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of money redeemable in government services. One postage stamp
represents the amount of government labor required to transport one
letter from one place to another. Postage stamps are fungible and can
be saved or traded.14
Although Harvey and Coxey both failed in their political
aspirations, elements of the platforms of both were adopted in the
New Deal. The dollar was taken off the gold standard, just as Harvey
had advocated; and the economy was jump-started by putting the
unemployed to work, just as Coxey had advocated. Roosevelt came
from banker money and had the support of big business, but he also
had a strong streak of the can-do Populist spirit . . . .

Web of Debt

Chapter 16

“What can I do for you?” she inquired softly . . . .
“Get an oilcan and oil my joints,” he answered. “They are rusted
so badly that I cannot move them at all. If I am well oiled I shall soon
be all right again.”
“ The Wonderful Wizard of Oz,
“The Rescue of the Tin Woodman”

I n the Great Depression, labor had again rusted into non-
productivity, due to a lack of available money to oil the wheels
of production. In the 1890s, Coxey™s plan to “prime the pump” with
public projects was an idea ahead of its time; but in the 1930s, Roosevelt
actually carried it out. The result was a national infrastructure that
has been called a revolutionary model for the world. The Tennessee
Valley Authority developed hydroelectric power for farming areas that
had never had electricity before. It accomplished flood control and
river diversion, provided scientific agriculture, developed new indus-
try, and overcame illiteracy by spreading public education. The Rural
Electrification Administration was built, along with tens of thousands
of sanitation projects, hospitals, schools, ports and public buildings.
Public works programs were launched, employing millions of work-
ers. Revolutionary social programs were also introduced, including
Social Security for the aged and disabled, unemployment insurance,
and the right of labor to organize. Farm and home foreclosures were
stopped, and savings accounts were restored.1

Chapter 16 - Oiling the Rusted Joints of the Economy

A farm policy of “parity pricing” was enacted that ensured that
the prices received by farmers covered the prices they paid for input
plus a reasonable profit. If the farmers could not get the parity price,
the government would buy their output, put it into storage, and sell it
later. The government actually made a small profit on these
transactions; food prices were kept stable; and the family farm system
was preserved as the safeguard of the national food supply. With the
push for “globalization” in later decades, thousands of family farmers
were forced out of the farming business. Farm parity was replaced
with farm “subsidies” that favored foods for export and were
insufficient to cover rising costs in fuel, feed and fertilizer.2
Where did Roosevelt get the money for all the pump-priming
programs in his New Deal? Coxey™s plan was to issue the money
outright, but Roosevelt did not go that far. Even for the government
to borrow the money was considered radical at the time. The dogma
of the day was that the federal budget must be balanced at all costs.
The novel idea that the government could borrow the money it needed
was suggested by John Maynard Keynes, a respected British economist,
who argued that this was a more sensible course than austerely trying
to balance the budget when funds were not to be had. In an open
letter in The New York Times, Keynes advised Roosevelt that “only
the expenditures of public authority” could reverse the Depression.
The government had to spend to get money into circulation.
Keynes has been called an elitist, because he was an intellectual
with expensive tastes, wealthy friends and banker affiliations; but like
Roosevelt, he had a strong streak of the can-do Populist spirit. At a
time when conventional economists were gloomy naysayers maintain-
ing that nothing could be done, Keynes was an optimist who thought
like the Wizard of Oz. There was no reason to put up with recession,
depression and unemployment. Balancing the budget by cutting jobs,
at a time when people were already out of work, he thought was
economic folly. The way to get the ball rolling again was just to roll
up your sleeves and get busy. It could all be paid for on credit!
But Keynes would not go so far as to advocate that the govern-
ment should issue the money outright. “Increasing the quantity of
money is like trying to get fat by buying a larger belt,” he said.3 It was
a colorful analogy but a questionable one. The money supply had just
shrunk by a third. The emaciated patient needed to be fattened up
with a good infusion of liquidity just to replace the money that had
been lost.

