THE DEVIL'S BARGAIN

Let's start with a few quotes:



Thomas Jefferson

I sincerely believe that banking establishments are more dangerous than standing armies.” -- Thomas Jefferson





James Madison



"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments .....”  -- James Madison



Abraham Lincoln

 “The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.”   -- Abraham Lincoln

Henry Ford



“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” --  Henry Ford



Franklin Roosevelt



“The real truth of the matter is … that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson.”  -- Franklin D. Roosevelt

These gentlemen didn't share the same politics.  But there's one thing they agree on.  Banks and bankers have always been dangerous.  The question is, why?   It would also be nice to know how it got that way, and if there's anything that can be done about it.


The Short Answer

Why are the bankers dangerous to democracy?  The short answer is that debtors are inevitably beholden to their creditors.  When the debtors are democracies, this means elected officials -- indeed, entire governments, are beholden to unelected individuals and organizations.  It's as simple as that - not exactly rocket science.  The more interesting question is, how does this come to happen?  Only when we understand that, can we figure out what, if anything, can be done about it.

Wars Cost Money ....

Historically, the story starts with a war.  It could start other ways –  such as excessive public spending on welfare benefits or celebrations or public monuments, but it generally doesn’t.  Because while there are many ways to squander resources, only when we fight wars do we use resources to destroy other resources, which virtually guarantees there won't be enough resources to go around.


Guns, bullets, artillery, tanks, aircraft, warships, smart bombs – are manufactured not only to kill and maim, but also to destroy infrastructure –  blow up bridges, burn crops, level factories. Even if the winner engages in plunder, exacts reparations, or steals natural resources, the booty rarely reimburses its cost for the war –particularly if we include the loss of trade and agricultural production.

The consequences are far worse for the loser. Along with destruction come disgrace, dishonor, and the sure and certain downfall of every political leader even remotely associated with the conflict.  Although nobody wants to lose a war, the aversion is probably greatest among the rulers and politicians.

History teaches that the biggest and best-equipped armies generally wind up winning. Given the enormous cost of arms and armies, there is never enough in the national treasury, and taxes can never be raised fast enough in the face of looming hostilities. So in the run up to a war, the prospective combatants tend to compete strenuously in a preliminary battle ... to borrow money.

Who lends this money?  Why do they lend it?  And how?

In early times, the motives for lending were as clear as those for borrowing: patriotism (mingled with an aversion to being enslaved or murdered), and the protection of property. As to the identity of the lenders, they were generally those who stood to lose the most if the war was lost; or, in other words, the richest members of society.

The important thing to note about these arrangements is that the wars were, in essence, being financed out of SAVINGS. Since the sovereign didn't have sufficient savings, it borrowed from the savings of private citizens.

But about 500 years or so ago, a new wrinkle was introduced. Wars began to be financed through intermediaries using various types of legal instruments evidencing government indebtedness. The motive of these intermediaries was neither patriotic nor personal. They did it in hopes of realizing a profit from an activity that would have been illegal in the absence of government complicity.

Other People's Money ....

The use of gold as a store of value allowed for the accumulation of wealth beyond the perishables you could store in a granary or warehouse.   But gold involved problems of transit and storage.  In ancient Egypt and Mesopotamia, gold was stored in temples under the auspices of priests -- presumably on the theory no one would steal from a house of God.  In Greece and Rome, private entrepreneurs began offering additional services.  Not only did they accept deposits, they also financed trade by arranging credit in distant cities, so physical coins didn’t have to be transported.

With the fall of Rome, trade declined.  Throughout Mediaeval times, wealth was land, the ownership of which was concentrated in the feudal nobility.  Still, finance was necessary for war – especially the Crusades. Since the Church took a dim view of money-lending, the need for finance was met largely by Jews (a favor returned in modern times by born-again Christians who help finance the State of Israel).

With the rise of the Italian city states, lending to finance trade again came to the fore. This came to be concentrated in Florence, particularly in the hands of the Bardi and Peruzzi, who also dabbled in the financing of wars. This could be profitable, but it was risky.  The Bardi discovered this in 1354, when Edward III of England defaulted on his loans during the Hundred Years War, sending the family into bankruptcy.  But another Florentine family quickly took their place, mixing commerce, finance and politics – the Medici.

