However, it does have application to workers who are not worth $2.30/hour to their employers. If a man produces goods worth $2.00 in an hour, his employer will find it profitable to employ him at $1.95/hour, but not at $2.05/hour. Because of the minimum wage law, therefore, his employer has an economic inducement to fire this man (or not to hire him in the first place), to replace him with a machine, if possible, or not to go into an area of business where he will have to hire many of such kinds of people. Such unfortunates fill the ranks of the unemployed. (Unemployment rates for minority youth run in the range of 25-40%.)

It is evident that, if the unemployed were given the choice, they would choose to have the minimum wage abolished. Since they cannot get jobs at $2.30/hour, they would prefer to have a chance to get them at $2.20 or $2.00. At the very worst they could reject these inferior jobs and be in the same situation they are in today. But at least they would have the freedom of choice. How then can such a law be justified as being for the benefit of the poor?

Proponents of the minimum wage argue that without it the wages of the lower level of workers would be driven down to subsistence. But, of course, there is no lower wage than the wage one receives when one is unemployed. The wages of workers worth $3.00/hour are not driven down to $2.00. The wages of workers worth $4.00/hour are not driven down to $3.00. Why should the wages of workers worth $2.00/hour be driven down to $1.00?

Any worker has a bargaining power depending on the value of his labor. If his employer does not want to pay him what he is worth, he can always go to another employer. A worker receiving $3.00/hour who is really worth $4.00/hour will be able to find an employer willing to pay him close to $4.00. This is simply in the self-interest of the employer. The wages of the lower level of workers were not driven down to subsistence prior to the enactment of the minimum wage (Karl Marx, to the contrary, notwithstanding). In fact, wages have increased steadily in this country in terms of real buying power ever since the Pilgrims landed in the Mayflower (with minor setbacks during periods of currency depreciation), and there is no reason to think things would be different now.

The members of the aristocracy who support the minimum wage law do not do so out of sympathy for the lower level of workers. They do so to help create a class of unemployed for whom they can feign sympathy.

Increases in the minimum wage are generally gradual enough so that the unemployment they cause is obscured by other economic factors at the time of the increase. But the initial establishment of the minimum wage in 1938 had an especially marked effect in Puerto Rico because of the large number of workers in that territory worth less than the minimum wage. Unemployment rose so rapidly that in 1940 the Roosevelt administration felt obligated to amend the minimum wage law to make an exception of Puerto Rico. Referring to this amendment, Senor Bolivar Pagan, Resident Commissioner for Puerto Rico said: It has been said that the application to the islands of the minimum wage rates prescribed by the Fair Labor Standards Act for the mainland of the United States has threatened to cause serious dislocation in some island industries and great curtail of employment. The amendment signed today will permit separate study of this problem and the fixing of wage rates for these islands which are high enough to protect industries on the mainland fromunfair competition but which are low enough to encourage industrial development and to provide employment opportunities in the islands.17 The Roosevelt administration knew that the measures they offered would throw people out of work. In areas where this caused a significant social problem which would have political implications (such as Puerto Rico), they quietly backed down. But in areas where the unemployed would be scattered and voiceless and have no political power, then no one gave a damn.

Pro-bank economists continue to deny the effect of the minimum wage in throwing the less valuable workers out of work. They admit the operation of the law of supply and demand in other areas. They admit that overpricing of wheat leads to a surplus of unused wheat. But they will not admit that overpricing of labor leads to a surplus of unused labor. These economists cannot approach their subject on the basis of reason. They must defend the myths of the aristocracy which supports them.

Since WW II, the minimum wage has gone up, both in real terms and in money terms. Labor unions have become more rigid. The effect is to throw ever larger numbers of people into the ranks of the hard-core unemployed. In this manner, the hard-core unemployed gradually move out of the unemployment statistics and onto the welfare rolls. (Only a small fraction of the total unemployed are unemployed for more than 26 weeks.)

