POWER OF STORY: ROOSEVELT AND KEYNES

by Dr. James W. Jackson

Founder, Project C.U.R.E.
Author, The Happiest Man in the World: Life Lessons from a Cultural Economist

Herbert Hoover was president when the stock market crashed in 1929. Franklin Delano Roosevelt, the charismatic governor of the state of New York was elected president in November, 1932, and inaugurated March 4, 1933. For three years the country had been traumatized by the worst economic crisis imaginable. The international scramble over gold supplies and debt repayments had involved and embroiled the economies of most of the world.

Roosevelt was a new face with a voice of hope. He was the only man to ever be elected president of the U.S. for four consecutive four-year terms. The irony of his election campaign in 1932 is worth a short review. Looking back over what transpired in the past seventy years it would almost seem as though Hoover and Roosevelt had somehow switched their campaign speeches and each delivered the lines of the other.

During the campaign it was Roosevelt who reiterated the old line party speeches promising reductions of all public expenditures, doing away with useless commissions and offices, consolidating departments and bureaus, and eliminating extravagances. Roosevelt even promised to balance the budget. Hoover was castigated for running huge deficits, his inability to halt the effects of the depression, or restore any semblance of prosperity. Roosevelt at one point even stated, “Our industrial plant is built; the problem just now is whether under existing conditions it is not overbuilt. Our last frontier has long since been reached.” Strange philosophical words when compared to what was set into motion over the dozen years that followed the election. (1)

Roosevelt spent the time between his election and inauguration at his Governor’s Mansion in Albany, New York with his Brain Trust, a group of intellectuals gathered from the universities, primarily Columbia University. Big change was on its way. The intellectual atmosphere on campuses around the world had changed over recent years. Now, we can look back and measure just how big that change was to become. From 1860 until Roosevelt’s election in 1932 the Republicans had held the presidency fifty-six of the seventy-two years. Democrats held for sixteen years. From 1932 to 1980 it was reversed: Democrats held the presidency for thirty-two years and the Republicans for sixteen.

Running against both the Democrats and Republicans in the 1928 election was the Socialist Party. Following is a listing of planks in their political platform:

• Nationalization of our natural resources beginning with coal mines
• A publicly owned giant power system (Tennessee Valley Authority)
• National ownership and management of railroads and other means of transportation and communication
• An adequate national program for food control, food relief, reforestation, irrigation, and reclamation
• Immediate relief of the unemployed by the extension and program of all public works
• Loans to states and municipalities without interest
• A system of unemployment insurance (part one of Social Security system)
• Nation-wide extension of public employment agencies (U.S. Employment Service)
• A system of health and accident insurance and of old age pensions (Social Security 2)
• Shortening the workday and forty- hour work per week
• Federal anti-child labor amendment
• Abolition of brutal exploitation of convicts
• Increase of taxation on high income levels, corporation taxes, and inheritance taxes
• Appropriation by taxation of all land held for speculation

The economic and cultural pendulum had internationally swung and was nationally swinging from belief in individual responsibility and a decentralized and limited government to a model of social outcome equality and a centralized and powerful government. The model relied on the government to protect the citizens from misfortune and to control the operation of the economy, even if that meant the government’s ownership and operation of the means of production.

Behind those closed doors of the Albany, New York Governor’s Mansion, between Roosevelt’s election and inauguration, a philosophical coalition had formed. The Brain Trust was ready to view the depression as a failure of capitalism, and to believe that active intervention by centralized government was the appropriate prescription for rapid remedy. Relief, recovery, and reform would be the theme of the game plan.

By March 4, 1933, Roosevelt was fired up and ready to lead the charge with his inaugural speech. He began by blaming the crash, depression, and economic crisis on bankers and financiers and their quest for profit, and the greedy self-interest of capitalism, never allowing once that the problem had also been the responsibility of the U.S. government itself and the inaction of the empowered Federal Reserve System:

Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence . . . The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit. (2)

The new president then called for a Bank Holiday and closed all the banks that still remained open. They would be reopened after the Emergency Banking Act and the Federal Deposit Insurance Corporation (FDIC) bills were passed by Congress. It was understood that successful economic systems must be based on confidence and convenience. There wasn’t a lot of confidence left in the system. The tacit message was that no longer would the depositors have to depend on the reliability of the bank, but could rest on the assurance of the government to protect their deposits. “The only thing we have to fear is fear itself.”

