Torch is Passed-a play in one act
By Jonathan Larson
The 1990s saw a dramatic rise in structural unemployment of the formerly properous
middle classes in the Industrial Democracies. The response is mostly bewilderment--especially
among the young with fresh college credentials and no relevant job prospects.
The following is a one-act play based on a overheard conversation in an upscale
cafe between a smart beautiful young woman and her obviously doting grandfather.
These two had obviously spent many long hours "sharing secrets" with
each other. The fact that the grandfather seemed slightly distressed with his
granddaughter's political conservatism only seemed to heighten his desire to
let her in on his best "secret."
Considering the arcane subject, it was a scene of charm, love, concern, and
a fiery political passion.
Julia: A freshly minted MBA from a prestigious school
Sven: Her grandfather, a old Depression-era Progressive
Setting: A fine urban restaurant. Julian and Sven enter and solve the problem
of being seated for dinner.
J: Well, Grandpa, you still know how to pick a good restaurant. This is very
S: Nothing is too good for you, dear Julia. We are celebrating. It is not every
day a man gets to dine with a beautiful young woman who has accomplished so
J: Oh Grandpa, you exaggerate! MBA's are a dime a dozen these days.
S: A dime a dozen, you say! I would hardly agree! By my calculations that degree
cost somewhere in the neighborhood of $120,000. By any reasonable standards,
you should be walking around with a helmet on that pretty head of yours to
protect such an investment.
J: (laughs merrily) Do you suppose I should wear one on job interviews?
S: (frowns) Why do you ask? Is the job hunt difficult?
J: I don't think anyone is seriously hiring these days. Everyone is frightened--or
at least, that's how they act.
S: Doesn't surprise me one bit!
J: Why's that?
S: We have been preparing ourselves in this country for a very long time to
have a rip-roaring depression. Now, we may have finally got one for everyone
except the very rich.
A waiter enters.
W: How is everything tonight?
S: Tonight, we celebrate.
W: Care for drinks to start?
S: Certainly. We will start with a
W: Do you need time to order?
The waiter leaves
J: The waiter looked very suspicious. You haven't been bringing your dates
in here--have you grandpa?
S: Now do I look like the type to be dating a 23-year-old?
J: In a word--yes.
S: Come now, anyone could see you are my grand-daughter.
J: Don't be defensive--I would approve. Maybe dad would not, but I would.
S: (Suddenly slightly annoyed) And how is my son these days?
J: (Frowning) Why don't you call him yourself and ask?
S: It's true what they say about grand-children--they are so much more enjoyable
than children. I wish he was as much fun to talk with as you.
J: Why don't you two get along better? You really are very much alike. For
example, you are both history nuts.
S: Ah yes. My son. The history professor.
J: What could be wrong with that?
S: Several things, actually. History is something a person makes. Or lives.
Or studies as a hobby. Teaching history, in my mind, is not a profession.
J: Be fair, if it were not for history teachers, no one would know history.
S: Is that a fact?! This country is full of history teachers yet no one seems
to know any history.
J: Dad says the same thing, you know. He says kids watch too much television.
S: Bunk! Utter nonsense! The problem is that people like my son teach history.
History is too important to be left to the historians. Once upon a time, he
actually was interested in making history, but now he sits around in that dreary
office of his and reguritates the drivel of his peers. The historians of his
generation are nothing but a bunch of trendies running in herds. It's like
he never escaped the sociology of the hula-hoop or the Davey Crockett hat.
J: What are those?
S: Oh they were the Teenage Mutant Ninja Turtles of his day. Anyway, if deconstructionism
is the latest intellectual fad, that is what you father will be. When he was
in college, he was a hippie. Then he was a Marxist. One would have thought
that a materialist view of history would mean more than wearing the most fashionable
love beads or consuming the drugs of the most fashionable third world country.
Tell me, did he manage to get his hands on any Nicaraguan pot during the 80's?
S: I suppose not! Danny Ortega did not seem like the pot-growing type of revolutionary
to me--no matter what the Reagan administration accused him of. So tell me.
What does the Marxist historian think about his daughter becoming a capitalist
J: I'm not sure what he thinks these days. These are not the best times to
be a Marxist. Tianamen Square. The revelations about Causcescu. Castro inviting
foreign investment. The collapse of USSR. German reunification. And now his
only daughter gets an MBA.
S: Well what did he expect? There aren't many positions open for Marxist history
professors that pay enough to retire the kind of education loans people like
you take on. His generation was blessed. He could get a tenured position at
student's and taxpayer's expense and be paid to spout irrelevant gibberish.
Funny thing is--if he was really a Marxist historian instead of a Marxist theologian,
he would be celebrating. Maybe not your MBA, but the events of the world.
J: How can you say that?
S: Marx's problem was not analysis. His problem was prescription. Educated
people have often been Marxists because a school can actually be organized
with Marxist principles. But a Marxist cannot organize agriculture or build
an automobile or run a restaurant. On the other hand, Marx's critcisms of capitalism
are probably more true in 1990s than at any time since the 30s. And in the
30s, things got so bad that there were almost the conditions for a Marxist
revolution--right here in the U.S.A. But Roosevelt did just enough to save
capitalism. If he could have foreseen Michael Milikan or Donald Trump, I wonder
if he would have thought the effort worth the trouble.
The waiter returns with drinks.
W: Are you ready to order?
S: Do you trust my taste Julia?
S: (Without looking at the menu or the wine list) We we start off with aFollowed
W: Very good sir.
The waiter leaves.
S: May I propose a toast. To Julia. The joy of my heart. The hope of the future.
