Hope in America online

imposed has been one of the things though, as I shall show
in a moment, I do not believe that it has been the most funda-
mental thing which has produced in those who own the
capital of America a furious hatred for Mr. Roosevelt and
his government. This hatred almost compels the rest of the
American people to support Mr. Roosevelt, even if they feel
doubtful of some of the things which he is doing.

59



HOPE IN AMERICA

At first sight, however, it must be admitted that, if the
object of the whole policy is to increase purchasing power,
so as to provide a market for industry, then raising the money
by increased taxation of the rich does not seem a good
method of financing the policy. For what is obviously wanted
is not a transfer of purchasing power from one group of
people, the rich, to another, the wage earners, but a net
increase in the purchasing power of the whole community.

This objection has a great deal of force, but it is not true,
I believe, that such redistributory taxation, as it is often
called, does not help to solve the problem of purchasing
power. Recently an English economist, Mr. J. M. Keynes,
has done some important new work on this subject. Mr.
Keynes has shown that such redistributory taxation does in
fact increase the total of purchasing power available for
buying the final products of an industrial system. The argu-
ment is a complicated one, but I can give a rough idea of
it as follows:

The richer people are, the higher the proportion of their
income they save. (As we noticed above, the capitalists
habitually save a high proportion of their income.) So long
as they see attractive avenues for investment, this may not
increase unemployment, for the money they save will be
used to put up new factories, sink new mines, etc. But, if
the prospects of making profits through new investments
are not good, there may not be enough investment going on
to take up all the savings which the rich have made. In that
case unemployment will appear, the national income will

60



MR. ROOSEVELT'S ANSWER

fall, and slump will be upon us. If, however, that part of
their income which they would have saved is taken from
the rich and given to the wage earners, who will certainly
spend almost all of it, all will be well. Hence, raising the
money for distributions of mass purchasing power out of
taxation from the rich is by no means an ineffective way of
increasing net demand. In general, we may say that by
maEng the system less lopsided, it helps to prevent the
onset of slump and unemployment.

D . 2. But it would have been quite impossible

Borrowing . . ^ r

/ +L z?- z. to raise the vast sums which Mr. Koosevelt
from the Rich. ,,..,,

has distributed out of increases in annual

taxation. The greater part of these sums Mr. Roosevelt has
borrowed. The rich, that is to say, have lent the money which
the ^American Government has distributed to the mass of the
population. Now the obvious thing to say about this method
is that it is all right as long as it lasts, but that if it is pur-
sued beyond a certain point, a time will come when the
interest which the Government has to pay on an ever increas-
ing national debt will make it too expensive to go on with
the process.

It is true that this time will come much later than you
might think at first sight. For the payment of interest on
past borrowings by a government to a capitalist class, and the
payment of taxes by this same capitalist class to the gov-
ernment is really a circular process. If the national debt is
large, it will mean that the capitalists receive a vast annual
sum from the government by way of interest. But the bulk

61



HOPE IN AMERICA

of this sum can be raised only out of taxation from the
very same people to whom the interest is paid. Therefore,
this circulation of money between the capitalist class and
the Government can go very far without becoming impossible.
Nevertheless there is, I suppose, a limit to it in practice.

, r -.. 3. The third source from which Mr. Roose-

New Money. _ . . . _ . , . _

velt has drawn the money which he has dis-
tributed to the population is by far the most interesting and
important. He has undoubtedly simply created a certain
proportion (I do not pretend to be able to work out what
proportion) of the billions which have gone to the farmers
and the unemployed, the big industries, the railroads and all
the other recipients of government relief. He has not taken
this part of the money from anyone. He has, directly or indi-
rectly, created it. This creation of money has not, it is true,
involved the old fashioned method of printing dollar bills.
That is because the modern banking system has reached a
point of perfection which makes paper money quite a sec-
ondary affair (I describe how this has happened below,
page 66).

