The economics profession presents the financial sector as a passive element of the economic system. That though is contrary to the facts, as most clearly revealed in the national accounts of the Great Depression. Prior to the Great Depression and Federal government bank deposit account guarantees, the circulating currency consisted of money and demand deposit accounts, the latter backed by only a small fraction of money. That was in consequence of the great majority of these accounts being created by bank loans, their security being solely the collateral against the loans' issuances.
When one examines the national accounts of the Great Depression, its cause is obvious: The loss of these demand deposit accounts with the insolvency of their carrying banks in consequence of they being unsecured by money. To better understand this, we need the numbers: The circulating currency in 1929 was $26.18 billion of which $3.90 billion was held by the public. This $3.90 billion was money, as it consisted of Federal government stamped notes and coins. The remaining $22.28 billion was demand deposit accounts. Against these $22.28 billion of demand deposit accounts, the banks held $2.70 billion of money. This was the banks' reserves against these accounts and met the requirements set by law. It is known as fractional reserve banking.
In 1933: the circulating currency was $19.17 billion; the money held by the public, was $5.09 billion; demand deposit accounts were $14.08 billion; and the banks' holdings was $2.90 billion. This loss in the circulating currency of $7.01 billion was a direct result of demand deposit accounts plummeting by (22.18-14.08) $8.20 billion. That was $1.19 billion more than the loss in the circulating currency. This loss in demand deposit accounts was due to bank insolvencies and was the sole cause of the Great Depression.
The consequence of this loss in circulating currency was that between 1929 and 1933 unemployment increased from 3.1 percent to 24.7 percent; Gross National Product (GNP) dropped from $104.4 billion to $56.0 billion; and Real GNP (chained to 1929 dollars) dropped to $74.2 billion. Other factors contributed to these changes, but these would have had nominal effect had it not been for this flaw in the law that allowed fractional reserve banking.
A group of economists drawn mainly from the University of Chicago recognized fractional reserve banking as the cause of the Great Depressions. Hence, they put forth a plan that called for 100 percent reserves behind all demand deposit accounts and, as understood here, a separation between institutions offering demand deposit accounts and those offering time deposit accounts. The circulating currency would then consist solely of money, not just that held by the public but that held by institutions in demand deposit accounts.
Institutions that then offered demand deposit accounts would back them with 100 percent reserves, that is, for every dollar in a demand deposit account, the bank would hold one dollar in reserve against that account. That plan is now referred to as the Chicago Plan and was offered to the Roosevelt administration shortly after its inauguration in 1933. But rather than adopt the Chicago plan, the Roosevelt administration chose Federal deposit insurances on all bank deposit accounts administered under the Federal Deposit Insurance Corporation (FDIC).
The Chicago Plan was the proper solution to the problems exposed by the Great Depression and remains the proper solution in our day. Sadly, few in the economics profession acknowledge this plan and those few that do, do so in a manner that hardly does justice to its simplicity and practicality. Do these, particularly those that do not speak of this plan, do so in ignorance or with deception? Both are wrong but the latter is fraud, a criminal offense. As written in A Plan For America, corruption is to miss-gotten gain as lie is to untruth; there is a difference although often it is a blurred one. Similarly, we might say: fraud is to misdirection as lie is to untruth.
Fraud is, according to the Free Dictionary by Farlex on line, deception practiced in order to induce another to give up possession of property or surrender a right. The most important right we have surrendered is the right to issue our own money. We have done this in spite of the fact the Constitution assigns this right solely to congress. Clearly the economics profession has and continues to deceive us. Was and is that deception intentional? For many in the economics profession, it probably is not; but for some, it must be. It is these latter that steer this criminal organization.
Because of the ambiguous form the financial system has taken since the Great Depression, in consequence of Glass-Steagall, which brought forth FDIC and the many awry acts of congress since, mainly during and since the 1970s, a return to 1933 and the Chicago Plan is absolutely necessary if this system is to be properly repaired; for if we do not, the standard of living for a great many of us will continue to deteriorate. But to achieve this correction will be an engrossing task in consequence of the role of economists in the economic system:
It is their members that govern the councils of government, as they fill the most important advisory positions in government; and it is government that charters the nation's financial institutions where many from the economics profession occupy their most important positions. With these charters are the rules that establish and govern these institutions. The Federal Reserve System, as the foremost example, belongs under the administration of the Federal government but has been assigned to a privileged private group, at the concurrence if not the direction of the economics profession.
Hence, with the power the economics profession has over our government, our financial institutions and our culture, and the fact that money controls economic activity, there remain only two choices if we are to seek this proper repair that the Chicago Plan offers: to either correct the economics profession or to remove its false influence over our government and in turn our financial system. These papers and the two books having in their titles A Plan For America, and my unpublished writings hopefully will aid in this repair regardless of the final choice.
These papers may be accepted as a request to the Nation to adopt the Chicago Plan with appropriate modifications and that this be done as soon as practical. As this is being written, a new president has been elected. Hence, this request is directed to the Trump administration. If the Trump administration achieves this goal it will be the greatest achievement since the founding of the Republic. But it must be joined with a National Dividend, as the latter is the only means this money can be effectively entered into the economy fully in accord with the Constitution.
Before leaving, a brief synopsis of these papers is in order. A Plan For America was written by design foremost to correct our seriously flawed financial system by having the Federal government alone issue the Nation's money. It is a scientific work that discourses on our history, economics, our political system, and the social, political, and economic problems we suffer. Extracts From And Supplements To A Plan for America assists in the understanding of these ideas but also how these ideas apply to our economic system and its problems.
This is the third book in this genre and is complementary to these two books: in describing the response of the Great Depression to the change in money quantity in graphical form, which it does in Complementary Papers # 1 and 5; in clarifying the means of money creation under the present financial system, which it does in Complementary Paper # 3; and in quantifying the effect of transforming our debt based monetary system to a cash system, which it does in Complementary Paper # 4. This transformation, described in Complementary Paper # 4, provides the money for the first National Dividend, $12,000 for each eligible electorate, and almost the total of the buy-down of the outstanding portion of the national debt. But this book does much more as it exposes the wrong teachings of economists, which it does mainly in Complementary Papers # 1, 2 and 5.
As in these previous two books, these papers employ the scientific method much as is done in our physical world. It is this means that exposes the many wrongs proffered by the economics profession. This exposure is most clearly shown in Complementary Papers # 2 and 5, the former in exposing: the economics profession's hype for free trade where in fact the object of free trade is to seek low cost labor for high corporate profits; the fiction of inflation resulting from the Federal Reserve monetary policy as the cause of the 1929 stock market crash where in fact the growth in the circulating currency, the Fed M1, was only 2.9 percent where GNP grew at 4.1 percent.
But the most egregious of these wrongs is the economics profession's denial of money as the drive on economic activity. Complementary Papers # 1 and 5, in drawing on the national account of the Great Depression, most strongly refute this denial with near perfect correlations between the growth in money and the growth in GNP and Real GNP, and between the growth in employment and Real GNP for the recovery years of this most important historical event. It is these correlations that confirm beyond any reasonable doubt that money growth drove this economic recovery.
However Complementary Paper # 5, also drawing on these national accounts, shows a similar correlation between the drop in GNP and Real GNP and the loss in the circulating currency (perceived as money) at the onset of the Great Depression. Although not shown in graphical form for the onset of the Great Depression, a similar correlation exists between unemployment and Real GNP. It is here where the true cause of the Great Depression is revealed in the numbers cited above.
But the fact that it is money that drives economic activity and the cause of the Great Depression being a severe contraction of the circulating currency in consequence of a fraudulent banking process is not all the economics profession has kept hidden from the public. Clearly shown in Complementary Papers # 1 and 5 is the fact that the banks extracted money from the economy during these recovery years; thus leading to Keynesian economics: Government deficits as the compensating factor for this bank-extraction of money.
The economics profession too has misrepresented this concept of Keynesian economics. The truth of Keynesian economics is clearly exposed in both Complementary Papers # 1 and 2, more so in Complementary Paper # 1 in its concept but most effectively at the end of Complementary Paper # 2 in terms of its decaying effect on economic recovery following the so-called trade cycles. Keynesian economics clearly is the Federal government running deficits to compensate for this extraction of money from the economy by the banking institutions. This these institutions have always done but not only during economic downturns but even during recovery stages.
