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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

1934 Cartoon

Posted by WARREN MOSLER on July 15th, 2010

We went off the gold standard in 1934 and solvency was never again an issue for the Federal government.

Those ‘sound money’ people were wrong then and are wrong now as taxes function to regulate aggregate demand and not to raise revenue per se.

This cartoon is claimed to be from the Chicago Tribune in 1934. Look carefully at the plan of action in the lower left corner.

17 Responses to “1934 Cartoon”

  1. Ramanan Says:

    Warren,

    A country’s currency is plunging and is losing foreign reserves. Foreign currency is barely enough to support two weeks of imports. The government issues debt in its own currency to bring in foreign investors with the aim that the central bank can acquire foreign reserves from the banks after the banks exchange currency.

    Who is “funding” whom ?

    To make it more interesting, the government needs to finance its spending and foreign investors whose bonds are near maturity have shouted “fire” and there is a good chance that there is a capital flight, threatening currency acceptability. Keeping yields low through central bank monetization is unhelpful because foreigners will run away.

    Who funds whom at the auctions ?

    Reply

    WARREN MOSLER Reply:

    with that kind of fixed fx policy govt is revenue constrained.

    Reply

  2. ted rorrer Says:

    Great cartoon!

    Reply

  3. dan weintraub Says:

    Warren says: “…Those ’sound money’ people were wrong then and are wrong now as taxes function to regulate aggregate demand and not to raise revenue per se…”

    My contention with Warren’s position here is that MMT is NOT the paradigm with which we are working. As such, employing operational realities as they MIGHT pertain to the world of MMT is an artifice.

    My advocacy of a return to a commoditized standard is aimed at placing a cap on GREED, and I am willing to sacrifice some measure of growth in order to mitigate the impact of the unbounded—and in our current monetary, system unchecked—avarice of men.

    Under a ‘gold standard’ [sic], the greed of men—and the willingness of men to exploit the weak for their own gain—is effectively capped. This does not mean that a gold standard is a panacea to our economic ills…and I am willing to stipulate that exploitation and greed will still take center stage in the rapacious drama of the human sepcies. BUT…an inability to “print” money without bounds will mean limits to kinds of gaming of the system—and the terrible suffering that such masterful frauds brings about—that men of greed will be able to enact.

    Until our rapacious and predatory monetary system can be ended—until our oney-as-debt system is dismantled and replaced with a version of MMT that is enacted and regulated for the public good—I believe that we need to return to a time when greed was, in the very least, limited by the Fed’s inability to create and destroy money—and lives—at will.

    Reply

    Tom Hickey Reply:

    Dan, this just does not meet the test of history. Convertible fixed rate monetary system are inherently deflationary and this favors creditors, i.e., the wealthy. If you are ultra-rich, I can understand your position. If not, then it’s a very bad idea indeed.

    Reply

    dan weintraub Reply:

    I understand your position. But in our current system, there are simply no checks on the ability of the FED, the Treasury, and the super-wealthy, to manipulate money in a manner that serves the interests, and NOT the public interest.

    Reply

    Min Reply:

    “But in our current system, there are simply no checks on the ability of the FED, the Treasury, and the super-wealthy, to manipulate money in a manner that serves the interests, and NOT the public interest.”

    Well, Dan, it seems to me that they have been doing that — by acting as though we were still on the gold standard!

    Greenspan made the point some time ago that central bankers well understand that the world is on fiat currencies, but that they have been acting as though we were still on the gold standard.

    It seems to me that acting as though we were on the gold standard has gone against the public interest in two ways. First, it has made counter-cyclical policy difficult. We are seeing the deleterious effects of that now, as the debt/deficit fear mongers have hamstrung efforts to reduce unemployment and to stimulate aggregate demand. Second, it has led to policies that favor creditors over debtors to an extent that has contributed to growing inequality and to overextension of private debt. (In truth such overextension benefits neither creditor nor debtor, but the creditor gets the crumbs and the bailouts.)

    dan weintraub Reply:

    @ Min,

    Interesting point. I understand your’s and Warren’s assertion that our policy makers do NOT understand the operational realities that exist in a fiat currency system. And that hence they act as though money were ‘finite’, when operationally speaking it is not. Got it.

