By J. D. Alt, author of The Architect Who Couldn’t Sing, available at Amazon.com or iBooks. Originally posted at New Economic Perspectives.
I’m nearly finished with a very long book that may well be the best illustration of the basic principles of Modern Money Theory available. The book is “A Call To Arms,” by Maury Klein. It is an historical account of the U.S. mobilization as it prepared for, and engaged in, war with Germany and Japan. The scale of the task was unprecedented in human history—and the accomplishment of it changed not just the structure of the American economy, but American society as well. What is striking about the story—and the monumental effort to quickly build, virtually from scratch, the largest and most sophisticated war machine ever to exist on the planet—is that there is nary a peep of concern or argument about how this enormous task would be paid for. All of the anguish and struggle had not to do with finding enough “money” to pay for things, but rather with finding enough things to buy—and enough skilled labor to properly marshal it all together. In the end, virtually every real resource available in the continental U.S.—oil, gas, steel, aluminum, rubber, copper, sugar, tin, and man-hours of labor—was purchased by the Federal government to build the Army, Navy, Air Force and Marine Corps that ultimately defeated the Axis powers. The scale of the sovereign spending is almost beyond comprehension—especially given the fact that, at the starting gate, the U.S. economy was still decimated and impoverished by the Great Depression. At the finish line, however—VJ day, September 2, 1945—the U.S. had become the most powerful, efficient, and equitable economic power the world had ever seen. So how did it all get paid for? And even more important, how did we travel from that VJ day of economic triumph to our sorry state of today, where we think we are so “broke” we can’t even afford to hire enough fire-fighters and equipment to put out the forest-fires raging in our western states?
A lot of people will say the mobilization and war were paid for in the same way the federal government always has, and always will have to pay for anything: by collecting taxes and selling bonds. Evidence for this will be the $186 billion in War Bonds the U.S. government sold to the American people between 1941-1945, and the Revenue Act of 1942 which doubled federal tax revenues. Let’s assume, for the sake of argument, that the War Bonds and taxes did pay for the mobilization and war effort. Conceptually, when we say that, what we’re proposing is that the American people had a whole lot of what we call “money” stashed away in bank accounts and mattresses, and the sovereign government needed that money to build an Army and Navy and Air Force. So the sovereign government collected some of the people’s money, and borrowed even more by selling them War Bonds. Now, what did the sovereign do with the “money” it collected and borrowed? It paid the money back to the people in exchange for the materials and labor to build ships and airplanes and bombs and tanks. The war was fought and, through perseverance, the sovereign defeated the Axis powers, while a great deal of the war machinery the people built was destroyed, spent or ruined in the process.
Looking at it from a simple balance sheet perspective, what is the net position after the war is over? The people have gotten their “money” back, apparently having used it to pay themselves (through the actions of their sovereign government) to build all the stuff they had to build, and do all the things they had to do, to win the war. On the sovereign’s side of the balance sheet there’s a big debt: When the sovereign government traded its War Bonds to the people for their “money”, it made a promise to redeem the bonds at maturity, with interest. To redeem the War Bonds with interest, the sovereign needs…what? It needs the people’s “money” all over again! And, once again, our “logic” tells us there’s only two ways the sovereign can obtain the people’s “money”—by collecting taxes or by issuing (what we might this time call) Peace Bonds. Let’s say this is done, and now the sovereign has collected the people’s “money” back again, enabling it to do…what? It pays the “money” once more back to the people to redeem the original War Bonds with interest.
Now the people have their “money” once again—but what has actually been accomplished? The sovereign government now has a new debt: when it sold the Peace Bonds it promised to redeem them at maturity, with interest. To redeem the Peace Bonds with interest, the sovereign needs…what? It will have to get the people’s “money” back again! And, as before, there are obviously only two ways the sovereign can “get” the people’s “money”….
According to my calculations, the people have now paid for World War II three times over: first, when they bought the War Bonds, second when they bought the Peace Bonds so the sovereign could have the money it needed to redeem the War Bonds, and thrice because now the sovereign needs to tax and borrow their money one more time to redeem the Peace Bonds! Can this possibly be the way things actually work?
Fortunately, there’s another explanation for how the U.S. mobilization against Germany and Japan was “paid” for—an explanation that doesn’t, by logic, devolve into mathematical absurdity. Here it is:
When the mobilization began, the U.S. was still struggling to emerge from the Great Depression. Most households had scant savings to spend on War Bonds, and could hardly afford the burden of higher taxes, so the idea of taxing and borrowing their money to pay for the building of a great war machine was not even a viable option. Nor was it necessary. Instead, the sovereign government simply issued the U.S. dollars, by fiat, as it needed them to buy materials and pay wages: It declared the dollars into existence—and then it paid those dollars to the American people to build the ships and planes and guns. In the historical narrative by professor Klein, we never encounter someone saying, “Sorry, Mr. Roosevelt, we need to sell another billion dollars in War Bonds before we can build that new aircraft carrier.” That conversation just doesn’t come up. By the time 1941 rolls around—and especially in the months after the Pearl Harbor attack—mobilization has pushed the economy to virtually full employment: Millions of previously unemployed people (including women who’d never before been in the workforce) were suddenly pulling paychecks as engineers, technicians and machine operators.
These, now, were the well-paid workers who were able to buy the War Bonds—using dollars the sovereign government had already paid them. But why, if the sovereign could simply continue issuing dollars by fiat, did it sell War Bonds—and by so doing, appear to be eliciting the financial help of the people in the war effort? And why, if the sovereign could simply continue issuing dollars by fiat, did Roosevelt feel compelled to force Congress to impose the large tax increases? In a pivotal chapter in the middle of his book, professor Klein gives a very clear answer to these questions—and it’s an answer that is a text-book illustration of the basic principles of Modern Money Theory.
Between 1941 and 1942 the cost of living in the U.S. rose over 16%. Labor was threatening to strike for wage gains matching the rise in living expenses—putting the mobilization effort at risk. A looming inflationary spiral threatened to undermine America’s ability to accomplish what it so desperately needed to do: continue to pay itself whatever dollars were necessary to build the machinery required to defeat Hitler and Hirohito. The cause of the inflationary pressure was clear to everyone: The U.S. was at—or even beyond—full employment. American workers were pulling in more paychecks every week than they’d ever seen before, and were flush with cash to go on spending sprees. At the same time, however, virtually everything there was to buy had been diverted to the war effort: gasoline, tires, sugar, nylon, shoes, clothing, canned foods and automobiles. (Production of new automobiles was halted in February 1942, and all the auto-plants converted to war production.) There was suddenly very little to buy, and the excess money in the private economy began quickly driving up prices for what was available.