Notice that it is the concept of unemployment which gets so much concern, not the concept of unemployable, which would include those on welfare who have given up seeking, work because they are so discouraged. Even in times of recession, only one-fifth to one-third of the unemployed (that is, 2-3% of the total labor force) represent people who have been unemployed for over 15 weeks. The rest surely represent people who are merely between jobs. The real social tragedy consists of those people who cannot find jobs and so drop out of the labor force (i.e., stop looking for work). Why is our concern not focused on them? The answer to this question is that the unemployment rate is subject to short term influences. Few people remain on the unemployment rolls for over a year. Thus the short-term influences of paper money, which are to reduceunemployment, are clearly reflected in this statistic. But the long-term influences of paper money, which are to increase unemployment (in the larger sense), are most clearly shown by looking at the welfare statistics.

The deliberate creation of unemployment in order to justify a policy of paper money has further consequences. A man who has sunk into the ranks of the permanently unemployed suffers a loss, not only of income, but of a part of his diginity. This is a spiritual loss; it can not be measured by the means of economics. But it has a real effect. It is such people who turn to drugs and crime.

There is no social or cultural reason for the large class of welfare dependent people, breeding crime and drug abuse, which has grown up in America during the past generation. Neither is there any genetic or environmental reason. The ancestors of our modern welfare class prior to 1933 were capable of dignity and self sufficiency; they did not turn to drugs and crime. But they had the same cultural milieu, the same genetic background, and, if anything, an even poorer environment.

If a 16-year-old black youth who has dropped out of school is employed for $2.00/hour, then he can earn spending money and contribute to the income of his family. More important, he has a chance to learn some skills and develop habits conducive to work. By the time he is 25, he has a reasonable chance at earning a living. But, if this same boy remains unemployed, then he never receives the training which will make him employable at a higher wage. Rather, he develops the habits of a life of idleness and becomes less employable, not more.

In Harlem, there are large numbers of blacks driving gypsy cabs. Their operations are illegal, and white cab drivers do not dare to enter their territory. The establishment has forbidden these men from earning a living. They have the character to fight back, to retain their dignity by breaking the law. These men have experienced the realities of power in America today and know how to evaluate it when phony liberals mouth pretty platitudes to the establishment press about their concern for blacks.

Not everyone has this much character. There are morally weak people in every group; these are the ones who give up, go on welfare and turn to crime and drugs. The black generation of 1865-1900, far moredisadvantaged in every way in comparison to our present blacks (except that they lived in a society in which there were no minimum wage laws and in which unions did not have the power to keep people from working), did not do this but were by and large religious people who lived moral lives. These social problems are the consequence of our paper money system, and when that is ended, they will go away.

A few years ago, a British economist named Phillips came up with the idea that there is a trade-off between inflation and unemployment. That is, to reduce unemployment we must put up with more inflation, and to reduce inflation we must suffer an increase in unemployment. He even plotted curves showing the amount of inflation which is associated with a given amount of unemployment.

Of course the statistics of 70 years ago refute Mr. Phillips' notion. At that time there was very little unemployment with only a mild rise in prices. And since the Phillips curve first became popular among economists, it seems to have shifted. For example it seemed to require more depreciation of the currency to reduce unemployment to the 4½% level in 1973 than it did to reduce it to the 3½% level in the mid-1960s.

The conventional economists flounder about and pretend they do not know what is happening. But it is very simple. The banker aristocracy, which benefits from paper money, has an interest in creating unemployment. It helps to increase the minimum wage; it helps labor unions to tighten their strangleholds on their various industries. The more unemployment which results from these policies, the more persuasive a case can be made for a further dose of paper money to temporarily reduce the unemployment. Thus structural unemployment is increased, and it requires ever greater rates of currency depreciation to reduce it to the same level.

In addition to serving as the motive for structural unemployment, paper money also causes cyclical unemployment because it leads to the malemployment of human labor as described in the discussion of Myth 1. Paper money distorts the economy so that jobs are created which can only exist as long as the paper money continues. People working in these jobs are malemployed.