May your life be filled with exciting challenge. May all your pain be bearable.
May your successes give grace to your life. May you know the joy of love. And
may you live long enough so that some day, you can sit like I am doing tonight
looking into the eyes of a grand-child who brings so much pride.
J: Thank you. (Glasses are touched) And here's to my favorite grandfather.
(Glasses are touched again)
S: So getting back to you. Why do you think the job hunt is so difficult?
J: Oh, there are many reasons. Too many unemployed middle-management people
with experience plus the MBA does not open doors like it did a few years ago.
S: That is not so surprising. Especially considering the damage done by the
type over the last few years. I would think that business would be looking
for other kinds of skills these days.
J: That, plus the fact that there are so many of us. I am not sure what a young
person like me is supposed to do. When I entered the MBA program, it was the
hot ticket to the good life. Now it seems to be just one more overpopulated
profession scheduled for hard times .
S: So what did they teach you about economic recessions in your expensive business
J: Not a whole lot. Recessions are supposed to be the province of the macroeconomists.
And I only had one macro course. And it seemed hopelessly irrelevant.
S: That also does not surprise me. Did you learn anything about monetary policy
or fractional banking?
J: What, pray tell, is fractional banking?
S: I thought they may have skipped over than subject. (Sven reaches into his
picket and pulls out a small blue jewelry box. He looks at it carefully and
then thrusts it towards Julia) Here is a gift I had made for you just because
I thought that you may be curious as to why your fine new MBA is not opening
the doors you expected. I had it made because I think that it may spark some
more of your famous curiosity. After all, dear Julia, your curiosity is what
I found most interesting about you. You were the most curious child I ever
J: (Julia eyes the box carefully) After that little speech, I am not sure what
might be in this box. It's not a snake?
S: Not even close--well maybe close enough. Go ahead--open it.
J: (Julia pries open the lid very carefully) Oh grandpa! It is beautiful! (She
pulls out a necklace. Suspended as a pendant is a gold coin encased in lucite)
The waiter appears with the soup. Sven and Julia taste it and murmer appreciatively.
Julia picks up the necklace and examines it closely.
J: I recognize the gold coin. But what is this black dot? It looks too purposful
to be a flaw--and I cannot imagine you buying anything with a flaw anyway.
S: (Eyes her. Takes several spoonfuls of soup. Leans back and grows expansive)
Julia. I was hoping you would ask that question. I figured you may not have
learned what you really need to know at that expensive school and this should
remind you of a very important lesson. I want you to wear that necklace as
often as it takes to remember what I am going to tell you.
J: (Laughs) You are right about my curiosity grandpa. Now I am really curious.
S: That dot is a computer chip. It is the new money. Just like the gold coin
is the old money. My hope is that you will know the difference.
J: Now you really have lost me.
S: Are you ready for another history lesson?
J: I guess so.
S: Once upon a time, there was no money. Economic activity, such as it existed,
took the form of barter. But barter has its problems and so a medium of exchange
needed to be invented. Over time, gold became the most popular medium of exchange.
It is rare and beautiful. It does not rust. It can be worked with primitive
tools and refining techniques. And it is easily divided into smaller units.
No question about it, gold makes good money.
J: So what was wrong with it?
S: Simple. There was not enough of it.
J: (Laughs) So what's new about that--no one ever seems to have enough money?
S: About 120 years ago, the shortage of money became such a big problem that
it boiled over into political debate that lasted at least 70 years. I was a
middle-aged man before this argument faded from the political scene. And believe
me, the argument was only suppressed--it has not disappeared. In fact, your
job hunting problems are directly related to that argument.
J: Now you really have my interest.
S: Here's the critical question. What makes money valuable? After all, beautiful
as it is, gold does not have much value. You can't eat it. You can't build
a bridge or an automobile with it. It does not provide heat. What makes it
J: Because it is rare--you just said that.
S: But mere scarcity does not make something valuable nor does it address the
real question. Many things are rare that cannot be used as money. And even
so, how does one determine the value of something rare?
J: The market, I suppose.
S: And that was the problem with gold. The supply of gold never seemed to match
the need for money. Take the following example. Suppose you have a society
with one thousand people, one thousand pieces of gold, and one thousand bushels
of wheat. Suppose that every purchase was for wheat. The wheat would be worth
one piece of gold. Now suppose that the population increased to two thousand
people and there were two thousand bushels of wheat but the supply of gold
remained at one thousand pieces of gold, what would happen?
J: Each bushel of wheat would be worth a half a piece of gold.
S: Correct! Correct! As a population expands, the supply of money has to expand
or prices begin to fall.
J: So what's the problem? I always liked a bargain.
S: The problem is that as prices fall, enterprise is choked off. Take our example.
The farmer who produces the wheat is seeing his income fall, but he does not
necessarily see a decrease in his costs to produce the wheat. In fact, because
there is a reletive shortage of money, an important cost--the cost of his operating
capital as measured with interest rates--goes way up.
When president Lincoln sought to finance the Civil War, he knew he would need
additional money. He printed paper money called Greenbacks. In 1873, the people
who believed in 'sound money' convinced the government to redeem the Greenbacks
in gold. The supply of money which had allowed the government to fight a war
and spread a great deal of prosperity throughout the land--shrank dramatically.
The price farmers got for their produce shrank with it. Wheat which fetched
a dollar a bushel in 1873 was 'worth' only 10 cents by 1892. This would not
have caused much pain if their land mortgages had shrunk by a similar amount.
But they had not.
J: So what did the farmers do?