President Roosevelt’s First 100 Days witnessed a record number of bills being sent to Congress for approval during a special emergency session. Soon there were so many Relief, Recovery and Reform bills in existence it was hard to keep track of the action. Any programs that failed to pass or were held up for some reason were re-instituted by the President’s Executive Orders. Congress would then have to override the orders or it would be necessary for the Supreme Court to strike them down as unconstitutional. Especially in Roosevelt’s second term, the conflict with the Supreme Court led to their unanimously ruling that the National Recovery Act (NRA) was an unconstitutional delegation of legislative power to the president.

In response, Roosevelt proposed a shocking law that would allow him to appoint up to six new justices of the Supreme Court so that he could have a “persistent infusion of new blood.” Even his own Vice President Garner led an intense protest, claiming that he was violating the very separation of powers that would give Roosevelt absolute control over the Supreme Court by Court Packing. Eventually, however, Roosevelt appointed eight of the nine justices of the Supreme Court. They began to ratify his policies with ease.

On other issues, it was ranking members of his own Democratic party that began taking issue with Roosevelt’s power and policies. Democrats led by Al Smith organized the American Liberty League and vociferously attacked Roosevelt by equating him with Karl Marx and Vladimir Lenin. But, people were going back to work, and once again businesses were beginning to reopen their doors. No one had expected that the depression would have lasted for ten years.

(Next week: More about Bathtub economics)

            (Research ideas from Dr. Jackson's new writing project on Cultural Economics) 

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

Dr. James W. Jackson often describes himself as "The Happiest Man in the World." A successful businessman, award-winning author and humanitarian, Jackson is also a renowned Cultural Economist and international consultant, helping organizations and governments to apply sound economic principals to the transformation of culture so that everyone is "better off."

As the founder of Project C.U.R.E., Dr. Jackson traveled to more than one hundred fifty countries assessing healthcare facilities, meeting with government leaders and "delivering health and hope" in the form of medical supplies and equipment to the world's most needy people. Literally thousands of people are alive today as a direct result of the tireless efforts of Project C.U.R.E.'s staff, volunteers and Dr. Jackson. 

To contact Dr. Jackson, or to book him for an interview or speaking engagement: press@winstoncrown.com

POWER OF STORY: IS JOHN MAYNARD KEYNES REALLY A GOD?

by Dr. James W. Jackson

Founder, Project C.U.R.E.
Author, The Happiest Man in the World: Life Lessons from a Cultural Economist

From the ivy-covered cloisters of Harvard, Yale, and Princeton to the T-shirt- clad students of your local junior college, wherever the subject of economics is studied and discussed, one name is preeminent: John Maynard Keynes. A sacred hush falls over the classroom when his name is spoken. All jokes must cease about economists with wire-rimmed glasses holing up in their cubicles trying to see if what they just observed in real life can be massaged around to fit their pet economic theory. It is expected that if a professor or student utters his name they must do so in soft, reverent tones, and then place their fingers to their pursed lips and gently touch the printed name on the page of their classical textbook. Just who is this John Maynard Keynes?

The sacred legend holds that in the hours of deepest distress, when the United States was not just reeling from the bludgeoning blows of the Great Depression, but was down and out for the final count, never to arise again from the smoldering ashes of dissipated wealth and shattered culture, John Maynard Keynes came riding to the rescue. It was Keynesian economic philosophy, emanating like a bright beacon light from the halls of King’s College in Cambridge, England, that saved the culture and probably the universe.

As the legend goes, John Maynard Keynes assembled his exclusive teachings into a printed book, The General Theory of Employment, Interest, and Money, that was printed in 1936. Miraculously, the newly elected president of the United States, Franklin D. Roosevelt, stumbled across the book just in time, read the magic words, arduously and meticulously implemented the teachings, and the floundering nation was transformed into the economic super-power that held sway over the entire world like no other nation in history. How could anyone with half a brain and one eye ever dispute or even question those sacred writings that were passed down to this favored nation so many years ago? Blessed is the name of John Maynard Keynes.

So, just what were those original teachings? My major professor in economics, Dr. Paul Ballantyne of the University of Colorado, one day told me, “Jim, if you want to easily remember the economic philosophy of Professor Keynes, just visualize in your mind a bathtub. It is about one-third full of water. Above the bath tub is a spigot with a handle to regulate the inflow of water. Above the spigot are the letters “G” and “I.” Those letters stand for Government and Investment.

As with all bathtubs, there is a drain at the bottom of the tub. Over the drain are the letters “T” and “S.” They stand for Taxes and Savings.