With the rise of the Habsburgs, the center of power -- and finance -- shifted to Bavaria.  The Fugger dynasty rose to prominence making loans to Archduke Sigismund and Emperor Maximilian I. With the assistance of a brother in Rome, they handled remittances to the papal court of proceeds from the sale of indulgences. However, in addition to this low-risk enterprise, they leant heavily to Philip II of Spain, who wound up defaulting four times in the second half of the sixteenth century when cash flow from the New World proved insufficient to finance his various wars in Europe.

Two hundred years later, a Frankfurt coin dealer by the name of Mayer Amschel Rothschild rose to power by assisting William IX, wealthy ruler of the German state of Hesse-Kappel, with his banking  needs.  Eventually, with William’s blessing, Mayer and his sons gained entrée into other royal courts of Europe. When the Napoleonic wars broke out, the Rothschilds gambled heavily on the eventual defeat of Napoleon by arranging loans to his enemies.  In this case, the bankers bet right.  By the end of the war the family had built a network of financial connections that placed it at the heart of government finance across Europe, a position it has never really lost.

Which leads to a single historic truth:

The rise and fall of bankers has always been inextricably linked to the rise and fall of governments.

Have you ever asked yourself why that is?   Why would a bank finance a war?  At present, in the aftermath of a historic housing crash, the overall delinquency rate on residential mortages in the United States is about 8%.  Yet in a war, 50% of the participants generally wind up losing. And the losers generally don't pay back their loans.  So why take the risk?


Why Banks Finance Wars
 
To understand the link between banks and governments, you need to go back to the nature of banking.  Recall that it began with dealers storing other people's gold. When the owner of the gold made a deposit, the dealer issued a receipt. Over time, people came to realize that so long as the gold was held in secure storage, it made no difference if the physical gold was transferred, or merely the receipt for it.  And since it was easier to transfer the receipts, they came to be traded like the gold they represented. In other words, they became money.

Knowing that the gold dealers had gold, people came to them seeking loans and, naturally, these potential borrowers were willing to pay interest. The easiest way for the dealers to make the loans was to issue gold receipts that the borrowers could use in trade and, since there was no way to know how much gold a dealer held for his own account or how many receipts he had issued against it, there was a clear temptation for the dealers to issue receipts – and earn interest – on gold they didn’t really own. So long as they had enough gold on hand to satisfy periodic demands for physical delivery, no one would ever know the difference.

In the beginning, gold dealers imposed a charge on gold owners for storage.  But the practice of money lending quickly became so profitable that the gold dealers began offering to pay interest on deposited gold, instead. At this point, the legal relationship between gold dealers and gold depositors was subtly transformed from one of safekeeping, in which the dealer was providing a storage facility, to a form of loan, in which the gold depositor lent gold to the dealer and the dealer became indebted to the depositor for return of gold in an amount equal to the amount deposited, plus interest.

Over time, gold dealers realized that they could create gold receipts in an amount far in excess of the amount of physical gold they actually held on deposit. In fact, they could issue receipts in an amount that was limited only by the degree of confidence their depositors had in their ability to return the metal when it was needed.

This was the beginning of so-called fractional reserve banking, which exists to this day, and there are two critical points to understand about it.

The first is, that what the gold dealers did when they issued gold receipts in excess of the amount of gold they had on deposit was to create money out of thin air.  Before that time, money (gold) had to dug out of the ground by the sweat of a man’s brow. When gold receipts came to be accepted in lieu of physical gold, money could be created with the stroke of a pen, and in unlimited amounts.

The second point is that what the gold dealers did was a form of fraud (defined, in the California Civil Code, for example, as "the suggestion, as a fact, of that which is not true, by one who does not believe it to be true" or "the suppression of that which is true, by one having knowledge or belief of the fact"). By lending gold, the dealers were making an implied representation that they owned the gold which, of course, they didn't.  In fact, when they lent gold in an amount greater than the reserves they had on hand, they actually purported to lend something that didn't exist. This certainly seems to constitute fraud by any reasonable definition.

Now, clearly this situation was known to the kings and princes who did business with the banks – or, anyway, to their finance ministers. So why didn’t they just send the gold dealers to prison.

The simple answer is this: The governments needed more money than there was gold, and the only way they could get that money was to let the banks create it.

Wars destroy resources, as mentioned above.  And they’re unimaginably expensive. They always cost more than the sovereign has on hand at the outbreak of hostilities. So in the fervor to raise the necessary funds for war, a bargain is struck, between the bankers and the governments.  The bankers are allowed to create money, so long as it is created for the benefit of the government.