S: They organized politically. All farm organizations had a monetary theory.
Many wanted to go back to the good old days of the Greenbacks. Some wanted
a bi-metal system that included silver because new silver mines were opening
in places like Colorado. All had one thing in common--they wanted to expand
the money supply. In 1892, the Populist Party held a national convention in
Nebraska and nominated a national slate. They failed. In 1893, there was a
terrible depression. By 1896, the rural activists and the western mining interests
combined to support William Jennings Bryan who gave a speech which said the
people of America should not be crucified on a cross of gold.
J: Bryan. Wasn't he the guy who made a fool of himself prosecuting poor Scopes
for teaching evolution in Tennesee?
S: The very same. But you should not discredit Bryan's monetary thinking because
he turned out to be a religious nut. You should also understand something about
the teaching of evolution. Darwin's theories would probably have remained an
obscure scientific idea on the order of Boyles Law except for the social implications.
During the hard times, the loses of the farmers became the windfall of the
idle rich. Each dollar they collected in rent or interest became increasingly
more valuable. The poverty of the countryside became the decadence of Park
Avenue. To explain away this awful injustice, a professor at Yale came up with
the concept of Social Darwinism. The rich, according to this theory, were simply
demonstrating the law of the survival of the fittest. One can only imagine
how evil Darwinism became to the rural folk who not only were being ruthlessly
exploited, but having a theory which attacked their religious beliefs used
to justify their misery.
J: So what happened? Obviously the paper money people won the day because I
have paper money in my purse.
S: You're getting slightly ahead of the story. Paper banknotes have long been
a part of the money scene. But under a gold standard, each piece of paper was
supposed to represent a holding in gold. Here is where we encounter the concept
of fractional banking.
J: So what you are saying is that paper money was simply a handy way to carry
S: But bankers found out something very interesting. They could print more
gold certificates than they actually had gold. What was even more interesting,
up to a certain point, the more certificates they printed, the greater the
J: So why doesn't everyone print more gold certificates.
S: Historically, what has happened is that the word gets out that there are
more certificates than gold. There is a panic and everyone rushes to the bank
to redeem their paper for gold.
J: But wait a minute, I though you said that this was a common practice. If
everyone agrees the gold certificates are a useful medium of exchange, why
should there ever be a problem?
S: There are several problems. The biggest is that the practice is largely
kept as a secret. Look at you. You are supposed to be an expert in American
business. You have an advanced degree. Yet you were not taught monetary theory.
Even MBAs are not supposed to think about the subject of money.
But there is an even greater problem. Money, whatever its form, has no value
in and of itself. Money has value because people through work and enterprise
do something that makes it valuable. If everyone who got his hands on a gold
certificate used it to produce something of value like a bushel of wheat, the
game could go on forever. But if the money is invested in a worthless enterprise
and the word gets out, panic ensues. Fractional banking compunds the problem
because if only a fraction of the enterprises is bad, it can call the whole
system into doubt.
The first time this sytem was tried was in France. It was called the South
Sea bubble. Money was printed for the purpose of getting fabulous riches in
the Pacific. Everyone prospered until it was found out that the guy who cooked
up the scheme was a crook. But even with the collapse of the South Seas Bubble,
people found out something very important. When money is created, it produces
J: Only now the limit of prosperity is the cleverness and hard work of the
members of society--not the shortage of money.
S: Exactly! But there must be a balance between the amount of money necessary
to produce prosperity and growth and the other little problem called inflation.
If the supply of money is increased without a corresponding increase in production
of goods, there is always inflation. This is true no matter what form money
takes. When the Spaniards brought back their ships of gold from the New World,
they caused inflation as certainly as if the had printed money.
J: But doesn't an increased supply of money always produce inflation?
S: That is a tricky one. Some things never increase in supply no matter how
clever a society is. Land is a perfect example. If the supply of money goes
up, land prices are certain to follow. But if the increased money supply goes
to open a mine, create a farm, or build a factory and production increases,
there is simply growth. If growth comes along with inflation, most people will
tolerate a little bit. But if inflation wildly exceeds growth, people get very
J: So how does one get prosperity without inflation?
S: That, my dear Julia, is the real question. And unfortunately for a lot of
people, the current answer is not very good because there is both too much
inflation and not nearly enough prosperity. But I am getting ahead of myself.
Post-Civil War American was the scene of almost reckless growth. The fertile
prairies of the American Midwest were being opened to farming. The population
was exploding. And it was an age of almost unprecidented inventiveness. The
list of great inventions from the end of the civil war until 1900 is almost
endless. But it includes, the automobile, organic chemistry, electrical generation,
the light bulb, the telephone, and on and on and on. My grandfather's generation
truly re-invented the world. In such circumstances, almost every increase in
money, no matter how reckless, would have resulted in growth. The problem was
a lack of money--remember. There could have been much, much more prosperity.
Banks on the frontier were the most reckless, if you please, in the creation
of new money. And they were the ones most likely to fail if one of the enterprises
they backed failed. The big city banks were cautious which constricted the
supply. This forced the frontier banks to be even more reckless. The result
was chaos. The major panics were in 1869, 1873,1884, 1893, and 1907. Everyone,
it seemed--the farmers, the factory owners, the commercial interests--wanted
a better system.
J: Did they get one?
S: Just barely. They got the Federal Reserve System in 1913.
J: What do you mean--just barely? I thought the Federal Reserve System was
considered the most resposible organization of an otherwise disorganized economic
system--the bulwurk against inflation.