In the face of this crisis, the Roosevelt administration had to do everything it could think of to take spending money out of the hands of the people. In other words, it had to destroy money in the private sector to create the “space” that would allow it to continue to pay those same people to produce the war machinery that would still be required to defeat the Axis powers. The War Bonds and the Revenue Act creating the personal income tax, then, were specifically created not for the purpose of “collecting” money so the government could have it to spend—but rather for the purpose of destroying money so the government could then issue and spend even more dollars without feeding an uncontrolled inflationary spiral.
The most astonishing thing is what the unprecedented sovereign spending of the U.S. war mobilization accomplished. The people had paid themselves—through the fiat monetary actions of their sovereign government—to build a monumental war machine that defeated the Axis powers. But more than that, they had also paid themselves to invent an array of new technologies and apparatuses originally conceived for waging war, but which now were clearly seen to have useful applications to peaceful life as well—and they had paid themselves to build a great many factories, research and production facilities capable of adapting and producing these useful things to civilian life—and they had paid themselves to train a very large workforce of engineers, technicians and skilled workers who knew how to make it all work. This was a powerful economic brew—and it was spiced by the fact that the returning G.I.s were getting paid to go to college to explore how to make the whole thing run even better. America never looked back (until now.)
But what happened to the War Bonds? Didn’t the sovereign have to redeem them with interest? Of course it did—but it did not have to fool itself into thinking the only way it could “get” the dollars necessary would be to collect taxes or issue new bonds. It redeemed the War Bonds in exactly the same way it built the aircraft carriers and bombers of World War II: When the War Bonds came due, the sovereign issued the dollars necessary to redeem them by fiat—and then it paid those dollars to the American people who held the bonds.
By my calculations, the fiat money flowed like this: First, the sovereign government issued and paid the people dollars to build the war machine; second, the people paid the sovereign government back some portion of the dollars they’d earned by purchasing War Bonds and paying taxes; third, the sovereign government destroyed the dollars it received in taxes and for War Bonds, thus enabling it to pay the people even more dollars to produce ships and bombers without creating a spiraling inflation; fourth, the sovereign government redeemed the War Bonds with interest, paying the people with new fiat money—but rather than being inflationary, these new dollars were absorbed by the rapidly growing post-war economy, the people using the money to buy the newly abundant goods and services produced by what was now the most technologically sophisticated, creative, well educated, productive and equitable social economy in world history.
But now, somehow, we’ve lost our way and our momentum. We’ve convinced ourselves that our sovereign monetary system works by a different logic—a logic that leads inexorably to a perpetual and growing shortage of Federal spending power. Given the real threats now racing our way with the same inevitability as was Nazism in 1938—climate change, rising sea levels, super-storms, extended droughts, gigantic forest fires, loss of fisheries and ocean acidification, water and food shortages, nuclear terrorism, and the possible failure of democracy itself—it seems we might want to consider another great mobilization to defend ourselves—if we can ever remember how to do it.
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Excellent posting!
I have a mobilization focus for you. How about if we save ourselves from nuclear extinction and shift to other energy sources.
The effort the US mounted in WWII is the minimum needed to save ourselves from nuclear extinction by Fukushima, Hanford, Chernoybl, etc. The benefits from this effort could totally reorient the building global hatred and distrust into cooperation and trust around common human goals…..like survival.
We need to find the global will to wrest control of our world back from the global plutocrats that created horrors like Fukushima.
+1
Keeping in mind that the “nuclear terrorist” mentioned is the State.
Thanks for this neat summary J.D. Alt. Delightful to read. I agree with Psycho that our new mobilization should be to clean up our most dangerous pollutant first, but let’s not end there. Let’s stay mobilized until the planet is renewed. Or maybe forever.
What do you think about Thorium nuclear energy. I keep hearing rumors that it once was considered by some to be a better, safer form of nuclear energy. It’s drawback, for TPTB, was that it’s by-products were NOT useful for making thermonuclear bombs, so we went the way we went. Does anyone know is there real truth to the idea of it being a safer and otherwise superior form of nuclear energy?
I’d love to know that as well. The “marketplace for ideas” for energy is so filled with completely unreliable information that it’s impossible to know wheat from chaff.
Hell, on top of molten salt thorium reactors there’s a bunch of alternative fusion technologies that could, at least if some of the unreliable sources are to be believed, could offer valid sources of energy at far lower costs than tokamak. I’d love to see a perfectly neutral analysis of the alternatives and their validity. Or at least one that wasn’t sorrily corrupted by this or that interest groups bullshit.
Not talking about cold fusion by the way, polywells, dense plasma focuses etc is the topic. Could some of them work for practical energy production? Could some of them be actually cheaper than the gigantistic tokamak designs?
TPBT have vested interests in keeping energy production centralised (extremely expensive, large power stations), or its fuel sources (oil being a primary one). Has anyone done any valid analysis on how much /that/ motivation affects the technologies that we pursue?
Three cheers for this post. We Brits and Americans take rather too much credit for winning WW2 given the Wehrmacht smashed itself against and was smashed largely by the USSR – but the creation of the US, German-Japanese and Soviet war machines all surely demonstrate the argument in the post. What might we do if we turned to mobilisation without war as PsychoH suggests?
I’ve long held the view we can modularise finance and change to a project-led economics of local-global cooperation. Next up, of course, is how we get democracy back to engage in this and change our notions on what growth, private property, inheritance and capital are.
Current economic argument is an argumentative machine constrained by cheating forms of ‘winning’ and, as importantly, constraint of what argument can be to ‘ready-to-hand evidence’ instead of best argument. The neo-classical denial of private debt is a classic form of an argumentative machine, as is the more general economic procedure of ‘exclusions’ – Dan Sperber has formalised the notion of the argumentative human.
Significant problems with the rich and the existing financial machine would remain to be dealt with. My contention is we should net out a lot of debt and riches.
