-- Posted Monday, 6 April 2009 | | Source: GoldSeek.com
by Howard S. Katz
President Obama has announced a series of programs to create jobs. I can only shake my head. Is it possible that there are people in this country who think that this is a desirable goal?
I go back in history and read The Federalist Papers. The Americans of the 1780s were so smart. And here the Americans of the 21st century are so stupid. What happened to progress?
First, we do not want to improve the economy to create jobs for people. We want to have jobs so that we can create wealth (improve the economy) and thus be better off. A job is a MEANS. It is the wealth which you create on the job which is the END. Politicians who engage in job creation do not understand this simple truth. For example, when FDR created jobs for people doing simple tasks which nobody in our society really wanted done, he created the outer form of jobs. These looked like jobs. The worker had an employer. He received a paycheck But the wealth represented by the paycheck was stolen from the remainder of the people by the government, and the “work” performed consisted of things that nobody really wanted done. It was a combination of stealing and wasting time. If the government had just stole the money and given it out, then it would have had the virtue of greater efficiency.
Second, since everyone today seems to be living back in the 1930s, let us study this period and see what actually happened. Because most of what I hear concerning the thirties consists of a huge concoction of lies, and the closer we look at this period the less credible it appears.
During WWI, the Democrats doubled the money supply of the country, and between 1914 and 1919 the price level doubled. Keep in mind that from 1793 to 1913, a period of 120 years, prices had remained stable in this country. If prices went up for a few years, then they would go down for a few years. The Wholesale Price Index for 1913 was the same as it had been in 1793.
Since prices were stable over long periods, people fell into the habit of saving. They received 5% interest from the local savings bank. Over a 49-year working lifetime, money saved and invested at 5% will multiply by a factor of 4.25. If one received an annual wage of 30 ounces of gold ($30,000 in modern money) and saved 15% of it ($4500), by age 65 one had saved $220,500. But by investing at the local savings bank at 5%, this amount had grown to $937,125 (937 ounces of gold). The first number was not enough on which to retire; the second number was ample.
So in 1919, the vast majority of Americans were savers. I don’t have the exact figures, but it must have been something like 98% of the population. During WWI, the Democrats stole enormous amounts of wealth from these savers and funneled it to Wall Street and the banks. The Republicans championed the savers. They advanced a policy called “a good 5¢ cigar.” Since cigars had gone from 5¢ to 10¢ during WWI, what was meant by this was a program to reduce prices back to their pre-war level. This program was popular, and the Republicans were elected in 1920, 1924 and 1928. The money supply contracted sharply in 1921. The contraction was interrupted by a credit easing by the Fed in 1922 – which caused the stock market bubble – but resumed in 1930. From 1930-32, both the money supply and the price level fell by 30% (10% per year), and in 1932 prices had returned to their pre WWI level. The program of “a good 5¢ cigar had been achieved.
Now let us go a bit more deeply into unemployment. It had been known for a long time in economics that, when prices changed, wages are much slower to adjust. If prices decline, then wages will also decline but much more slowly. The real buying power of the average worker’s wage will rise. John Maynard Keynes was aware of this paradox and said, “when money wages are falling, real wages are rising.” [John Maynard Keynes, General Theory of Employment, Interest and Money, (London, 1936), p. 10.
As prices fell from 1929-32, nominal wages did not fall as rapidly, and real wages rose. Businesses could not pay these higher wages and had to lay workers off. Workers refused to take reasonable pay cuts to bring their wages in line with their earnings power. Even though they could get by on much less in ’32, their pride was injured by a wage they felt to be beneath their dignity. (One clever employer got around this by offering workers $50/week, but to get the job they had to agree to kick back $10 to the boss. Their real pay, of course, was $40/week [$680/week in today’s dollars]. But they could go around saying, “I’m a 50 dollar a week man.”)
So the main reason that so many people were unemployed during the 1930s was that they refused jobs they thought were beneath them. In effect, the change in the value of the money tricked them into turning down jobs they should have taken. Meanwhile, the vast majority of the people, who remained employed, were having a ball. Per capita consumption of meat rose sharply. People were able to switch from margarine to butter. Charitable giving rose to the highest levels on record. As the singer Eddie Cantor put it, “tomatoes are cheaper; potatoes are cheaper; now’s the time to fall in love.”
The reason that the average person was better off during the early 1930s was that the wealth which had been funneled to Wall Street and the bankers during WWI and again from 1922-28 was now flowing to the common people. The rich, of course, could not raise any sympathy for themselves, and so they decided to play up the plight of the unemployed (whose short term interest coincided with theirs).
In conclusion, the Republicans were faced with a choice. Either restore the nation’s savers and hurt the unemployed (for a few years), or go easy on the unemployed by siding with the Democrats and destroying the savers. Since the savers were by far the majority of the common people, since they were vital to the economy of the country and since they clearly had justice on their side, the Republicans made the right choice. Further, it was the Democrats who created the situation wherein the interests of the savers and the unemployed were in conflict. So the entire blame for the unemployment of the 1930s belongs on the shoulders of the Democrats.
Now let us step back and look at unemployment from a long range perspective. There are many “economists” today, arguing from the perspective of the 1930s, who say that unemployment is inherent in a free economy and that the 1930s provide an example of this. But in fact these people are not economists. They are paid agents of the bankers and Wall Street. They are a collection of crackpots and whores and illustrate the kind of obstacle you will come up against in this modern age.
There was no word for unemployment in America until the 1870s. That is because there was no unemployment. Let us practice an unusual technique in the field of modern economics. Let us look at the facts.