Of course, there are problems. Once the government is indebted to the bankers, it loses its ability to regulate the bankers. It has to tread lightly, covering up their peccadilloes and blunders.  It has to go easy in establishing reserve requirements.   It has to institute a system of insurance to make sure depositors keep depositing.  If the system stumbles the government has to prop it up. (After all, government is the biggest borrower.)  It has to establish a central bank to bail the bankers out when depositors run for the doors. Eventually, it becomes complicit in the fraud.

Those guys at the beginning of the post -- Jefferson and Madison and Lincoln, FDR and Henry Ford?  That’s what they were talking about.

To finance wars, nations spend money they don’t have. And to get that money, they make a deal with the bankers to create it out of thin air.

A Devil’s Bargain.

You were wondering why the banks are too big to fail?  Because if they fail, they take the governments down with them. 

Let’s end with another quote.



“Give me control of a nation's money and I care not who makes it’s laws.”

 --  Mayer Amschel Rothschild

Is this the face of democracy?  Until we stop borrowing money and fighting wars, I'm sorry to say, the answer is, yes.

THE BIG LIE III - INFLATION

There are enough lies about inflation that if you tried to deal with them all, you’d wind up writing a textbook. But we have to start somewhere, so ....

Let’s start with the definition. Most people – journalists and economists included – think inflation means “a general increase in prices.” But defining inflation as an increase in prices is like defining war as an increase in casualties. It tells you nothing useful about what caused it. So, for the record, inflation is not an increase in prices.  It's an increase in the supply of money (or credit). When the supply of money (or credit) increases faster than the supply of things you can buy with the money (or credit), prices go up.  No "demand pull"; no "cost push".  Inflation has nothing to do with labor union contracts or monopoly pricing power.  It has to do with one thing and one thing only: credit.

But no one wants to admit the problem is credit because the institutions that create the credit (i.e., banks) make money by creating credit. And the institution that allows them to make money creating credit (i.e. the government) is the world’s biggest user of credit (in other words, the world's biggest debtor).

Not only is the U.S. government the world’s biggest debtor, but it reports to a bunch of ill informed,  irresponsible adolescents (i.e. voters) who refuse to cut back on the stuff they get from the government or to tax themselves enough to pay for it.

As a result, it’s impossible for the government to cover costs on a current basis, let alone pay back what it owes from its past exhuberances.

So, faced with this impossible situation, what does the government do? 

First, it obfuscates.

So for example, on November 10, 2005, the Federal Reserve issued a press release stating that it as of March, 2006, the statistical monetary measure known as M3 would no longer be reported.  According to the Fed, the reason for this was that "M3 does not appear to convey any additional information" and the Fed "judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."  This was, of course, complete nonsense. M3 was the broadest and most useful measure of money in the economy, including not only checking account balances but time deposits, money market funds and repurchase agreements as well (repurchase agreements being the Fed's favorite mechanism for injecting liquidity into the monetary system). The reason the Fed stopped reporting M3 wasn't that it was not a useful number; it was because it was too useful and showed the money supply growing far faster than the underlying economy.

The second thing the Government does is, of course, lie. 

The first lie is about the amount of borrowing.  The government uses accounting practices that make it look like it’s borrowing less than it's actually borrowing. So, for example for fiscal 2009, the government reported a deficit of about $1.2 trillion. But if the deficit had been calculated in accordance with the "generally accepted accounting principles" that businesses use, the deficit would have been $1.4 trillion – or $200 billion greater.

On a balance sheet basis, at this writing, the "national debt"  as officially reported by the U.S. government, is about $13.85 trillion, or $125,400 per taxpayer.  But this "official number" leaves out unfunded liabilities for Social Security, Medicare and prescription drug benefits of $111.7 trillion, or a staggering $1 million per taxpayer. In other words, most of the debt is hidden. 

(These numbers don't include state and local debt or personal debt of $16 trillion.)

The next thing the government lies about is the extent to which prices are rising.