I agree that the USSR was the country that engaged and defeated Germany by forcing Germany to move forces to the Eastern front where they were decimated and eventually retreated, as Napoleon had in the previous century. Russians united as U.S. Americans had; but Russians fought with their lives and also implemented a scorched earth tactic whereas the U.S. was able to build itself up into a power. The USSR was decimated while the US became the ascendant world power. Oliver Stone and history professor Peter Kuznik recently summarized this in their TV series.
Yes, the U.S. built a war machine and funded (and indebted) many allied countries but historians acknowledge that the actual fighting and winning of battles was accomplished by the USSR. U.S. public relations has fairly successfully rewritten history for primary and secondary textbooks approved by Texas and California; but U.S. higher education and international historians luckily maintain the truth.
Ah but if it becomes common knowledge that the monetary system works the way J. D. Alt explains there will become a widespread clamour for quarter of a per cent government home mortgages and student loans and how could Banksters then blow house price and student loan bubbles, etc?
Historical correction: There was no US Air Force in WWII. The land-based flying component of the military was handled by the US Army Air Corps, and was entirely within the Army’s structure and command chain.
It was not until the National Security Act of 1947 that the air component was split off and made its own wholly separate military branch, as the US Air Force.
On a sidenote, this was the same law that renamed the Department of War to the National Military Establishment (a name that unweildy was obviously chosen by committee). Plus its acronym is entirely too amusing to take seriously… NME? How did you guys not notice that one? “In other news today, the en-em-ee declared that it is taking the nuclear threat from Russia very seriously…”
An amendment in 1949 changed it to the now familiar Department of Defense (“DoD”).
Ture, true, true. This feature really is excellent. And we’ve had such recent reminders, proof, if you like, of just how accurate the author’s conclusions are.
Right through Austerity 2.0 for which we’re assured that There Is No Alternative to, we in the UK have continued to somehow find sufficient money — a lot of it denominated in ForEx too — to fund the tail end of the wars in Iraq and Afghanistan. And, so topical, in all the war mongering over Syria, yes, guess what, at no point has anyone said that with sea launched cruise missiles currently retailing for $10M+ apiece, then sorry, we just don’t have the money to buy them if we use them. Ask though for a few hundred million to cover social services care for seniors, stop rationing certain medical procedures on spurious grounds that are just cover stories for saving money or even a bit of extra cash to fix the roads and the answer is, apparently, sorry, no, we’re broke.
All of which goes to show that, as with WWII, “money” can always be found if deemed necessary. Necessary for the survival of the current political class, to meet the aims and objectives of the political classes geopolitical strategies or the well-connected CEOs of corporations who have managed to make themselves systemically important that is.
One minor critique of the feature — it is, as with most history, written from the perspective of the winning side. By doing that, it tugs on the morality play heart strings of the reader. Good. It makes it’s point more captivatingly. But the flipside of the winners is the losers. Japan and, especially, Germany, got out of their post Great Depression economic funk by military expansion — basically the same trick that the US used. It worked for them too. I once saw a fit-of-apoplexy inducing programme on National Geographic TV which kind-of covered this subject. It was trying to explain how Germany managed to expand its economy so dramatically in the inter war period without succumbing to Weimar Republic rivalry levels of hyperinflation. In a typical example of lax and feeble analysis, the TV show tried to make a case that this was because of forced labor and concentration camps being used as the means of production. Such slave workers and oppressed people are hardly likely to campaign for higher wages. Survival for another days was a good outcome. So on the face of it, that argument seems valid.
But of course, it simply isn’t true. There’s no logic in suggesting that a couple of million people working as salve labor out of a productive population of 50+ million in the Axis countries could make a meaningful difference to supressing a wage/price spiral. No, as with the US, the populations of Germany, Austria and Italy allowed itself to be paid with it’s own money which was created by a fiat process.
Winning WWII was not a product of who had the most “money”. It was who could get access the most resources and who could utilise them in the most effective manner. Japan or Germany could have “funded” their own Manhattan projects. What they lacked was materials, engineering know-how and logistics.
The only mystery is why people are so willing to let established political and economic theory pull the wool over their eyes. It’s like aiding and abetting your own wrongful incarceration. The psychology of this mass co-dependence and abdication of responsibility is fascinating.
I can’t help but feeling though (not exactly scientific I know) that we’re on the cusp of people waking up and saying “hey… I saw what you just did there…”
I hope you’re right–but I don’t see it happening in the US anytime soon. The main problem we have in thinking about “the economy” is precisely that. There is no such thing as “an economy” as such–there is an aspect of politics called economics. Currently “the economy” is not some kind of virtual lifeform that has its own character it is purely and I emphasize “purely” a method of political control. Once that is grasped we can understand a bit more about how the world works–without that central understanding we are bogged down is theories that are mainly fantasy.
Yes. And what Clive said about the USA at the time – we were a nation rich in resources and expertise. That’s what our wealth is based on. Was and is. Interesting that we have conserved our minimum petroleum resources and purchased oil from the Saudis since the 30s. And can’t help thinking that our insistence on controlling the oil market now, by takeover if necessary, is part of our long term vision. Not that I like anything about the brutality of our power. Or the lies told to justify the simple truth. But mobilization will only work insofar as there is control to do so, including control over various outside forces that could screw the whole thing up. Interesting stuff about Bandar Bush on ZeroHedge too.
Re Resources: An unintended consequence of WWII was the harnessing of renewable hydropower by the Federal government to build the enormous TVA infrastructure. The TVA was not constructed – as the government, contemporary newsreels and current textbooks purport – to provide electricity for poor Appalachians, but actually to provide the enormous amount of electricity required to produce and enrich uranium for the bomb.
Canada has (or had) a place called Port Radium in the then North-West Territories. They had a “secret” uranium mine there: http://www.ghosttowns.com/canada/nwt/portradium-eldoradomine.html Canada also had a “Camp X” facility near Oshawa, Ontario where MI5/SEO Branch (British) taught spycraft to Canadians and Americans.
@peace
Wrong. The TVA was founded during the Great Depression. The nationwide construction of the hydroelectric dams began well before the Great Depression. It continued during the depression and sped up during the New Deal era. They were utilized and expanded even more during the mobilization of the country for war.
The hydroelectric dams energy output was utilized by productive industry across the board. Industry has always been a heavy user of energy, and under wartime conditions of full employment it is even more so.
So get your dam facts straight.