Complementary Paper # 5 directly attacks the teachings of economists and those that follow them beginning with their false construct of the demand function, which is an implied denial of Keynes law of effective demand, that money drives economic activity. This law Keynes clearly states in Chapter 21 of The General Theory and is proven by the national accounts of the Great Depression beyond any reasonable doubt in Complementary Papers # 1, 2 and 5.
Other teachings attacked in Complementary Papers # 5 are the false construct of the supply function, which goes back to the economics profession's denial of money as the drive on economic activity, and its claim of an equilibrium "natural rate of unemployment", an idea akin to full employment, which it depicts as the long run aggregate supply line. Implied in these constructs is that the economy will always seek this "natural rate of unemployment" given sufficient time. That too is proven erroneous in Complementary Paper # 5 drawing on the historical record going back to the Napoleonic Wars: With very rare exception only during major wars was something akin to this "natural rate of unemployment" achieved.
A final point: A deteriorated standard of living was the condition for many brought on by the Great Depression. Its solution was Glass-Steagall and the many arwy acts of congress since, mainly during and since the 1970s, supplemented with seemingly a continuous state of war, driven, as best one might judge, by a covetous need for the earth's limited natural resources, foremost being petroleum.
Though we and our neighbor immediately to our north, on a per capita basis, consume over twice the amount of petroleum than the next major geographic region and multiply times the World average, a great many of us still have at best a standard of living that is tenuous at best. Beyond that, it is putting our world in jeopardy of sustaining human life, as we know it. This I tell in: Peak Oil and Energy Consumption, CO2 Emissions - The Other side And What To Do About It. Hence, this document is also considered complementary to these studies that began with the formal publication of A Plan For America. Hence, it may be considered the fourth book in these genera.
TABLE OF CONTENTS
COMPLEMENTARY PAPER # 1 8
THE GREAT DEPRESSION AND KEYNESIAN ECONOMICS
EXPOSING THE MOST BLATANT OF NATIONAL WRONGS
Money, Employment, Economic Activity Relationships 10
Banks - The Impediment to Economic Recovery 15
Keynesian Economics 16
The Most Blatant of National Lies 17
A Typical Source Of these National Lies 19
COMPLEMENTARY PAPER # 2 21
THE TRUTH FROM SCIENCE ABOUT FREE TRADE
THE GREAT DEPRESSION AND KEYNESIAN ECONOMICS
Murphy's Lead-in Commentary to Free Trade and More 24
the Great Depression - Not An Overly Complex Event 25
Understanding Free Trade Through Analysis 26
The Fiction of Money Inflation As the Cause of The 1929 Crash 30
the Decay in Effectiveness of Keynesian Economics 37
COMPLEMENTARY PAPER # 3 41
UNDERSTANDING MONEY CREATION WITH FRACTIONAL
RESERVE BANKING AND FEDERAL DEPOSIT INSURANCES
DRAWING ON HISTORICAL TABLES OF MONEY AND DEBT 41
The Money Creation Process With Federal Deposit Insurance 41
the Definition of Money and Moral Hazard 43
Money And Debt in Numbers 45
The Stated Goal of Congress - Truth or Fiction 47
Grossly Dysfunctional And Costly to the Extreme 51
COMPLEMENTARY PAPER # 4 54
A NATIONAL DIVIDEND 54
The Justification For A National Dividend 54
Financing A National Dividend 56
A Final Comment On The Need For A National Dividend 58
COMPLEMENTARY PAPER # 5 61
UNDERSTANDING MONEY CREATION WITH FRACTIONAL
Keynes Law of Effective Demand 63
The Cause of Instability in the Money Supply Growth 73
The Cure For Economic Instability 74
The False Construct of the Supply Function 77
The LRAS - Another False Construct 81
Say's Law - The Source of the LRAS 85
Concluding Remarks 88
COMPLEMENTARY PAPER # 1
THE GREAT DEPRESSION AND KEYNESIAN ECONOMICS
EXPOSING THE MOST BLATANT OF NATIONAL WRONGS
We derive our circulating currency from banks issuing credits rather banks issuing loans from the circulating currency. This is the cause of the periodic instability of our economy.
Money and the circulating currency are not always the same, although they are often used interchangeably: In A Plan For America, money is defined as: a unique accounting system consisting of markers and entries in a series of accounting ledgers made secure by the people through the fiat of their government. In contrast, the circulating currency is defined as that which serves a community as the means by which payment is made. This distinction cannot be over emphasized, as only by understanding the difference between money and the circulating currency is the cause of the Great Depression understood:
In 1929, the Fed M1, which by definition was the circulating currency, was $26.18 billion; of this $26.18 billion, the public held $3.90 billion and the banks held $2.70 billion in reserve against $22.28 billion in demand deposit accounts. Of these quantities, only the $3.90 billion held by the public and the $2.70 billion held in reserve by the banks were money. The remaining $19.58 billion of demand deposits were created through the fractional reserve process, as some say: "Out of thin air", as they were created by bank entries in accounting ledgers. Between 1929 and 1933, the circulating currency contracted by $7.01 billion; but that was less than the loss in demand deposit accounts, which was $8.20 billion. The loss of these demand deposit accounts was the primary if not the sole cause of the Great Depression.
That this loss in demand deposit accounts was the cause of the Great Depression was well understood by a group of economists dominantly from the University of Chicago. They also understood that for the economy to recovery, the circulating currency had to be increased money but to be secure it had to be solely money. In consequence of these understandings, they offered a proper solution to the Roosevelt administration in 1933: to require the banks maintain 100 percent reserves behind their demand deposit accounts with the Government creating additional money to meet these reserves. This is known as the Chicago plan, which is explained briefly by Irvin Fisher in his book: "100% Money and the Public Debt". The following extraction from Fisher's book exposes clearly that the cause and recovery was known at that time:
"The most outstanding fact of the last depression is the destruction of eight billion dollars - over a third-of our 'check-book money' - demand deposits. This was the natural result of our unstable short-reserve banking system.
"To specify in more detail: the level of wholesale prices was nearly cut in two, that is, the dollar was nearly doubled. So, drastic was this change in the buying power of the dollar that even after a liquidation of 20% in the number of dollars of debt, the actual debt burden was not 20% lighter, but, in terms of commodities, 40% heavier. This is what I have called the Debt Paradox-the more the debtors pay the more they owe!
"The obvious reason for this Debt Paradox is that, when prices fall, the dollar grows dearer; it grows dearer because it grows scarcer; and it grows scarcer by reason of the destruction of the check-book money of the nation through the liquidation of bank loans; and finally, the fundamental reason why such liquidation destroys our check-book money (bank demand deposit accounts) lies in our partial reserve system.
"Not only can we largely explain the downswings of the depression by the lessened deposits subject to check, but we can explain the subsequent upswing by the restoration of those deposits. To this end, Uncle Sam made every effort to induce banks to lend to business and to induce business to borrow of banks. In this, he failed. Then he stepped into the breach and did the borrowing himself. The essential point is not his borrowing but his borrowing of banks. Thereby he and they jointly created the 'credit,' that is the check-book money which they lent him. This new money, though only a by-product of debt, is, according to my theory, the main cause of our present partial recovery."
But rather than adopt this obvious proper solution, the Roosevelt administration chose Glass-Steagall with Federal deposit insurances on all bank deposit accounts to a certain limit administered under the Federal Deposit Insurance Corporation (FDIC). This was the wrong solution that has led to the dysfunctional financial system we now suffer from. Hence, the importance of understanding this most important historical event cannot be over emphasized, as it is critical to a proper repair of our present dysfunctional financial system.
Money, Employment, Economic Activity Relationships
The traces in Figure 1, which draws on the national accounts of the Great Depression, summarized in Table 1, reveals a most important discovery, though possibly known by many as far back as antiquity, that money (or the appearance of money) drives economic activity. These traces display relationships between Gross Domestic Product, GDP, and Real GDP, and the circulating currency, the Fed M1, for the early recovery years of the Great Depression, 1933-37. The correlation coefficient for the relationship with M1 and GDP is 2.80 with a coefficient of determination of 0.984 and for the relationship with M1 and Real GDP it is 2.20 with a coefficient of determination of 0.993.
Also, included in the chart in Figure 1 are the data points for 1938 when the economy suffered a severe relapse. Between 1937 and 1938, the Gross Domestic Product dropped from $90.8 billion to $85.2 billion and the Real GDP drop was from $82.3 billion to $77.9 billion. Corresponding to this drop in economic activity was a drop in M1: from $30.7 billion to $29.2 billion. Again, a very strong correlation between M1 and GDP and Real GDP is exposed.