S: Try to understand the nature of the arguments that raged around the creation
of the Federal Reserve System. In 1912, every major political party in the
U.S. had a a plank in their political platform about currency reform. The Progressives
headed by Theodore Roosevelt wanted a government agency to control the supply
of money. The Republicans wanted to be protected from the intrusions of government
and suggested only the most minimal reforms. The Democrats, headed by Wilson,
echoed the Progressive position and they in fact won the election. But this
hardly settled the matter. There were very powerful interests at work because
those who controlled the creation of money controlled almost everything else.
Banks were not going to give up their ability to print money because it was
at the heart of their business.
J: Wait a minute, I thought banks took in deposits and paid 6%, made loans
at 10% and made their profit from the difference.
S: Wrong, wrong, wrong. Under the system of fractional banking, a bank with
ten thousand dollars in deposits can make 100 thousand dollars in loans. If
banks operated under the system you described, they certainly would not own
all the largest buildings in any city. Only loan-sharks really operate in that
manner. Understand something very important. The world of banking is just inverted
from the world you and I occupy. Deposits are their liabilities because they
have to pay interest on them. Loans are their assets because that is what generates
their income. In spite of the joy which greets you whenever you come in bearing
money for deposit and the hassle they give you whenever you appear for a loan,
banks are in business to make loans. In fact, getting a loan from a bank is
very similar to getting a job from anyone else. People will employ you only
because they believe you are going to make them money. Jobs are not granted
through altruism. When you interview for a job, the employer is merely selecting
that person he believes will make him the most money. The same is true with
a loan from a bank. Loans are given to that person who the banker believes
is most likely to give the money back. In fact--and listen to this very carefully--because
of fractional banking practices, charging interest is utterly unnecessary.
Banks could make a great deal of money even if they never charged any interest
J: Then why do banks charge interest?
S: My feeling is that it is simply an anachronism left over from the days before
fractional banking--when money lending was actually as you described it--a
diversion so that people do not think about the reality of creating money from
J: Are you suggesting that banks charge interest only for psychological reasons?
S: I cannot think of any other. Look at that necklace I gave you again. Today,
because of many historical changes, money has become information stored in
computer memory banks--yet for most people, money is a matter of life and death.
If people understood that money was simply information on a computer chip,
what would be the incentive to ever pay back a loan. Folks would walk into
their banks and say--screw you, I am not going to pay back the loan--why don't
you just re-program that stupid little chip of yours. So the psychology of
money IS important. It keeps people going to work and producing those real
goods that in the final analysis, make money valuable. Interest rates are the
enforcement mechanism to make people pay back their loans. Because interest
is charged, people have an incentive to pay today because it will cost more
to pay tomorrow. Interest is merely the monetary cop. The higher the rates--the
harder people must work.
J: So then you are saying that high interest rates are a social good?
S: I certainly hope not. Because if rates get too high--that causes problems
too. In fact, most of the economic problems we face these days have been caused
by interest rates being too high. Honest enterprise has limits. If rates get
too high, the debtor cannot repay his loan with hard work and must resort to
cheating, fraud, or other forms of criminal behavior. Over time, high interest
rates will turn a nation of hard working people into a nation of crooks. This
is true because only a dishonest person will even promise a banker that he
can make the high payments required when interest rates are high.
J: So how does a society know when interest rates are too high?
S: The answer lies in careful measurments of growth. Real growth is hard to
measure but over time, we have developed measuring tools. The most common is
the measure of G.N.P. or the Gross National Product. Assuming the G.N.P. measurements
are accurate, real interest rates should never exceed the growth in G.N.P.
And even this rate is too high because it means that everything produced by
hard work goes to the bankers. There is a question of social justice here--should
not some of the rewards of a person's efforts be retained by the person who
made the effort?
J: So what you are saying is that in a well-ordered society, real interest
rates should be slightly less than the growth in real G.N.P.?
J: But wait a minute. The economy of the U.S. grew at something on the order
or about 1% in the first half of 1990. Are you saying that interest rates should
S: Yes! That is exactly what I am saying. But remember, I am talking about
real interest rates. The rates actually charged would be the real rate plus
inflation which was about 5% during that time--for a total of about 6%. Actually,
If you subtracted the reward for those producers who actually performed the
magic of turning computer information into real goods with value, the charged
rate should be about 5.5%.
J: I do not ever remember rates ever being that low.
S: And that dear Julia, is why we are having all the economic problems we are
having. It is why you are having such trouble getting a job.
J: But what do interest rates have to do with the Federal Reserve?
S: Simple. They are the people who set the rates.
J: But if the Federal Reserve is the government body entrusted with setting
rates and the setting of rates is so socially important, why do they set rates
so high as to produce a society of crooks?
S: That is the real question. And the answer is difficult indeed. But it is
rooted in the history of the system itself. You see, the Federal Reserve is
not really a government agency and has rarely operated for the good of the
country. In fact, it has only operated as its founders intended during the
reign of one Mariner Eccles, the head of the Federal Reserve under Franklin
Roosevelt. But I get ahead of myself.
You grew up in what can best be called the age of fundamentalism. From the
clerics in Iran to Gorbachev and his call for the economics of Lenin's new
economic policies, fundamentalism has raged throughout the world. There is
a tendency for humans in times of stress to talk about some glory days of the
past and try to determine the nature of the wisdom of the forefathers.
I, as you know, am not a fundamentalist. Part of this stems from the fact that
I became an adult during the Great Depression and know that the good old days
were not so good. The rest stems from the realization that each historical
period presents its own set of problems.
J: Did the U.S. have its fundamentalist movement?