Re Resources as the bedrock of wealth: In 1941 we had seemingly endless supplies of light sweet crude oil and other natural resources, like water. Today we’re scraping the bottom of the barrel -so to speak- with shale oil and tar sands. They are not economically viable and ecologically disastrous. So this author’s ending of “But now, somehow, we’ve lost our way and our momentum” is like the confidence fairy in reverse or ending a story by saying “then suddenly a truck ran over me!” What’s going on now economically and financially was anticipated by M. King Hubbert and Frederick Soddy. They did not, however, reckon on neoliberlism, the very worst system imaginable to be in as the end of growth advances.
We do not lack resources including energy what we have is a powere elite who use carbon baed fuels as a way to maximize their political power and ensure their wealth. We could, if not for these forces, get out of the Middle East, use various combinations of alternative ways of producing energy and, above all, conserve energy through materials use, less centralized powere plants, recycling enrgy and creating more efficient everything through artificial intelligence networks and what I call elegant engineering. But this sort of thing is, politically impossoble because the oligarchs own the USG, the corporations, the universities and the mainstream media. The issue has nothing to do with resources at all.
“…minimum petroleum resources”?
The United States used to be the Saudi Arabia of the world. When environmentalists succeeded in instituting a bare minimum of energy saving standards millions of barrels of oil were conserved per day. If America wasn’t such a glutinous energy consumer the US would be a member of OPEC.
Back in the 1940/50(s), hydroelectric power provided roughly 30% of the nation’s energy supply. Over time it’s share was replaced by natural gas and oil consumption as the growth of residential and commercial consumption displaced the industrial sector’s energy use. In comparison hydroelectric energy provides less than 10% of the nation’s energy consumption in the present.
There’s a lot of potential for exploring themes regarding the evolution and transformation of the economy. but I think I’m wasting my time trying to fight the “rich country claiming poverty” myth.
The Nazis were very good at keeping wages down as they expanded the economy through Mefo bonds. We need an explanation of how MMT would cope with hot money, such as in the effects of QE, say, in the collapse of the Indian currency by 30% this year.
I see MMT as giving us a theory to describe what it really means to be a sovereign issuer of a floating non-convertible currency. And the idea that taxes give credibility to this currency.
(I loved Clive’s comment above ‘I can’t help but feeling though (not exactly scientific I know) that we’re on the cusp of people waking up and saying “hey… I saw what you just did there…” ‘)
Addressing policy issues like income inequality and where the money is actually directed seems to be related but more in the form of ‘functional finance’ where issues like employment take more center stage. The job guarantee program tries to put labor in a more prominent role as an anchor of the currency rather than say gold.
Giving it to the financial sector indiscriminately seems to lead to these volatile hot money flows.
Functional finance would also embrace collaborative fiscal policy such as a more accommodating tax structure and more affordable education opportunities. And a socially stabilizing single payor medical system.
Great post–and it shows that when there is a political will to do something it gets done. There was a lot of planning involved in regulating the WWII economy and much of it was very good as was the post-WWII running of a good chunk of the world by U.S. military authorities. The U.S., after WWII, was at the pinnacle of power and, moreover, it’s policies were, for a short time fairly intelligent, well-thought out and somewhat benign certainly compared to the Soviets, the French and the British. What happened? I suggest that most people, even here, don’t want to know so I won’t go into it but whatever it is we woke up one day in 1962 with most of the top generals of this country screaming for a first-strike nuclear attack which they estimated would “only” cost the U.S. 40 million dead but would kill much of the people of the S.U. Allrighty then. What happened? And then one year later the President who stood against this horror was dead and the Soviet Premier who leashed his own martinets was out of office and we sank into a nonsensical and expensive war in Vietnam for the benefit, some say of Johnson’s cronies at KGR.
To put it another way, the U.S. pulled away from and essentially successful socialist regime in order to re-invigorate the American ruling elites who suffered greatly during that period and have never forgotten the horror of being subject to a regime that was focused on something beyond profit for the few. Since then the elites have systematically worked to destroy economic planning, peace, labor unions, and now chip away at the middle-class built up as a result of the policies of WWII and after (GI Bill and so on) that built up infrastructure and education to ensure prosperity for a generation and used that period of prosperity for its own ends. The oligarchs were happy to have racial equality of sorts–made their lives easier, same with women’s rights–more people in the labor force lowers wages, same for gay rights and so on–now marijuana may become gradually legalized and that’s fine. But social democracy is out of the question now and forever in this country.
Economics is a subset of political science and has no independent existence. Economic theories are interesting but do not connect with reality unless coupled with a political agenda. Today’s economic policies proposed by both Rs and Ds are nonsense aimed at particular political cliques within the power-elite and have nothing at all to do with ensuring general prosperity. It’s hard to imagine anyone will “get” this until economics stops being taught and reported on as a separate subject from politics.
If leaders want to have a prosperous country they use economic models that make that happened as they did in WWII. If they want to just enrich the rest at the expense of the rest then they do that. The intention of both political parties is to enrich the rich because that characterizes the power relations of today–they just have somewhat different ways of going about it.
“Today’s economic policies proposed by both Rs and Ds are nonsense aimed at particular political cliques within the power-elite and have nothing at all to do with ensuring general prosperity.”
Preach it Banger.
Thanks for that capsule summary of the way things are, Banger. It fits with everything I’ve been able to glean.
But no fair teasing us that you could say more about how we got here, but NC “can’t handle the truth” as it were. I don’t know about other NC readers, but I know I’m interested in nothing but the cold hard truth (well most of the time.) Are you hinting at some Russ Baker style level-headed conspiracy territory? Deep dark truths about the human condition? Or what?
Btw, I watched Kubrick’s “Eyes Wide Shut” recently (saw it when it came out too) and you seem like somebody whose take it would be interesting to get. I find it hard to wrestle with because I don’t have direct experience of the inner circles of the uber-wealthy, so it’s hard to judge both as art and as possible comment on society. For all I know it could be quite factual. At least in an artistic sort of way.
I love Kubrick though he can be annoying as a filmmaker. I am glad you brought up Eyes Wide Shut I think it is his masterpiece as he believed. I don’t have an intimate understanding of the ruling elites but I’ve had the good or bad fortune to be near enough to smell it and connect with various personalities active in the power game. I believe what Kubrick was saying in the movie was as close to the truth as any artist has gotten.