Not shown in Figure 1 are the data points for the onset of the Great Depression, the period following 1929 and inclusive of 1933; however, this data is included in Table 1. For the relationship between M1 and GDP for this period, the correlation coefficient is 6.74 with a coefficient of determination of 0.963 and for the relationship between M1 and Real GDP the correlation coefficient is 3.63 with a coefficient of determination of 0.976. For the short 1938 recession, shown in Figure 1, the correlation coefficient is 5.83 with respect to GDP and 6.15 with respect to Real GDP.
A similar correlation to that shown in Figure 1 can be drawn from the national accounts between GDP and employment: Inclusive of the years 1933-38 the respective employment numbers, in millions were: 38.76, 40.89, 42.26, 44.41, 46.30, and 44.20. This data is plotted in Figure 2 against Real GDP. The correlation coefficient for this relationship is 3.63 billion dollars in the increase in Real GDP per million employed with a coefficient of determination of 0.987. The relationship between employment and M1 can be drawn from the relationship between Real GDP and M1 in Figure 1: it is 606 thousand added to the employment for each $1 billion of M1 added to the economy.
This close correlation seen in Figure 2 between GDP and employment, as told in the relatively high coefficient of determination of 0.987, is quite amazing and even more so when it is considered that approximately three plus million employed in the WPA and CCC were not considered in these employment numbers. Labor unrest, for example the General Motors strike, and other factors outside the norm undoubtedly added to the unexplained variance of little more than 1 percent, the difference between unity and the coefficient of determination.
The first thing that can be drawn from these analyses is that the explanation for economic activity during the early recovery years of the Great Depression, as documented in Real GDP, to the tune of 98.7 percent, was labor and that the explained drive on economic activity, to the tune of 99.3 percent, was the circulating currency. That left 0.7 percent of economic activity to be explained by such as taxes, regulations, trade, labor disruptions and a host of other factors. It was these non-money factors that constitute this unexplained variance. But yet those that form public opinion argue these other factors as if these were the 99.3 percent and maybe money being the 0.7 percent as the drive on economic activity. This is the most blatant of national lies but it also is the most destructive to our national well being.
The analyses describing the onset of the Great Depression display a near doubling in correlation coefficients over that for the early recovery years. These much larger correlation coefficients reflect mostly reductions in labor wages but also the significant price deflation brought about by the severe contraction in the circulating currency. Also, compounding this contraction of the circulating currency was people holding money more dearly during this period. The price inflation during the early recovery years, from 1933 inclusive of 1937, averaged 1.9 percent per year, whereas price deflation for the onset of the Great Depression, from 1929 inclusive of 1933, averaged 6.1 percent per year. This is Irvine Fisher's Debt Paradox: "when prices fall, the dollar grows dearer."
The obvious conclusion from these analyses is that to increase employment and grow the economy all that is needed is to increase the quantity of money. The traces in Figures 1 and 2 make this evident beyond any reasonable doubt. But it has to be done in some rational manner. During the Great Depression, it was done in the early recovery years mainly through Federal Government purchases of products of national value supplemented in 1936 with the passage of the bonus bill, which added roughly $2 billion to the economy through direct disbursement to a relatively large segment of the public. Both of these means proved effective in bringing the economy out of its depressed state.
This fact: that all that is needed to increase employment and grow the economy is money seems to be understood by the monetary authorities, as that would be the objective of quantitative easing. The problem is that this money is passed almost solely to the elites where it stagnates. These authorities and the elites that rule them too likely understand this. But to act on this understanding would require changing the financial system along the lines of the Chicago plan and instituting something akin to a National Dividend. This, the monetary authorities and the elites that rule them are not yet willing to do.
To recap: these very high correlation coefficients and their very high coefficients of determination hardly square with factors other than money being dominant in bringing on the Great Depression and then in bringing about its recovery. Hence that shown here is contradictory to that told by many mainstream economists, namely that money serves more as a veil than a factor in economic production, meaning that it is not a major factor in economic activity. But this may be simply part of the fraud carried out by the economics profession, as told in the Introduction to this work in this profession's failing to effectively explain the Chicago plan by the few that acknowledge it and the avoidance of it by the great many in their teachings.
Banks - The Impediment to Economic Recovery
The national accounts from the Great Depression also expose, in a very clear manner, the fact that banks actually extract money from the economy during depressed times. The evidence for this occurrence during the Great Depression is in column ∆M1+deficit in Table 1: During the 5-year period, 1933-38, the banks extracted $7.91 billion and the total amount extracted by the banks for the 10-year span, 1930-39, was $16.53 billion. Only one year during this 10-year span did the banks not extract money from the economy; that was in 1935 when they added a paltry $1.07 billion.
This extreme drop in economic activity between 1930-33, mainly due to bank failures, was halted by the bank holiday in March 1933. But it is quite obvious too that the slide would have continued, largely in consequence of more bank failures, had the Roosevelt Administration not called for this bank holiday. This event secured the banks, which in essence guaranteed the banks' accounts. But even with securing of the banks the slide would have continued had the Federal Government not ran the deficits it did, as the banks continued to draw money from the economy through loan retirements outpacing loan issuances.
Hence had the Federal Government not done the things it did, the Great Depression would have continued in a manner maybe not so different than occurred between 1930 and 1933 but more likely far more severe, as 1932 and 1933 were the worst of these years. Thus, it much be concluded, from facts beyond obvious, that during depressed times the banks actually impede economic recovery; meaning that the banks are incapable of regulating the money quantity in a rational manner.
As quoted above from Irvine Fisher: "To this end Uncle Sam made every effort to induce banks to lend to business and to induce business to borrow of banks. In this, he failed. Then he stepped into the breach and did the borrowing himself." Stepping into the breach and doing the borrowing himself is the next topic of the essay: Keynesian economics. But the reason banks do not do what "Uncle Sam made every effort to induce banks to" do and cannot do is told in the section: Bankers - The Special Entrepreneurs in Chapter XI in A Plan For America.
This too was a fact well known these many years ago, as Irvine Fisher told above on the Great Depression. Yet the economics profession continues to advise and to do through their administration of the Fed such activities as Quantitative easing and zero interest rate loans that only banks and preferred others too numerous to know can receive. This is not hypocrisy, it is criminality, and members drawn almost solely from the economics profession are those that do it.
Clearly this profession is criminal, although not all of its members can be so charged, as some obviously are simply duped. But maybe for the latter there should be something akin to a charge of manslaughter. For the former, that may be too foreboding to say at this time. But what they have done and continue to do is wrong if not treason and the penalty for treason is death. That was the penalty for those that would counterfeit the Continental currency, clearly viewed as a crime of treason. Those that administer the Fed and those that receive the benefits of Quantitative easing and zero interest rate loans from the Fed are equally if not more so guilty than those that would counterfeit the currency at the birth of the nation.
Because the banks extract money during depressed times, in more recent times mainly through loan retirements exceeding loan issuances, the Federal Government compensates for this extraction by "borrowing". This it must do if the economy is not to worsen during these times. This "borrowing" of money by the Federal Government that it spends into the economy is Keynesian economics.
Had the Reagan, Bush, Clinton, Bush and Obama Administrations not engaged in Keynesian economics following the 1979-81 Recession, the 1990-92 Recession and the 2008 financial crisis, these economies would have been far worse than the Great Depression. This is also why the Federal Government has run deficits every year since World War II, with very rare exceptions:
Under the Obama Administration, for the respective years 2009-2014, the deficits, as a percent of GDP, were: 13.52, 11.40, 8.18, 8.23, 3.94 and 6.10. The average of these numbers is 8.57. These are greater but not excessively different from the deficits ran by the Reagan, Bush and Clinton Administrations for the inclusive years 1982-1994 where the average for this 13-year span was 5.50 percent of GDP. The minimum was 4.12 in 1994 and the maximum was 6.80 in 1986.
But there should be little question that the bubbles that bring on these depressions and the treatments, Federal Government deficits, are worsening with each event: Clearly applying Keynesian economics to the recovery of the Great Recession was far less effective than its application to the two events of the last two decades of the last century, as evident in the higher deficit to GDP ratio. More than interesting though is that this average of the deficits for the earlier recovery years of the Great Depression, 1933-37, was 3.98 as a percent of GDP. 
the Most Blatant of National Lies
So why doesn't the general public know that it is money that drives economic activity and that the banks are incapable of providing this money when the economy is most in need of it? These things were obviously known by all presidential advisers since the Great Depression and surely should then have been known by these presidents and their congresses. But rather than exposing these two very obvious facts, these political leaders and those that advise them and those that create public rhetoric have argued such as taxes, regulations and a host of other factors as the reasons why businesses do not increase production during these depressed economic times.