Web of Debt

Keynes started thinking more like the Greenbackers at the end of
World War II, when he proposed a debt-free Greenback-style currency
called the “Bancor” to serve as the reserves of the International Mon-
etary Fund (the fund established to stabilize global currencies). But by
then England™s economic power had been exhausted by two world
wars, and America called the shots. The Bancor lost out to the U.S.
dollar, which would become the world™s reserve currency along with
gold. (More on this in Section III.)

Challenging Classical Economic Theory

The Keynesian theory that dominated economic policy after World
War II was the one endorsing “deficit spending.” The notion that the
government could borrow its way to prosperity represented a major
departure from classical economic theory. The classical “quantity
theory of money” held that there was no need to increase the amount
of money in circulation. When the money supply contracted, prices
and wages would naturally adjust downward, leaving all as it was
before. Murray Rothbard, an economist of the classical Austrian School,
put it like this:
We come to the startling truth that it doesn™t matter what the
supply of money is. Any supply will do as well as any other
supply. The free market will simply adjust by changing the
purchasing power, or effectiveness, of its [monetary] unit. There
is no need whatever for any planned increase in the money
supply, for the supply to rise to offset any condition, or to follow
any artificial criteria. More money does not supply more capital,
is not more productive, does not permit “economic growth.”4
That was the theory, but in the Great Depression it clearly wasn™t
working. The country was suffering from crippling unemployment,
although people wanted to work, there was work to be done, and
there were consumers wanting to purchase the fruits of their produc-
tive labors. The farmers™ hens were laying, but the eggs never made it
to market. The cows were producing milk, but the milk was being
dumped on the ground. The apple trees were producing bumper crops,
but the growers were leaving them to rot in the orchards. People
everywhere were out of work and starving; yet the land was still fer-
tile, the factories were ready to roll, and the raw materials were avail-
able to run them. Keynes said that what was needed was the very

Chapter 16 - Oiling the Rusted Joints of the Economy

thing classical economists said would have no effect “ an infusion of
new money to get the wheels of production turning again.
Roosevelt was slow to go along with Keynes™ radical notions, but
as the Depression got worse, he decided to give them a try. He told
the country in a fireside chat, “We suffer from a failure of consumer
demand because of a lack of buying power.” When the United States
entered World War II, Roosevelt had no choice but to test the limits of
the national credit card; and in a dramatic empirical display, the pump-
priming theory was proven to work. Unemployment dropped from
more than 17 percent to just over 1 percent. The economy grew along
with the money supply to double its original size, the fastest growth in
U.S. history.5 The country was pulled out of the Depression by prim-
ing the pump with liquidity, funding new production that put new
wages in consumers™ pockets.
Keynes had turned classical theory on its head. The classical
assumption was that output (“supply”) was fixed and that prices were
flexible. Increasing “demand” (money) would therefore increase prices.
Keynes said that prices tended to be fixed and output to be flexible.6
When the economy was operating at less than full employment, adding
money would not increase prices. It would increase productivity. As
long as there were idle resources to draw from, watering a liquidity-
starved economy with new money would not produce inflation; it
would produce abundance.
And that was how it actually worked, for a while; but adding
liquidity by borrowing money into existence did not actually create
money. It created debt; and to service the debt, the taxpayers had to
pay interest compounded annually. Roosevelt™s plan put people to
work, putting more money in their pockets; but much of this money
was taken out again in the form of taxes, which went largely to pay
the burgeoning interest tab. From 1933 to 1940, federal taxes tripled.
In the New Deal years, the average annual federal budget deficit was
about $3 billion out of an entire federal budget of $6 billion to $9 billion
-- a greater percentage even than today, when deficit spending has
reached record levels.7 Wholesale endorsement of Keynesian deficit
spending caused the federal debt to balloon from $22 billion in 1933 to
$8 trillion in 2005, a 364-fold increase in just 72 years. The money
supply increased along with the debt. In 1959, when the Fed first
began reporting M3, it was a mere $288.8 billion. By 2004, it had
reached $9 trillion.8 In only 45 years, M3 had multiplied by over 30
times. In 2007, the federal debt also hit $9 trillion; and little of this
borrowed money goes to improve infrastructure or to increase
Web of Debt

