Stephanie Kelton: Reading Between the Lines – A Memo from Fed Chairman Marriner Eccles

Yves here. Even though there are some news stories that might merit comment, economists and finance people often have an inadequate appreciation of history. Stephanie Kelton does an important service in discussing a memo from the Fed chairman during the Roosevelt Administration, Marriner Eccles. I was reminded of Eccles’ a fine appreciation for how the real economy worked and how government actions affected business. This keen eye for the fundamentals is sorely absent among most macroeconomists and policy experts today.

By Stephanie Kelton, Associate Professor and Chair of the Department of Economics at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives

After I shared a few thoughts on the impending decision to replace Ben Bernanke as Chairman of the Federal Reserve, I couldn’t help revisiting the writings of Marriner Eccles. Eccles was a Republican and a businessman who, by the age of 22, had become a millionaire with an impressive record of restructuring and consolidating balance sheets (including those of financial institutions) to withstand the turmoil of the Great Depression. In 1934, Franklin D. Roosevelt tapped Eccles to head the Federal Reserve, a position he held until 1948.

The following memo – written May 19, 1938 – gives you a flavor of the way Eccles thought about important issues related to financial stability and macroeconomic policy. What he doesn’t say is at least as important as what he does. For those who struggle with econo-speak, my own plain-speak is interspersed throughout.

As a general principle, deficit-spending by the government should only be undertaken in depressed times as a means of offsetting in part or compensating for the lack of private activity. Conversely, when private debt is rapidly expanding, there should be a contraction of public debt as a counterbalancing and stabilizing influence.

KELTON: The government is a partner in the economy. When the private sector tightens its belt (i.e. borrows and spends less money), it is fiscally responsible for the government to compensate by loosening its belt. (This, by the way, is exactly what ended the Great Depression and, more recently, what halted the Great Recession.)


However, there may be times when national income is at a high and rapidly advancing rate when it would be desirable from every standpoint to increase taxation—for example, by broadening the tax base— in order to maintain a flow of funds to impoverished elements of the population, to the aged and unemployables, whose purchasing power is necessary to sustain production and thus help to preserve existing capital and make possible further profitable expansion of facilities. This, in turn, would provide an outlet for accumulations for savings in the field of private investment. Otherwise, as happened in the late twenties, there may be excessive accumulations of investment capital which, unable to find out­let in productive domestic enterprise, are diverted to unproductive channels and to speculative bidding up of stocks and other equities or put into uncollectable foreign loans.

KELTON: It might make sense to raise taxes on the rich and increase spending on seniors and the unemployed, because the rich plow too much of their income into speculative endeavors, creating bubbles, whereas seniors and the unemployed will spend their income buying the products of industry, which helps this thing called capitalism work.

The problem to which I refer seems to me to be basic in our economy. I think it has been well outlined by the Brookings Institution in their studies. Thus, in their volume entitled “Income and Economic Progress“, they point out that we have always had, even in boom times, a sufficient supply of manpower, of fuel, of money and credit and of material resources to produce far more than was actually produced. They point out (p. 37) that ‘the consumptive requirements or wants of the people were far from satisfied during the period of our highest economic achievement’; and (p. 36} that ‘the great problem of American business men is not how to produce more, but how to sell what they have already produced.’

KELTON: We have more money, people, and natural resources than we know what to do with. What we lack — in a world where the profit motive rules — are enough lucrative ways to put them all to use. So we end up with an economy that almost always undershoots its potential.

Having called attention to the maldistribution of income, they then raise what seems to me to be a most fundamental problem, namely, the maintenance of a balance between the three factors of savings, consumption, and capital formation. They state (p. 41 et seq.)* ‘According to traditional views the way in which income is divided as between spending and saving in no way affects the degree to which our productive resources will be utilized. If more money is saved, the greater, it is contended, will be the construction of capital goods; if more is spent, the greater will be the output of consumption goods. An increase in savings thus merely shifts labor and materials from employment in the consumption goods industries to employment in the capital goods industries; and the total disbursements for wages, interest, etc., remain unaffected. Society would, however, have the benefit of an increasing supply of capital goods.

This traditional analysis, it should be carefully noted, is based on the primary assumption that all money savings automatically become new capital equipment. Such an assumption ‘implies that business men will always expand plant and equipment to the full extent of the funds available. Stating the matter another way, it is assumed that the formation of new productive capital in no wise [sic] depends upon consumptive demand—that business men will increase the supply of capital goods even though the demand for consumptive goods is declining. In other words, it is assumed that consumptive demand and the construction of capital equipment ere independent variables.

KELTON: A lot of people will tell you that our system is naturally configured to make sure our economic ship never sails too far off course. They think of the economy as machine that comes equipped with its own mechanism to churn one person’s saving into someone else’s spending.

Now if this is true we should always have— barring other mal­adjustments— full employment either in the production of capital goods or consumer goods. But if it is not true— if the expansion of capital goods depends upon a concurrent expansion in the demand for consumption goods— then an increase in savings might have very different results. How have we been able to clarify the basic issue thus raised?

KELTON: But what if our view of the way the economy works is wrong? What kind of evidence is there to support the claim that businesses buy more equipment or build more factories when their customers are spending less?

First, we sought to show, on the basis of general reasoning and observation, that an increase in savings at the expense of consumptive demand would reduce the construction of new capital goods as well as of consumption goods. Since business men are concerned with making profits, and since profits from the use of new capital depend upon the manufacture and sale of consumer goods by such productive establishments, we contended that an expansion of plant and equipment will not take place in any large way when consumptive demand is declining and the general business situation as a whole is accordingly unpropitious.

KELTON: Common sense suggests that a businessman would not ordinarily borrow to expand his business when he’s experiencing a decline in sales.

Second, we surveyed the facts of our industrial history as a check on the validity of this general reasoning. The available evidence showed conclusively that new capital is constructed on any significant scale only during periods when consumption is also expanding. In periods of declining consumption the construction of new capital also decreases sharply.

KELTON: But we don’t have to rely on imagined behaviors. The evidence shows that businesses spend more when they’re swamped with customers, not when their customers are closing up their wallets and saving more.

We concluded from this analysis that if new capital is to be constructed there must of necessity be an increasing flow of funds not only through investment channels but also through the channels of retail and wholesale trade. This led inevitably to the question: How is it possible to finance simultaneously an increase in the output of consumption goods and of capital goods? We showed that a concurrent increase in the flow of funds through consumption and investment channels is made possible by the expansive quality of our commercial banking system, which is a manufactory of credit. In a period of expansion, credit is in fact extended both for working capital purposes— to facilitate the production of consumptive goods— and for fixed capital purposes— to finance the construction of new plant and equipment.

In either case the funds are in due course disbursed in payment for wages, materials, and other production costs, and thus the aggregate money income received by the people is enlarged. This “makes it possible to spend more as well as to save more, and thus the flow of funds through consumptive and trade channels is increased concurrently. The facts with reference to investments and consumptive expenditures prove that this is the case.

KELTON: Credit — not savings — makes the world go round. The idea that we have to sacrifice current consumption (i.e. save more today) for future consumption (i.e. more business investment today) is wrong. Bank credit allows income, consumption, saving and investment to grow together.

Third, we found from the study of our industrial history that the growth of capital is closely adjusted to and dependent upon an expanding demand for consumption goods. The evidence bearing on this question is of two types.

We found in the first place that expansion or contraction in the construction of new capital closely parallels expansion or contraction in the consumption goods industries. Moreover, fluctuations in the construction of capital goods have usually followed rather than preceded fluctuations in the output of consumption goods.

KELTON: Businesses wait to invest in new capital until after they see strong demand for their products. Consumer demand for the stuff they produce is the all-important guide.