This brings us to the absurdity that production is the drive on economic activity. This absurdity comes from Say's law: that supply creates its own demand. This is to say that money is irrelevant in economic activity, as there is always enough money to purchase what is produced. This is where the false idea that money serves more as a veil than a factor in economic production comes from, which is in reality the foundation on which supply side economics resides. This false idea of supply side economics is the propaganda the Reagan Administration popularized so effectively and has been continued by all administrations from both political parties since.
Why this most blatant of national lies? Obviously, we do not know the answer to this question with absolute certainty. But reasonable speculation is that its purpose is to preserve this dysfunctional financial system. It is this system that provides the elites with, in essence, an open checkbook. That open checkbook provides those with access to it a life-style most could never dream of. This we must conclude from the mere fact that many if not most of these with this immense wealth provide little if any value to the well being of society. We can begin with those whose wealth comes dominantly from their association with the financial industry.
There are many groups within this association, dominantly through the investment banks commonly known as Wall Street. But possibly foremost amongst these, after those that form in these banks, are those that rule the military industrial complex, an industry we must conclude contributes only negatively to the well being of society. The military industrial complex and its consummate wars may be the most destructive to society's well being, but it is far from the sole tool for transferring great wealth to the elite: Those activities that unnecessarily deplete nonrenewable resources, that degrade our environment, that concentrate economic activity, etc. simply as a means to transfer great wealth amongst the elite also fit into this category.
But this open checkbook, to continue reasonable speculation, is used most effectively in the purchase of those that sustain the lies that maintain this dysfunctional financial system. These are the sycophants mainly at the universities and think tanks and those at the peripheral of the investment banks and then those in the mainstream media that propagate this wrong information. But those who act on this wrong information are undoubtedly the highest paid of this group, our presidents and those that occupy our congresses.
The obvious solution to this very serious national problem is for the Federal Government to issue the Nation's circulating currency in total, as is its constitutional charge: To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. It is expressly noted that regulate is far different from fix and can only be accomplished by the power to change the quantity of the circulating currency, which the Government can only do if it alone issues the money that forms the circulating currency.
This emphasis on regulate and fix is added, as many of those that provide this false information argue that the Federal Government does not have the constitutional authority to issue the Nation's currency as fiat money. This they do in clear view of these two different verbs in this clause and in spite of many Supreme Court decisions that affirmed: "to regulate" means "to issue".
For congress to abrogate this most important of its powers in view of the great damage it has done to the Nation for almost the total of its existence is clearly wrong, a display of arbitrary power, not an exercise of judgment. For any congress to continue to do this in light of this overwhelming evidence can only be understood as criminal. However, because of the ambiguous form the financial system has taken since the Great Depression, in consequence of Glass-Steagall and the many awry acts of congress since, mainly since the 1970s, a return to 1933 and the Chicago Plan is absolutely necessary if this system is to be properly repaired.
A further point is that Glass-Steagall has been misrepresented over the years since: being presented as a firewall between commercial and investment banks; whereas in fact the main feature of this act was deposit insurance on all commercial bank deposit accounts. At that time it was FDIC, argued by some at the time as a suitable alternative to the Chicago Plan, which it obviously was not. This misrepresentation is just another part of the many lies that keeps the operations of this dysfunctional financial system hidden from the public.
More importantly though is that this main feature of Glass-Steagall, insurance on time deposit accounts, is most responsible for the convoluted form the financial system has evolved into, as it confuses that that serves as the circulating currency with that that is loan money. It also is now a major source of money creation by the commercial banks and other lending institutions, as these insurances makes these accounts essentially money. Hence a proper repair of the financial system requires all such insurances and guarantees be removed.
The evidence that the economic decline that occurred between 1929 and 1933 and again in 1938 was lack of economic demand and that economic demand is driven by money is so overwhelmingly obvious as to defy reason. So why does this false idea that it is production that drives economic activity continue so persistently? The only reasonable answer at this point in time is that this false information generated by the economics profession and propagated through the mainstream media is far more effective than truth that the public is un-availed of except through secondary media outlets and even these seem hesitant to bring forth these truths.
A Typical Source Of these National Lies
Typical of these lies and their source is a study titled: Great Depression by Christina D. Romer that includes on its title page: Forthcoming in the Encyclopedia Britannica, December 20, 2003. But this false information is propagated by far more than those economists that claim authority on the Great Depression. If we were to name these, we would have to include essentially the total of Nobel Prize winners. But these are not alone nor are those at the universities and think tanks the limit of these. Financial advisers, Peter Schiff and others like him, do their part in propagating this wrong information to the public.
Romer is a professor of economics at the University of California Berkeley and served the Obama Administration as its first Chair of the Council of Economic Advisers. Her treatment of the Great Depression is little different from that of others from the universities, think tanks and other entities that associate closely with government and who have served in government, for example both Ben Bernanke and Allan Greenspan fit in this role and have claimed expertise on the Great Depression.
Romer's treatment of this event is to identify a host of factors treating them as if their contribution to this event were of equal significance: stock market crash; banking panics and monetary contraction; the gold standard; and international lending and trade. But she fails to show how these events impacted or contributed to the Great Depression.
The cause of the Great Depression, to the tune of over 96 percent was monetary contraction, and the recovery, to the tune of over 99 percent was money expansion. These, shown in the above analyses, have no entry in Romer's study. Why Romer does not go to the national accounts, which of course are necessary if the cause of the Great Depression is to be exposed and its recovery understood, one may only wonder. But to continue with Romer:
In describing the recovery, Romer writes: "There is a notable correlation between the time countries abandoned the gold standard (or devalued their currencies substantially) and a renewed growth in their output" while totally ignoring any correlation or even making reference to any correlation between money, employment, GDP and/or Real GDP.
Whereas Romer mentions fractional reserve banking in her commentary on banking panics and monetary contraction, she does not relate this feature of the banking system, which can only be understood as nothing different than legalized fraud, as the underlying cause of bank panics. Instead, she proceeds to write that: "banking panics are largely irrational, inexplicable events" in a tone of defense of fractional reserve banking.
What Romer has done in this document is blatant in its dishonesty, leaving the question: Does she and others who have written on the Great Depression not know the great damage they have done and are doing to society? That question of course is directed to the total of the economic and financial communities and others that aid in propagating these lies that maintain this dysfunctional financial system.
"I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science, whatever the matter may be.” Lord Kelvin
COMPLEMENTARY PAPER # 2
THE TRUTH FROM SCIENCE ABOUT FREE TRADE
THE GREAT DEPRESSION AND KEYNESIAN ECONOMICS
A recent You-Tube video recorded a debate between David Friedman, son of economist Milton Friedman, representing the Chicago School of Economics, and Robert Murphy, a scholar at the Ludwig von Mises Institute, representing the Austrian School of economics. This debate has significance as it exposes much of the character of economics that makes it such a flawed discipline. This it did in spite of Friedman arguing economics as a science, not unlike what we have in our physical world. But as shown here and elsewhere, economics, as it is practiced by all of these schools, is not scientific: And the consequence of this fact is that not only has economics not achieved betterment for society in a way the physical sciences have, it has actually lessened the value to society of these gains achieved through science in our physical world.
However, this debate was also chosen here as it provides opportunity to demonstrate through the scientific method the errors economists foster onto the public in their non-scientific acts. Exposed amongst these are: 1) The high return on capital from manufacturing in countries with large relative wage rate differences; 2) The growth rate in the circulating currency (referred to by Murphy, as money) preceding the October 1929 crash of the stock market, which contradicts statements by Murphy; and 3) The lessening influence of Keynesian economics on economic activity over time. It is this last item that does more than expose the errors fostered onto the public by economists; it clearly shows that we have reached the limit of the means now used to periodically repair our dysfunctional financial system.
The first of these exposes the large profits gained through free trade, which then explains the propaganda proffered by the universities, think tanks and others in the service of these corporations. The second denies the claim that the Fed brought on the stock market crash of October 1929 through lax monetary policy. This is not to say bank loans were not involved in bringing on the crash of 1929, as that is known historically; but rather how those loans were generated. The third exposes the weakening effect Keynesian economics is having since the 1930s in bringing the economy out of a depressed state. This effect has now reached its limits leaving only the proper solution to take its place: the Chicago Plan presented to the Roosevelt Administration some eight decades ago properly modified to address the accumulated wrongs since.
