Production: The True Money Standard
There has arisen a recent controversy over the direction of the U.S. economy. Many analysts point to the potentially negative impact that a rising rate of interest has had over the past two years and also the real estate market slowdown. The real issue at stake, however, is that of production and that will be the focus of this article.
The popular press likes to present a bleak picture of U.S. manufacturing, but as the American Institute for Economic Research recently pointed out there is more to this story than is being presented in the mainstream media.
Reports in recent months have focused on the woes of GM and Ford and other automobile manufacturers in the U.S. as more plants are closed and thousands are laid off. As the Institute report pointed out, "Some analysts point to the record U.S. current account deficit, almost seven percent of Gross Domestic Product (GDP) and widening, as further evidence of the decline in manufacturing." But as the report details, "the focus on manufacturing jobs and on the declining fortunes of particular companies and industries can be deceptive." According to the report, manufacturing output actually been growing and in 2004 reached a record high in spite of a general decline in manufacturing employment. Increased reliance on technology and automation are responsible for the huge increases in productivity growth.
Does increased production through automation help or hinder an individual's economic prospects? History shows that it helps by increasing the aggregate standard of living. As long as industrialization is increasing within the boundaries of a given economy (as opposed to being outsourced to foreign countries) the rising level of automation will only increase productivity along with the standard of living.
In eighteenth century England the invention of the "spinning jenny" promised to revolutionize the cloth making trade and free up man hours for other, less toilsome enterprises. This labor-saving device could make clothes 10-to-20 times faster than could be spun by hand. At that time the "home factory" system was prevalent in England and women were principally engaged in this productive endeavor. The invention of the Spinning Jenny, far from being greeted with open arms, became an object of revile and thousands rose in protests against the machine. The common argument leveled against the Spinning Jenny was that it would ruin the economy of England to have a machine that would make more clothes than could be produced by hand.
Clearly this was a fallacious argument, a point that becomes clear with the benefit of hindsight. In subsequent generations other labor-saving devices have been greeted with the same fear and rejection that was cast upon the Spinning Jenny: mechanized harvesting implements, industrial robots, computers, etc. In France a machine that was designed to produce tapestries was destroyed because the French feared this would hinder their hand-made tapestry industry.
Today tapestries are produced in France with machines at a huge savings in cost-per-unit and man hours. Workers in general have always feared new inventions that promise to increase production at the expense of cutting man hours. But as the American Institute for Economic Research aptly states, "[T]he goal of economic activity is not to employ as much labor as possible to produce something, but to produce more from a given amount of labor."
This latent fear of labor-saving devices is a product of Keynesian economics. The reasoning behind this fear is lacking; the assumption is that people don't want more things than they already possess. In 1932 the arguments of Keynes was that the Great Depression was caused by over-production and only by controlling industrial output could future depressions be averted. Dr. Stuart Crane addressed this fallacy in one of his lectures back in the early 1980s: "This idea of satiation economics or over-supply economics is what is taught today - the idea that we must control and regulate what is being produced in order to make sure they don't get out of balance - fails to realize that production is always out of balance."
No one understood more clearly or preached more fervently the basis of production as a standard of monetary wealth than Henry Ford. The great American industrialist and innovator fought against the Keynesian concepts of his day, particularly during the Great Depression era. In his recent Ford biography, "The People's Tycoon," author Steven Watts summarized the economic philosophy of Ford in the following words:
"He relentlessly insisted that Americans confused money with wealth. Though money needed to circulate freely in order to facilitate the buying and selling of goods, he admitted, it had no intrinsic value. 'Money...may represent wealth, but it is not wealth itself,' Ford wrote. In the 1920s, however, businessmen had sought profits rather than producing solid products. The result had been disastrous, because 'wealth consists of useful goods, and money which is made out of thin air does not add to the stock of goods and therefore does not add to wealth.' This trend also increased the power of financiers and bankers, the old ideological bogeymen in Ford's populist worldview. For Ford, the economic crash had demonstrated that a 'system of business in which the money lender too conspicuously thrives is not a truly prosperous system.'"
Ford's solution for the socio-economic malaise brought on by the Depression could be summarized in a single word, according to Watts: production. Watts highlighted Ford's core belief that the production of "tangible goods to meet the demand of consumers provided the bedrock of American prosperity. In Ford's words, 'Plenty means production and still more production; production means wealth, and scarcity means poverty; and the entire social problem is poverty....Production and the effects of production give the answer to practically all the things that trouble us."
A socialist-type government such as the U.S. government embraces the Keynesian economic view. It not only attempts to control production but also the capital and labor of the individual participants within the economy, regulating their liberties to produce when and what they want and in whatever quantities they desire. "The key to production," writes A. Ralph Epperson in his book, The Unseen Hand, "is the incentive of the marketplace, the right to keep what is produced, the Right to Private Property! The right of the individual to better his life by producing more than he consumes and to keep what he produces." Government economic policy that has been contaminated with Keynesian thinking will always be at odds with this.
Contrary to what contemporary economic theory teaches, in the supply/demand equation it is usually demand over against supply that is the culprit in economic downturns. More specifically, the problem usually lies in the failure of the money supply to keep up with production and not in oversupply (which economists are too quick to blame).
To former U.S. President James Garfield is attributed the following quote: "Whoever controls the volume of money in any country is absolute master of all industry and commerce." This statement is self evident and has reached its apotheosis in our day under the Federal Reserve's control of our monetary system.
What happens when the money supply is expanded out of all proportion with the demands of industry and commerce is that money quickly loses value and the prices of goods and services rise to exorbitant levels, in other words, hyper-inflation. Notice that it isn't "inflation" that is the great evil, only hyper-inflation. Inflation, which is to say expansion, of the money supply when commerce and trade are growing is a vital necessity to ensure the economic health of any nation. This is true as long as the inflation isn't allowed to exceed the demands of commerce.
It follows then that the best measure of whether the money supply should be expanded or contracted is taken by measuring productive output and keeping a pulse on the needs of the marketplace as measured by production. This can never be adequately undertaken by out-of-touch bureaucrats or Ivory Tower economists. Nor can it be based on the whims of a central bank unconcerned with the everyday needs of individual capitalists.
Thomas Jefferson clearly had this view in mind when he said, "If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
While visiting London, Benjamin Franklin was once asked what accounted for the prosperity of the American colonies. He replied: "That is simple. It is only because in the colonies we issue our own money. It is called Colonial Scrip and we issue it in the proper proportion to accommodate trade and commerce." As one writer has pointed out, the colonies didn't abuse their power to create inflationary monetary conditions; rather, the issuance of currency was done so according to the current demands of the market and not according to the immoral socioeconomic schemes of corrupt men. Would that our present monetary authorities could regulate money supply the way it was done in Ben Franklin's day! Then the roller coaster cycle of boom-bust-boom could be mitigated to a large degree and allow for a smoother, more extended wave of prosperity than the Fed's monetary policy allows for.