employment. Jobs are being out-sourced abroad, while taxpayers
struggle to make the interest payments on the federal debt.
Prices have gone up in tandem. Many people still remember when
ice cream cones and comic books were 25 cents each. Today they are
$2.50 or more. What was once a 10 cent cup of coffee is now $1.50 to
$2.00. A house that was $30,000 in 1970 is now more than $300,000.
In 1970, it could have been bought by a single-breadwinner family.
For most families today, both parents have to work outside the home
to make the mortgage payments.9 These parabolic price increases re-
flect a parabolic increase in the money supply. Where did all this new
money come from? No gold was added to the asset base of the coun-
try, which went off the gold standard in the 1930s. All of this increase
came into existence as accounting-entry bank loans. More specifi-
cally, it came from government loans, which never get paid back but
just get rolled over from year to year. Under the plan of Coxey and
the Greenbackers, rather than borrowing from banks that pulled the
money out of an empty hat, Uncle Sam could have pulled the money
out of his own tall hat and avoided a mushrooming debt.

Roosevelt in the Middle

Coxey was not alone in urging the Greenback cure for the
economy™s ills. Some influential federal officials also thought it was
the way to reverse the depression. In a congressional address in 1933,
Representative Louis McFadden quoted a Hearst newspaper article
by Robert Hemphill, credit manager of the Atlanta Federal Reserve, in
which Hemphill argued:
We are rapidly approaching a situation where the
government must issue additional currency. It will very soon be
the only move remaining. It should have been the first step in the
recovery program. Immediately upon a revival of the demand
that the government increase the supply of currency, we shall
again be subjected to a barrage of skillfully designed and
cunningly circulated propaganda by means of which a small
group of international bankers have been able, for two centuries
to frighten the peoples of the civilized world against issuing their
own good money in sufficient quantities to carry on their
necessary commerce. By this simple, but amazingly successful
device these “money changers” “ parasites in a busy world intent on
creating and exchanging wealth “ have been able to preserve for their

Chapter 16 - Oiling the Rusted Joints of the Economy

private and exclusive right the monopoly of manufacturing an inferior
substitute for money which they have hypnotized civilized nations
into using, because of their pressing need to exchange goods and
services. We shall never recover on credit. Even if it were
obtainable, it is uncertain, unreliable, does not expand in
accordance with demand, and contracts unexpectedly and for
causes unrelated to the needs of commerce and industry. . . . In
our present situation the issue of additional currency is the only way
out. 10
Hemphill said the government needed to issue enough new, debt-
free currency to replace what had been lost. Congressman Wright
Patman went further: he urged the government to take over ownership
and operation of the banks. In an address to Congress on March 13,
1933, he asked rhetorically:
Why is it necessary to have Government ownership and
operation of banks? Let us go back to the Constitution of the
United States and follow it . . . . The Constitution of the United
States says that Congress shall coin money and regulate its value.
That does not mean . . . that the Congress of the United States,
composed of the duly elected representatives of the people, have
a right to farm out the great privilege to the banking system,
until today a few powerful bankers control the issuance and
distribution of money “ something that the Constitution of the
United States says Congress shall do.11
Flanked on the right by the classical laissez-faire economists who
said the money supply and the banking scheme should not be tampered
with at all, and on the left by the radical reformers who said that the
power to create money and perhaps even the banking system itself
should be taken over by the government, Roosevelt took the middle
road and opted for the Keynesian deficit spending alternative. He
expanded the money supply, but he did it without unseating the private
banking cartel.
Instead, Roosevelt tried to regulate the bankers. In 1934, the Federal
Reserve System was overhauled to provide additional safeguards for
the economy and the money supply. The old Federal Reserve Board
was dissolved and replaced by a seven-member Board of Governors,
appointed by the U.S. President for 14-year terms. The Board was


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