For example, when major issues of paper money were issued in 1971 and 1972, it created a boom in the housing industry, and housing starts ran up to a 2.5 million annual rate. Because interest rates had dropped, people found it cheaper to get mortgages and so did more building. When the rate of money expansion was reduced in 1973 and 1974, interest rates rose and housing starts fell below a one million annual rate. Thus many people in the construction field were thrown out of work. They were unemployed in 1974 because they had been malemployed in 1972.

It is true that the paper money issued in 1975 will cause these people to be reemployed. But they will not be properly employed; they will be malemployed in artificial jobs. When the politicians decide it is time to fight inflation again, these people win be thrown out of work. They face a lifetime alternating between inflation and unemployment.

The Loco-Foco movement (a left-wing splinter of the Democratic Party which appeared in the 1830s and advocated an end to all bank issues of paper money in excess of their gold and silver) used to say in explanation of this 53 dilemma: When the currency expands, the loaf contracts; when the currency contracts, the loaf disappears. That is, when more paper money is issued, the worker is cheated by the fall in his real wages; when the paper money is restricted, the artificial jobs cease to exist, and he is unemployed.

When faced with the problem of cyclical unemployment, the proper course of action is to allow the unemployed workers to find real jobs, not to create artificial jobs by new issues of paper money. That will not feed the unearned profits of the bankers, but in the long run it is best for the working man.

Myth 3. The myth of something for nothing.

In Chapter III, we discussed economists who believed that paper money was the magic road to wealth, that it enabled society to create something for nothing. This theory began when paper money first started, in the late 17th century, and some of its infamous practitioners are William Paterson (previously mentioned founder of the Bank of England), John Law (originator of the Mississippi bubble in France) and Dan Shays.

With the development of economic science in the late 18th century, these ideas were rejected and the United States entered a long period ofrelatively sound money. However, early in the 20th century the something-for-nothing ideas were reestablished, chiefly due to the work of John M. Keynes.

What Keynes did was to take the old mercantilist economic viewpoint, dress it up in modern language and present it as the latest scientific word in economics. Much of Keynesian economics has already been discredited. For example, no one today believes — as Keynes argued — that by breaking a window one increases society’s wealth. (Not only was this believed in the 1930s, but in the middle of the depression, the Roosevelt administration adopted a deliberate program of killing hogs in the belief that this would increase the nation's wealth.) However, there is one aspect of Keynesianism which still survives and is widely accepted. Keynes introduced a new argument to prove that paper money creates something out of nothing. What he said was the following:

(1) There exists a portion of the working force which is normally unemployed. These are not merely people who are in a transitional period between jobs. They are people who are actively seeking work and cannot find it.

(2) Paper money reduces unemployment. (Actually Keynes would have said that government deficit spending, reduces unemployment. But government deficit spending would not reduce unemployment if the deficits were not financed through paper money. If government deficits had to be financed by borrowing from the people, then the extra money spent by the government would be exactly counter balanced by the lesser amount of money spent by those who had lent to it.) As we have seen in the previous sections, the effect of a depreciation of the currency is to lower the workingman's real wages. When all is said and done, this is how paper money reduces unemployment. Paper money leads to a depreciation of the currency; this lowers the real value of wages. Employers see that wages are lower and thus find it expedient to hire more workers.

Paradoxically, it is just when wages are suffering the most that public opinion thinks that they are going up. When prices are rising and working men demand a wage boost to keep pace with the cost of living, the newspapers scream headlines about the demands of the greedy unions. Conversely, in a depression, when the real value of wages is going up (because prices drop more rapidly than wages) but money wages are goingdown, the public is filled with sympathy for the worker. The public is fooled by money wages and does not look at real wages.

(3) Since some of the unemployed are now working, more goods are being produced.

(4) Conclusion: Paper money has created something out of nothing.