    My argument—which I am clearly not articulating well—is that fundamentally, ALL human economic and fiscal and monetary systems are vulturine at their core. It is a conveyor-belt system, in which, throughout history, wealth has been leached away from those on the fringes to further enhance the power and wealth of the center. Preceding from that assumption, a system of floating currency becomes a tool for wealth enhancement, NOT a system that foundationally benefits the middle and working classes (for lack of better terms).

    My point about a commoditized monetary standard is that it places a cap on the creation of money, and thus it levies an (admittedly) artificial cap on the exploitation of money by those who control it.

    Look, I am not purporting to support a return to the gold standard, ala folks like Antal Fekete. HOWEVER, Fekete gets it RIGHT when he talks of the abuse of fiat money as precipitating a cataclysmic and ongoing event for those who exist on the monetary margins of society.

    Again, it strikes me as problematic that the men who would employ post-Keynesian monetary policies are the same men who benefit from the wealth it creates for THEM, while the so-called “public interest” still exists and is promoted at the whim of those at the center.

    Tom Hickey Reply:

    Dan, I suspect that they understand the operational reality of fiat currency perfectly well and don’t like it because they see it as inherently inflationary and favors debtors. They prefer a convertible fixed rate system, which is inherently deflationary and favors creditors. They are bankers, after all. So they run the system as if we still had a convertible fixed rate currency, or at least a close to this as they can manage politically.

    Min Reply:

    Dan: “Interesting point.”

    Thanks. I like your response, too. :)

    Dan: “I understand your’s and Warren’s assertion that our policy makers do NOT understand the operational realities that exist in a fiat currency system. And that hence they act as though money were ‘finite’, when operationally speaking it is not. Got it.”

    You may be confusing me with someone else. I am a consumer of MMT. And I agree with Tom Hickey. I think that the powers that be (save some politicians) do understand fiat currency. They just want to pretend that it doesn’t exist, that we have run out of money, that Social Security is broke, that we have to tighten our belts now, etc., etc.

    Dan: “My argument—which I am clearly not articulating well—is that fundamentally, ALL human economic and fiscal and monetary systems are vulturine at their core. It is a conveyor-belt system, in which, throughout history, wealth has been leached away from those on the fringes to further enhance the power and wealth of the center. Preceding from that assumption, a system of floating currency becomes a tool for wealth enhancement, NOT a system that foundationally benefits the middle and working classes (for lack of better terms).”

    Thanks. I think I understand you better now. :)

    I guess I am more optimistic.

    Dan: “My point about a commoditized monetary standard is that it places a cap on the creation of money, and thus it levies an (admittedly) artificial cap on the exploitation of money by those who control it.”

    I don’t understand things well enough to agree or disagree.

    However, to respond in general, it seems to me that in modern times (i. e., post 1500) fiat money has been associated with the democratic impulse. Perhaps the largest experiment before the Great Depression was in the American colonies. Britain kept its American colonies cash poor, so that they would be dependent upon trade with the mother country to get money. As a result, the Spanish peso (aka dollar) began to circulate in the colonies, and later, starting in 1690, fiat currencies appeared. One result was a leap forward in prosperity. Another was inflation (which they called depreciation of the currency). Paper money was backed by accepting it for taxes or in payment of gov’t loans (via land banks). OC, creditors did not like the inflation, but debtors controlled the legislatures. The creditors appealed to the Crown, and in 1764 Parliament did not outlaw colonial scrip (as they called it), but said that it could not be made legal tender. That, along with the Stamp Act and the Intolerable Acts, was a major factor in the Revolution.