S: Oh, indeed it did--and I am not merely talking about the crooked televangelists
of the 80's like Jimmy Swaggert and Jim and Tammy Bakker. I am talking about
the economic fools of the Reagan days who glorified the memory of Calvin Cooledge
and the legal reactionaries like Robert Bork who assumed that every problem
facing the Supreme Court could be solved by examining the motives of the founding
fathers who wrote the constitution.
J: But I read an article about the comparison between the 20's and the 80's.
The similarities were very great--a prohibition movement, a war in Nicaragua,
the glorification of wealth, and so on. Is there nothing to be learned from
studying the 20's?
S: Certainly there is. But there were also great differences--the biggest being
that while Cooledge always balanced the budget, Reagan tripled the national
debt. More to the point, in the 20's, the Federal Reserve System was new, untested,
and always the subject of public debate. In the 80's, the Federal Reserve System
was powerful, certain of its role, and almost never a source of public controversy.
That is a big BIG difference.
J: So what happened that caused such a change?
S: Remember, most of what the Federal Reserve does is absolutely uncontroversial.
Check clearing is a prime example. They are efficient in this task and as such,
are a boon to commerce. They simply took some time to get the bugs out of the
system. There are other functions that developed over time whose controversy
has not gone away. The most controversial is the function of the Open Market
J: And what, pray tell, does the Open Market Committee do?
S: They control the supply of money. When they buy bonds, they pump money into
the banking system. When they sell their bonds, they remove money from the
system. Because of fractional banking, they do not have to buy or sell much
to make a very large difference.
J: What is so controversial about that--I thought you said that someone had
to regulate the supply of money?
S: Of course, someone has to perform this task. The controvery has always been
about who performs the task and how is it performed. A tight money supply favors
the creditor, the banker, and the city. An easy supply of money favors the
debtor and the rural areas. When the original legislation was written, each
of the regional reserve banks was supposed to have its own open market system.
The first big controvery was about the open market operation being concentrated
in New York. The other controvery was about what kind of persons made the decisions.
Galbraith said it best in 1965 when he said, "it is hard to recall any
occasion when the Federal Reserve was known to be agitating for lower interestwe
have come to envisage the Open Market Committee as a group of men of excellent
character and reassuring demeanor who meet to consider whether there is a reason
for tighter money."
J: So that is why whenever a Federal Reserve official is quoted, the subject
is always the fight against inflation.
S: Galbraith had something to say on this subject as well. He said, "I
do not wish to be unfair to these excellent and indispensable gentlemanthe
bankers. Perhaps they have persuaded themselves that the money is, in their
case, unimportant. But it should be observed that an increase in interest rates
is the only form of inflation control that ever appeals to the financial spokesman.
Increased taxation is never urged. The wage and price guideposts evoke no applause." You
CAN fight inflation with tight money. The problem is that you only do so by
causing recessions--driving inflation out of the system by putting the whole
country on an going-out-of-business-sale footing.
J: But wasn't inflation a big problem in the 70's. And didn't the high interest
rates of the 80's pretty much cure the problem without a recession. As I recall,
there were something like 19 million jobs created in tne 80's. Most countries
would die to have that kind of recession.
S: There was a terrible recession in 1981-82 that folks for some reason seem
to forget. And, inflation was not controlled all that well in the 80's. In
fact, it was only in February of 1989 that the present chairman of the Federal
Reserve System, Alan Greenspan, deemed inflation to be such a problem that
he engineered what he thought was going to be a small recession--a soft landing
he called it--to fight inflation. Unfortunately, he triggered the crash of
1990 because of the weaknesses built up in the economy during the 80's. The
problem is that there are different types of inflation just like there are
different types of jobs and prosperity. Tight money and high interest never
did get at the real causes of inflation in the 80's and finally crushed a fragile
prosperity bought with huge debt. For Greenspan to tighten money in 1989 was
a bit like dropping an atomic weapon to cure inflation and getting the rest
of the economy instead.
J: What do you mean when you say there are different kinds of inflation? I
thought inflation was simply too much money chasing too few goods.
S: This is true but as Galbraith said, taxation will lower the supply of money.
And a well targeted tax would probably have been a preferrable way to fight
the inflation of the 70's. Your definition of inflation works if the market
operates as described in the textbooks. In that case, inflation happens because
prices are bid up for something like land. Increase the supply of money without
increasing the supply of land and the price of land goes up. But many, if not
most, prices are fixed through some form of a monopoly arrangement. When this
occurs, prices can go up no matter what the bankers are doing with the money
J: But wasn't the whole deregulation movement designed to decrease monopolies
and increase competition and thereby make the economy operate more like the
textbooks say a market should operate.
S: The problem in the seventies was that oil prices, easily the most important
factor in the economy of the U.S., were being set overseas. In a sense, the
inflation of the 1970's was the only rational response to that reality. If
the price of oil could not be controlled, then the price of everything else
should have inflated so the people could cope. The problem of the 70's was
that inflation got so bad that even those groups which think a little inflation
is a good thing got scared.
I think markets are simply too inefficient to cope with modern inflation. The
desire to form monopolies is simply too strong. And not all monopolies are
bad. Why should a country have more than one telephone system? Do we really
need more than 3 or 4 car companies? In fact, all industrial enterprise is
designed to form monopolys of some kind. The only place markets really function
as advertised in setting prices is with commodities. It is the nightmare of
any company to manufacture anything that becomes a commodity because they lose
their ability to set their own price. And the preferred method of price setting
is to form a monopoly of excellence. And that is not so bad. The reason you
will pay more for a Mercedes-Benz than a Yugo is that the Mercedes is a better
car and the makers can convince you of the fact. Now you can buy a car from
almost anyone--but if you want a Mercedes, you must buy from Mercedes-Benz
and pay the price they set.