Jefferson commented on this point of view almost 160 years ago:

Like a dropsical man calling out for water, water, our deluded citizens are clamoring for more banks, more banks. The American mind is now in that state of fever which the world has so often seen in the story of other nations. We are under the bank bubble, as England was under the South Sea bubble, France under the Mississippi bubble, and as every nation is liable to be under whatever bubble, design, or delusion may puff up in moments when off their guard. We are now taught to believe that legerdemain tricks upon paper can produce as solid wealth as hard labor in the earth. It is vain for common sense to urge that nothing can produce but nothing, that it is an idle dream to believe in a philosopher's stone which is to turn everything, into gold, and to redeem man from the original sentence of his Maker, in the sweat of his brow shall he eat his bread.18

Keynes indeed did teach that legerdemain tricks upon paper (manipulation of the Federal budget) can produce solid wealth. If this process works, it is certainly a wonderful thing. If we can create something out of nothing, then we should surely do it. Why not print up billions and billions of paper dollars until there is no unemployment at all? This would give us the maximum effect of something for nothing and would fill the humanitarian goal of ending unemployment.

In fact, Keynes argued that when paper money was used in this way, it would not lead to a depreciation of the currency (i.e., arise in prices). He claimed that, since more goods are being produced, this balances off the fact that there is more money in existence; therefore, a given amount of money will still buy the same quantity of goods.

The Keynesians thus believe that, as long as there is unemployment in the society, you can safely issue paper money without causing inflation. If there is unemployment, you have not issued enough paper money. If there is inflation, you have issued too much. According to this theory there can not be both unemployment and inflation at the same time. But there is, in America today, both unemployment and inflation. There has been both unemployment and inflation for most of the last 42 years.

In the summer of 1971, Arthur Burns, the Chairman of the Federal Reserve Board, said, The old laws of economics aren’t working like they used to. Mr. Burns was disturbed by the existence of a 6% rate of unemployment together with substantial inflation. The old laws to which he was referring were the, laws of Keynesian economics, to which Mr. Burns subscribes.

The error in the Keynes argument is in Step 1. This step appears plausible because there is, in fact, unemployment in our society. But as we have seen in the previous section, this unemployment is caused by artificial government acts which prevent people from working. Take away these artificial government restrictions on employment, and aside from the minimal amount of unemployment which is due to people who are temporarily between jobs, unemployment in our society would be zero.

Every person’s labor has a value. That value consists of the value of the goods he is capable of producing. It is always profitable for an employer to hire a worker for less than the value of his labor. It is never profitable for an employer to hire a worker for more than the value of his labor. Most people are hired for approximately the value of their labor.

If someone is unemployed, the reason is that he is asking more for his labor than any employer thinks he is worth. It may be painful to a man’s self concept, but what he must do is to lower Ms demands. Then he can find employment.

It stands to reason that there will always be some people who ask more than they are worth and some people who never quite succeed in persuading employers to give them what they are worth or who have a hard time finding their exact niche. But these people will not represent permanent unemployment. The man will have to lower his wage demandsor search a little harder; but it is scarcely credible that he will sit like a dummy and not do what is required to find work.

This is the reason that unemployment rises rapidly in a period of declining prices (appreciation of the dollar). If a man's salary is $10,000 and if prices in that society then decline in half, then the dollar has appreciated to twice its value; his $ 10,000 in wages is really worth $20,000. In such circumstances it is not a surprise that his employer fires him. The employer cannot afford to pay him So much. This man may not want to believe that in terms of the new, appreciated currency his salary ought to be $5,000. He may spend a long time looking for a new job at his old salary. It does not occur to him that, because of the appreciation of the currency, a salary of $5,000 would be equivalent to his old salary of $10,000. Thus he continues to turn down job offers which he thinks are beneath him. This phenomenon was responsible for much of the unemployment during the depression.

If you take the Keynesian viewpoint and think what it means in personal terms, then what Keynes was saying was that a, man would choose to remain unemployed permanently rather than adjust his wage demands to a realistic level that would get him a job. This is absurd on the face of it. Some people may be slow in adjusting their wage demands. Some people may hold unreasonable expectations. But to say that people will simply sit, like blocks of wood, with unreasonable wage demands for ever and ever does not correspond to the actions of real people in the real world.