But when, for instance, Mr. Roosevelt declared that the
gold in the vaults of the Federal Reserve Board and the U.S.
Treasury was worth 40 per cent more dollars than it had been
before, he in fact created out of nothing that amount of new
money. This act in itself did not necessarily have any effect
on the situation. For it was necessary not only to create this
amount of new money, but to distribute it; it was necessary
to put this amount of new money into the hands of people who

62



MR. ROOSEVELT'S ANSWER

would use it to satisfy their wants. But this new money did
become a source from which both the government and the
Federal Reserve system could distribute money, either by
way of loan or direct gift. And it is certain that a proportion,
though again I do not pretend to know exactly what propor-
tion, of this new money has been distributed.
r * n/r -9 Now to most people the creation of money

Is It MaglC? r i i r r

out ot nothing savors either ol crime or of
magic. (Those who have benefited by it usually think it is
magic. Those who have not, that it is crime.) How, people
ask, is it possible simply to create wealth out of nothing?
Is it not obvious that no good can come of this sort of tricky
business? Our answer must be, however, that that all depends
upon the situation in which the new money is created.

Of course, it is true that it is impossible to create new
wealth simply by declaring one day that the gold in your
vaults is worth so many more dollars than it was the day be-
fore. Wealth can be created only by work; wealth is the prod-^
uct of human labor acting upon natural resources. Human
labor is its father and nature its mother/as tKegreatest econ-
omist who ever lived once said. Hence it is perfectly true that
if all the available workers are already working, if all the
factories and mines and all the cultivatable land are already
being used, then no creation of money, whether by the
printing press or by writing up the value of your gold or by
any other process whatsoever, can increase the wealth of the
community. All that the creation of new money in such
circumstances can do is, of course to raise prices.

63



HOPE IN AMERICA

That is what people call inflation. It would not be quite
true to say that it does no good to anybody. Inflation may do
quite a lot of good to some people, i.e., debtors. But it will
do quite a lot of harm to another set, i.e., creditors. Anyhow,
it cannot increase the real wealth of the community. It can
only shift it about from one set of people to another.

r c But now look at the situation if everybody

It Can Set . J J

,, Ti7 i is not working if there are millions of unem-
Men to Work. e

ployed workers in the country, thousands of

factories idle or not working at capacity, acres of fertile
land uncultivated. This, alas, is a situation quite as familiar
(or a good deal more familiar) to us as is the situation of a
community which is using all its means of production. In this
situation, when there is unused productive capacity, the cre-
ation of new money certainly can result in an increase in the
wealth of the community. It can do so for the simple reason
that it can set men to work. For that, and that alone, is what
increases wealth.

Let us follow the process out. Let us say that a government
creates in a certain week a million new dollars. Some of this
money it may give outright by way of relief payments to the
unemployed; some of it it may lend to the employers, either
directly or by putting it into the banking system, so that the
banks may lend it, say to a railroad which will spend it on
ordering new steel rails from the United States Steel Corpora-
tion; and U.S. Steel will in turn distribute the money to its
employees.

In either case though, as you notice, in the first case much

64



MR. ROOSEVELT'S ANSWER

more simply and directly than in the second the money will
get into the hands of individual men and women who will go
out into shops and spend it. This will increase the effective
demand for the ultimate products of the industrial system.
It will enlarge the final market for which the whole of pro-
duction is carried on. In a word it will help to solve the ques-
tion of who is to buy the goods. Therefore, it will set human
beings to work. Thus because the alternative was not that
human beings should be doing other work, but that they
should be standing idle producing nothing, the creation of
the new money, by adding to the amount of useful work done
in the community, can increase its real wealth.

