In the previous posting in this series, we ended by asking the question, What was wrong with the New Deal? Didn’t it save the country?
Not exactly. In fact, a good case could be made that the New Deal ruined the United States, especially monetarily.
|Backing promises to pay with other promises to pay is not a good idea.|
Backing the money supply with government debt throws a monkey wrench in Say’s Law of Markets. The solution to the Keynesian bogeyman of market gluts is not to create artificial demand, but for the people who want to consume to produce something that they can trade for the unsold productions of others. As Say explained in his first “Letter” to the Reverend Thomas Malthus,
All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.
To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.
|Jean-Baptiste Say: Production and consumption in balance.|
I know that this proposition has a paradoxical complexion, which creates a prejudice against it. I know that one has much greater reason to expect to be supported by vulgar prejudices, when one asserts that the cause of too much produce is because all the world is employed in raising it. — That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new. This doctrine has, indeed, probability on its side; it can be supported by arguments, facts may be interpreted in its favor. But, Sir, when Copernicus and Galileo taught, for the first time, that the sun, although we see it rise every morning in the east, magnificently pass over our heads at noon, and precipitate itself towards the west in the evening, still does not move from its place, they had also universal prejudice against them, the opinions of the Ancients, and the evidence of the senses. Ought they on that account to relinquish those demonstrations which were produced by a sound judgment? I should do you an injustice to doubt your answer.
Besides, when I assert that produce opens a vent for produce; that the means of industry, whatever they may be, left to themselves, always incline themselves to those articles which are the most necessary to nations, and that these necessary articles create at the same time fresh populations, and fresh enjoyments for those populations, all probability is not against me.
|Ricardo: Land a cost-free factor of production.|
That being the case, if technology and land are (contrary to Keynes) actually productive in and of themselves, then another spanner gets bunged into the works, as P.G. Wodehouse put it. Trying to finance economic growth out of past savings instead of future savings, and then denying that land and technology are productive, inserts two fatal flaws into the system. Trying to reconcile the irreconcilable by manipulating money, credit, private property, contracts, taxation, and whatever else comes to hand to force the system to work against its own principles is a certain recipe for disaster.
There was also the problem that the currency was no longer convertible into gold on demand. It actually became illegal for Americans to own gold. Convertibility of the debt-backed reserve currency into gold and a legal limit on the amount of government debt that could be used to back the currency was the only thing that had kept the National Banking system from being a complete disaster.
Does that mean, however, that the situation is hopeless?