The controlling importance of consumption was, however, more conclusively revealed by the discovery that the rate of growth of new plant and equipment in a period of industrial expansion is adjusted to the rate of increase of consumptive demand rather than to the volume of savings available for investment purposes. Savings are made in the first instance in the form of money. This money is directed into investment channels; but it does not follow that it will always be used in constructing new capital goods. We found that between 1922 and 1929 the volume of funds rendered available for investment purposes was in­ creasing rapidly, but that the volume of securities floated for purposes of constructing new plant and equipment remained practically unchanged in amount from year to year. In 1929 the volume of new securities issued for the purpose of actual capital construction plus mortgages was less than 5 billions, while the volume of funds seeking investment was in the neighborhood of 16 billions.

The evidence thus shows conclusively that the construction of capital does not vary directly with the amount of investment money available. It is apparent that the decisions of business enterprisers with reference to the construction of additional plant and equipment are determined primarily by reference to the state of the markets for the products which such new capital equipment could turn out.

KELTON: Higher saving does not automatically get churned into new investment. The reality is, business won’t borrow money for investment purposes unless they experience strong demand for their products.

When the volume of money savings is in excess of the requirements for new capital construction, what becomes of the excess? The answer is that funds seek employment in one way or another— just how, depending upon varying economic conditions or situations. They may be loaned abroad, as large amounts were in the period from 1925 to 1929. They may be used in purchasing securities already outstanding in the markets, and be absorbed in bidding up the prices of such securities. Or, as during the depression, when new security issues for purposes of private capital expansion have virtually disappeared, they may remain stagnant in bank deposits, be used in financing government deficits, or, again, in bidding up the prices of outstanding corporate issues.

KELTON: Savers might just want to hold onto their cash. They might part with some it in order to buy government bonds or foreign securities. Or they might plow it into the stock market, driving up share prices.

A flow of money savings into investment channels in excess of the requirements of the capital markets is a comparatively new phenomenon in the United States. Throughout our earlier history, indeed until approximately the World War period, the requirements of business enterprises for funds with which to develop new capital were characteristically in excess of the supply emanating from the savings of the people. The deficiency was made good by borrowing abroad and by the expansion of commercial banking credit. In the last twenty years, however, the situation has been profoundly altered. As a result of a higher average level of income, and particularly because of the concentration of income, the volume of money savings flowing to investment channels has so greatly increased that the balance has been shifted. Instead of having a deficiency of investment money, we have a surplus.

KELTON: This wasn’t always such a big problem. Income used to be more equally distributed, and people spent most of what they earned, leaving little extra to satisfy the investment appetite of the business community. We have a vastly richer economy today, but it is also more unequal. This makes it harder to keep investment high enough to keep the economy on track.

This diagnosis or analysis of the economic mechanism may then be summarized as follows. Our study of the productive process led us to a negative conclusion— no limiting factor or serious impediment to a full utilization of our productive capacity could there be discovered. Our investigation of the distribution of income, on the other hand, revealed a maladjust­ment of basic significance. Our capacity to produce consumer goods has been chronically in excess of the amount which consumers are able, or willing, to take off the markets; and this situation is attributable to the increasing proportion of the total income which is diverted to savings channels. The result is a chronic inability— despite such devices as high pressure salesmanship, installment credits, and loans to facilitate foreign purchases— to find market outlets adequate to absorb our full productive capacity.

KELTON: We have an economy that chronically undershoots its potential. Income inequality is a big part of the reason way. The very wealthy save too much, and try as we might, we can’t seem to get the poor to pick up the all of the slack by taking on debt to finance higher consumption.

In another volume entitled “The Formation of Capital”, the same authorities state (p. 146): ‘We had funds available for investment ranging from around 8 or 9 billions in 1923-24 to as much as 15 or 16 billions in 1928-29. On the other hand, the volume of new corporate issues for productive purposes, including mortgages, remained practically stationary at about 5 billions. The amount of the savings that passed into the hands of business enterprisers for use in buying materials and hiring labor for the construction of new plant and equipment was thus about 5 billion dollars annually. The question is what became of the balance.’

KELTON: A lack of saving is not our problem. Too much saving is.

Answering this question (p. 151), they state: ‘The answer is that, aside from that portion which went into foreign issues, the excess savings were absorbed, dissi­pated, in bidding up the prices of outstanding securities. Money savings were thus transferred increasingly into specu­lative profits rather than into productive plant and equipment. The inflation of security values resulted in a vulnerable fi­nancial structure, the collapse of which was an important contributing factor to the depression.’

They state also (p. 152): ‘When the amount of the national money income that is saved increases faster than the amount that is disbursed through consumption channels, there are various possible outlets for the excess savings. Funds not demanded for the construction of new plant and equipment may be invested abroad, as during the World War and again in 1925-29. They may be absorbed in bidding up the prices of existing securities, as in the recent boom years.

They may stagnate in bank deposits— or go to finance government deficits— as has been the case during the depression. ” This phenomenon of an excess of savings relative to productive out­lets, they discuss in the conclusions to this volume (p. 159 et seq.): ‘The rapid growth of savings as compared with consumption in the decade of the twenties resulted in a supply of investment money quite out of proportion to the volume of securities being floated for purposes of expanding plant and equipment, while at the same time the flow of funds through consumptive channels was inadequate to absorb— at the prices at which goods were offered for sale— the potential output of our existing productive capacity. The excess savings which entered the investment market served to inflate the prices of securities and to produce financial instability. A larger relative flow of funds through consumptive channels would have led not only to a larger utilization of existing productive capacity, but also to a more rapid growth of plant and equipment.

KELTON: In the period leading up to the Great Depression, savings were not churned into new factories and new machines but into speculative endeavors that turned our economy into a casino.

The phenomenon of an excessive supply of funds in the investment markets had never been anticipated. Not only had it been assumed that all savings would automatically be trans­formed into capital equipment, but it seemed impossible to con­ceive of a situation in which savings might become redundant.

KELTON: The dominant economic theory — which taught that you can never have too much saving — had it wrong. Malthus was right. We ended up with an economy that was capable of producing a lot more than we were collectively prepared to buy. Those who believed in a self-correcting mechanism to turn unspent income (i.e. savings) into productive investment were wrong.

Such a point of view is natural enough in the light of our historical evolution. In the early history of this country the volume of funds available for the purposes of capitalistic enterprise was per­sistently inadequate. Business men often found it difficult to obtain the liquid capital, at any price, with which to expand the size of their business undertakings or to exploit new fields of enterprise. In colonial days, for example, the shortage of funds was a continual source of difficulty and a primary cause of irritation with the mother country, which opposed the issuance of bills of credit by colonial governments. Until well into the nineteenth century the volume of savings rendered avail­able through investment channels for the needs of business enter­prisers was negligible in amount. The philosophy which empha­sized the fundamental importance of increased savings was a realistic one for that age.

KELTON: There was a time when it made sense to assume that the business community would eagerly absorb any and all savings and put it to productive use. In fact, the appetite for surplus funds used to vastly exceed the supply.

In the period since the Civil War, however, two factors have combined to produce a profound change in this situation. The first has been the growth of a well-to-do middle class, with funds available for investment. The second has been the develop­ment of the commercial banking system, making possible an ex­pansion of credit to business enterprise for both fixed and work­ing capital purposes. It is these developments which account for the emergence of the United States as a great financial power.

KELTON: It became a lot easier to secure funding after we built a strong middle class and a banking system that could easily provide credit when businesses wanted to expand operations.

Not only do we now have an abundance of funds with which to fi­nance American enterprise, but we are also able to extend credits to the world at large. In this development we have followed the road which England travelled at an earlier date. At the present stage in the economic evolution of the United States, the problem of balance between consumption and saving is thus essentially different from what it was in earlier times. Instead of a scarcity of funds for the needs of business enterprise, there tends to be an excessive supply of available investment money, which is productive not of new capital goods but of financial maladjustments. The primary need at this stage in our economic history is a larger flow of funds through consumptive channels rather than more abundant savings.

KELTON: We solved one problem but created another. Now we have too much much saving and not enough investment.