J: What would you have done with the inflation of the 70's?
S: I would have done two things. First, I would have instituted wage-price
guidelines to cope with the monopolies that exist within the borders of the
U.S. But of course, this would not have addressed the problems caused by higher
oil prices set by OPEC in Vienna. For this problem, I would have raised the
taxes on imported oil so that prices would be much higher to encourage conservation.
I would have used the additional revenues to fund the research and development
of alternatives to oil use.
J: But wouldn't that have made the problems of high oil prices even worse?
Would not these higher taxes have made the recessions worse than they were?
What about the poor people at the bottom of the society?
S: You protect the people at the bottom of the economic scale by increasing
the money supply, raising the minimum wage by indexing it to the inflation
rate like was done with pensions and social security. In fact, you index almost
everything including tax brackets and even wage-price guidelines.
J: But doesn't indexing just institutionalize inflation.
S: What is wrong with that? Institutionalization merely puts things under public
control. This, after all, is the function of a democracy.
J: So what was wrong with what they actually did?
S: Tight money and the high interest rates of the late 70's and 80's caused
a sickening litany of disasters that grew and compounded themselves not unlike
the interst rates themselves. At first, the disasters were mostly small and
in some ways, symbolic. For example, when the interest rates were raised to
the sky-high level of 21% in 1979 and 80, the usury laws which our grandfathers
gave us in their wisdom, had to be repealed. In some states, state constitutional
amendments had to be repealed. Usury had to be decriminalized.
J: Then what happened?
S: As you might expect, the smallest businesses--especially those which were
least monopolistic, produced real goods, and relied most heavily on credit,
were destroyed first. It is estimated that by 1982, 80,000 farmers, contractors,
and other small businesses were crushed.
J: Was there no protest?
S: Indeed there was. Save-the-family-farm movements sprung up throughout the
land. Building contractors started mailing 2x4's to the Washington offices
of the Federal Reserve. The Kentucky Homebuilders Association printed wanted
posters with pictures of Paul Voelker, the head of the Federal Reserve, on
them. There were so many threats that Voelker was given Secret Service protection--the
first time in history that has happened.
J: So protests helped drive down interst rates?
S: Probably not. The oldest rule in banking is "never kill your customer." Defaults
by debtors will eventually lead to a bankruptcy of creditors. A few thousand
angry farmers and homebuilders were not enough to change the mind of an ideological
lunatic like Voelker. But in 1982, Mexico, an oil-producing nation threatened
the big U.S. banks with default. That situation finally got Voelker's attention
and interest rates were eased back to the 14% range. This seemed like a big
drop in interest, but in fact, since inflation had cooled considerably, the
rates were still at historically high levels.
J: So high interest rates did cool inflation?
S: They did, of course, but only in reletive terms. Just as 14% interest looked
good after a round of 21%, so 5% inflation looked good after 11%--even though
5% inflation was high enough during the Nixon administration to bring on wage-price
guidelines. The inflation brought to us by the various monopoly arrangements
was virtually untouched by Voelker's disaster. And thanks to some absurd moves
by the Reagan administration, the damage was only about to start.
J: Like what?
S: If you can counter inflation and easy money with high taxes, you can counter
a recession caused by high interest rates by lowering taxes. And that is what
happened. But while taxes were lowered, the government had to continue. Many
expenses such as government pensions were contractural. Some things like Social
Security were politically untouchable. The devastation to agriculture had to
be staunched--so farm programs had to be funded at higher levels. Some costs,
such as unemployment insurance, rose because the economy was so weak. And Reagan,
who had been shilling for military contractors his whole adult life, felt compelled
to reward his backers with higher weapons expenditures. Lower taxes combined
with higher government costs to produce unheard of and massive federal debt.
The U.S. government had become the ultimate crazy borrower. Had it not been
for massive U.S. government borrowing, interest rates might have fallen to
more normal levels through sheer lack of demand.
J: Why didn't the Federal Reserve lower the rates once inflation had been driven
from the system?
S: Because inflation had not been driven from the system. It was still at historically
high rates. Moreover, because of federal borrowing, there was a demand for
money--even at crazy interest rates. And because of the stimulation caused
by lower tax rates, the economy was acting as if there was real prosperity
again. Of course, this prosperity was utterly phoney--the homeless were filling
the streets, the infrastructure of the nation was rotting, schools were becoming
a bad joke, and young people were being offered the career choice of flipping
hamburgers or selling crack. And all the while, the government was slowly going
bankrupt from its borrowing. Worse than that, anyone in the happy-talk, feel-good
80's who noticed anything was really going wrong was considered to be unpatriotic
or mentally deranged.
J: But didn't business support the policies of the 80's?
S: That depends on what you call business. The businesses that produced real
products thought that all of this was insane--especially guys from my generation
who thought that the ultimate in a well-run business was one that never had
to borrow--ever! But on Wall Street, the predators whose business it is to
seize the productive assets of others were having a field day. Never had becoming
rich been so easy for them. They thought this was dandy. They kept devising
new schemes to force businesses, which almost never had to borrow to operate,
into going into debt up to their ears with leveraged buyouts, greenmail, and
J: So you are saying that high interest rates will even destroy capitalism?