We may only speculate why economists persist in proffering views that are mostly irrelevant but when they are not they are generally wrong. However, reasonable speculation is that they do this to maintain this dysfunctional financial system we now have and have had since 1933. In that sense, they are servants of power, as those in the financial and corporate world, the realms of power; apparently believe this dysfunctional financial system is necessary to maintaining their power. If this is their belief, it is indeed a most reasonable one.
For clarification, this dysfunctionality in the financial system is reflected in: the stagflation of the 1970s, followed by the deep 1979-82 Recession, the saving and loan debacle of the 1980s followed by the 1990-92 Recession, the Dot.com bubble in the early part of this century, and most recently the 2008 financial crisis, which we have still not recovered from in spite of increasing the national debt by over $8 trillion since 2008. There clearly is no other part of our world where such a flawed system would be allowed to persist, but yet this system, which dominates over our economic life, persists.
The problem for these in the realms of power is that periodic repair of this system, as necessary to maintain it to something that seemingly is tolerable to the well being of the majority of the people is becoming less effective with time. This means of repair is Keynesian economics, which is deficit spending with the object of increasing employment. But more important is the consequence of this loss of effectiveness and the increased national discontent that goes with it. It is this discontent in our economic lives and our disenchantment with those in high political office that seemingly is reflected in the strange form the 2016 presidential primary elections have taken and into the general election.
The benefits science has brought forth for mankind in our physical world over the past two plus centuries are many: Through science we have built large and important structures; tall buildings, bridges spanning large watercourses; material containment vessels that carry commodities of great volume and weight across oceans; machines that move over rough terrain, on and through ground, water and air, and pass through hard rock; and much more. This we have done but only with the aid of Newton’s laws of mechanics; Hooke’s laws of the behavior of material solids; Boyle’s laws of gaseous behavior; Darcy’s law of the flow of fluids through porous media; Bernoulli’s Equation of the constancy of kinetic and static energies in fluids; the laws of electricity, the laws of chemistry, etc.
It is through “exacting observations” and the application of “intelligent thought” to these “exacting observations” by those that have discovered the principles that describe our physical world; and then the acceptance of these principles by our engineers and scientists that work in the real sector of our economy that have brought about this modern world that has improved so much our way of life in this modern age over that existing a mere two centuries ago
In the financial sector of our economy, the part of our world that administers our money (circulating currency) and credit (loan money), we have similar laws as they govern our social and physical behavior. Examples are the law of effective demand and the law of liquidity preference; and the multiplier, which in its basic form is a derivative of the law of effective demand. It should be added that the law of effective demand is as powerful a force in our social world as the law of gravity is in our physical world. It is indeed a most powerful idea that can only be ignored at our peril.
The problem with our financial sector is that the economists who aid in its design and development, unlike our engineers and scientists in the real sector of our economy, do not accept these laws that describe our nature. They do this either through ignorance, lack of confidence in these fundamental principles, or for some less clear reasons. We saw this in the means chosen to correct the 2008 financial crisis. Yet, when we understand these fundamental economic principles and the political system our founding fathers gave us, we fairly see the necessary and proper solution to our present malaise.
Science by definition is the application of “intelligent thought” to our “exacting observations” and in doing so makes better mankind's existence. For clarification, our “exacting observations” only become meaningful when we are able to quantify them, more specifically, record them in numbers. This is where Friedman's argument loses value, as he apparently accepts, and it seems to be so of most if not all economists and especially those that subscribe to the Austrian School of economics, that human behavior, as it relates to economic activity, is too disjointed for meaningful understanding of our nature. Such a view can only pass by ignoring the national accounts.
The consequence of economics not being a scientific discipline but rather something akin to scholasticism has, possibly like some false religions, led mankind away from what mankind was meant to be. Had economics been more akin to science, as we see it in our physical world, we would have solved such problems as: poverty, immigration, global warming and other forms of environmental despoliation, international conflicts to name possibly the most pressing; or if we had not completely irradiated them, then we would have at least greatly mitigated the adverse effects they now suffer on us. So maybe we need a little understanding of scholasticism, as that is what we want economists to turn away from and toward something more akin to what we have done in our physical world.
Scholasticism, more formally defined, is the systematized Christian logic, philosophy and theology of medieval scholars from the 10th Century to the 15th Century based on Aristotle's logic and metaphysics and the writings of the early Christian Fathers. It was this philosophy and theology that governed the understanding of the medieval world. It was far more based on revelation than on exacting observations of our physical world.
This is not to say scholasticism is devoid of intelligent thought, as that is clearly wrong. The error in scholasticism (to the extent that we can separate our physical world from that beyond our physical senses) like the error in orthodox economics is not in its logic but "...in a lack of clearness and of generality in the premises." This also is not to denigrate scholasticism as it guides us in our faith in the supernatural.
The problem scholasticism causes in applying it to our physical world is revealed in its genesis: Scholasticism, less formerly, is more the idea of those who claim to have insights into the supernatural that mere mortals do not. It provided the basis for such arguments put forth by Popes and Kings, for example, Henry VIII and James II, and their scribblers who wrote that the rule of Kings is divine. This method is still much a part of our political and social world.
Murphy's Lead-in Commentary to Free Trade and More
Murphy's commentary that leads in to free trade, the Fed role in the Great Depression and Keynesian Economics also exposes the means economists use to propagandize the public on these false ideas. This commentary also raises the question: Does Murphy and economists in general actually believe these posits on macroeconomics and their arguments on such as free trade, the cause of the Great Depression, etc.? That question is not totally rhetorical, as it bears on something beyond ignorance. Following is Murphy's commentary beginning at Minute 40:33:
"I'm saying that in economics the important thing for economists to get across to the public is not something that we know because we've gone out and run econometric time series analyses. Its things that we would convey to the public by using cute little thought experiments or logical ways of reasoning so like (?) with free trade, the standard I think it's crucial that economists get that across to the public because there's a lot you know that it's very easy to think of the government putting a tariff to create jobs domestically that it’s hard to get people to stop thinking like that.
"And in free trade one of the things that it's --- economists have nineteen different ways to show what we mean by the case for free trade and yet it's hard to get that across even to undergrads. And again, the way you do it is through appeal to get people to think through the implications of what they're saying. It's not to go look at studies to show o' this country has (?) a lower tariff this year then this followed and so forth. There could --- there are such studies and you could make a case that there's so many moving parts that they wouldn't be definitive to get someone to really see -- O' yea, now I see the problem. I was thinking I want to create jobs for Americans and therefore we got to keep out cheap Japanese cars.
"The way to get someone who has an aha moment is not to appeal to statistics. It is to appeal to the logic of the point. And it's sure you could quibble with the arguments and so on. But I'm saying in terms of what economists, what do they bring to the table in terms of: What does economics know about the world? It's that sort of thing. That's what's crucial to get across."
This last part of Murphy's commentary in this lead-in tells how the economics profession keeps the public in a continuous state of confusion on the key issue of macroeconomics: "Maybe just to show you why. Look at arguments that the Austrians typically have with the Keynesians over economic policy right now. If this were just a matter of…appealing to the data and seeing what can we reject with 95 percent confidence and that sort of thing and we're still arguing over what happened in the Great Depression. We still have diametrically opposed views as to whether the Obama stimulus package was good or bad."
This argument is more clearly stated by Murphy following Minute 53:05: "Again just to clarify because there might've been this perception that there is no real clash in the Austrian and the Chicago School. I mean, the issue of the Great Depression itself. The standard Austrian view is the reason that happened is there was a monetary inflation in the twenties and that caused an unsustainable bubble that then popped in '29 and then that necessitated what would have been a very painful reallocation of resources. And then unfortunately the government didn't sit back and let that happen. That's when you had Hoover having unprecedented interventions and then of course FDR. So that's what made that readjustment take a decade what we know as the Great Depression."
the Great Depression - Not An Overly Complex Event
Murphy is correct: economists are "still arguing over what happened in the Great Depression." But the Great Depression was not an overly complex event although it had a devastating effect on a great majority of the populace. The obvious cause of this distressful event was a faulty monetary system. Today we find this system even more flawed than it was during the Great Depression. However, a far more complex problem to solve than the Great Depression were failures that were occurring with the de Havilland DH 106 Comet only a few years after it was put in service. This problem was somewhat in line with the problem with our economic system in the sense that there were many facets associated with these failures that were not readily observable.