It is, of course, essential that the economy have at all times an ample supply of private capital for investment in productive enterprise. I am speaking of conditions not as they have been, or as we would like them to be, but as we are forced to deal with them as we find them today. These conditions include the slow rate of increase in the population, restricted immigration, the disappearance of the frontier in the west and south, and restricted world trade due to tariffs and quotas, exchange controls and fluctuating currencies.

These factors force upon the government the necessity for dealing with social and economic problems on a nationalistic basis to a degree that has never before prevailed.

KELTON: The world has changed, and there is a new role for government in our economy.

I agree that as a general rule of the past we had a scarcity rather than a superabundance of investment capital relative to productive outlets, and that, therefore, recovery from depressions before the last war was almost invariably led by new investment. I seriously question whether this rule, and the economic philosophy based upon it, is valid under present and prospective conditions.

KELTON: We cannot sit around and wait for the business community — which is driven by the profit motive — to lead us out of the doldrums.

The point I wish to make is that it would be to the interest of capital under such conditions to advocate such taxation on a broad income tax base as would, in effect, sustain buying power and thus make for a sustained and expanding production which, in turn, serves not only to protect existing capital investment but also to provide a productive and profitable outlet for accumulated private savings.

The idea is by no means new or untried, for we have an example of its application in England and some of the other capitalistic democracies, where the level of taxation is extremely high— and bear in mind that I am just as unenthusiastic about paying taxes as you are— but where by various public expenditures a reasonably even flow of purchasing power has been maintained and production has been kept at continuously high levels. It seems to me that this is very much in the interest of the capitalist because he is better off in the end, since the products of the mill and factory continue to find a market and the return in profits to the owner of capital, after paying the higher taxes, is far greater than would be the case if the economy bogged down, the plants had to be closed and the value of all investment sharply depreciated.

KELTON: Capitalism runs on sales. If there aren’t enough customers to buy what our businesses are capable of producing, capitalists will suffer. It is the government’s responsibility to do what it can to maintain a proper balance between saving and investment on the one hand and consumption on the other. Rebalancing the economy might involve raising taxes.

I recognize, of course, that the execution of such a policy would have to be very skillfully managed and well timed, and that, as I have said, there must be at the same time every encouragement for the employment of capital in new production— that there must be always an ample supply of funds for that purpose.

Accordingly, when the supply of savings is insufficient to meet the expanding needs of the country for new capital on a profitable basis, income taxes should be reduced. A condition such as this may develop in the future, for I realize that technical progress opens up indefinite possibilities for production, and education, by causing needs to become more refined and diversified, can increase the requirements of our people indefinitely. But in times when savings are too large relative to productive outlet, government should increase taxes and should apply the proceeds to depressed areas, to public health and educational purposes, to public improvements, conservation and protection of natural resources— to preservation of the resources, human and material, of prosperity and not to competition with private initiative.

Higher taxation could well be applied, in these circumstances, to the income groups of, say, between $2,500 and $50,000, and to corporations, always, of course, on an ability-to-pay basis. It seems to me that some of the other capitalistic democracies, such as Great Britain and Sweden, have managed this general policy fairly well in net effect upon their economies, and I am inclined to think that it is their greatest economic safeguard in the preservation of democracy.

KELTON: Redistribution of income can put idle money to work, supporting businesses that would otherwise fail.

As I said in the introduction, this piece is interesting not just for what it says but for what it doesn’t say. What is says is that the US economy has reached a stage in its evolution where chronic unemployment — due to insufficient demand — is the normal state of affairs. What it doesn’t say is that the monetary authority (Fed) can do anything to fix it. It was then, as it is today, primarily up to the fiscal authorities (Congress) to compensate for the demand deficiencies.

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  1. Nell

    Nice peice. Bill Mitchell also discusses Eccles 1938 speech on his blog peice title ‘There is nothing new under the sun’.
    It is very sad that we have to relearn the lessons of the Great Depression because our feral establishment is so drunk on their own excess and our populations are zombified by mass marketing and mainstream media.

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  2. profoundlogic

    Something else it doesn’t say…

    “The Fed has a dual mandate, and no, it’s not stable prices and employment. The Fed’s real dual mandate is:

    1) Preserve and protect the banking sector’s power and share of the national income

    2) Preserve and protect the Fed’s political and institutional power.”

    If we’ve learned anything from recent history, it’s that the Fed is pretty damn lousy in the economic forecasting department. But that’s beside the point. The real point is that they have less control of the real economy than they’d have you believe. What they are very adept at is protecting the banking establishment and facilitating the mispricing of risk. That “safe, flexible, and stable monetary and financial system” they’re referring to is a mirage concocted to keep most Americans compliant while their banker friends feed at the trough of gluttony and fraud.

    1. Ben Johannson

      Oh yes, we should definitely go back to the six depressions per century model we had before creation of the Federal Reserve System.

      1. Malmo

        @ Ben Johannson

        I’m not sure what you are driving at in describing pre Fed economic history, but are you claiming the present Fed cannot and should not be reformed in any way, shape or form?

      2. tim s

        Go back?? I’m afraid we are probably there already.

        The fed alone does not prevent depressions, although it may prove key in attempting to hide them based on how numbers/statistics are shuffled around. Without a working system larger than just the fed (i.e. a healthy cultural/economic environment), they can at best hold their fingers in the leaking dyke that we have in our shadowy systems.

    2. Yves Smith Post author

      Aside from Ben’s points, you need to study up on history.

      The Fed did not get its full employment mandate until 1946.

      1. Calgacus

        Actually, I think the Fed’s full employment mandate was only with the 1978 Humphrey-Hawkins act (written by a young congressional staffer, James Galbraith, btw). I believe the 1946 act urged full employment efforts on the Executive, not the Fed. The Fed really can’t do much about unemployment except create it, and alleviate the unemployment it created earlier. As economic understanding was more advanced back then than during the current, long dark age, it would then not have occurred to Congress to lodge an impossible responsibility on the Fed.

        Illustrating Cockburn’s maxim to never believe anything until officially denied, soon after the Fed received this mandate, Volcker merrily ignored it and created the worst recession and unemployment between the Great Depression and the current one.

        1. nonclassical

          …some might suggest Greenspan’s handling of FED during Clinton (fiscally conservative), contrasted with hands off Randian during bush-cheney, holding interest rates lower longer than memory serves, has more to do with FED “control” than either Volcker or agent 86…

  3. Ben Johannson

    An excellent illustration of how much economists have forgotten. You are unlikely to find a single mainstream example who is aware of:

    Mr. ECCLES. Well, as I remember the discussion—and I have referred to it in this statement—there was a feeling that this left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget.
    Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is
    naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is
    the way the war was financed.

    Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing
    to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future.

    Translation: Government borrows from itself and the national debt is economically meaningless.

  4. financial matters

    Another great NEP article. has the intriguing paragraph:

    “Why does the U.S. sovereign government borrow trillions of the Dollars which it has, itself, created in the first place? To begin researching that answer I’d suggest beginning here

    The Chinese central bank buys these dollars from export companies to keep them out of the economy. Germany has a different problem as it uses the same currency of the peripheral countries. This seems similar to taxation as it helps give value to the USD. China uses it to support exports. To change this it needs to support domestic demand.

  5. Klassy!

    “Conversely, when private debt is rapidly expanding, there should be a contraction of public debt as a counterbalancing and stabilizing influence.”
    But doesn’t this lead to more private debt?

    1. Susan the other

      Right. So, trying to think it thru, I sense a contradiction which is this – that the government can cut back when the economy is expansionary because private debt will be serviced by all that growth. When the economy contracts, government steps in with more money. But it’s not very efficient to allow the economy to expand insanely on credit and casino capitalism and then when the expansion fizzles step in – it’s too late then because the fizzle bankrupts the whole system which was relying on growth to pay debt. And we get another depression regardless because Elvis has left the room. Other that the obvious problem of debt relying on growth until growth goes Minsky, I’d like to see MMT fine tune our finances. We should just get rid of the previous burden of illogical debt first.