As a student of the classical historians I believe politics is what we now call Machiavellian or, as I prefer to call in “deep politics” coined by Peter Dale Scott. Most leftist believe someone like me as a conspiracy theorist or worse simply because we do not believe the bizarre tenets of American Exceptionalism which most of the country including the vast majority of people on the left seem to believe in. This belief posits that the old view of history with its big and little conspiracies that Shakespeare loved are obsolete because we are Americans and we are incapable, due to our amazing and magical institutions, of producing political leaders who would act like leaders recognizable from Herodotus to Gibbon. I won’t and cannot say much beyond this other to note that the tide changed on the left after the publication of “The Paranoid Style in American Politics” in Harpers Magazine in 1964 and later in book form that shaped the critique against those of us who believe in what I would call normal politics.
I will give you a non-controversial example of this kind of thinking. Jim Lehrer had Christian Parenti on his show sometime after the invasion of Iraq and reported that Baghdad was rife with allegations of American corruption all stuff which turned out to be true of course and Lehrer banned him for the show for daring to even mention such a thing because that would have implied, of course, that Americans are capable of corruption when everyone knows that at most there are a few bad apples and when things go wrong it’s always the magic mantra of “mistakes were made.”
I love my country and don’t need comforting myths to enhance that love.
Banger I found a news report of the 3/2/04 Lehrer/Parenti interview you refered to.
http://fair.org/take-action/action-alerts/fear-and-favor-at-the-pbs-newshour/1588/
Eyes Wide Shut is Kurbrick’s masterpiece and accurately reflects the reality of the oligarchs class with lots of artistic license. As for my own experience, I’ve skated around the edges of power and occasionally glimpsed something of what these people are like and then some. This was acquired purely by accident and largely socially rather than professionally though I picked up quite a lot from working in government.
As for deep politics or what some people call “conspiracy theories” I believe in the classical approach to politics that Shakespeare and the great classical historians from Herodotus to Gibbon might recognize. If you read the classic and understand that today’s ambitious person is not that different from the same sort of person or association of such persons of the past you will get where I’m coming from. Also, let’s be clear here, the stakes that are being played for in today’s world are so astonishingly huge that I suggest that the methods to achieve victory might be just a tad ruthless.
Thank you, Banger.
@Banger
I’m starting to think that political sentiment on that front is changing. Richard Haas appeared on the Daily Show awhile back, promoting his book that covered the need to reform the domestic sphere of the country. Of course, this would take place while we continue to maintain our overseas empire. If Haas’ olive branch is genuine, there might be more support within the Establishment for necessary reforms. Though how much exactly is uncertain.
That doesn’t mean anybody is happy about this. Already people in certain political circles are calling this the “Great Betrayal”. Just about any wide-sweeping domestic reforms are going to give the American empire a new lease on life.
It’s something to ponder.
I know this might sound strange, but I have no theoretical objection to Empire. I’m a realist and do not believe that democracy is necessarily always the answer to every problem, at least not the way today’s world is structured. An imperial bureaucracy that possesses a sense of honor and mission is possible and has been enjoyed by societies in the past. China has gone through benevolent rule, India enjoyed some good imperial periods, the last being the Mughals. The early rule of the Ottoman Turks was benign and increased peace and prosperity as did Roman rule at various points. I have a much less benign view of the British Empire but it had its periods of relatively benign rule.
Great post and great comment.
Here’s my question: what purpose does an aggressively anti-inflationary monetary policy serve when the economy is far from full employment?
The answer seems to be, on the basis of the above: That IS the purpose of such a policy.
More dangerous than inflation is a very, very large middle class who possess both the education and the economic security to do things like: organize mass protests, engage in civil disobedience, form novel kinds of political organizations, engage actively in politics, etc.
This is why Banger is so right to note that, in the actual world, there IS NO SUCH THING as economics apart from the politics that enables it and whose purposes are in turn served by its “science”. What passes as “economics” is really a political movement funded by and in support of the oligarchy who name chairs, fund institutes, offer grants, and so on, which are devoted to justifying in suitably complex and obfuscating ways policies decided in advance on account of their political usefulness for those already in power.
Grandpa needs to eat cat food and lose his home, in other words, because otherwise he might be able to take an interest in things.
Oh, and the blacks….Well, last time we saw legitimate lower-middle classes emerging in black urban areas it took the FBI, CIA, mass imprisonment, assassinations, and the government-sponsored introduction of heroin to keep THEM under control. Otherwise known as the history of Los Angeles.
Lovely post. I will link to it on facebook. I remember reading somewhere that the federal government did not push E Bonds to pay for the war. The money they got was in no way sufficient. They did it to give people a sense that they were involved in the war effort, they were funding the war. The E bonds would also reduce the spending money people had. Finally, rationing was also used to reduce inflation. But E bonds sound to me like a better method.
What a great post! It gives me more ammunition for my persuasive talks with my husband who insists that the government cannot issue all the money it needs for whatever projects it wants. Here’s hoping that this argument in favour of MMT will make the grade!
As to the reference to fires raging in the West: fires are not raging in the West. See this for acres burned/burning for year to year comparisons.
http://www.nifc.gov/fireInfo/nfn.htm
Also, what determines whether a wildfire gets large or not is a matter of weather. The ability of firefighters to put that fire out is very limited. What typically puts these large fires out is – again – weather.
http://www.nifc.gov/fireInfo/nfn.htm
So . . . not a good example to show what the government can do with MMT. Furthermore, what is often referred to as the fire industrial complex indicates, fire fighting has become a big economic impetus demonstrating just one more institutional imperative: self-perpetuation of growth regardless of cost and whether efficient or not.
“…absorbed by the rapidly growing post war economy.” And THAT is the CRITICAL part of this equation, and the part that simply creating money to make stuff to be destroyed in combat does NOT explain. In the war, the German and Japanese infrastructures were DESTROYED. The British infrastructure was literally worn out. Yes, we had the Marshall Plan, but to a great degree, the rest of the world was a captive market for American goods to rebuild their economies with. And that, rather then the goosing of the American economy with fiat money is what explains how we eventually managed to grow our economy out of our debts in the way that say, Britain was not able to.
It would be interesting to hear an MMT view of the dynamic between the US and global economy in the post-WWII period… I think I understand how it works in one country, but I’m not sure about what it means with multiple sovereigns interacting.