If you want to fill up and regulate the economy you turn on the “G” and “I” spigot and plug the “T” and “S” drain pipe. By increasing the Government Spending and Investment faster than the leakage of Taxes and Savings out of the economy, you can increase the level of income and reduce unemployment.

“But,” I protested to Dr. Ballantyne, “what’s so brilliant and new about that? Explicit provisions were made for that clear back in 1913 when the U.S. passed the Federal Reserve Act. The Federal Reserve was given certain rights:

• The Feds were given the right to raise or lower the percentage of reserves that the banks must keep on hand. If they lowered the amount of required reserves, then the banks would have more money to lend out to customers to invest in their projects. The higher the reserves imposed on the banks, the less money could go into the system.
• The Feds have the right to raise or lower the Discount Rate of the money they can lend to the banks to lend to their customers. The higher the discount interest rate, the less the banks will borrow from the Feds, and the less will be available to the customers, and the less money will be introduced into the system. The lower the discount rate, the more likely the banks will borrow from them and lend the money out to their customers, and more money will find its way into the system, and there will be an increase in employment.
• The Feds have the right to sell and buy back notes and securities to citizens and foreigners to cover the debts the government creates because of their desire to spend more than they have in their account.

How much more could they want? What’s new about Keynes?”

John Maynard Keynes had the advantage of watching Great Britain go through an earlier depression of its own. He was in England and only twenty-nine years old when the U.S. passed the Federal Reserve Act. He was also able to watch what had happened during the recessions of the U.S. and the early years (1929 – 1935) of the Great Depression before he wrote his book. He was convinced that the severe bumps of the boom and bust economic cycles could be flattened out with his aggregate expenditures model. He declared that Say’s Law was not dependable, and if the economy were left to correct itself it would not happen. He pointed to the Great Depression as his needed proof.

But why the God-like treatment for Keynesian economics? All of the tinkering with aggregate expenditures did not lift the U.S. out of the Great Depression. Successful economies are built on production. They have to produce something, and it was not until the U.S. began production for the buildup for World War II that employment and incomes began to rise. Indeed, World War II was a horrible price to pay to end the Great Depression.

John Maynard Keynes did not leave any question as to government’s economic involvement. He felt it was the government’s responsibility to be in control of the stability of the national economy and play an active role in the policies and procedures. He also was a strong advocate of the government’s control of housing and ownership of utilities and transportation. Recent polls indicate that 70% to 80% of today’s economists subscribe to the ideas associated with the Keynesian approach that business cycles should be managed by the Fed. That comes close to divinity. 

Next week we will look at Franklin D. Roosevelt.

      (Research ideas from Dr. Jackson's new writing project on Cultural Economics)

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

 

Dr. James W. Jackson often describes himself as "The Happiest Man in the World." A successful businessman, award-winning author and humanitarian, Jackson is also a renowned Cultural Economist and international consultant, helping organizations and governments to apply sound economic principals to the transformation of culture so that everyone is "better off."

As the founder of Project C.U.R.E., Dr. Jackson traveled to more than one hundred fifty countries assessing healthcare facilities, meeting with government leaders and "delivering health and hope" in the form of medical supplies and equipment to the world's most needy people. Literally thousands of people are alive today as a direct result of the tireless efforts of Project C.U.R.E.'s staff, volunteers and Dr. Jackson. 

To contact Dr. Jackson, or to book him for an interview or speaking engagement: press@winstoncrown.com

POWER OF STORY: DEPRESSIONS AND PANIC

by Dr. James W. Jackson

Founder, Project C.U.R.E.
Author, The Happiest Man in the World: Life Lessons from a Cultural Economist

Once upon a time to a fabled piece of real estate came individuals and small clusters of sincere, hard working people. Their intentions were to carve out a place of peaceful and prosperous existence on the prized piece of land that miraculously stretched all the way from the Atlantic Ocean to the Pacific Ocean. They dreamed of their desires and opportunities one day materializing into feelings of security, satisfaction, and happiness. Their economic endeavors eventually found them building thousands of individual businesses and employing tens of thousands of their neighbors as laborers.

Their simple economy included the practice of barter and a currency of metal coins and commodities such as tobacco. By the late 1700s, their economy had begun to mature and even show signs of sophistication. A business observer by the name of J. B. Say wrote that it appeared the very act of producing goods seemed to generate income equal to the value of the goods produced. That idea became known as Say’s Law, where supply creates its own demand. In other words, there will be sufficient spending to purchase all that is produced.