      1. Klassy!

        Thanks for answering. Yes, it does not seem very efficient to me– waiting until the inevitable contraction occurs. Or maybe I am just thinking about this in terms of the great depression (going Minsky)and the great recession and that is my problem.

        1. F. Beard

          It’s actually sadistic – cutting back on the interest required in aggregate to service the debt.

          1. F. Beard

            Because whether the aggregate interest exists or not, the banks can still drive the population into debt. The banks have to be some of the cruelest taskmasters ever.

      2. nonclassical


        ..perhaps our greatest tragedy; the problem of “previous burden of illogical debt” has not been discussed within our society, meaning propagandists can divert attention (austerity, scapegoating) away from what has actually been perpetrated, which is discussed often right here…

        Few enough Americans realize WK Black intoned “criminogenic accounting fraud”….to the degree the surrounding argument never transparent…

        which is reason for us to come here to learn…

      3. anon y'mouse

        forgive a dumb question, but doesn’t this suggest that when there’s too much private investment money starting to chase around fake profit, the central bank should be putting pressure upwards on interest rates so that borrowing to fund investment becomes unappealing.

        if people are playing with their own money, won’t they become more careful about whether the thing they’re investing in is actually going to be productive?

        hrm…sorry. still confused, I guess.

        1. F. Beard

          What is important to those who borrow to speculate is the SPREAD between what they can borrow at and expected price rises which they, incidentally, are mostly driving themselves. So raising interest rates mostly only hurts the real economy.

        2. nonclassical

          …what is “confusing” is what Greenspan did, in contrast to raising interest rates…

    2. E. Gerry Spaulding

      IF the private capital expansion results in full employment and general price stability, then, no foul.
      If it results in price instability, either inflation or deflation, then GUV must act – either through deficits to combat deflation, or taxes to combat inflation.

      Importantly, these private sector (bank) actions can only proceed on the basis of there being willing borrowers. In today’s ‘balance-sheet recession’ – meaning there is an unwillingness to borrow – the public sector must act.
      Which raises the question of how to finance the deficits, either debt or equity.

      1. nonclassical

        ..but the real problem is large corporations (Boeing, G.E. for example) who transfer “equity” and profit into paper debt….sending profit offshore as “investment” (write-off) and through various (Shaxton-“Treasure Islands”) secrecy jurisdictions, then back into country as “business loan” to itself (another write-off)…

        therefore paying no taxes while burdening infrastructure…and while creating no jobs or investment in economy….

        while conducting $peculation in commodities or gambling (just as noted, 30’s depression era) in various financial products (derivatives)…none of which is productive for economy…..but due to new technology and secrecy at all points, quite profitable for them…

        here’s an example from Sunday New York Times-JP Morgan monopolizing aluminum ingots:

    1. Andrew Watts

      Any piece specifically written on Eccles and the Great Depression between the years 1950 – 1970 will be solid. That’s assuming that whatever material you’re reading didn’t originally come from the John Birch Society. Beyond that point in time it will be tainted by neoliberalism, as it began to propagate itself going forward. Which was increasingly reflected in the conclusive writing of historians, economists, journalists, and pundits from that time period onward.

      There is a particularly good biography on Eccles floating around. I cannot recall the author’s name though and I found it to be a bit overly sentimental at the time.

      1. Rowlf

        Many thanks for the considered reply. It’s like you sensed I abhorred the airbrushing of history, an evil practice by nasty little minds.

  6. E. Gerry Spaulding

    Both Mr. Eccles and Dr. Kelton are spot on the majors of government initiative and the role of consumption as being superior to capital markets and finance as the driving force in real economy.

    Financing consumption through government initiatives in times of potential-GDP deficits will undoubtedly have positive effects on the economy. But the manner of financing those initiatives, whether through public debt or public equity, will also have effects on other important economic trends as well.

    These would include the distribution of wealth away from its producers to the issuers and marketers of debt-finance. Does it make sense, or not, to finance these public initiatives through the creation of new private monetary ‘assets’?
    Does it matter whether the financing of the government’s economic initiative in support of increasing demand in the economy should be done with private debt, or with public equity, as money, so that we all only pay for it only once.

    The Overt Money Finance (OMF) proposal of Lord Adair Turner, former chairman of the UK’s Financial Services Authority and member of the government’s Financial Policy Committee, proposed just such equity-money financing in several recent forums. A report of his proposal has recently been issued by Paul Volcker’s Group of Thirty.

    We are now well served by a discussion of the monetary options for funding government economic initiatives. Should the bankers or the government do the money? And why?

  7. Glen

    KELTON: A lack of saving is not our problem. Too much saving is.

    The problem is too much global savings. Not domestic savings. Countries with large USD reserves (China, Japan. etc.), for the purposes of currency manipulation, have severely impaired the ability of the US to increase its non rent seeking economy.

    1. Yves Smith Post author

      No, I’d actually say the problem these days is too little investment. Business short-term-ism. You can see a big change in corporate behavior starting in the 1990s when you had a move towards more equity-linked pay. The business sector, even in the pre-crisis expansion, was a net saver in pretty much all developed countries and all of east Asia ex China. This is simply unheard of.

      I’m a little worried about applying Eccles too broadly. Claudio Borio and Petit Disyatat pretty decisively debunked the “global savings glut” theory of the crisis (not saying you were saying that, BTW) but Bernanke et al use it as a excuse to cover for the lack of oversight of the financial system.‎

      1. nonclassical


        ..”excuse for lacking oversight”…

        and for taxpayer provided infrastructure robbery=”austerity”???

  8. Skulldug

    Eccles established and maintained a personal fortune as a big banking insider, forever secured when he also became a Fed insider. I’m sure his wet-dreams consisted of general acceptance that national debt is meaningless, meaning also the profit potential for his ilk would be essentially infinite.

    1. F. Beard

      I’m sure his wet-dreams consisted of general acceptance that national debt is meaningless, meaning also the profit potential for his ilk would be essentially infinite. Skulldug

      Without sovereign borrowing, and if the monetary sovereign NEVER ran a budget surplus then budget deficits by the monetary sovereign would accumulate in the economy as debt-free fiat. So instead of a National Debt, we would have National Private Sector Equity.

      The National Debt should therefore be paid off as it comes due with new fiat and the US Government should never borrow again.

      As for central bankers in general: Yes, they must be expert parasites lest they kill the host or anger it so that it kills them and their banker ilk.

      1. Bapoy

        I would much prefer debt free money, but you do know that this new currency will not be “equity”. The government would be doing it in a heartbeat if this was the case. I mean, who wouldn’t want to just spend on whatever and benefit the economy at the same time? And you think the rich wouldn’t like this either? Of course they would, all they have to do is control the government’s spending for their own benefit like they do now.

        More supply of anything lowers its price, doesn’t it? What would happen in such scenario though, which is why i would prefer it, is high inflation or even hyperinflation. Not that I’m a masochist, but at least people would see the actions of the government for what they are. This issuance of credit and having to pay it back is a much slower death sentence.

        The government bureaucrats know this. They also know that issuing credit is theft, but at least they get to buy votes and stay in power. And on top of that, the majority of Americans like to be stolen from because otherwise it’s “austerity” which sounds like something bad.

        1. F. Beard

          Money creation is not necessarily theft. In fact, some money creation is necessary to prevent theft by deflation as the economy and/or population grows but the money supply doesn’t. And then there’s the matter of where else will the aggregate interest come from to pay the government-backed counterfeiting cartel, the banks? From net exports? But then the central bank will just create new FRNs and sell them to foreigners so they can buy our real wealth. So either the Treasury will create the interest or the Fed will, assuming we can net export. Or the interest won’t be available and so some debts will necessarily default.