The de Havilland DH 106 Comet was the first jet commercial airline. It was an invention that helped fulfill mankind’s need for rapid and comfortable movement in space in our modern age. Its early faulty performance put at risk human life, which was only discovered from its past performance. That is exactly the same thing we find in our financial system: an invention of mankind that has experienced serious mal-performance, which has put at risk human life and certainly great discomfort to a great many amongst us. Hence, it is far more critical to our wellbeing than any one single device in our physical world.
But most perplexing is that the problems that plague our financial system are far less complex than why an aircraft flying at several hundred miles an hour at high altitudes was after some time breaking-up; And then the complexity of correcting this flaw in the original design. This went to a host of disciplines, some still under development as accepted science. But a solution was found, as is evident from the proven safety of commercial jet air transport. So there obviously is something far more involved in correcting our dysfunctional financial system than simply understanding its mechanisms.
If economists would investigate the Great Depression in a manner similar to that used by engineers in their investigations of such events as the de Havilland DH 106 Comet failures, they would soon find the proper means of correcting our dysfunctional financial system. If they simply looked at the national accounts between the years 1930 to 1933, they would find a relatively high correlation between the contraction of economic activity and employment and the contraction of the circulating currency. And if they examined these accounts a little closer, they would find that the cause of this contraction was the direct consequence of fractional reserve banking.
That was the discovery of a group of economists of that period drawn dominantly from the University of Chicago. They then recommended to the Roosevelt Administration that the banks be required to maintain 100 percent reserves behind their demand deposit accounts and that the Federal Government create the nation's circulating currency solely as money. This recommendation is now referred to as the Chicago Plan. Had the Chicago Plan been adopted, the nation reasonably would have reached its full productive capacity in only a few years, as did Germany, and in the process, the total of the national debt, at that time $22 billion, would have been fully removed.
But rather than adopting the Chicago Plan, the Roosevelt Administration chose to insure all commercial bank deposits and then to increase the circulating currency (the Fed M1) with government purchases with money created by the banks through the fractional reserve system in exchange for Federal government debt instruments. Between 1933 and 1940, the national debt was increased by $22.6 billion to bring forth an increase in M1 of $19.5 billion. Passing debt instruments to the banks in exchange for money accounts in these banks is Keynesian economics.
We may only ask: Why did the Federal Government do such a silly thing? The logical answer is national ignorance. But that ignorance prevails, in large part due to the non-scientific character of economics. Stephen Zarlenga wrote an excellent article a few years back, which he appropriately titled: “Economics: A Clandestine Religion Masquerading As A Science.” That was not always so: The economists from the University of Chicago were of a far different character some eighty years ago then those Friedman represents in our day. They actually observed the behavior of their physical world and responded accordingly to it. That was the Chicago Plan.
Understanding Free Trade Through Analysis
According to the Merriam-Webster Dictionary, free trade is: "trade based on the unrestricted international exchange of goods with tariffs used only as a source of revenue." According to this definition, free trade does allow some tax to be placed on imports as a source of revenue but not for other purposes. However, imports produced with cheap labor will reduce a nation's labor rate or it will force that nation to remove itself from the production of that product. Stated otherwise, a nation with lower labor rates exercises economic control over the nation with higher labor rates, which can be viewed no other way than a loss of sovereignty over this component of its economic system by the nation having the higher wage.
As to why a nation with a democratic-republic form of government would accept such a loss of sovereignty, one might only speculate. However, the best speculation is in misunderstanding by the people in consequence of false information offered by those that gain most from products produced with lower cost labor. To understand the force behind this false information it is necessary to understand the gain capital may achieve from cheap labor. An estimate of this gain can be drawn from the cost of the factors of production, historically identified as: land, labor and capital. Land may be viewed as synonymous with rent, which may not be far removed from capital. If it is incorporated as a capital element, then remaining is capital and labor.
Between 1930 and 1969, Compensation of employees in the United States varied between the rather narrow limits of 64.0 and 71.1 percent of national income. Other costs identified in the table from which this data was taken included: Income of unincorporated enterprises, between 10 and 17.2 percent; Rental income of persons, between 3.2 and 4.3 percent; Corporate profits before tax, between 5.3 and 14.1 percent; and Net interest, between 0.9 and 6.9 percent. Discounting the lowest of the numbers for corporate profits, which was for the Great Depression years, the average of these is 13.2 percent. The average for compensation of employees was 67.1 percent. Hence the average sum of Compensation of employees and corporate profits is 80.3 percent.
We may now analyze the effect on corporate profits using hourly labor rates for manufacturing in the United States and in Mexico for 2012 drawing from Figure 1. The averages for compensation for employees of 67.1 percent of product cost and corporate profits in the United States of 13.2 percent are assumed in this analysis. Also assumed is that the costs over that for compensations for employees and for corporate profits in the United States is the same in Mexico. The results of this analysis are tabulated in Table 1 for a product having a total cost of $1000.00.
The US and Mexican hourly wage rates in Table 1, drawn from Figure 1, are respectively $35.67 and $6.36, which result in respective labor costs of $671.00 and $119.64 for this $1000.00 product. Hence the corporate profits for the product produced in the US is $132.00 whereas in Mexico it is $683.36. That is a 5.18-fold gain in corporate profits for the product produced in Mexico over that produced in the United States.
Simply looking at Table 1 should tell all including the least knowledgeable amongst us why corporations press these trade agreements on governments. It should also tell these why such as the Cato Institute and others, mainly at the universities such as Bob Murphy, and the think tanks through the media propagate these false arguments for free trade onto the public. What they tend to omit are those factors that most influence wage rates.
Possible the most obvious factor influencing wage rates, even beyond culture, is demand on labor: where labor is scarce, wages rise; and where labor is plentiful, wages drop. A nation's economic activity relative to its maximum potential economic activity undoubtedly is the most important factor influencing the demand on labor. Those arguing for free trade seem most oblivious of this very important factor. But possibly an equally important factor is the monopolization of resources, including knowledge, that are used in product production in our present industrial age. Labor is fully deprived of these and under present international custom is given no claim on them.
If one was to wonder why possibly 20 million Mexicans sought work in the United States, many at great personal risk, even to loss of life, over the past four or so decades one need look no further than these numbers in Table 1 for answers. But that is not what the propaganda mills tell us in their arguments for free trade. Typical of these are drawn from the Cato Institute in the essay: Seven Moral Arguments for Free Trade:
1. Free trade respects the dignity and sovereignty of the individual.
2. Free trade restrains the power of the state.
3. Free trade encourages individuals to cultivate moral virtues.
4. Free trade brings people together across distance and cultures.
5. Free trade encourages other basic human rights, such as freedom of speech and religion.
6. Free trade fosters peace by raising the cost of war.
7. Free trade feeds and clothes the poor.
Following this last item is the phrase: "Free trade and free markets empower poor people by giving them greater opportunity to create wealth and support their families. By dispersing economic power more widely, free trade and free markets undercut the ability of elites in less developed countries to pillage a nation’s resources at the expense of its poor." Nothing in this essay supports these items with numbers. What is said in their support is solely rhetorical propaganda.
Price benefit to the consumer, which these propagandists often argue as a benefit of low foreign wages, was not included in this analysis in consequence of no conclusive evidence in its support. What may be found is a lower cost at the early stages of entry of the foreign product. But what is also likely found is that such discount price will not remain for long, as with time the ability of the United States to compete in that product is lost even at a higher price. Hence one should expect this lower product price, if indeed it existed, to soon morph to something similar to the original cost with the US wage rates.
To accept these foreign products produced at such inferior wages is in truth to accept a loss of sovereignty by the people of the United States. But that loss is not a gain to the people of Mexico, as working for such low wage rates does not make a sovereign nation, one in accord with the substance of a democratic republic. The fact is that these low wage rates are a consequence of the debt based monetary system that now governs the total of the World's industrialized nations, Mexico being one of them. In the final analysis, it is this dysfunctional financial system that must be changed, not simply for fairness but to maintain this World as an inhabitable place for humans.
The US in its early years had tariffs, which to some extent were based on the difference in the price (cost of production) of foreign and domestically produced products. Although we do not have good information on wages for that period, as we see in Figure 1, we do have anecdotal information, as might be drawn from such English writers as Charles Dickens, who tell of the dismal working conditions of the poor in Britain during this period. The outlet for these people and many others in Europe seeking a living at the margins of their societies were the newly discovered lands of the Western Hemisphere, South Africa, and Australia. Of these, America seems to have been the greatest attraction, in large part to the higher workers' wages, an obvious consequence of tariffs.