That’s a large undertaking but I think there are a few interesting areas.
China has a large economy and the yuan would seem to be a candidate for a reserve currency. But China soaks dollars out of its economy and then uses them to buy treasuries. This just further enhances the credibility of the USD. But to break this cycle it would have to increase the value of the yuan. This would be good for its workers by increasing their buying power but bad for their powerful exporting companies.
Other countries than the US can also use their own domestic currency to try and build domestic industry and increase domestic demand…
http://neweconomicperspectives.org/2013/05/money-taxes-and-what-we-can-afford.html
If you really believe that climate change is our greatest threat, then you should be singing:
“Leaping and hopping on a moon shadow
Moon shadow moon shadow.’
[A song about making due with less and savoring nature.]
Instead, you’re making like “Lady Gaga’s mother” spewing the refrain of “More, More, More” straight outta my Disco Nightmare:
http://www.youtube.com/watch?v=RlJGrIyt-X8
How do ya like it?
How do ya like it?
“No, BITFU, you got it all wrong. We’re gonna take that money, build momentum and get our MoJo back! These fiat dollars will be absorbed by the rapidly growing post-2008 Collapsed Economy. And the people using the money will buy the newly abundant goods and services produced by what will once again be the most technologically sophisticated, creative, well educated, productive and equitable social economy in world history! And it will be green too! Really, really green.”
Oh. OK.
Even the most charitable reading of your post asks humanity to take the biggest gamble in history, as in:
“Yes, climate change has in fact been caused by man and his never ending pursuit of more wealth, more goods and more land, but we can stop it, and here’s how we’ll do it: We’ll step on the peddle and print even more. This will give us more growth, more expansion, more jobs. But those jobs will be green jobs, so there’s nothing to worry about.”
And if you are wrong?
“How could I be wrong?”
Jevons paradox, for one. http://en.wikipedia.org/wiki/Jevons_paradox
Humans for two. Something about your breathless “we we’re once the most technologically sophisticated, creative, well educated, productive and equitable social economy in world history and we can do it again!” strikes me unsustainable.
But, hey–maybe Jevons is a crock and humans really can live together in peace and harmony. “But time is a ticking on this climate-bomb”, so you had better be right on this.
Still, if you really think climate change is our biggest threat, it seems like you’d want to pursue a whole new paradigm, not MORE of the same.
How do ya like it?
How do ya like it?
I believe you are mistaken to say the government was “destroying money” issuing War Bonds and collecting a personal income tax. Rather it was redirecting capital away from consumption and into production.
Now, the income tax might be seen on the surface as “destroying money,” yet being used to back the credit that was necessary to finance the war effort (i.e. the dollars created out of thin air you mention), the capital this personal income tax marshaled is better seen part of an investment in the future wealth creating capacity of the physical economy, and this even if every last bit of war production was destroyed following VJ Day. It’s safe to say all the machine tools and equipment necessary to produce materiel for the war effort, as well as the human capital mobilized the same, in fact were not destroyed following the war’s conclusion. Therefore, the combination of credit, and tax revenue backing it, directed toward war production acted as an investment: wealth deferred for the sake of greater wealth to be realized in the future.
The same can be said of capital deferred from consumption and absorbed into War Bonds.
By the way, one of FDR’s ancestors (Isaac Roosevelt) evidently collaborated with Alexander Hamilton. So, it comes as little surprise FDR would be keen on credit policy that, the likes of Hamilton established as most suitable for fostering the creative capacities of the sovereign people of the United States.
“…and they had paid themselves to train a very large workforce of engineers, technicians and skilled workers who knew how to make it all work.” This is the very reason why Elizabeth Warren’s Bank on Students Fair Lending Act, financing Department of Education Stafford loans at the Federal Reserve’s discount window, is the right policy, the best policy, a truly American policy, and the reason why the people of the United States should say, “Screw Summers, screw Yellen–Seize the Fed!
“…When the War Bonds came due, the sovereign issued the dollars necessary to redeem them by fiat…” Yet this so-called “fiat” was backed by a robust physical economy much more capable of creating something from nothing–generating new wealth–(expanding commerce, and thus, tax revenues), and so the means to contain the most vicious tax of all, inflation, effectively were contained, much as you, indeed, indicated (not to suggest there was no inflation, as within minutes following FDR’s death in April 1945, the nation’s Anglophile imperialists–for the sake of simplicity let’s call them nation wreckers (as opposed to nation builders)–were on the march and have not stopped since).
The point you only briefly touch upon, saying, “rather than being inflationary, these new dollars were absorbed by the rapidly growing post-war economy, the people using the money to buy the newly abundant goods and services produced by what was now the most technologically sophisticated, creative, well educated, productive and equitable social economy in world history,” really is the key matter that must be highlighted per any defense of the sovereign’s capacity to issue credit (a much better word, by the way, than “fiat currency”). The means by which this is accomplished strictly involves increasing the energy throughput per unit of physical production capacity in place throughout the economy. Thus are windmills and solar panels woefully ill-suited for the present, post-WWII task at hand. Thus, too, is the destruction of NASA national suicide(!), by the way, as technological advances this agency has been responsible for bringing to a more energy-dense, post-WWII U.S. commercial economy have been immensely valuable to the cause of creating new wealth. MMTers really need get a better handle on this key matter of physical production and the means by which this is both effectively expanded and made increasingly more efficient per unit of energy input powering the physical economy.
Well done, though, J.D.
The sovereign issues real money, fiat currency. (T-bills, notes, and bonds; physical dollar bills and coins.)
Banks issue credit money. (Loans create deposits.)
The difference is significant.
The difference is significant. MRW
Yes. The first is legitimate* and the second (credit creation) is a form of government-backed counterfeiting for the benefit of the banks and the so-called creditworthy.
*Except insofar as fiat is de jure legal tender for private debts when it should ONLY be legal tender for government debts. However, fiat could always be VOLUNTARILY used to settle private debts.
Agreed. As I wrote in a comment near the bottom of the page, I also disagree with the term “destroyed”, but that’s from the citizen’s point of view. He eventually (if he lives out the war) gets the money back. But from the government’s perspective, that money is out of circulation, which is a good thing. Plus, it keeps the citizens involved in the war effort.