First, the government pretends that increases in the prices of certain things somehow shouldn’t be counted. For example, asset prices (stocks, bonds, real estate, precious metals) are excluded from the Consumer Price Index (CPI) on the theory that they aren’t “consumed”. Okay, they’re not consumed, but why should a price index be limited to goods that are consumed?  To the extent that inflationary government policies disproportionately benefit the rich (as they have done in America over the past 35 years or so), it’s logical to assume that most of the price impacts will be reflected in asset prices because rich people save more than poor people and asset investments are made from savings.  

Second, the Bureau of Labor Statistics excludes certain prices from the CPI because they’re supposedly too hard to measure. Interestingly, the excluded items go up faster in price than many of the items that are included. Among these excluded items are health care costs and the costs of higher education.

Another exclusion is reflected in the Federal Reserve’s concept of “core inflation” which it reportedly likes to consider in setting monetary policy. As we are repeatedly told in the financial press, core inflation excludes "volatile food and energy prices”. Food and energy prices are volatile alright, but their volatility seems to be primarily in an upward direction.

Creative and entertaining lies are reflected in several "adjustments" that have been built into the Consumer Price Index over the years to reduce the rate of price increases as publicly reported.  Among these are “geometric weighting” which automatically reduces the weight of a product in the index to the extent that its price increases.  The theory here is that consumers will buy less of a product if its price has risen.  Of course they will buy less, but reducing the weight of expensive items results in an index that no longer measures a constant standard of living.  As the CPI is presently calculated, it measures an ever-declining standard of living.   A second categroy of lies are called “hedonic price adjustments” which automatically reduce the dollar price actually paid by consumers within the index to account for supposed increases in product quality or function.  The problem is, no adjustments are ever made to increase the prices of items to account for reductions in product quality, or the availability of customer service.

(A complete catalog of the chicanery engaged in by the Bureau of Labor Statistics is beyond the scope of this post, but if you’d like to educate yourself further, you can go here:  http://www.shadowstats.com/article/consumer_price_index)

To be sure, there are a lot of lies told about inflation. But behind those lies is a bigger lie – a mega-lie, if you will, that we, the American people, like to tell ourselves and each other.

That lie is that the infrastructure and the services we expect from our government – from interstate highways to public education to national defense to Medicare to Social Security – somehow belong to us as a matter of right and should be delivered to us by a beneficent government without the necessity of our paying taxes. This lie is not a new one – Americans have believed they shouldn’t pay taxes since before the Revolutionary War. (Come to think of it, that’s why there was a Revolutionary War.)  But over the years, the list of services we expect has expanded considerably.

Since we won’t tax ourselves to pay for the things we want from the government, and won't even elect people who are willing to tell us the truth about our need to pay for them, the only alternative is lies.  Lying about the amount we owe, lying about the value of our dollars, lying about our ability to repay this debt, and now lying about the printing of money by the Federal Reserve (so-called "quantitative easing") in order to buy government debt that no one else is willing to buy anymore. 

But as they used to say when I was a kid, you can't get something for nothing.  This explosion of debt has caused – and will continue to cause – prices to rise, resulting in an invisible tax paid by us all.

This is also not a new phenomenon.

Before there was a United States, there was a confederation of colonies that met expenses by printing a paper currency called the Continental. These things wound up being worth so little that debtors chased their creditors up and down the streets trying to pay them back with Continentals.  In the 1790s, after the U.S. Constitution was ratified, Continentals could be exchanged  for treasury bonds at 1% of face value.

This could easily happen again in the United States.  Only this time with something called the dollar.
In fact, unless Americans find the will to pay their expenses on a current basis, it will happen again.

But I have no doubt that when it happens, we will probably find a way to lie about it.

THE BIG LIE II - GROWTH THROUGH BORROWING

I’d like to continue my Big Lie series with an even bigger lie than the one I talked about last time. This lie – generally (and unfairly) attributed to John Maynard Keynes – is the one that says a nation can stimulate economic growth through borrowing.

I need to be unequivocal on this. The notion that a nation can increase its standard of living by borrowing is completely and categorically false. It is not supported by history or logic.

First, let's be fair to Lord Keynes. Although his name is almost always mentioned in connection with deficit spending, he didn’t advocate it. What he said was that a nation can smooth out the effects of the business cycle by acting counter-cyclically. In other words, the ups and downs of the cycle can be mitigated if a government borrows and spends when times are bad and pays the money back (i.e., runs surpluses) when times are good.

And this is right. I agree. Governments can lessen the impact of a down cycle by spending. In that sense, I am a total Keynesian. But have you ever heard anyone quote Keynes to argue in favor of running surpluses? I haven’t. And my guess is, you haven't either.