The same thing, clearly, takes place if, instead of giving
the new money directly to the unemployed or lending it to the
capitalist employers, the government uses the new money it-
self to employ men on big public works schemes, such as
building dams for flood control and electric power genera-
tion, or building houses in a rehousing scheme.
, j i Here then is a real way by which a govern-

c i v ment can begin to find an answer to our basic
solution?

question of who is to buy the goods: As long

as there are workers out of a job, the government, so long as
it not only creates the new money but actually distributes it
by one means or another, can enlarge the ultimate market for
goods. Is this then a final solution to our problem? Unfor-
tunately, that is by no means the case. Valuable and impor-
tant as is a policy such as Mr. Roosevelt's of distributing
large sums of money, which will have been raised partly by

65



HOPE IN AMERICA

increased taxation, partly by borrowing, and partly by the
actual creation of new money, such a policy has very definite
economic and political limitations. That is no reason why the
American people should not support such a policy and carry
it right up to those limitations. But it is a reason why they
should realize that those limitations exist, so that they can see
what to do when they reach them. Before, however, we dis-
cuss the economic and political limitations of the policy of
direct distributions of purchasing power, let us meet one of
the most obvious objections which is brought against such a
policy. For, in doing so, we shall see more clearly how the
thing works.

,, D j As soon as it becomes evident that a govern-

The Banks .* ' i , . i

** i TM ment, such as Mr. Roosevelt s, is both taxing,

Make Money. , _

borrowing and creating new money, in order

to distribute it to the mass of the population in one way or
another, a most furious opposition to that government on the
part of the capitalist class inevitably develops. In particular
the heavens are rent by cries and lamentations that the cre-
ation of new money on the part of the government is an act
of catastrophic "unsoundness" ; that this is "tampering with
the currency" ; that this way lies ruin and destruction.

There is one simple and sufficient answer to all this line
of talk. A government) when it creates new money, is doing
nothing more nor less than the banking system does every day
of its life. The truth is that in recent times, with the growing
perfection and centralization of the banking system, and the
growth of the habit of making all considerable payments by

66



MR. ROOSEVELT'S ANSWER

check, a radical change has come over the nature of the
money which is predominantly used in a modern community.

Let us examine this kind of money for a moment. Now, if
you asked an average well-off man how much money he had,
he might think you meant the total value of all his property
his house, his bonds, his shares, his life insurance policy, and
the like. Even if you explained to him that what you meant
was the amount of ready cash in his possession at the moment,
he still would not merely look at his pocketbook and tell you
that he had, say, fifteen dollar bills in it. He would look rather
at his bankbook and tell you how much money he had on de-
posit. For he knows that this money is as good as cash, since
at any moment by drawing a check he can use it to purchase
anything he wants.

Now what does this money in the banks consist of? What is
this money which a man feels he has, if he has say one thou-
sand dollars in his account at the bank? It does not consist,
as we know, of gold. Nor does it consist of pieces of paper.
The bank does not keep one thousand one-dollar bills, or one
one-thousand-dollar bill, in a safe-deposit box against this
client's account. The simple truth is that this money lying on
deposit does not consist of anything tangible or material at
all. It is bank money or money of account. It consists simply
of the written entry in the bank's books. Now, and this is the
important point, the banks can, and do, within very wide
limits, create as much or as little of this bank money as
they like.

67



HOPE IN AMERICA



H Thev ^ ** ^e *kis. They create

Q j money every time they decide to make a loan

to a customer. For in a modern banking sys-
tem every loan on the part of a bank immediately creates a
deposit of the same size. Let us say that the bank has made a
loan of ten thousand dollars to Mr. X, who wishes to extend
his factory or, quite likely for that matter, to speculate in
stocks and shares. Will Mr. X ask the bank to give him the
ten thousand dollars in dollar bills? Obviously he will do
nothing of the sort. He will immediately deposit his ten thou-
sand dollars, either with the bank which made him the loan,
or with some other bank, and he will do so by writing a check.
And if all the banks of the country are joined up together
by a banking system as they now are in both Britain and
America that really means that for purposes of currency
they may be regarded as one bank.