          So then why do we subsidize debt-creation for usury? So we can create new fiat to give to the banks? So we can export real wealth to foreigners?

        2. E. Gerry Spaulding

          Please explain why you think that money issued without debt by the goverment would not be considered ‘equity’ on the liability side of the government’s balance sheet.
          (Not that the government really has a balance sheet, per se.)
          What happened with the Greenbacks?

          1. Bapoy

            Please see the supply/demand curve.

            There is never a bad time for money creation. The interesting thing I read on the posts is that first concern is government spending. I seriously doubt I’d be so focused on that if I was getting welfare checks.

            Something is not being said by the anti ‘austerist’.

            1. E. Gerry Spaulding

              “Something is not being said by the anti ‘austerist’.”

              And, that is ……….. ???

              1. Bapoy

                Let’s just say the notice is not the well being of their fellow men. Something tells me the folks on these boards don’t work in McD or receive welfare checks. Something tells me they benefit from government spending greatly.

  9. backwardsevolution

    People – not much beyond the hunter-gatherer stage. At least when they gorged themselves, bred, then stripped an area of all there was to eat, they moved on. And they kept breeding (over-population) and gorging and stripping until… we are today, but, whoops, there’s nowhere else to go. Does that mean we’re faced with looking at ourselves?

    When you’re at a buffet, you often gorge yourselves. After all, it’s all you can eat for one price! The economy is kind of like that. You’ve gorged yourselves, but now you want someone else to pump your stomach so you can go on gorging.

    People with savings stop spending? Well, it’s a little hard to live without spending anything. After all, you’ve got to have shelter, clothing, food, etc. People with savings still continue to spend, but when they’re getting absolutely no return (so that banks and homeowners can get bailed out, the very people who caused this situation), they tighten their belt a little. Make sense? Only an idiot wouldn’t.

    Oh, let’s have everyone just spend everything they make. Heck, let’s have them spend more than they make (charge everything up on the maximum credit cards they can get). That’ll solve it? Man, the world could go nuts. The emerging markets could join in, and soon all 10,000,000,000 (ten billion) of us can strip the planet bare. Let’s have that growth to infinity and beyond!

    INSTEAD of wondering what to do when the private sector stops spending because ANOTHER crisis has hit, and you’re hurting, why don’t you spend your time coming up with ways to stop these bastards from ever being able to create these crises in the first place?

    1. F. Beard

      why don’t you spend your time coming up with ways to stop these bastards from ever being able to create these crises in the first place? backwardsevolution

      Yes, and another danger is a set of bastards who want to sit back and enjoy risk-free returns via a non or slowly growing money supply.

      Money creation is first and foremost a problem in ethics. How could it be otherwise?

      1. backwardsevolution

        F. Beard – I don’t care whether I receive any interest at all – none. My point was that when I don’t, or when I get very little, then I DO cut back some.

        Yes, and another danger is a set of bastards who want to sit back and receive risk-free housing, stock and bond gains via the Fed QEing.

        Money creation is first and foremost a problem of some pigs are more equal than others. Tell me how it’s otherwise.

        1. F. Beard

          Money creation is first and foremost a problem of some pigs are more equal than others. backwardsevolution

          Yep. There are the banks and the rest of us. And the banks enjoy government privileges which allow them to bypass fiat savings and which also make them immune to competition from ethical private money forms such as common stock, which shares wealth and power rather than concentrates them.

          So now we have the situation where the population cannot afford the production their stolen purchasing power financed. Whocouldanode?

        2. anon y'mouse

          on a personal level, savings are there for future spending.

          I don’t think this Eccles guy is talking about that, but what he’s discussing does impact it.

          for the household, you save for future emergencies (car breaks down, injury/illness forces temporary unemployment, etc.) and against the time when earning income is no longer possible or perhaps personally desireable. unless you are in the mind to create some kind of dynasty. if the value of one’s dollars hold (meaning, pretty much no inflation) then why do you need interest?

          I am very puzzled. doesn’t the very concept of “interest” period drive and make necessary an economic system based on growth?

          1. backwardsevolution

            anon y’mouse – you DON’T need interest. Yes, give me no inflation any day, but we’re not going to see that, are we? Debasing the currency is one of politicians’ favorite pastimes.

            1. F. Beard

              Actually, it’s the banks who debase the currency because the Fed will create any reserves necessary to meet their credit expansion.

              And since the banks have their own source of fiat, the Fed, why should they be in favor of fiat creation by the US Treasury?

              So are you unintentionally spouting the banker’s line? Gee, that would embarrassing.

              1. backwardsevolution

                F. Beard – yes, except I don’t get embarrassed. That’s for retards.

                The Fed should be abolished, pronto! And IF we live in a democracy, which I think we do, we COULD get rid of the politicians that refuse to rein in the Fed, which they COULD do.

                Bankers should be returned to the rotund little men who wore glasses in back rooms. Return Glass-Steagall, whatever it takes, blah, blah, blah. Shut these mothers down!

            2. Bapoy


              Interest is not something someone dreamed up. Like everything else, money has a future value, which is why there is a futures market. This is how producers and consumers secure themselves from price volatility.

              The rate of interest is a forecast of the future valued of the currency. If the currency is expected to depreciate quickly (thanks to government debasement), than the rate of interest will be greater.

              1. F. Beard

                Like everything else, money has a future value, which is why there is a futures market. Bapoy

                The question is “Whose money?” or “Why should I rent your money supply when I can create my own?”

                A common stock company, for example, would have no need for fiat at all except for taxes, if it issued and accepted its own common stock as money. But as someone pointed out to me, equity financing is more expensive than debt. Really? Honest sharing is more expensive than legalized theft as a form of financing? Whocouldaguessed?

                1. Bapoy

                  Money is a utility, a very important one but a utility. Any amount of currency is sufficient, there is no need to create more PC it. Unless, of course your goal is to transfer wealth.

                  The equity is better served in plates of food, homes, cats, affordable education and medicine. No redistribution is needed, just leave the chips where they may. People are smarter than our government at allocating resources.

                  1. F. Beard

                    Unless, of course your goal is to transfer wealth. Bapoy

                    A fixed money supply would transfer wealth – to lazy money hoarders. A fixed money supply is also anti-progress since progress requires taking risks, not lazy, risk-free money hoarding.

                    But also a fixed money supply is fascist since it would require government suppression of alternative private money supplies.

                    1. Bapoy

                      In one comment you state banks blow bubbles due to excessive risk taking on the other you want people to take risks.

                      A fixed money supply does not steal from anyone, it leaves capital in the hands of their rightful owner to do what the owner wants with it. Printing new money into existence removes wealth from existing money, something you are well aware of. Deflation is a nature’s way of distributing wealth. Unless, you think nature also has winners and losers like your government. Like those government contractors in the medical, military, education, etc industry getting juicy contracts.

                      People and organizations led by people will always have a favorite, free markets do NOT.

              2. E. Gerry Spaulding

                There is no problem with interest as a money-cost when money that someone has is being lent to anyone for any purpose.
                The problem with interest as a money-cost is that we are forced to pay it to money-issuing bankers for the price of our national money-creation and issuance.
                Money should be issued into existence by the government without debt, and, once issued it automatically becomes private wealth and a monetary asset(commodity) for spending, saving, lending and investing.
                For which the future value concept gains validity.
                But to pay interest to the private privileged monopoly for the purpose of providing exchange media needed by the national economy is pretty much insanity.
                Not that it doesn’t happen every day.

  10. allcoppedout

    Kelton is a voice of sanity, so must be attacked as a delusional idealist. ‘She’s marxist really’, nudge, nudge, wink wink. We know the form. I’ve just seen it done to the opposition (UKIP) on the BBC – its intolerable treatment, even of the opposition (in this case ‘little Englander’).
    I can barely manage her control these days – diabetes and too much exposure to the squalor evident from my own estate in England to rural India. I easily attract grumpy old leftie stuff. We taught much of this in the 80’s and they abolished much of the funding (our Workers’ Education Authority).