What WWII tells me is that it’s the resources that matter, not the money per se. If the resources are there, there should be money available. As I see it (and I can’t claim to even understand MMT, much less claim I’m an adherent) it’s government’s job to make sure money supply isn’t an obstacle to using them.
No, MRW, TC is right on that point. Better to say credit (=debt looked at the other way) than fiat money. Banks issue credit, bank credit which circulates as money. States issue state credit, which circulates as money. Whether in the form of bonds or ready money/currency/reserves is usually of negligible importance, which is why most “economists” spend most of their time obsessing about it. Money is always a form of credit/debt. There is no difference whatsoever between state credit and bank credit, except for the identity of the issuer. But one is not necessarily, more truly money, real money than the other. In recent times, in ancient times, most of the times in fact, state money is at the top of the pyramid. But this is a mere empirical observation. During much of the middle ages, it was not so. State money could trade below par to, could continually depreciate in terms of, bank money.
The difference is significant, but only because the state is significantly different from the bank(s), because the state has enormously more real and fiscal power, nowadays.
The fundamental concept of MMT is not “fiat” “money”, which is eliminable, but “credit/debt”. The State Theory of Money is a case of the Credit Theory of Money. Many, many MMTers do not really understand this. It is so simple, so trivial that the mind is repelled.
MMT is still a mystery… The post seems to imply that MMT can only work under war-like conditions. Would expanding the money supply work in peacetime? It did not in Zimbabwe, although one could argue that Zimbabwe, having had considerable productive capacity, had lost its ability to use it. Like the US, starting from the woes of the Great depression, Zimbabwe created money starting from a difficult position (at least according to some interpretations). Like the US, it had/has considerable potential. In one case, the potential was realized, in the other not. If it was only a case of creating ‘enough’ fiat or credit, then Zimbabwe should have been a success story.
Which raises the question: would printing money have worked in Zimbabwe if only the government had also issued ‘Emergency bonds’? And how do you do that without an emergency?
The placebo effect is real. Under emergency conditions, the effect seems to be stronger. MMT depends on placebo economics to induce people to produce more and consume less – the output gap needs to be maintained otherwise …kaput.
MMT works if you spend the money in an area of the economy where lack of money is the thing limiting activity e.g. giving it to poor and working people who will spend it, or on something that’s starved for investment. It doesn’t work in the rare cases where the economy is at full capacity. It especially doesn’t work if you just give more money to people who already have a lot and don’t feel like doing anything with it (which is what we’ve been doing lately).
the US government was nothing more than a puppet controlled by the international capital at the time to do what was needed to be done, that is to accumulate more debt for the war efforts. the author’s reading of the history conveniently forgot this simple fact. for the records, it was Uncle Joe’s Red Army destroyed Hitler’s Third Reich.
“What is striking about the story…is that there is nary a peep of concern or argument about how this enormous task would be paid for.”
“it seems we might want to consider another great mobilization to defend ourselves—if we can ever remember how to do it.”
I’m wondering if someone would be interested in explaining what is different today? What projects have not been pursued due to worry about how to pay for them? We have mobilized trillions of dollars worth of labor – it’s just been spent differently than some of us would desire.
Plus, concern about war profiteering and the general costs from what was briefly the Great War was a huge factor in delaying US entry into WWII. Public and Congressional opinion was more anti-interventionist in the 1930s than any time since. FDR basically spent an entire Presidential term getting the country to go to war.
Nice post but let’s not forget that it was the banks who CAUSED World War II and which will cause even more destruction with the unnecessary rat race they drive.
And if the monetary sovereign (e.g. US Treasury) is to spend as freely as it should (to reverse previous bank induced injustice), it MUST reign in another source of fiat creation, the central bank, else we’ll have TWO sources of potential price inflation and we know from past experience who’ll get the blame (Hint: It won’t be the banks!).
Actually, the Fed bought lots of war bonds all the way thru 1951 which funded most of the “war mobilization”. Then post war taxes were very high – top rate at 90% – for a very long time. Then our post war economy was good because Europe had blown itself up and we had lots of customers for US products and construction materials and not much competition.
But why mess up a nice fantasy story with facts?
What? You deny the banks were a major cause of WWII?
1) Bernanke admits that the Fed caused the Great Depression.
2) The Great Depression is widely acknowledged to be a major cause of WWII.
3) Additionally, the Fed financed the US entry into WWI, which broke the deadlock and allowed the humiliation of the Germans – another major cause of WWII.
Actually, the Fed bought lots of war bonds all the way thru 1951 which funded most of the “war mobilization” craazyboy
You’re impressed that the Fed created some FRNs from thin-air to purchase US Treasury bonds?!
Ok, maybe I was too brief as usual and need to comment further.
“What? You deny the banks were a major cause of WWII?”
No, didn’t touch on that one at all. WW1 was about the largest cause of WW2 – war reparations leading ultimately to Hitler and all. Different reason in the pacific however. Also recall reading something about how banks and industrialists in the US were keen to profit on the war. Maybe that’s what you are referring to.
“1) Bernanke admits that the Fed caused the Great Depression.
”
I think Ben was referring to The Milt himself whom proclaimed the Fed should have increased the money supply to counteract the crash of ’29. Ben just did it the “right way” for the crash of 2008 – so we can see how “the right way” is working out for us.
“2) The Great Depression is widely acknowledged to be a major cause of WWII.”
Um, see the beginning of this comment, and then I’ve also heard that WW2 was the solution to the Depression – If we can flip flop cause and effect and maintain one-to-one relationships.
“3) Additionally, the Fed financed the US entry into WWI, which broke the deadlock and allowed the humiliation of the Germans – another major cause of WWII.”
Ya, The Fed was created in 1913 – I can only guess at the reasons.
“You’re impressed that the Fed created some FRNs from thin-air to purchase US Treasury bonds?!”
I felt I had to mention it because the entire posted article failed to mention it.
The only part that impressed me about the concept was back then Fed actually did it by creating paper notes instead of just using electrons.
Different reason in the pacific however. craazyboy
I’d bet central banking was behind that too. The banks drive people into debt (by lending purchasing power into existence) for usury and thus exponential growth is required to avoid bankruptcy.
and then I’ve also heard that WW2 was the solution to the Depression craazyboy
War is a stupid, immoral, dangerous and wasteful way to correct a mere shortage of purchasing power in the right hands. It’s also obsolete since it’s become dangerous to even bankers.