You know that there was no unemployment among the Pilgrims after they landed in 1620. But do you know why? Well for the first 2½ years they lived under communism, and everybody had to work on the collective farm. But in March 1620, they abolished communism and set up a system of private property. Each family farmed its own land and kept the product which it had raised. This second type of economy is called the self-sufficient farm, and it was later practiced by the settlers of the west. In a self sufficient economy, each person works on his own land and produces the wealth which he consumes. There can be no unemployment for the simple reason that there is no employment (i.e., no employer hires anyone for a job).
Later a third type of economy arose. Certain people specialized in common tasks. One man was a good shoe maker. Another could raise a lot of potatoes. Yet another made beautiful clothes, etc. These specialists set up small businesses. They brought the advantages of specialization and division of labor to the community. As many of these small businesses grew large, their owners took in new people, trained them in his method and paid them money to produce more product than he could alone. These were the first employees. However, at this point the employer-employee relationship was minor and did not play an important role in the economy. A small businessman might have 5-10 employees and many had no employees at all.
It was the beginning of the factory system which led to large scale employment. Factories would employ hundreds of people, and factory towns sprung up mostly filled with the employees of a given factory. What happened next is very important.
Where did these employees come from? Since the first factory in America was 1793 (Pawtucket, R.I.), where had the employees been prior to 1793 and what had they spent their time doing? The answer is, they had been farmers, mostly on self sufficient farms. The wages they were offered in the factories were so high that these farmers quickly gave up tilling the soil and flocked to the cities. (I know that you have been told the opposite, but then most of your education has been a lie. Why would people give up the way of life they knew, their friends and their surroundings to be exploited for inferior wages? And why would people keep coming, by the millions, many from foreign countries, for centuries? Indeed, they are still coming today.)
So we are confronted with the fact that from 1793 to at least the 1870s, the burgeoning American free market created jobs by the millions. Each decade created enough jobs for all the people of the previous decade and then added a lot more. And during all this time there was negligible unemployment.
From 1873-1879, there was a phenomenon very similar to the “depression” of the 1930s. Lincoln had printed money to finance the Civil War. (The American people refused to vote the taxes for it.) After the war, the country (wisely) returned to the gold standard, and this required a reduction in the money supply. What happened was similar to the case after WWI. Prices fell. Nominal wages also fell, but not as rapidly as prices. Thus real wages were left too high, and this caused unemployment. This was the period when the word first came into the English language.
The “depression” of the 1870s was no big thing. The party in power was reelected in 1876. Nobody thought that the government had any role to play in the economy. The free market cured the unemployment, and America continued on being the richest, fastest growing nation in the world. In the process, it created so many jobs that people flocked here from all over the world. Unemployment in 1906 was 0.8% (according to Historical Statistics of the United States, Colonial Times to 1954, U.S. Department of Commerce).
Looking back on the whole period 1793 to the present, we can see that virtually all of the farmers came off the farms to get jobs. That is, the free market economy’s desire for workers was so great that it drew in pretty much everyone in the country. And then, as we know, it drew in many other people from all around the world.
Then where did the unemployment come from, the unemployment that appeared starting in the 1870s? The answer is in a single word: government. Government caused all the unemployment which has existed in the past and which exists today. And then statist hacks blamed it on freedom.
We have seen that wages tend to lag a decline in prices. Nominal wages follow prices down, but they do so reluctantly and slowly. The buying power of the wages goes up. Employers cannot pay the exceptionally high wages, and the result is unemployment. The clear solution here is price stability. If prices are kept stable, then there will be no unemployment.
Who destabilizes prices? We have discussed two cases, the Civil War and WWI. In both cases, prices doubled during the war and then came back down later. The period when prices declined was a period of high unemployment. Actually, the period when prices rose was a period of low wages. The working man was cheated two ways.
Once the Democrats found that faking sympathy for the unemployed worked at the ballot box (because of the inability of the Republicans to understand what was happening and to formulate a coherent rebuttal), they started to deliberately create unemployment (in order to win votes as the party which can best reduce unemployment). They empowered union workers to go out and beat up non-union workers to keep them from taking jobs. They passed laws forbidding workers from taking certain jobs which they wanted to take. It is no accident that Utah and New Hampshire, two true-blue Republican states, are always among the lowest unemployment rates while Rhode Island and Arkansas, two true-blue Democratic states, are always among the highest.
The current unemployment results from malemployment. When credit is easy, certain sectors of the economy become very profitable and hire workers to expand. Two examples of this are construction and the financial area. Both are enriched by a central bank policy of easy credit. But when the easy credit has to stop (because it has caused prices to get too high), then these favored sectors cut back and lay off workers. From 1950 to today housing starts have fluctuated (roughly) between 1 million per year and 2 million per year. If the country were on a gold standard and there were no central bank, then housing would be a stable industry building 1½ million houses per year. The stock market would be a stable industry servicing the capital requirements of the country. There would be far less malemployment and far less unemployment.
At the One-handed Economist, I keep myself fully employed exposing the errors of conventional economists and beating their time. (The average U.S. mutual fund is down 30% since the start of the century. My model conservative portfolio over the same period is up just about 50%.) I would like to offer to keep you at least partially employed reading my letter. You can get a feeling for my writing by visiting my web site, www.thegoldbug.net, and visiting my blog (no charge). This is about political and social issues (this week is about religion) from an economist’s point of view. The One-handed Economist is $300 per year, and I think that the profit to your pocketbook will be far greater.
Thank you for your interest.
-- Posted Monday, 6 April 2009 | Digg This Article
| Source: GoldSeek.com