    At issue for me is not what Stephanie is saying, but the way there seems no way forward through sensible argument. I made a living once in management development – a hodge-podge of dire fawning to management whim and self-image. Many of us found the material we were supposed to use crass and thankfully so did many participants, happy to stray into Critical Theory for some relief from practical grind. I was lucky enough to supervise an HR manager comparing HRM to de Sade’s ‘Justine’ (thesis marked unavailable for ten years).

    Private evaluation comments were always concerned with how any espoused theory could translate into the overbearing ideology of practice – this even extends to my teaching of true statistical analysis and business maths today – students are keenly aware that work is doing what the boss demands. Some recognise the freedom of my classrooms as welcome relief from the daily grind of deferrence and mannered lying of management, to be enjoyed for what it is.

    I’ve enjoyed meeting participants in this blog, but we share the same problems in implementation as well as desires to ‘change the world’. I involved students in my work bidding for research and project money, successfully tailoring business plans to whatever cockamamie criteria and metrics demanded – usually clapped-out business-speak about 10 years behind the fashions. In practice, what we believe is ruled-out before one can speak – an important lesson.

    The Catch-22 of radical argument is that it faces ridicule before publication and there is no real freedom of speech other than an ideal type (as in Habermas’ Weberian concept of communicative rationality) easily feigned by media and the powerful. A speech by Tony Blair on education, education, education was almost a direct lift from an East German polemic from the 1950s. We still have a lot of irrelevant higher education and no decent child-minding and nursery education for the kids of ordinary people, despite knowing money spent early is much more effective, particularly for poor kids. Such is political correctness I’ll be marked as ‘not the right type’ for using the term kids.

    Academics may say, partially justified, that their job is not to produce a workable politics, but this is clearly what we need. I come from the background of massive failure that was managment training – sensitivity groups, industrial democracy (even in the muted German form), product innovation – all failing under neo-liberalism and becoming dross like excellence, kwality, management fashions – cover for the financialisation curse purporting to be working smarter. We had the theories – some very radical indeed (Giroux, Frere, Bernstein) – all useless against the blackhole of power and laughable as the ‘love-trust orientation’ in a world of ‘dirty hands morality’ (i.e. lack of it).

    What I’m saying is somewhat obvious and not intended as criticism – though the details of implementation are important and we have theory. Kelton’s work is a beacon (though MMT is shaky) – but we are in the same situation as Wittgenstein’s notion on philosophy as long failure with deep problems in language bewitching us. Radical economics can win any fair argument (not that there is much) and be safely ignored because experiment (implementation) can be denied. Maybe the time for the ideas will come. Barrett-Brown once had the ear of the Labour Party with similar ideas in the 70’s. I don’t know how we get experimental in the genuine sense (very complex in standard science – Popper etc.) with economic theories, but those who say we can’t do this with real people miss the beat. Neo-liberalism is such a (vile) experiment. Without experiment we are left with meme-wars and a waiting language of ridicule maybe similar to the piercing shrieks of insect consensus.
    We obviously model and simulate in economics, but the general history of argument with different epistemological roots without deciding experiments is poor. Any social analysis is subject to generic frames of reference (paradigms) likely to be incommensurable, making analytic critique between the frames so easy as to be futile. Dan Sperber has a theory that insists reasoning was not designed to pursue the truth, but designed by evolution to help us win arguments. That’s why he calls it The Argumentative Theory of Reasoning. The evidence reviewed shows not only that reasoning falls quite short of reliably delivering rational beliefs and rational decisions. It may even be, in a variety of cases, detrimental to rationality. Reasoning can lead to poor outcomes, not because humans are bad at it, but because they systematically strive for arguments that justify their beliefs or their actions. This explains the confirmation bias, motivated reasoning, and reason-based choice, among other things. Science works very well as a social process, when we can come together and find flaws in each other’s reasoning. We can’t find the problems in our own reasoning very well. But, that’s what other people are for, to criticize us. And together, we hope the truth comes out.
    Even if economists could stay in a room long enough to do this, this is not how economic policy is decided as civil servants and politicians are involved. Who would admit to formulating experiments to control inflation through unemployment, or to engage financialisation and run down productive industry – ‘someone’ did.
    There are de facto experiments in economics and they have caused great harm (and we refer to the Sino-Soviet experiments). What there is not is any deciding experiments on what kind of economics to experiment on the public with, other than that it’s a good idea not to have someone like Mao or Stalin in charge. We have a general concept of experiments that is far too simple and I half-intuit we may be able to produce some sophisticated deciding experiments in economics – there may, for instance, be something like cosmic rays lurking in our data, we might find a way of training groups in Argumentative Theory to see if that shifts paradigmatic closure (when 365 economists agree government policy is rubbish, there is always another they can buy – this would be a very different form of peer review), ‘big data’ might show us much more certain money-flows, we might produce a gadget that allows Stephanie’s between the lines as mainstream blather flows on the BBC (experimental way of combating mainstream bias) – some of this is fringe or half-baked, but we might be closer than we think to experimentation other than by the neo-liberals. There are many very indirect experiments in science and thought experiments are much more closely related with theory formation than most think. Would the sky fall if every senior banker died tomorrow? This is a good thought experiment as they are damned if the sky stays in place (their claims to mega-skills were untrue) and damned if it does fall (they should have put a succession plan in place in case of their demise – which also admits they are replaceable). I suspect the real experimentation would start with a transparent, machine-embodied accounting system.

  11. allcoppedout

    I’d like to see a sophisticated experimental system we could use to take the paradigm, bickering out of our arguments. I generally like Kelton’s arguments but they have been around in slightly different form for a long time.

    Scientific experiment is much more complex than social science seems to know. A start could be made by adopting a method that accepts a more biological basis of why we are equipped with argument – to win them – and how this hobbles us as individuals – the theory I have in mind is French and called Argumentative Theory. This could be the basis for agreement on what is right and experiments that could be accepted as tests.

    This would only be the beginning and my suggestion is that economics doesn’t even know how to do scientific-standard peer review.

  12. anon y'mouse

    “But in times when savings are too large relative to productive outlet, government should increase taxes and should apply the proceeds to depressed areas, to public health and educational purposes, to public improvements, conservation and protection of natural resources— to preservation of the resources, human and material, of prosperity and not to competition with private initiative.”

    up until that very last part, this guy sounds suspiciously like some kinda socialist.

    I don’t think we can trust him, folks ;-}

    1. nonclassical

      ..yup…that’s what right wingers claim regarding Keynes…

      as we all know, Rand’s “perfect deregulated economy” relies upon transparency-equal access-equality of information…

      in other words, it’s never been real world…

  13. Jim Shannon

    Austerity is clearly a really dumb international move embraced by governments controlled by CentaMillionaire$ and Billionaire$, of which the US has become the shining example!
    Failure to raise taxes on Ultra High Incomes above $500K has clearly extended the Great Recession, world wide and it will go on indefinitely!
    Refusal to pay labor a living wage will have a permanent and devasting effective on our collective futures.
    Clearly current economic policy is not being conducted for the benefit of working class anywhere in the world.
    Of the Rich – by the Rich – for the Rich – that is the REAL New Normal of our collective reality!

    1. Bapoy

      Taxes haven’t increased in the US in 40 years. Pick another excuse.

      Also, what is austerity and which country is implementing it?

      1. E. Gerry Spaulding

        Not sure what the excuse should be for, but that taxes for the rich have gone down for forty years is part of the fiscal problem we face.
        Fiscal problems without solutions demand austerity.
        I’m trying to understand your point.
        Is it that we need more taxes?
        Less taxes?
        Or more creative government financing?
        Or an end to government borrowing?
        No taxes and no borrowing?

        1. Bapoy

          The point is that if taxes haven’t gone up in 40 years, while the economy did boom in the same time frame, what makes you think it’s low taxes on the rich that is harming the economy?