Ok, maybe I was too brief as usual and need to comment further. craazyboy
Briefness is not the problem with your comment, insulting inaccuracy is.
Actually, the Fed bought lots of war bonds all the way thru 1951 which funded most of the “war mobilization”.
No, the Fed didn’t buy any War Bonds. War Bonds were bought by individuals, small savers. Their purpose was not to “destroy money” per se – they didn’t – but to defer consumption. The Fed bought Treasury Bonds. But this was just an interest rate operation, not a funding operation. In fact, until rates were unpegged in 1951, the peg made banks naturally prefer to hold money at the long 5-year maturity end, because it paid the most interest and they were confident that the Fed wouldn’t go back to its idiotic-fucking-around-with-interest rates and destroy the value of their principal. The ancient Mesopotamians had the right idea – peg the base rate at whatever. And hold it there for 1000+ years.
Government expenditure “funds” itself. It has value because what the government sells – in particular, get out of jail free (actually for 1 year, after you pay your taxes) cards – are in high demand. Back then, when men were men and women were women and cats weren’t allowed to marry dogs, economists were economists. People understood that the dollar backed gold, and that the Treasury backed the Fed, not the other way around.
What happened with the War Bonds? Well, because price controls were lifted too fast, because even then fantasy-“economics” was too strong, there was rampant postwar inflation, much worse than wartime inflation, worse than the 70s inflation. Prices rose so fast that Manhattan office workers weren’t paid enough to avoid malnutrition. But why do you never hear about it? Because it screwed the 99%, not the 1%. Too many of the lesser people had significant savings, which had to be diminished. The best example of the inflation tax that the Austrians rant about. But they never mention it, showing whose side they are on.
Ideas like US postwar prosperity being directly caused by Europe blowing itself up – belong firmly in the realm of fantasy, not fact. How does your neighbor burning his house down make you richer? Answer: It doesn’t.
Zimbabwe also implemented “price controls”. Can you give one example, one single, where price controls ever worked?
I bet you can’t find one because there is no such thing. You put price controls and what you do is cut off supply. Who sells things at a loss?
Also,
Very interesting analogy about the neighbor’s house. What about the neighbor’s business, why didn’t you put it in that context. If you and he neighbor are the biggest suppliers of goods and services to the world, what would happen to your business when your neighbor’s burns down?
It doesn’t? Try again Calgarus, the Austrians are RIGHT.
Wow! Excellent post!
Now, if only historical outcomes and evidence were used in some way to inform current policies …
third, the sovereign government destroyed the dollars it received in taxes and for War Bonds, thus enabling it to pay the people even more dollars to produce ships and bombers without creating a spiraling inflation;
Possibly others have made this point already, but from the point of view of those citizens, that money wasn’t destroyed. Instead, it was a form of savings. In the end, that policy worked both for the government and its citizens. Which is probably why it worked at all.
What if the FED stopped buying mortgage backed securities and purchased student loans instead. They are both sucky investments with poor prospects of returns. How different would it really be, aside from the obvious question of who benefits from such actions. I am just trying to think of simple messaging that people could get behind. and i happen to be drowing in students loans….
Do you mean have the Fed buy the student loans now being issued by the federal government? They’ve been projected to turn a profit of over $50B for 2012, with an additional $110B projected by the time Obama leaves office. Hardly a “sucky” investment for the federal government. Instead of subsidizing higher education costs like other advanced economies, Uncle Sam is cashing in on the rising costs of college tuitions.
http://www.huffingtonpost.com/2013/05/14/obama-student-loans-policy-profit_n_3276428.html
Great article. J. K. Galbraith (who was, at least in part, the architect of this program) also provides a very good description of the rationale in some of his books.
It makes intuitive sense if you think about it in the right way. The government needed a massive increase in production in a short span of time. That implies substantial GDP growth, so logically the money supply must also expand to match.
Put differently, people aren’t just going to go out and start making planes and guns and ships because the government tells them it’s their patriotic duty. There needs to be an incentive at the microeconomic level, and the simplest is to just give people a job and pay them to do it. But the money to pay them needs to come from somewhere. If you try to do it without expanding the money supply, then every dollar you pay them needs to be taken from somewhere else, via taxes, spending cuts or whatever. That’s likely to cause an economic contraction in the sector you take it from, which will offset any economic expansion caused by your spending. In the end you will never get the kind of GDP growth that you need in order to achieve your production goals for the war effort.
Galbraith talks about all this in his books. He also discusses the Marshall Plan after the war, which was (as he describes it) a big financial giveaway that had to be disguised as a loan in order to make it palatable to the public. He points out the absurdity of expecting a destroyed national economy to recover and catch up with those of the victors while simultaneously extracting payments from it (the lesson of Versailles, and one that European central bankers would do well to heed).
And since our Fed was a major cause of WWII anyway, it could easily be argued we OWED the Europeans reparations.
Wouldn’t there have been much more destruction if the US did not get involved?
The US saved Europe, and they asked for our help.
What cured the Great Depression was the flow of capital (both wealth and intellectual) from Europe to the United States.
The writer of the post is completely mistaken in thinking that it was printing that led the economy when in fact it was backwards. Demand came first, printing second. And heck, there was so much printing that inflation was extremely high even with high growth. Keep in mind that the US dollar was also pegged to gold, meaning, there was settlement back then. The US could not borrow to infinity to fund the war, it had to repay it’s debt.
After 1971 (nixon closed gold window), nothing can stop the US from printing as there is no settlement. The US can keep building debt until someone will accept it, and the majority of countries accept it. You may think this is a good thing?
Well, what do you think happens to jobs if other countries are not forced to settle (buy) with the US. China can continue to buy US debt and continue to grow its economy, while not buying an iota of US goods.
As I have said many times, people don’t get it. They keep complaining about jobs while at the same time approving the government’s recklessness in borrowing. Folks, you cannot have both, pick one.
Also,
By wealth/capital, I also mean the factories. Factories were destroyed in Europe, where else could people get their goods but the US?
When supply was shut off in Europe, the demand would stay constant, but the supply was reduced greatly. That meant higher prices paid for US goods. On top of that, you had the war going on.
It’s not rocket science.
oh, but labor really isn’t valuable any more…
crack me up.