The Fiction of Money Inflation As the Cause of The 1929 Crash
The Austrian School of Economics' claim that monetary inflation caused the stock market crash in 1929 is not consistent with the national accounts. Such is evident in the slow growth in M1 following the 1920-22 Depression, as shown in Table 2. For clarification: M1 is currency (money) held by the public plus commercial bank demand deposits. It constitutes the circulating currency and it is solely through this item that payments are made. Hence it is reasonable to think of M1 and only M1 as money. But what we think and what is truth becomes muddled and even more so in later years, a consequence of our dysfunctional financial system and the means chosen to keep it operational.
To continue with these definitions: M2 is M1 plus time deposits in commercial banks and M3 is M2 plus time deposits in saving and loan and other type government charted financial institutions. Hence, M2-M1 is time deposits in commercial banks and M3-M2 is time deposits in saving and loan type institutions. These time deposits were loans made to these institutions by individuals and other sources such as state and local governments and nonfinancial institutions and were so understood by the public. The average annual growth rate of these Fed money parameters for the seven years: 1922-1929 is shown in Line 9 in Table 2.
What needs to be understood in reviewing these money parameters over these respective years is that the growth in M1 is almost solely by the commercial banks issuing loans through fractional reserve banking, which means that only a fraction of the money placed in a demand deposit account needs to be held in the bank's vaults, the remainder may be loaned out. The fraction held by the bank constitutes its reserves. As to the required amount of these reserves, the Fed sets them within narrow limits, whereas Congress retained authority to set broad limits on them. This is money creation. However there are certain restrictions on the type of currency that can be used in this creation of money.
Friedman and Schwartz, in their analysis of the Great Depression, use the term high-powered money, which seems now to have been incorporated into the economic literature. As they have defined it: "The total amount of hand-to-hand currency held by the public plus vault cash plus...deposit liabilities of the Fed to banks. The two final items constitute bank reserves, which, in our terminology, exclude inter-bank deposits and before 1914 consist only of vault cash. This total is called high-powered money because one dollar of such money held as bank reserves may give rise to the creation of several dollars of deposits. Other things being the same...any increase in the total of high-powered money involves an equal percentage increases in the stock of money."
For clarification, any money loaned to the banks by the Fed would constitute high-powered money, as would money used by the Fed to purchase outstanding Federal treasury securities that found its way to the commercial banks. However, under the gold standard there was a role played by gold in determining the amount of high-powered money. In panics or the alternative, war, gold would lose its position. As to the role gold played in the 1920s, that is not conclusive here, but it probably was central. This can be drawn from the relatively slow growth rate of M1, 2.9 percent per year. During this same period, the average annual growth in GNP was 4.1 percent.
The above briefly summarizes the control on the creation of M1, which indirectly controls the amount of M1 the banks can create through fractional reserve banking. However, there is no constraint on the amount of time deposits that can be created by the commercial banks and saving and loan type institutions. The reason is that changes in these accounts depend solely on the public's desires on how it wishes to hold its money. This goes to the law of liquidity preference.
Specifically, if a person or nonfinancial institution or some other entity has more money than he (or it) deems necessary for his ongoing needs, he may choose to place this excess money in a time deposit account in either a commercial bank, in M2-M1, or in a saving and loan type institution, M3-M2. This money is a loan to the bank and reasonably understood so by the public. It is this money that adds to the bank's reserves when placed in a commercial bank saving account whether that bank serves to create money through the fractional reserve system or simply placing loans against loan deposits, i.e., from M2-M1.
Back to the inflation claimed by Murphy: Clearly there was inflation but it was not in the real economy and especially not in M1 but rather in the stock market. This inflation in the stock market is shown in the chart in Figure 2, which shows the Dow Jones Industrial Average for the years 1920-1929. From 1922 to mid-1924, the DJIA was roughly constant at 100. However from mid-1924-on the DJIA began its rather uniform growth rate at 30.6 percent per year to October 1929 when it reached its high of 386 and then followed an almost immediate drop to 195. That is a loss of 191 points or approximately half of the peak. That was the stock market crash of October 1929.
What we do not have in Figure 2 is the money value of the stock market in the run-up to October 1929. This numbers is drawn partially from the national accounts and partially from the plot of the DJIA shown in Figure 3. The national accounts provide market value of stocks and bonds for 1935 to 1970. The value for 1935 is $19.1 billion. The DJIA in 1935 was 100. Multiplying the stock value in 1935 by the ratio of the DJIA in 1929 to 1935 gives a stock value for 1929 of $72.6 billion unadjusted for deflation. Adjusting for deflation this number becomes $91.6 billion, which is 93.2 percent of the 1928 GDP. The lowest value of the DJIA occurred in mid-1932. It was 40.5, which corresponds to a value of $9.61 billion, but was $7.36 billion when adjusted for deflation. Hence the loss in stock market value was $82.0 billion.
Our interest would not be in the cause of the October 1929 crash had it not been for the collapse of the economy that followed, as all financial bubbles eventually burst. That is historical going back to the Tulip bubbler in 1637 and the South Sea bubble in 1720, as the most memorable examples. And it would not be if not for those such as Murphy erroneously saying: "There was a monetary inflation in the twenties and that caused an unsustainable bubble that then popped in 29."
This claim by Murphy needs more attention and is given such subsequently here but for now it need only be said that the stock market loss would have been far less had the economy too not crashed, as it did between 1930 and 1933. And it would not have done so had the banks not been allowed to create demand deposit accounts through the fractional reserve system. That, as noted above, was understood by a group of economists dominantly from the Chicago School of economics of that time. Clearly those economists were far more astute to macroeconomics than the present Chicago School Friedman tells of in the video drawn from here.
Obviously, a growth in M1 of 2.9 percent per year, as shown in Table 2, is not inflationary in an economy growing at 4.1 percent per year. Hence from what is seen in Table 2 and understanding the means the Fed used to regulate M1, the blame for the growth in the stock market, reflected in the DJIA in Figure 2, cannot be attributed to loosen credit by the Fed. But it probably is fair speculation, also drawing from Table 2, that the time deposits in commercial banks, M2-M1, were a factor in the growth in the stock market, even though the growths in these accounts were not excessive when compared to their more recent rates of growth. But they were significantly higher than the growth in M1: being 7.8 percent per year for M2-M1 and 6.5 percent per year for M3-M2.
Hence, the best evidence is that commercial bank time deposits, M2-M1, contributed to the stock market growth, which made those institutions holding these accounts vulnerable to insolvency when the stock market continued its decline from 1930 on. But failure of these institutions holding these time deposit accounts would not have seriously influenced economic activities had these banks not been allowed to create money through the fractional reserve system. But beyond that they should not have been allowed to hold demand deposit accounts, as even with 100 percent reserves, such insolvencies would have put these accounts at risk, as they constituted roughly 85 percent of the circulating currency, M1. That is why the Chicago Plan included an institutional separation between demand and time deposit accounts (or so it is understood).
A further word on this issue: The most likely view held by the public at large during this early period was that money placed in demand deposit accounts would be available on demand. In other words, that it was held in trust by the banks. We can contrast this perception with time deposit accounts, which constitutes money passed to the financial institution with the understanding that it will be unavailable and for that (plus risk) the account holder will receive compensation, interest. This in reality has certain truth to it.
The fact is that by law all money placed in financial institutions is loans to these financial institutions. Hence under fractional reserve banking, the commercial banks are free to loan from these demand deposit accounts, holding only a portion of these deposits in reserve. With these accounts uninsured, as they were prior to 1933, their viability remained only so long as the bank could meet its contractual obligations.
Banks unable to meet their contractual obligations became bankrupt and when they became bankrupt they took down with them their customers demand deposit accounts. Between 1930 and 1933, 4,000 banks failed, approximately 20 percent of the banks in operation in 1929. This resulted in the contraction of M1 from $26.2 billion in 1929 to $19.2 billion in 1933 and with this contraction of M1 was a drop in Real GDP from $104.4 Billion to $74.2 billion, a drop of 25 percent, which was about the percent drop in employment. This relationship between GDP and Real GDP and M1, drawn from the national accounts, is shown graphically in Figure 4.
The coefficient of determination between GDP and M1 in Figure 4 is 96.3 percent and between Real GDP and M1 it is 97.6 percent. These coefficients expose a very strong monetary influence on economic activity in an environment where some kind of employment in the formal economy for many was the alternative to starvation. Such is contrary to the musings of Austrian and other mainstream economists.