But enough of Keynes. God knows, he’s received enough scholarly analysis already. What I want to talk about is the dynamics of borrowing, what it is, what it does to human beings, and what it does to the economy. First of all, we need to ask the fundamental question, what is borrowing?

Borrowing means using something I don’t own, right? I borrow your saw to cut some lumber. I borrow your shovel to get the snow off my driveway. I borrow a cup of sugar to bake a cake. No harm, no foul. Nothing wrong with that. As long as I get your permission to use the saw or the shovel or the sugar, and as long as I give it back.

Okay, so we know what borrowing is. The next question is, when I borrow something, where am I borrowing it from?  I don’t mean this in the sense of “Bob’s garage” or “Emily’s kitchen”. I mean it in the sense of,  “from what source or store of value”?

One answer might be, I am borrowing from someone else’s savings. At some time in the past, the person who bought the saw or the shovel or the sugar deferred the possibility of present consumption in order to “invest” in the things I am borrowing, and I am borrowing from those savings.

Another answer, equally correct, is, I am borrowing from my future consumption. In other words, by borrowing, I am incurring an obligation that will have to be repaid from resources that I am going to have to save, rather than consume, some time in the future.

Now, you may object that not all borrowing has this characteristic. For example, if I borrow a saw from you, I haven’t necessarily taken anything away from my future consumption. This may be true in some cases, but in general, the fact remains that if I borrow the saw, I have an obligation to return it in more or less the same condition. If I break the saw or damage it or wear it out –which I eventually will do if I keep borrowing it – I’ll have to replace the saw, and this will have to come out resources that could have been devoted to future consumption. (Admittedly, the point becomes clearer if I borrow the sugar or, say, a hundred dollars or two.)

So, in general, it’s fair to say that borrowing involves a shifting from future to present consumption or, in other words, a higher standard of living now, at the expense of a lower standard of living later.

Don’t get me wrong. There’s no value judgment implied in this. It’s a statement of fact. It may be entirely rational for me to borrow in order to meet a present need. But the idea that borrowing can increase my standard of living in the long run is preposterous. While my standard of living may apparently increase when I am in debt, it will decrease when I pay the debt back. In the long run, my standard of living will remain the same. In itself (i.e., ignoring the cost of interest) borrowing is standard-of-living neutral.

What’s true of me, is also true of a nation. In the long run, borrowing affects only the timing of consumption, not its quantity. It has no effect on the long term standard of living … ignoring the impact of interest.

But how can we do that? How can we ignore the impact of interest?  The answer is, we can't.

If you read the Bible (especially the Old Testament), you will see that the ancient Israelites took a very dim view of lending anything out at interest. The reason is never really stated, but a distinction is clearly made between lending as an act of generosity or kindness, which is considered good, and lending at interest, which is considered bad.

So, what’s the difference?

Again, the Bible doesn’t really say, but here’s my guess: The world is an uncertain place. Things don’t always go according to plan. Despite our best intentions, it’s sometimes impossible for us to meet our obligations. And the problem is, the debtor- creditor relationship doesn’t take this into account. If I borrow from you, end of story, I have to pay you back. If you’re my neighbor, I may have reason to hope you’ll make allowances. But if you’re my banker? If you’re my banker ... let's just say, at the first sign of trouble, you're gone. The friendly loan officer who was delighted to welcome me as a valued customer, extend me a line of credit and take me to lunch, is nowhere to be found. In his place is a “workout specialist” who calls me, my wife, my boss, my kids and anyone else he can think of to make my life a living hell.

Obviously, this situation does nothing for me psychologically. It raises my stress level. It damages my self esteem. It in no way helps me to relate harmoniously to my wife and family, to perform my work or, for that matter, to repay the loan. But as bad as it is for me, it’s probably even worse for the workout guy, who somehow has to find a way to deal with the guilt he feels, day in and day out, for the despicable things he has to do.

So there are very real psychological and spiritual costs to the institutionalization of debt that economists don’t consider in computing standard of living. But there are also important economic consequences that they do take into account.

The first – and obvious – consequence is that when debt is institutionalized and the debtor has to pay interest, the interest tends to make borrowing a worse deal than it would have been without the interest. And all governments – even governments like ours, with central banks that can print money to buy the debt and force down the interest rates – still have to pay interest when they borrow money. The negative impact of interest is exacerbated when nations borrow money from foreign sources, because the interest cost directly reduces the long term domestic standard of living. This is present the case in the U.S.