When times were good the business owners would invest in purchasing goods and materials to build their enterprises. They would also buy raw materials in order to produce the items they were going to sell. If they did not have enough money of their own, they would invite investors to share in their business venture. Their hard work and diligence ended up with successful production of goods. Many times their successful endeavors resulted in producing more of the items than the present market could purchase.

Once a businessman’s warehouses were full and he had saturated the marketplace with his goods, he would have to put a bookmark in his production until the customers’ purchases would catch up to his production. He would have to lay off his workers until the demand for his products emptied out his warehouse. That allowed him to start up his business again. The lack of continued investment in production resulted in a temporary recession of business and the occurrence of unemployment. The reoccurring cycle gave the appearance of a boom and bust economic pattern.

Observers, also in the late 1700s, like David Ricardo and John Stuart Mill recognized these bumps in the business experience, along with other interruptions like wars, gold rushes, and droughts, and concluded that over the long haul of time all the bumps would tend to even out, and full employment and production would work out just fine, and that eventually demand must equal supply. There would eventually be sufficient spending to purchase all the supply.

But some of the recessions were worse than others. During the seventy-five years in the U.S. prior to 1929, there had been nineteen business recessions with some gaps that even lasted as long as two years. Then came the Great Depression! The Roaring 1920s had produced a period of easy money, abuse of credit, speculation in risky ventures, and high expectations driven by greed and lack of discipline.

The 1929 crash of the stock market opened the door to panic, and the people waited in lines at their banks to withdraw their money. But, as we learned earlier, when people deposit their funds in a bank it is unjustifiable to think that everyone can demand their money back all at once. Their money that was deposited was not in the banks at all, but had been loaned out to someone else. The new borrowers were not expected to repay those loans for another ten, perhaps twenty years.

All economic systems depend upon the factors of confidence and convenience. When depositors cannot withdraw the money at will that was deposited, they get quite nervous. When, after standing in lines for a long time, they still cannot withdraw their money, they panic. That panic spreads like a wildfire to all other depositors.

It takes such a tiny pin to prick the balloon of confidence. Early in the Great Depression over one third of all the banks in the U.S. failed and closed their doors. The depositors’ funds evaporated into thin air. The confidence in the system was likewise gone.

More than twelve million people lost their jobs. Production dropped 30% and per capita income shrank 40%. Unemployment jumped to 25%, 85,000 businesses failed, hundreds of thousands of families lost their homes, and over half of home mortgages were in default. The financial constriction did not just solve itself. The Great Depression lasted over ten miserable years with no apparent hope in sight.

The local, county, state, and federal governments likewise panicked. They embarked on harsh plans to quickly increase taxes to cover their losses. But there was no money to pay the taxes. The Federal Reserve Bank failed miserably. It had been empowered to move cash early on to the first banks experiencing runs on their accounts in order to stave off such panics. That probably would have stopped the panic, as the people realized that others were getting their money back. Instead, however, the Fed officials applauded in some cases, saying it was all working to weed out the weak banks and those with bad management practices.

What had gone wrong? Was it possible that Say’s Law was wrong? Why were the safeguards of the Federal Reserve System never implemented? What would pull the economy and the people up and out of the Great Depression?

Next week we will look at Franklin D. Roosevelt and John Maynard Keynes.

 (Research ideas from Dr. Jackson's new writing project on Cultural Economics)

© Dr. James W. Jackson  

Permission granted by Winston-Crown Publishing House

Dr. James W. Jackson often describes himself as "The Happiest Man in the World." A successful businessman, award-winning author and humanitarian, Jackson is also a renowned Cultural Economist and international consultant, helping organizations and governments to apply sound economic principals to the transformation of culture so that everyone is "better off."

As the founder of Project C.U.R.E., Dr. Jackson traveled to more than one hundred fifty countries assessing healthcare facilities, meeting with government leaders and "delivering health and hope" in the form of medical supplies and equipment to the world's most needy people. Literally thousands of people are alive today as a direct result of the tireless efforts of Project C.U.R.E.'s staff, volunteers and Dr. Jackson. 

To contact Dr. Jackson, or to book him for an interview or speaking engagement: press@winstoncrown.com

POWER OF STORY: MONETIZING THE FEDERAL DEBT

by Dr. James W. Jackson

Founder, Project C.U.R.E.
Author, The Happiest Man in the World: Life Lessons from a Cultural Economist

So, just how does the U.S government magically turn the federal debt into an asset of spendable money?

As we discussed earlier, the U.S. Treasury Department keeps most of its money in the Federal Reserve Bank. Checks are written for every government expenditure from this account. Upon occasion, however, those in the government have a very interesting problem: they spend more than they have in their account.