          Why wasn’t the economy bad 10, 20, 30 years ago?

          I am not defending the rich, but the rich and taxes are not the issue. All taxes do is remove funds from one bucket and put it on another. How does that help the economy?

          Hint: the economy recovers when there is capital investment. Taxing that capital investment will not improve the economy, but it can certainly help destroy what’s left.

          1. E. Gerry Spaulding

            So, your metric of economic success is merely that of GDP growth?
            Why, we’re doing G-R-E-A-T !!!

            My metric of economic success IS the more equitable distribution of the wealth and national income that was created by labor over those last forty yers.
            Without that success, the result is that the owner class is renting its monetary assets to the Restofus to use as money.
            The Restofus have gotten the forty-year shaft and have no earnings (purchasing power) with which to consume, thus relying on ‘credit’ , a.k.a. ‘debt’, again as issued by that owner-class.

            Efforts aimed at restoring the equitable distribution of the national income and real wealth (Please read Soddy’s “Wealth, Virtual Wealth and Debt”) are better aimed at ending the privilege of the rich to issue he nation’s money as debt than to take back the excess as taxes.

            Hint: The economy recovers when consumers have purchasing power that leads to demanding increased production from investment.
            Investment without consumption-power kind of defines mal-investment.


          2. Jim Shannon

            The consumer drives all markets for everything! The TAX Code drives everything else! It’s the consumer that creates All wealth! It’s the Tax Code that decides who gets that wealth!
            Anyone who believes that Free Market Capitalism exists for any other purpose than wealth creation for the few is in denial of reality!
            “Poverty is that state and condition in society where the individual has no surplus labour in store, or, in other words, no property or means of subsistence but what is derived from the constant exercise of industry in the various occupations of life. Poverty is therefore a most necessary and indispensable ingredient in society, without which nations and communities could not exist in a state of civilization. It is the lot of man. It is the source of wealth, since without poverty, there could be no labour; there could be no riches, no refinement, no comfort, and no benefit to those who may be possessed of wealth.”

  14. DannyBoy


    This is an interesting article. Did everyone miss the contradiction?

    Government intervention is what has “gotten” us out of the Great Recession, yet we are still in a Great Recession.

    How a professor that has spent countless hours reading books does not see that it’s economic output that makes us richer (not papers) is beyond comprehension. I would rather have more rice and beans (real output) than papers in my pockets.

    There are no jobs because prices are too high due to massive credit issuance. What’s being suggested above is not more credit issuance (which does not cause inflation), issuing paper money will guarantee not only inflation, it will guarantee hyperinflation and a collapse in REAL output. All in all, we will be starving to death just like the Russians and North Koreans.

  15. Bapoy


    This is an interesting article. Did everyone miss the contradiction?

    Government intervention is what has “gotten” us out of the Great Recession, yet we are still in a Great Recession.

    How a professor that has spent countless hours reading books does not see that it’s economic output that makes us richer (not papers) is beyond comprehension. I would rather have more rice and beans (real output) than papers in my pockets.

    There are no jobs because prices are too high due to massive credit issuance. What’s being suggested above is not more credit issuance (which does not cause inflation), issuing paper money will guarantee not only inflation, it will guarantee hyperinflation and a collapse in REAL output. All in all, we will be starving to death just like the Russians and North Koreans.

    1. nonclassical

      ..perhaps you could read to find out where the $$$$ (rice and beans) went, and how much is involved to destroy a U.S. $6.5 trillion per year economy for over
      6 years already?

      ($4.19, free shipping)

      ($14.97, free shipping)

      (you know-follow the $$$$, to $600 trillion, derivatives, 2007, up by around 100 times from 2001, 95% owned by 6 U.S. “investment banks”, 80% of which resides in “City of London” secrecy jurisdiction)….

    2. F. Beard

      What’s being suggested above is not more credit issuance (which does not cause inflation), … Bapoy

      Actually it causes both inflation (the boom) and deflation (the bust). Moreover, it transfers interest to those with a lower propensity to spend it.

      1. Bapoy

        It does cause inflation but at a much lower rate. Also causes deflation when things turn south, although the fed and DC will fight it tooth and nail to keep the game going.

        Given that profits call competition, the natural state of affairs is deflation. I mean, who doesn’t want lower prices?

        1. F. Beard

          I mean, who doesn’t want lower prices? Bapoy

          More efficient production (less labor, less energy, less materials, etc. for the same output) requires investment. But an appreciating money rewards risk-free money hoarding instead so it is self-defeating.

          The most anyone should expect from taking zero risks with his money is zero returns. Indeed, if he hoards a large amount, he is likely to get a very large NEGATIVE return (See Matthew 25:14-30 (The Parable of the Talents) and Luke 12:16-21).

          1. backwardsevolution

            F. Beard – “More efficient production (less labor, less energy, less materials, etc. for the same output) requires investment. But an appreciating money rewards risk-free money hoarding instead so it is self-defeating.

            The most anyone should expect from taking zero risks with his money is zero returns. Indeed, if he hoards a large amount, he is likely to get a very large NEGATIVE return.”

            But isn’t QE putting a bottom under housing, stocks and bonds when, after the crisis, they should have rightly gone down? Aren’t those people benefitting while taking no risk? I mean, where is the risk when you put next to nothing down, or leveraged, hoping to gain appreciation, and now the Fed has got your back? Don’t you think that young people would like to be able to buy a house that hasn’t been artificially inflated by the Fed? Again, some pigs are more equal than others!

            So appreciating houses, stocks and bonds rewards risk-free speculation instead, so it is self-defeating (to parrot some of your words back)?

            So if the most anyone should expect from taking zero risks with his money is zero returns, should not houses, stocks and bonds be down around our ankles by now?

            1. F. Beard

              Don’t you think that young people would like to be able to buy a house that hasn’t been artificially inflated by the Fed? backwardsevolution

              I advocate at least a temporary ban* on further credit creation and that equal restitution checks of new fiat be sent to the entire population, including non-debtors, at least until all demand deposits are 100% backed by reserves and further if slack remains in the economy. So young people would receive new cash to help them pay off existing debt or to help them buy a house with.

              *Otherwise, once the economy starts to recover, the banks will blow another bubble and the new fiat will be blamed for it. Besides, government-backed credit creation is theft. Until the banks are fully private businesses, they should not be allowed to extend new credit. Loans 100% backed by reserves are, of course, permissible since those don’t create purchasing power but merely transfer it.

            2. F. Beard


              1) Steve Keen suggests something similar with his “A Modern Debt Jubilee.”

              2) The restitution checks should be metered out over time but at a rate to at least replace existing purchasing power as existing credit debt is repaid.

              1. backwardsevolution

                F. Beard – of course, more government meddling. I don’t want a check mailed to me. What I do want is what should have happened in the first place (but everybody keeps pushing under the rug): lower prices!

                As Bapoy said above, “There are no jobs because prices are too high due to massive credit issuance.” Prices must come down.

                You are so preoccupied with your “lazy, risk-free money hoarders” that you do not see the equally “lazy, risk-free capital appreciation hoarders”. How is it different?

                It’s like you’re standing at the edge of a predicament and you KNOW the right thing to do, what should have been done all along, but you are simply refusing to do it, like a child refusing to clean up the mess he created.

                In your mind, the government must come in and save you, prices CAN’T be allowed to decline. In your mind, it’s okay to lower mortgage rates, thereby keeping prices up; it’s okay to keep inventory off the market (houses and commodities), thereby keeping prices up; it’s okay to send out restitution checks, thereby keeping prices up.

                All of this to prevent what should have happened all along – a decline in prices, and bankruptcy. Oh, but that would penalize the people who caused the problem in the first place, you say? Yes, it would.

                So prices stay high, and how’s that going?