Now, therefore, the banking system has created ten thou-
sand dollars of new money without having had to issue a
single dollar bill. Moreover it may be that for quite a long
time this money can be used without there being any need to
issue any cash at all. The man who borrowed the original ten
thousand dollars is quite likely to pay it by check to someone
else in payment for some shares he has bought, or in a series
of checks to building contractors who are extending his fac-
tory for him. These men in turn will be likely to pay their
creditors by further checks, and the ten thousand dollars of
new bank money will go circulating round wholly by check
without anyone coming in to draw a single dollar bill. Sooner

68



MR. ROOSEVELT'S ANSWER

or later, it is true, some of the ten thousand dollars will per-
colate down into the hands of people who do not have bank-
ing accounts, and they will need to touch actual dollar bills.
But the banks have learned from experience that of any
given amount of money of all kinds in circulation they will
be asked for only a certain proportion of it to be actually
cashed in the form of bills. In Britain this proportion is just
about one- tenth (I understand that it is somewhat higher in
America, as checks are not quite so widely used as they are
in Britain) . If the proportion is one-tenth, then it means that
the banks must keep one-tenth of the amount which they cre-
ate by way of loans of new bank money, in the form of cash
in case they are asked for it. Hence, if the government, or
the central banking authority, does not allow any currency
expansion at all, or does not increase its gold reserve, the
banking system will be prevented from expanding the amount
of bank money in the country to more than ten times the
amount of gold and notes which it has in its vaults. But in
America this is not a very practical consideration, because
the amount of gold and notes available is far more than one-
tenth, or whatever the figure is which is necessary to the cre-
ation of large additional amounts of bank money.
Wh Th Hence the banks can, whenever they can

Object ^ nc ^ a customer to wnom they can safely lend,

create new bank money. And both/ the British
and the American banks have been creating mo|iey like this
for years on end. We have no particular complaint against
the banks for doing this. Indeed, the economic system could

69



HOPE IN AMERICA

flot have worked at all unless they had done this. But it is
extremely important to appreciate all this in order to see
what nonsense it is when the bankers and their friends hold
up their hands in horror against a government, such as that
of Mr. Roosevelt, when it creates new money. For such a
government is only doing something which they themselves
habitually do whenever they get the slightest chance. The real
truth is, of course, that they object violently to the govern-
ment creating new money precisely because this is something
which they habitually do themselves. They object because the
creation of money on the part of the government means the
invasion by the government of a function which they intend
to reserve for their own. The creation of new money, which
is then lent out on interest, is an exceedingly profitable pre-
rogative of the bankers. That is why they are so violently op-
posed to the government doing anything of the kind. That is
why they tell us that it is "criminally unsound" for the gov-
ernment to do something which they do every day of the week.

,, ,, That is all quite natural and understand-

New Money _ _ -..,.,. . , , ,

TT j able. It is indeed inevitable that the bankers
not Unsound. . . . .

and their friends should feel this intense op-
position to the Government entering the business of supplying
the population with purchasing power, just as they feel op-
position to it entering any other field of economic activity in
competition with themselves.

But we should not allow ourselves to be misled for a
single moment by the forms which this inevitable opposition
takes. There is not the slightest substance in the reiterated

70



MR. ROOSEVELT'S ANSWER

charge of the bankers that for the government to create new
money is "fundamentally unsound," "inflationary," "a de-
ception of the people," and the like. The creation of new
money on the part of the government is no more, and no less,
unsound than the creation of new money by the banks. The
creation of new money, either by the government or by the
banks, is unsound and futile, if all the means of production
are already working, for then it can only cause a rise in
prices, and so inflation. But the creation of new money, either
by the bankers or by the Government, is not necessarily un-
sound at all when a substantial proportion of the means of
production, and in particular of the workers, is unemployed.
This does not mean that the mere creation of new money
will in itself remedy unemployment. The new money not only
has to be created; it also has to be put into the hands of
people who will use it to create effective demand. But it does
mean that a policy of the distribution of purchasing power to
the mass of the population by one means or another, which
involves the creation of new money, is by no means neces-
sarily unsound on that account. Its soundness or unsoundness
will, as we shall see, depend largely on the way in which the
purchasing power is distributed to the population.