If your personal bank account were overdrawn, you basically would have two ways of covering the deficit. Either you would hurry around and earn enough to cover the amount, or you would find someone who would make you a quick loan. The federal government does not earn money, so it is left with the choice of either quickly levying a new tax to raise the money, or going to the marketplace to get a loan. Taxing is part of the government’s fiscal policy, while adjusting the money supply is part of the Federal Reserve’s Monetary Policy.

But, think about it for a minute: who could lend the government several trillion dollars just to cover the extravagant spending desires of the administration and Congress? Lots of people . . . together, that is! The government does not go to just one source and borrow the money; they make thousands and thousands of little loans in the form of U.S. Treasury bills (T-bills), notes, and security bonds. They are essentially government I.O.U.s given in return for the borrowed money.

In order to assimilate the debt into our system we use a function called monetizing. Many less sophisticated countries simply print the money to pay for the cost of overspending by their governments, finding that form of taxation to be a simpler method. But, as you will recall, increasing the supply of money in the system causes inflation.

We sell the security bonds and treasury notes to our citizens, and also to foreign countries. But that transaction does not inject new money into the system. It would be as if there were 10 dollars and 10 cherry pies in the system. The government wanted one of the cherry pies, but did not have 10 dollars to pay for it. So, it would offer a bond, presuming that there would be one person in the system who would rather have an interest-bearing bond than a cherry pie. So now you have 10 dollars, 10 cherry pies, and 1 bond in the system.

When it comes time to pay back the borrowed money plus the agreed interest on the secured bond or T-bill, the Federal Open Market Committee of the Federal Reserve Bank calls in the note and pays it off. How do they do that? You guessed it . . . with newly created money!

The monetizing process is accomplished by the Federal Reserve Bank issuing a check to the bond dealer, who in turn deposits that check into his bank account. The check, when it is deposited, is credited by the Federal Reserve Bank to that bank’s reserves, and that bank is then entitled to make loans against that new reserve or exchange it for cash.

Why did the Federal Reserve Bank have the right to issue the check? Because it was backed up by the U.S. Treasury I.O.U. that it had just purchased! In essence, what happens in the transaction is that the federal debt—a liability—is transformed into an asset of spendable cash by the U.S. Treasury’s signing of a note! The note is an asset of the Federal Reserve Bank. In other words, the debt of the government has been miraculously turned into spendable money. That’s called Monetizing the Federal Debt!

Monetizing the national debt, by using the intermediate step of issuing bonds, stalls the impact on the economy for at least a year . . . perhaps much longer. But it has exactly the same ultimate effect as if the government did not issue the bonds in the first place, but simply paid its debt with printing-press money or entering strange numbers into a computer. Instead of having 10 dollars and 10 cherry pies and 1 bond in the system, there would now be 11 dollars, 10 cherry pies, and no bond. The outcome is the same as the irresponsible actions of Germany in paying off the war reparations. There is new money injected into the monetary supply that lowers the value of the rest of the money and causes a sustained increase in the general level of all prices . . . Inflation!

When a government overspends, goes into debt, sells bonds and T-bills, it is not a slick process of smoke and mirrors whereby that government creates free money. That government has just set into motion the devaluing of their money and economic system through inflation. The people do not vote on having the value of their money taken away from them, their earnings and equities stripped from them, and their savings stolen from them. The Congress doesn’t even have to vote to raise a tax to accomplish such results. But the silent consequences of extreme and rapid inflation (hyperinflation) are set into motion, as sure as the sunset.

So, just what gave rise to the notion that the federal government could manufacture debt and new money to satisfy the lust of over spending? Next week we will take a look at the interesting paper trail. 

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson

Permission granted by Winston-Crown Publishing House

Dr. James W. Jackson often describes himself as "The Happiest Man in the World." A successful businessman, award-winning author and humanitarian, Jackson is also a renowned Cultural Economist and international consultant, helping organizations and governments to apply sound economic principals to the transformation of culture so that everyone is "better off."

As the founder of Project C.U.R.E., Dr. Jackson traveled to more than one hundred fifty countries assessing healthcare facilities, meeting with government leaders and "delivering health and hope" in the form of medical supplies and equipment to the world's most needy people. Literally thousands of people are alive today as a direct result of the tireless efforts of Project C.U.R.E.'s staff, volunteers and Dr. Jackson. 

To contact Dr. Jackson, or to book him for an interview or speaking engagement: press@winstoncrown.com