The second – and less obvious – consequence of interest is that its existence tends to increase the concentration of wealth; first, because the existence of interest increases the incentive for those with excess resources to hold onto them rather than spend them; and second, because it increases the amount of future consumption those with resource deficits (i.e., borrowers) have to give up when they repay the money.

Concentration of wealth has its own negative consequences, which are beyond the scope of this post. Perhaps we’ll deal with that in another installment of the Big Lie series.

But I think the next post will have to deal with inflation.

THE BIG LIE I - WORLD TRADE

There are a lot of big lies out there, but the one I want to talk about today is the lie that says a country can increase its standard of living by buying cheap stuff from places where the standard of living is lower. This lie is usually defended under the banner of “free trade”-- the benefits of which are taken to be well established and proven. Actually, this defense is bogus. Trade among nations with different standards of living ultimately has a leveling effect. The lower standard of living goes up, and the higher standard of living goes down.

The classical notion of free trade is that nations can benefit by concentrating on the production of goods with respect to which they have “comparative advantages”. The classic example -- given by David Ricardo -- is trade between England and Portugal. Since the cool, damp weather of England is hospitable to sheep, and the warm, dry weather of Portugal is hospitable to grapes, both England and Portugal will benefit if England produces wool and Portugal produces wine, compared with the situation in which both countries try to produce both commodities themselves.

In situations where nations have true “comparative advantages” – such as location, climate, or natural resources – this is no doubt true.  Both can benefit from expanding production of the product with respect wo which they have a comparative advantage  (forgetting, for the moment, the cost of transportation).

But what does any of this have to do with the modern world.  In particular, what does it have to do with China?

China is located nowhere near its primary export markets. Its climate is highly variable, and not particularly suited to the production of one thing or another. What’s more, China is notoriously poor in energy and many other natural resources. So what does it have going for it?

Well, despite several decades of Communist pretense, China does have a centuries-old tradition of trade. Just travel around Asia and you’ll see what I mean. Everywhere you go, there are Chinese (and Indian) traders descended from long lines of Chinese (and Indian) traders. Second, China has a command economy that can allocate capital quickly to take advantage or perceived opportunities. Third, China has an enormous pool of unemployed and underemployed workers who are used to an abysmally low standard of living.

All of these factors are necessary in explaining China’s recent economic ascent; none is sufficient standing alone. But it also needs to be pointed out that none of these factors – least of all a large pool of impoverished workers – can be called a “comparative advantage” in the classical sense. A “comparative advantage” in the classical sense is not diminished by its exploitation. England does not get less rainy by producing wool. Portugal does not get less sunny by producing wine. But a pool of impoverished workers? Over time, it will be diminished as people are put to work. As their standard of living rises, the “comparative advantage” of their poverty will be lost.

And what about the trading partners that have benefitted from that poverty?   Even assuming all else is equal -- that they have traded goods and services -- whether in raw materials, technology, or agricultural commodities -- of equal value, their benefit will be lost.  But to the extent these countries have run trade deficits with China,  their export has been debt. 

Debt is a promise to suffer a lower standard of living tomorrow in exchange for enjoying a higher standard of living now.

This is the trade the United States has been, and still is, engaging in.

WHAT EVER HAPPENED TO HENRY FORD?

In an interview published in the October, 1926 issue of a business magazine called The World’s Work, Henry Ford announced that he was instituting a 5-day, 40 hour work week throughout his business enterprises -- with no reduction in pay. 

Five days work for six days pay.  It was a big deal.  Remember, the norm at the time was a 6 day, 48 hour week.

A dozen years earlier, Ford had shocked the industry by instituting am 8-hour day and a $5 daily minimum-wage. (The average in the auto industry at the time was $2.34 for 9-hours.)

So why did he do these things?  There were no labor unions to worry about at the time. There was no shortage of factory labor. 

Was Ford a bleeding heart liberal?  Was he a socialist?   A communist?   Was he an altruistic humanitarian? 

None of the above.  Ford was a capitalist, through and through -- and hard nosed as they come. But in seeking to maximize returns, he beyond the next quarter's profits.  According to Ford's own account, when he originally instituted the $5 minimum wage,  he was concerned mainly with retaining a quality workforce, which was being undermined by high labor turnover. 