S: It would be hard to draw any other conclusion. Debt has crippled productive
small business, destroyed the capacity for even large business to compete,
and turned the great bastion of capitalist thought--the U.S.--into a musclebound,
helpless giant whose role in the world has become almost irrelevant. We have
become Argentina with nuclear weapons.
J: Grandpa. How can you say that the U.S. has become irrelevant? I see new
immigrants every day. I see the Eastern Bloc in a state of collapse and countries
embracing democracy. You will notice that when Saudi Arabia was threated by
Iraq, they did not call in Austria to defend them. Didn't we just win the cold
S: No we did not. Japan and Germany won the cold war--that is, if you insist
on calling anyone a winner from that moral debacle. Look at the facts, there
are several new democracies in this world and none have chosen to imitate us.
Poland wants to become Sweden. Hungary wants to become Austria. And of course,
East Germany became West Germany. All of them became parlimentary democracies.
None chose to emulate our silly political system, none want our medical system,
or our educational system, or, or. And as for our presence in Saudi Arabia,
what kind of country sends 200,000 plus soldiers to sit in a desert to protect
corrupt feudal monarchies whose only relevance to us is that they have a commodity
we need because we were too foolish to design our country not to need it?
And that is the final absurdity of the 80's. If we were going to go into debt
for something, why could it not have been to re-design the country so that
it could get along without so much oil? Debt, for my generation, was only justified
if it bought something of value. What did we get for our debt-- government
and business with no room to maneuver, weapons that only make us look silly,
and a host of empty office buildings, mini-malls, and condos to be auctioned
off for pennies on the dollar.
J: Are you even blaming the S&L scandal on the policies of the Federal
Reserve? I thought that was one problem that could be laid at the feet of corrupt
S: Of course you are right about the S&L problem being mainly the fault
of crooks. But this only proves my point about high interest rates making crooks
out of honest people. For over 50 years, the S&Ls of this country provided
a valuable service--financing affordable housing for the productive middle
class. In fact, it might be argued that S&Ls created the American middle
class. When interest rates were 6%, the S&Ls prospered. When rates became
15%, S&Ls were forced into making such absurd loans that it has become
a $500 billion to $1 trillion tragedy. High interest rates not only corrupt
people, but institutions.
J: Grandpa, I am convinced. But what is someone from my generation to do. I
have no money. I certainly have no power or influence. Our generation is faced
with this huge debt and we barely can get jobs. What would you do?
S: Julia, you must first take a good look at yourself in the mirror and decide
just who you want to be. If you want to be the kind of person who gets by making
the fewest possible waves, there isn't much you can do. But if you believe,
as I do, that social activism is the price one pays to live in a democracy,
I have several suggestions.
J: You mean I should become an activist like was common in my father's generation.
Do we really have to go back to the sixties?
S: I sincerely hope not. I, for one, was not impressed at all with the sixties.
Certainly the 60's generation produced some social gains--if only in awareness.
The problem with the children of the 60's is that they did not have a real
plan of action. As a result, they successfully agitated for civil rights, for
example, but did nothing to improve the economic condition of black citizens--except,
of course, for the few blacks who profited from things like affirmative action.
I always thought affirmative action most fully demonstrated the intellectual
bankruptcy of 60's thought. The goal should have been to provide goods jobs
for everyone--not set up a new set of racist, discriminatory rules to allocate
the few jobs that were left.
J: If not the sixties, what?
S: I know I am showing my age, but I would advocate the activism of the 30's.
Now those people had ideas. Just think about the changes we made in our youth--the
New Deal, for example. Of course, people were generally more politically aware
in those days. People really believed in democracy and the responsibility of
acting out one's beliefs. Now, people assume that all difficult things in government
will be solved by professionals who know what they are doing. They view elections
as being the choice between various forms of management. Politicians today
have no ideas--and are actually proud of the fact. In 1988, the Democratic
presidential candidate actually said in his acceptance speech that the election
was about competence, not ideology. Well, he was wrong. Politics is all about
J: All right, so politics is really about ideas--and good citizens act out
their ideas, what is a person like me supposed to do?
S: First, you must educate yourself. This is not an easy process--especially
since you have just paid a great deal for an education and should rightly assume
you have been educated. But remember something very important, that expensive
education merely taught you what the small group that owns this country wanted
you to know. In fact, what you really must do is de-educate, if there is such
a word, yourself. Fortunately, the process is not totally impossible. Most
libraries have all the information you need. You only have to know what to
J: Like what?
S: You must know history. Reading Gore Vidal's biographical series on America
might be a place to start if you hate traditional history books. Then you should
read something like Josephson's The Robber Barons to gain perspective on the
birth of American industrialization. You might also want to read Moran's Political
Prairie Fire to understand the agricultural protest movement.
You must also understand political economics. Hielbroner's The Worldly Philosophers
is an excellent place to start. Then I would recommend plunging into the works
of Thorstein Veblen starting with The Theory of the Leisure Class.
Then, and only then, are you ready to understand monetary theory and the arcane
workings of the Federal Reserve System. Fortunately, the definitive book on
the subject was written in the otherwise lost decade of the 80's. I refer to
Greider's Secrets of the Temple. If that isn't enough, Wright Patman, the longtime
chairman of the house banking subcommittee and a persistent critic of the Federal
Reserve System, produced a wonderful study of the institution in 1976.
J: You must write out this reading list--okay? You know me, I do my homework.
So now I am properly de-educated. Then what?