_. Has Mr. Roosevelt then discovered a simple

Has Roosevelt f IT o wr-n i- T e

_, T _ way out of our troubles: Will his policy of

Found the ,. ., . , . . , ,. .

. distributing purchasing power in addition to

Answer -c ., , . , , f , 7 .

the wages which the mass of the population

receives, solve our basic question of who is to buy the goods?
Will it therefore set the whole economic system to rights? Un-

71



HOPE IN AMERICA

fortunately, the problem is by no means as simple as that.
i The real truth is that this policy of the distribution of addi-
tional purchasing power, while leaving the ownership of in-
dustry unmodified, can be little more than a temporary ex-
pedient. That is no reason for not supporting it strongly. But
it is a reason for seeing that it will either have to be carried
forward to a new phase, or abandoned. It cannot in itself pro-
vide any permanent resting place for the social system.



72



Chapter VI



Public Works and Private Hates

T , w Let us now consider how the new purchas-

1 flT6 W ujfS . .

/ ZT '6 m ^ power is to be distributed to the mass
of the population. Just as there are three
sources from which this purchasing power
can come (from taxation of the rich, from borrowings from
the rich, and from creation of new money by the govern-
ment), so there are three distinct channels through which
this purchasing power can be distributed to the population.
Let us consider them in turn.

First, the money can be lent by the government, either di-
rectly or through the banks, to capitalist employers who will
use it to extend or re-equip their factories, mines, railroads,
etc., etc. In this case the money will percolate only gradually,
through the contractors and sub-contractors, down to the mass
of the population.

Second, the government can itself inaugurate great public
works schemes, such as the dams and electrical power sta-
tions of the Tennessee Valley Authority, or such as the
works schemes road building, post office building, park im-
provements, etc. which have been undertaken by state and
city governments all over the Union. By far the largest and

75



HOPE IN AMERICA

best, however, of possible public works schemes has not yet
been undertaken in America on any considerable scale,
though it has been suggested. That is a program for rehous-
ing the ill-housed population by public initiative.

Third, the money can simply be given by the government
to individuals who will use it to satisfy their everyday needs
and so buy additional consumers' goods such as bread,
clothes, furniture, motorcars and the like. Money paid out in
direct relief of the unemployed, money given to the farmers
under various schemes, and money given to the veterans of
the world war, are all instances of this kind of direct pay-
ment to consumers.

I notice that, under the new schemes with which at the
moment (Summer 1938) Mr. Roosevelt is proposing to fight
the new depression, all these three channels of distribution
will be used. As I understand it, it is proposed to spend
nearly five billion dollars over the next fifteen months. Some
of this money is to be lent to capitalist employers through a
revived Reconstruction Finance Corporation, some of it is
to be spent on public works, and some of it is to be given
directly to the unemployed, etc., by way of relief. Let us ex-
amine the advantages and disadvantages of these three meth-
ods of distribution in turn.

i T j. The big question for this kind of distribu-

1. Lending to . . , . nn

L . 7 tion is the rate of interest. The only way in
the Capital- . . J . ,

which additional money can be got into cir-
culation by this method is for the government
to lend at lower rates of interest than the banks or private
lenders are willing to grant. If the government does this,

76



PUBLIC WORKS AND PRIVATE HATES

as it undoubtedly can, we may expect to find capitalist em-
ployers (whether they are great corporations such as the
railroads, or individual private employers, makes no matter)
who will be willing to borrow for the extension or re-equip-
ment of their works at the new low rate of interest made
available by the government, while they would not have seen
their way to borrow at the old higher rate available from
the banks or private lenders.

But there is a serious snag here. If depression has really
begun, most capitalist employers will not be willing to bor-
row money for extensions or re-equipment of their works at
any rate of interest at all. They would not enter into big
schemes of expansion even if you gave them the money; for
they see no opportunity of operating their new, extended, or
re-equipped factories at a profit if and when they should build