This is why the Keynesian theory on inflation and unemployment does not work. The unemployed in our society are not those who sit with unreasonable wage demands. They are those who are made unemployable by the minimum wage and by restrictive labor union practices and those who have been malemployed.

It is true that a currency depreciation will temporarily reduce unemployment. The reason for this is that the excess profits of business are so big that there is competition to expand, and this spurs the demand for workers (such as the demand for scientists previously described). It is as though you allow a man to rob you throughout the week because you get a little bit of the money back by working for him on Saturday. But in viewing this as an argument for paper money, the following must be keptin mind:

(1) The reduction in unemployment is temporary. As we have seen, over the long term there is a tendency for unemployment to rise under paper money.

(2) The greatest unemployment occurs in a depression when prices are declining. The reason for this is, as we have seen above, that people are slow to adjust their wage demands to the rise in value of the dollar. But of course the principal reason for a depression is the boom which preceeded it. That is, during the boom the banks issued paper money until they were overexpanded and were forced to contract. The contraction caused a decline in prices with resulting unemployment.

It is therefore not valid to argue for paper money expansion as a cure for unemployment. The contraction is the result of the previous expansion. Had there been no paper money expansion, there would be no contraction and no unemployment.

(3) The ideal state is a condition where there is no expansion of paper money and no contraction. If we had such an economy and there were no minimum wage law and the labor unions could not use their coercive power to reduce employment opportunities in their fields, then there would be effectively no unemployment. That is, the only unemployed would be those people who are between jobs and whose period of unemployment lasts only a few weeks or a couple of months.

At the end of WWII there occurred what was almost a laboratory test of Keynesian economics. Keynesians believe that the number of employers in a society is, relatively speaking, a fixed quantity. They do not understand that many employers will spring up if wages are low, and few will appear if wages are high. They did not recognize that the large scale unemployment of the Depression was caused by high real wages. They thought it was a feature of the American economy. Their explanation for the low unemployment in the early ‘40s was that the war had siphoned off 10,000,000 men from the labor force. When these 10,000,000 ex-servicemen hit the civilian economy, they predicted, unemployment would rise to the neighborhood of 10,000,000. We would be back in the Depression.

However, what happened was that during WWII there had been a severe depreciation of the currency. Prices had risen sharply from their 1940 levels. This had the effect of reducing real wages. Thus when the servicemen returned to work in 1946 and 1947, they found it easy to get jobs.

When the unemployment did not appear, the Keynesian economists looked around for an excuse. They found it in the concept of consumer demand. No one can measure consumer demand and no one can define too precisely what it is. Therefore, no one can ever know whether it is present in greater or lesser quantities. When a Keynesian economist is wrong in his predictions, he does not question his theories; he merely postulates a quantity of consumer demand sufficient to explain the difference between his prediction and reality. He then explains that he was unable to read the mind of the consumer. This is a pretty explanation. It means that his theories never have to face the test of reality. If his predictions are right, well and good. If they are wrong, postulate a consumer demand. This procedure flies in the face both of scientific method and common sense. A theory which cannot be put to any test against reality cannot claim the status of a truth.


  1. See Raymond F. DeVoe’s article Statistics Don’t Lie in the July 5, 1971 issue of Barron's.
  2. Linda Jenness, A Program to Combat Soaring Prices, Inflation, What Causes It, How to Fight It (New York, 1973), pp. 18-19.
  3. I use single quotes here to indicate that this is not a direct quotation; merely, the substance is accurate.
  4. Effective Jan. 1, 1976.
  5. Senor Bolivar Pagan, as quoted in Puerto Rico Labor News (Dept. of Labor, Gov't of Puerto Rico, May-August 1940), III, Nos. 3-4, p. 76, My italics.
  6. Thomas Jefferson, letter to Colonel Charles Yancy, Jan. 6, 1816, Writings, XIV, p. 381, Jefferson’s italics.