    The big failure, OC, was the Continental Dollar, which was not backed by land or taxation, but only by the “Full Faith and Credit of the Continent”. That was not enough. If it had not been for the failure of the Continental, the U. S. might have had a fiat currency from the beginning.

    Another failure was the Assignat of the French Revolution, which was
    backed by land. I do not know why it failed.

    Going off the Gold Standard was one of the best things a country could do during the Great Depression, it appears. By the end of the Great Depression the difference between rich and poor in the U. S. had decreased. How much going off of the Gold Standard had to do with that, I don’t know, or if it did. However, I ran across an interesting study online a while back. Today we think of gold as a hedge against inflation, but before the Great Depression it was a hedge against deflation: exactly the opposite. How come? Well, its nominal value decreased, but its buying power increased relative to other commodities. That makes sense, because the value of money held up the value of gold relative to everything else. In deflationary times, guess who owned the gold. ;)

    Dan: “Look, I am not purporting to support a return to the gold standard, ala folks like Antal Fekete. HOWEVER, Fekete gets it RIGHT when he talks of the abuse of fiat money as precipitating a cataclysmic and ongoing event for those who exist on the monetary margins of society.”

    I have not read Fekete, but I will have to. :) But does he distinguish between gov’t fiat money and money created by private banks? It seems to me that bank money, unlike gov’t fiat money, does have aspects of a Ponzi scheme, and that that leads to cataclysmic financial events that harm ordinary people.

    Thanks again, Dan. :)

    WARREN MOSLER Reply:

    I’d say a gold standard would make it worse from your perspective

    Reply

    ESM Reply:

    I’m reluctant to pile on here, but I would refer you to William Jennings Bryan’s Cross of Gold Speech. Jennings Bryan didn’t understand evolution, but he sure understood money.

    Reply

  4. Uno Says:

    I agree 100% that the type of society one wants to live in must be decided first and then an appropriate financial systems built to support it – most Americans have it backwards.

    Most Americans believe “Greed” equates with “Capitalism” – Greed is Good – and that it is ok for a minority of greedy individuals to step on the non-greedy because “that is capitalism” – this thinking is not only backwards but directly opposes the constitution of America.

    The US constitution DOES NOT advocate Capitalism nor Free Markets. It advocates EQUALITY, property rights, freedom from religion, other individual rights and fredoms. Nothing to do with a specific economic system such as capitalism vs. socialism.

    The framers of the US constitution advocate DEMOCRACY – policy the favors the majority over the greedy minority that have figured out how to game the current systems. Most Americans today, especially the greedy would call that a form of socialism – helping the majority obtain the rights and freedom set out in the US constitution.

    Reply

    ESM Reply:

    I’m sorry Uno, but your reading of the Constitution is almost exactly backwards. The framers were very wary of Democracy because of the possibility of the minority being oppressed by the majority. Also, the rights reserved in the Constitution are all negative rights. You have the right to be free of certain forms of government control, repression, and action without due process. They are not positive rights like the right to be given food, shelter, and health care, even if you can’t provide for yourself. If you want to argue that humans should have such positive rights, be my guest. But you will not find them in the Constitution.

    Reply

    Tom Hickey Reply:

    ESM is correct. The Constitution was framed as a representative government in which only males of property could exert influence. That was gradually relaxed, and as it was, “men of property” took it upon themselves to ensure that they remained in control of the selection and election process through campaign finance and lobbying (legalized bribery). The US now has a one party system with two factions that alternate power.

    Reply

  5. Mr. E Says:

    My most recent article had several paragraphs about the bond vigilantes and how they have been wrong for my entire lifetime. Looks like I underestimated their length of being wrong by a factor of 2.

    Reply

    Min Reply:

    You don’t work for Life Magazine, do you?

    You know, Sweet Mr. E of Life?

    (Sorry folks, I couldn’t resist. ;))

    Reply

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