Regarding the reduction in hours, his reasoning was somewhat different. Here, in his own words, is Ford's explanation of why he did it.

The country is ready for the five day week. It is bound to come through all industry ... because without it the country will not be able to absorb its production and stay prosperous.

The harder we crowd business for time, the more efficient it becomes. The more well-paid leisure workmen get, the greater become their wants. These wants soon become needs. Well-managed business pays high wages and sells at low prices. Its workmen have the leisure to enjoy life and the wherewithal with which to finance that enjoyment.

The industry of this country could not long exist if factories generally went back to the ten hour day, because the people would not have the time to consume the goods produced. For instance, a workman would have little use for an automobile if he had to be in the shops from dawn until dusk. And that would react in countless directions, for the automobile, by enabling people to get about quickly and easily, gives them a chance to find out what is going on in the world-which leads them to a larger life that requires more food, more and better goods, more books, more music -- more of everything. ….

Just as the eight hour day opened our way to prosperity, so the five day week will open our way to a still greater prosperity.

[emphasis added]

Wow!   Reading these words today is like a breath of fresh air, isn't it?  Make no mistake, this stuff is radical .  Because it reflects a recognition that in the end, there can be no difference between a company's employees and its customers.  Corporate policies that seek to exploit cheap labor eventually destroy the market for the very goods that cheap labor is producing.

Listen to this.  Henry Ford in his own words. “The people who consume the bulk of goods are the people who make them. That is a fact we must never forget -- that is the secret of our prosperity.”

The secret of our prosperity.  Well, sorry to say, American business has forgotten that secret.  And it's lack of remembrance is the source of our current Great Recession. Offshoring, out-sourcing. part-timing, pension-raiding, benefit cutting -- business tactics like these, pursued over a period of decades, has systematically undermined the American consumer.  It's no wonder income disparity hasn't been this high since the eve of the Great Depression. 

The nation is stuck at 20% unemployment/underemployement.  Why?  Because the job market has been gutted through a series of short-sighted schemes instituted to “maximize shareholder value”.
Adjusted for inflation, average weekly wages haven’t increased since 1973. All the wives and kids who can find a job are already working. And now that the home equity is gone, there’s nothing left to borrow against. It's no wonder the consumer has finally run out of gas.



Ask yourself this, "Where is a recovery going to come from when our biggest export over the past three decades has been jobs?"

What we need is a renaissance of American thinking.  We need to realize that making cheap goods abroad will not sustain a domestic market.  We need to realize that nobody's going to have a job if everything we buy is made aborad.

We need to realize we're all in this together. 

We need few more Henry Fords.

SO WHOSE FAULT IS IT, ANYWAY?

Certainly the oddest feature of modern American culture has to be the notion that the government is supposed to take care of everything for us.

Is there a problem? The government has to fix it. Is there a challenge? The government has to meet it. Is there a risk? The government has to utterly and completely obliterate it.

If there are people without food, the government has to feed them. If there are people without medical care, the government has to provide coverage. Folks out of work? The government needs to create jobs – and pay unemployment compensation until they do.

Is there discrimination? The government has to stop it.  Identity theft?  Stop that, too. Credit card fraud, sleazy sub-prime mortgages. Stamp them out. Greedy bankers? Islamic terrorists? Stamp them out, too.

War on crime! War on terror! War on greed! War on drugs!

Oil spill in the gulf?  Mine disaster in Kentucky?  Athletes on steroids?  Wall Street … the deficit … mediocrity in education. War on them, too!

These things shouldn’t be happening. Why isn’t somebody stopping them? It must be the government’s fault.

That’s what most Americans think. If you ask them, they'll tell you …the problem is actually ... the government.  American icon, Ronald Reagan, said it in his first inaugural address:

“Government is not the SOLUTION to our problem; government is the PROBLEM.”

And Ronald Reagan ought to know. He doubled government spending and increased the national debt by 70% during his time in office. But that proves the point, doesn't it? For all his wit, charm and pomade, Reagan was a politician, too. And everybody knows, you can’t trust the politicians.

Because politicians run the government and “government is the problem.”

According to a recent Rasmussen poll, 59% of Americans agree with that statement,  40% of Democrats, 60% of Independents, and 83% of Republicans. They'll tell you. Government is the problem.