S: Then, you become politically active. If you have the ability to organize,
organize. But I want to warn you, you may not like all the people with whom
you may come to associate. Right now in the 1990s, most of the people who know
anything about monetary policy are vicious anti-Semites. It doesn't help one
bit that the current head of the Federal Reserve is Jewish. But this is an
old tradition. It wasn't until John Calvin, that Christians could charge interest
on loans and so Jews have a 1500 year head start in the practice of usury.
Even though monetary understanding and anti-Semitism have historically gone
hand in hand, and even though Jews were the main cheerleaders for the economics
of the 80's, don't you fall into that trap. Anti-Semitism is just a diversion.
Remember, most of the bankers in the U.S. are good Protestants in the Puritan
tradition. On the other hand, you will meeting some of the most creative people
on this planet. Most of the people who make things hate the current system.
But most importantly, you must develop an agenda. Why go marching in the streets,
or organize, or write letters, or educate yourself if you do not have a plan
and a coherent ideology. This is very important. The powerless only achieve
power when the folks at the top become confused. Right now, they are very,
very confused. All the old assumptions about how the world works are failing
them in a big way. Roosevelt could not have accomplished all he did in his
first 100 days if there were not people around the country with ideas and plans.
J: Yet again I ask you, what would you do? You lived through the 100 days.
What political changes are possible.
S: Remembering that even the 100 days did not radically change the Federal
Reserve, you must understand that change in monetary policy is difficult indeed.
But having said that, I would first agitate for the re-imposition of usury
laws. Make sure that never again will real interest rates exceed growth--at
least when it come to basic credit as it applies to infrastructure, agriculture,
homes and business.
Of course, some people will want to charge more and some ventures are not really
creditworthy. That is probably all right. A person who cannot hold off purchasing
a television until he has saved enough to buy it probably deserves to pay a
higher rate of interest than the basic rate. But these sorts of transactions
should be outside the real banking system which means NO fractional banking
and NO government insurance. And of course, there should be NO lending money
for stock market and other predatory transactions. These should be outlawed
entirely. No leveraged buyouts--no hostile takeovers.
If you can accomplish this agenda, you could turn your attention to more structural
J: Such as what?
S: I have always believed that the head of the Federal Reserve System should
have to be elected. A person who can cause the devastation that Voelker did
in 1981-82 should have to answer to the voters. This person is far more powerful
than the President, why should he be appointed? If he were elected, then Americans
could choose whether they wanted growth or recession or whether they were tired
The Federal Reserve should also be required to get their operating appropriations
the way every other government agency must.
J: You mean they don't?
S: No. What happens is that the Federal Reserve gets its operating funds from
interest on their bond holdings. This creates an institutional conflict of
interest. There are benefits to the Federal Reserve System from high interest
rates. All because we have a silly system where taxpayers must pay interest
on bands purchased by the Federal Reserve with the people's money. One might
rightly ask why a country should be forced to pay interest for the simple act
of creating the money supply. The Federal Reserve should be forced to only
buy bonds issued by the government that are completely interest-free.
J: But I thought you said interest is what makes people go to work?
S: Yes, but something must be done with the huge interest overhang that is
currently crushing the economy. Right now, with no changes at all, the U.S.
government owes something like $300 million in annual interest payments. Unless
the government borrows more than that, government spending is deflationary.
Keynes taught us that economic stimulus is the proper role of government in
times of recession. Because interest on the current federal debt compounds
itself and will for the foreseeable future, government debt must compound itself
at geometric rates to provide stimulation. If the government could issues interest-free
bonds for real projects of national need, the process of geometric compounding
of the debt could be slowed or reversed without causing recession.
J: What kind of projects would meet your definition of real economic need?
S: Oh my dear, look around you. We have a country designed to run on oil. The
USA's supply of oil will be gone before you are a middle-aged woman. The whole
country must be rebuilt to reflect this new reality. There are huge environmental
problems to be addressed. There is no shortage of necessary projects. The government
could raise the money for these mega-projects and put everyone back to work.
And because the money would be turned into something useful, growth would automatically
be assured. And if the money was paid out in return for this needed work, inflation
would not have to be a problem and interest would not be necessary as a monetary
J: What happens if such a program is not adopted?
S: There will be a traumatic collapse of the financial system.
J: How about restructuring the debt?
S: You mean like declaring a national bankruptcy and starting over? Actually,
your generation deserves that. You did not run up the national debt--you only
inherited it. I am for debt restructuring too but even in my most idealistic
moments, I think that would be totally impossible. If you grow out of the problems
left you, won't that be much more satisfying? Besides, these projects need
doing and what else are you going to do with your lives?
J: This sounds like quite a task.
S: It is! And I would not wish it on my worst enemy, let alone my favorite
grand-daughter except for one thing.
J: And what is that.
S: The alternative is so much worse.
J: Sounds grim.
S: It is. Your generation has not been exactly blessed. I began my adult life
during the Great Depression and I do not envy you. Things were bad then but
we had not trashed the environment, we were not grossly overpopulated, and
the government was not in debt. Best of all, we did not have so many people
who had had their brains damaged by their educations. In the final analysis,
our big advantage was that we still believed in the power of ideas. Remember,
the quality of your life depends on the quality of your ideas--you and the
rest of your generation. I wish you well. I hoped we were leaving a better
world for our grand-children. I am sorry we did not.
J: That's all right grandpa. I am sure you tried your best.
S: Thank you Julia. Actually, I am sorry I will not be around to see what you
young folks accomplish. But I will be with you in spirit. And if you ever come
to fully understand the arcane subject of money, I hope you remember this conversation.
J: I will.
TO: VEBLEN FOR THE NEW MILLENNIUM
TO: Correcting the history of Thorstein Veblen