                1. F. Beard

                  In your mind, it’s okay to lower mortgage rates, thereby keeping prices up; it’s okay to keep inventory off the market (houses and commodities), thereby keeping prices up; it’s okay to send out restitution checks, thereby keeping prices up. backwardsevolution

                  Don’t put words in my mouth, please. Of the above I only advocate the restitution checks but you omit that I’d ban further credit creation too.

                  But I’ll tell you what I advocate – the peaceful euthanization of the banks. And reforms such that they’ll stay dead PERMANENTLY. Anything less should not be worth our time given the damage the banks have done through the centuries and continue to do.

                  And here’s what you apparently don’t understand: The bust is no more normal than the boom. Money should NOT be lent into existence any more than blood should be lent into existence since the repayment thereof is damaging.

                  1. Bapoy

                    You want to do things, I want to do things, Bernanke wants to do things, Obama wants to do things. Everybody wants to do something different and I guarantee that what I see as beneficial, harms someone else. Banks by the way are NOT the issue, the issue is the Fed who bails them out each time. No banks would be blowing bubbles if they knew the Fed would not bail them out.

                    What we need to do is stop meddling with the markets. Sending checks to people is meddling with the markets. Let the young people EARN their money and let the producers produce their homes for something of value, LABOR.

                  2. Bapoy

                    With regards to the hoarding comment.

                    What happens when you introduce money into the economy bear? Well, according to demand and supply curve, prices rice by the same amount. So introducing new money inflates the economy and this hurts the poor more who have to work to survive. Wealthier people invest and hedge against inflation.

                    Well, what happens when you remove money from the economy bear? Well, according to demand and supply curve, prices drop by the same amount. So go and save, put that money away and don’t get it out into the economy. Who cares, you benefit me and you benefit yourself as prices drop. My labor buys more as time passes and that my friend is what you and I want. Is it not?

    3. E. Gerry Spaulding

      Not to quibble, but why does ‘printing money’ cause inflation, hyper or otherwise, a collapse of the economy and guaranteed starvation?
      And, can I presume that by ‘printing money’ what is meant is the electronic equivalent – debt-free issuance through direct government spending?
      This was advocated recently as Overt Money Finance(OMF) by Adair Turner to the recent INET conference, where he presented on this paper, recently issued by Volcker’s Group of Thirty.


  16. Jeremy Grimm

    While I do think that of Eccles analyses of the economic problems in his time were apt for that time I think it might be fruitful to build on the implications of Yves’ comment @Glen . I’ll take a stab at a beginning but I’m venturing outside my area of expertise.

    The model for business enterprise and the economy of the 1930s that Eccles seems to be working from appears as different from our present economic structures as the 1930s are compared to the business enterprise and economy of our colonial period. Many events from that period seem unlikely today. Start for example with the rise of the trade unions. People just don’t band together like that today – they barely know or interact with their neighbors. They ‘bowl’ alone; many don’t vote and don’t follow politics and don’t want to. They feel much more impotent to effect any change. There was still some democracy in the 1930s and looking back (I know it’s easy to romanticize), there seemed to be a stronger sense of noblesse oblige in the ruling elite. Today we bend under whatever burdens we’re loaded with, knowing that our ruling elite barely regards us as fully human.

    One explanation for the victories of the trade unions that seems plausible is that the dominant groups in the power elite at that time thought it wiser to deal with unions and start the slow work of coopting their leadership than to continue fighting with angry workers who threatened to get out of control with their wildcat strikes, sabotage and outright rebellion at the extreme. I think that’s a fair representation of the Wobblies point of view (?). In contrast, the dominant groups in the power elite today seem to believe that they control sufficient coercive force, propaganda and intelligence capability to counter whatever actions the populace might attempt.

    What of the place of the economy within the larger world economy? There seems little or no comparison between the levels of multinational integration In the 1930s and today. Now, an earthquake and tsunami in Japan impacts and temporarily shuts down the computer industry and some carmakers here []. I believe that Mr. Eccles economic model treats the world economy as just another pair of terms for calculating aggregate demand and aggregate supply. Our production today relies on resources and basic products controlled by other countries, many of whom are not entirely our friends. If there were ever doubt that economics should be considered within a broader context including politics as a crucial element this interrelationship between U.S. Industry and Industry in other nations should dispel that doubt. Mr. Eccles seems to suggest in his argument: “It is, of course, essential that the economy have at all times an ample supply of private capital for investment in productive enterprise.” I read into this and the rest of his argument, the idea that American private capital invested in productive enterprise will tend to put Americans to work. That connection is broken now. When an American firm invests in productive enterprise it build factory, and research centers outside the United States.

    Another important difference is both the degree and type of consolidation characteristic of U.S. Corporations in the 1930’s and now. In the 1930s firms tended to build simple vertical and horizontal monopolies in many industries. In the 1930s the government played an active role in efforts to break up and control monopolies. Since Reagan the government has tolerated, even fostered the creation of near monopolies in most every sector of the economy. Today many of our largest industrial firms make as little as possible themselves to avoid tying up capital. Instead they outsource production, just-in-time their inventories and focus on control over market share while they cut costs by exerting tighter and tighter control over their suppliers; and use their control over the end-user market to extract profits from the suppliers and from their end-user customers.[Ref. “End of the Line” and/or “Cornered” by Barry Lynn]. These activities have helped decimate domestic small business manufacturing of products and all but wiped out independent retailers. As I look around at the businesses where I live and those I’ve seen elsewhere in the country when on travel, most of the ‘new’ small business retailers I see appear to be branches of one franchise or another. Today’s structure of business enterprise squeezes employees and suppresses small business, damaging employment in two ways.

    Another structural problem should not be forgotten. Machines displaced workers in the 1930s just as today but machine capabilities today are several orders of magnitude greater than they were in the 1930s. Today’s machinery displaces more and more highly skilled workers. Today the costs of machines are weighed against the costs of cheap labor, but labor not in this country, or labor specifically brought into this country to displace American workers.

    Eccles is also dealing with a world inhabited by rational economic gentlemen whose sole drive is to maximize profits for their firms. I don’t think that’s an accurate model for the behavior of businessmen in the 1930s and certainly doesn’t fit the behavior of businessmen today. The actions of today’s Corporations seem less like economics than actions in a winner takes all game of strategy. I think that the best explanation for the activities of American business must include consideration of power relationships and the tools for wielding and wresting power. Disregarding these non-economic determinants for the behavior of Corporations oversimplifies the problem. American business has acted to crush the power of labor in ways that don’t always add up to greater profits. American management rationalizes work to exercise power and control over workers, not to increase their efficiency.

      1. nonclassical

        ..the “trusts” of ’30’s monopolized, just as DEregulated Wall $treet does today=
        we live in Washington State, over 100 years later (than U.S. Constitution) to our state constitution, and with great natural resources at disposal-therefore, state constitution reflects different perspective, for example…..

        however, “trusts” were a huge issue…dominating political arena…which is reason for state government departmentalization, which disallowed control of depts of government by trusts…100 years later than U.S. Constitution, this was a noticeable hindrance to “the people’s representative government”…

        there were also trust driven “depressions” in 1880’s, ’90’a, 1900’s, prior to 30’s…(“Wall $treet-A History”)

        It is certainly necessary to note differences, historically, in manufacturing abilities….Kevin Phillips notes (as have Michael Hudson-WK Black) the historical perspective of Spain, Netherlands, Britain, when allowing banks to trade paper debt as a basis of economy, having given up manufacturing base:

  17. nonclassical

    …might be interesting to also note perspective applied by thinker who discussed evisceration of “labor” as having to do with invention of 30 year mortgage-noone wanted to lose their home, and all invested in, so….labor (and I work in union) remains afraid to upset their own economic basis…it’s quite difficult today, to get all union members onboard with standing together against exploitation…home, family, considerations dictate…

  18. Abe, NYC

    I wonder how this applies to Japan. Inequality is low there, and household savings have declined dramatically over the last 20 years while government spending has increased, yet they never returned to solid growth.

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