Well, that sentiment might fly in a dictatorship, but in a republic it’s more than a little bit idiotic. Because here in America, we have something called “elections”.  Politicians have to run for office. If we don’t like them, we need to start waging war on the idiots who elected them.

War on Us!

That's right, war on us!  War on the self-righteous, self-indulgent, emotionally adolescent, ever-increasingly-indebted American.
Where on earth did we get the notion that government – which is really nothing more than an aggregation of people just like ourselves – was supposed to solve our problems for us?  Our grandparents didn’t think so. The pioneers didn’t think so. And the founding fathers CERTAINLY didn't think so.

"We hold these truths to be self-evident," Thomas Jefferson wrote in the Declaration of Independence, "That all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men ..."

Hear that?  Life, liberty and the PURSUIT of happiness. Our government was instituted to secure our right to PURSUE happiness.  It wasn't instituted to make sure we actually achieved it. 

That’s a big difference.  A difference we Americans seem to have forgotten.

If we decide there are things we need before we can be happy, it's up to US to get them.  If there are things we decide we need to get rid of before we can be happy, it's up to US to get rid of them. 

Oh, and one more thing for you tea party-ers out there.  When we decide to pursue our goals collectively -- in other words, as a nation? 

We need to be willing to pay for it.

WHAT AMERICA WANTED

The America we baby boomers were born into was a very different place from the America we know today.  I mean, think about it, in the days right after World War II --

• 33% of the homes still didn’t have running water.
• 40% didn’t have a flush toilet.
• 60% didn’t have central heat.
• Less than 50% had a phone.
• Only a third of the people lived in a town with 50,000 or more people.  If you lived on a farm – and 17 percent of the people still did – the odds were better than even you didn’t have electricity.

Running water, electricity, flush toilets -- these were simple things.  Things everybody wanted.

Then there was the car.  When I was born, there were 26 million cars registered in the entire country.  And as we know, everybody wanted a car.

And the television. Believe it or not, there were a total of 17,000 T.V. sets in America in those days – hulking cathode ray machines with unsteady black and white images and tiny 10 inch screens. The picture quality was so bad that every TV came equipped with “hold controls” you needed to keep the picture from rolling one way or the other for no apparent reason. And remotes?  Forget about it.  The Zenith Space Command didn't come on the scene till a decade later. When I was born, if you wanted to change the channel, you got out of your chair.  Not that it did much good. TVs had twelve channels in those days – but only three that worked – ABC, NBC and CBS. That was it. And they weren’t on 24-7, either. Around 1:00 a.m. each night, a waving American flag came on and they played the Star Spangled Banner.  Well, that had to change!

In those days, a lot of the things we now take for granted either hadn’t been invented or hadn't come into  common use. A few of them:

• Air conditioning - except in a few public buildings (imagine the Sunbelt without it!)
• Microwave ovens
• Anything digital (computers, cameras, watches, CDs, MP3s)
• The Internet

• The cell phone
• Credit cards, debit cards, ATMs
• Anything battery operated
• Almost anything imported

We needed those things, right?

I guess so.  I mean, there are more cars in America today than there are people registered to drive them.  

Today the average American household has 2.86 television sets, and there are more telephones in the country than there are people.

Yeah, we've come a long way ....  By other measures, too.

At the end of World War II, America produced —

• 57% of the world’s steel
• 62% of the world’s oil, and
• 80% of the world’s cars

Per capita, Americans earned roughly twice as much as the British, the Canadians, the Swedes or the Swiss (the group of nations that came in second). 

• America had 7% of the world’s population, but produced 42% of its income.
• America was the world’s premier creditor nation
• America had three-quarters of the world’s gold.

Obviously, things had to change. I mean, when I was born, the second World War had just ended and the United States, was the only major country that hadn’t been either bombed, invaded, or both. So Americans were much better off than most, and the world economy had to rebalance .....

Still, it’s interesting to see just how much things have rebalanced.

 Today America produces –

• 7% of the world’s steel
• 10% of the world’s oil, and
• 12% of the world’s cars

We Americans still have the fifth highest GDP per capita.  But unfortunately --

We also have the world's highest debt.  In fact, we are the biggest debtor nation in the history of the world.


And when they write the history of the Baby Boom generation, I'm afraid that's what they'll remember. I guess the ttruth of the matter is, we got what we wanted.

And we wanted it all.