Fractional reserve banking may not have initiated these bank failures, but it was bank failures that caused the contraction of M1 and that was in consequence of fractional reserve banking and that contraction of M1 was the cause of the severe drop in economic activity. This group of economists that presented the Chicago Plan to the Roosevelt Administration in 1933 understood this when they proposed that commercial banks be required to maintain 100 percent reserves on all demand deposit accounts and that institutions holding demand deposit accounts be separate from those holding time deposit accounts.
There is much information on the Chicago Plan both recent and that offered in the Great Depression years. As to the latter, possibly the most informative is in the 1936 publication by Irving Fisher. A more recent publication, June 1992, by Ronnie J. Phillips gives the history behind and the substance of the Chicago Plan in a certain amount of detail. Phillips ends with a most prophetic statement:
"…the Federal Reserve can do little to cajole banks into lending when they do not wish to do so. What we are seeing is banks buying more government debt, which is available today on a scale far beyond the 1930s. The Federal Reserve can effectively restrain activity during a boom, but during a business downturn can do little to stimulate the economy beyond cutting interest rates to historically low levels. This is precisely the situation we face today."
Phillips wrote during the 1990-92 Recession and obviously was addressing the means left to governments to stimulate depressed economies, by the purchase of debt. That was the then pressing issue. But only a decade later, The Federal Reserve demonstrated that it could not "effectively restrain activity during a boom." There are many reasons for this but maybe they were not as well exposed in 1992 as they now are. But there have been changes in the banking laws: one that came about since 1992 was removing the separation between commercial and investment banks that was part of the original Glass-Steagall Act. This happened in the late 1990s.
the Decay in Effectiveness of Keynessian Economics
To recall Ronnie J. Phillips' words over two decades ago: "The Federal Reserve…during a business downturn can do little to stimulate the economy beyond cutting interest rates to historically low levels. This is precisely the situation we face today." But that was precisely the condition our fathers and grandfathers faced in the Great Depression and it is still the condition we face today in 2016. The alternative, as long as the political leaders follow the advice of mainstream economists, is for the government to buy more debt. That is Keynesian economics: borrowing money from the banks to compensate for money taken out of the economy by banks continuing to retire past loan issuances.
But the effectiveness of Keynesian economics since its adoption in the 1930s has deteriorated with each new recession. This is clearly exposed in Table 3, which includes: the work force, employment, change in employment, deficit, GNP, the ratio of deficit to GNP and the ratio of the change in employment to the deficit to GDP ratio change for the early recovery years of the Great Depression, the 1979-82 Recession, the 1990-92 Recession, and the Great Recession.
During the early recovery years of the Great Depression, employment increased at the average rate of 4.54 percent per year in response to an average deficit to GDP ratio, expressed as a percentage, of 4.86. The ratio of these two numbers is 0.915. The comparative numbers for the recovery years following the 1979-82 Recession are: 2.65 percent and 5.91 percent with a ratio of 0.449; for the recovery years following the 1990-92 Recession, they are 2.34 percent and 5.91 percent with a ratio of 0.475; and for the recovery years following the Great Recession, they are 1.22 percent and 6.51 percent with a ratio of 0.1.88.
The obvious conclusion is that the effectiveness of deficit spending, Keynesian economics, has decayed from the Great Depression to the Great Recession by nearly five-fold (4.87)! That decay has been progressive: From the Great Depression to the 1979-82 Recession, it was 2.04; and from the 1990-92 Recession to the Great Recession, it was 2.53. The effectiveness of deficit spending for the recovery of the 1990-92 Recession was slightly better than for the 1979-82 Recession.
As to the cause of this decay, it is not well hidden. What we see when we look are: 1) A growing debt since World War II, mainly in households, which has increased over three-fold (as a ratio of GDP); 2) Mixing of demand and time deposit account in consequence of FDIC and other account guarantees creating an unbound and unmanaged money quantity; and 3) Passing money into the economy through grants to states, universities, agriculture, etc. that is largely counter-productive or simply wasteful expenditures. As this money passes more to the affluent members of society, much of it eventually finds its way back to the investment firms.
Of these three causative factors, the second is most damaging, as it denies the meaning of money and investment and indirectly is most responsible for the other two. These debt numbers with the progressive decrease in M1 over these years are shown in Table 4. In Complementary Paper # 3, is provided a brief commentary on why money should not be passed to the states and local governments and other privileged groups, which is done mainly through the grants programs. The slight increase in M1 for 2010 and 2014 are apparently in response to quantitative easing, an obviously failed measure.
The numbers in Table 3 speak for themselves. But still some comment is warranted. Removing regulations on the saving and loan institutions in the late 1970s and again in the early 1980s helped the recovery from the 1979-82 Recession. But the consequence was the failure of many of these institutions, which brought on the 1990-92 Recession. The recovery from the 1990-92 Recession was mainly from deficit spending but that recession wasn't as deep as the 1979-81 Recession. Both of these recoveries were reasonably strong, comparatively speaking.
In contrast, the recovery from the Great Recession, in spite of deficits of over one trillion dollars on average per year, has been anemic at beat. A reasonably strong recovery would have required deficits more like $1.5 trillion per year on average over this period. This does not bode well for the next recession, as its recovery will require deficits in excess of two and maybe three trillion dollars per year if any reasonable recovery is to be achieved through Keynesian economics. And we can be assured the next recession will come if we continue on with this dysfunctional financial system.
This loss in effectiveness undoubtedly plays into certain political groups denigration of Keynesian economics. Those representing the Austrian School are foremost among them. It is obviously true that Keynesian economics was and is a ridiculous means of regulating the economy. But these mongers of delusion do not argue for the Chicago plan, the only proper solution to our financial system, but rather for a Laissez-faire approach on the financial system. Such an approach would drive the economy into an extreme depression, as it did in the 1930s, a condition that could not and would not be tolerated by the public.
Clearly these mongers of delusion are taking advantage of the Nation's discontent and disenchantment over the dire economic state of affairs - a state of affairs that has been deteriorating over the past several decades but particularly so since the beginning of the Great Recession, some eight years ago. So why do they do this? Is it to keep the people in confusion over a proper solution? Or are they really this ignorant?
As Ronnie J. Phillips strongly implied in his closing paragraph: the Chicago Plan is long overdue. That will be 24 years from the time the next administration takes office. If that administration does not lead us in this most important endeavor, our discomfort may be due to more than these distressful economic conditions, which affects most distressfully the poor and those amongst us that have tolerable security in the present but remain tormented over the future. But when these other things come to pass, we all likely will feel the effects and they will not likely be pleasant.
The solution Phillips strongly implied be adopted is not something new. That group of economists drawn mainly from the University of Chicago most effectively set it forth during the Great Depression. Hopefully the next administration will see what these economists saw over 80 years ago and what Phillips retold us over 20 years ago and what is being told even stronger in these passages.
COMPLEMENTARY PAPER # 3
UNDERSTANDING MONEY CREATION WITH FRACTIONAL RESERVE BANKING AND FEDERAL DEPOSIT INSURANCES DRAWING ON HISTORICAL TABLES OF MONEY AND DEBT
No well-informed person would pretend that our present monetary and banking machinery is perfect; that it cooperates as it should to promote an adequate and continuous exchange of goods and services; that it enables our productive resources - our labor, materials, and capital - to be fully or even approximately employed. Indeed, the contrary is the fact. If the purpose of money and credit were to discourage the exchange of goods and services, to destroy periodically the wealth produced, to frustrate and trip those who work and save, our present monetary system would seem a most effective instrument to that end.
the Money Creation Process With Federal Deposit Insurance
Joe has a house he wishes to sell. Pete wishes to buy Joe's house but he does not have the money to make the purchase. Pete goes to the bank for a loan sufficient to make the purchase of Joe's house. The bank agrees to grant Pete the loan but only if the house is used as collateral against the loan. Pete agrees. A third party, escrow, is now involved, which arranges the transfer of the money from the bank to Joe and the title to Pete with the bank having a claim on Pete's title.
Now the money lent to Pete but received by Joe can be created through the fractional reserve process, providing the bank has excess reserves or it can be drawn from the bank's time deposit accounts should there be an excess of deposits or other sources of money over and above the bank's loans. Should the loan come from the bank's fractional reserve process there is then an increase in the Fed M1 and since the Fed M2 is equal to the Fed M1 plus the bank's time deposits there is an increase in the Fed M2 of the same amount.
For purposes of illustration, it is assumed that the amount of money the bank loaned to Pete was $100,000. What happens next depends on what Joe does with the $100,000.
If Joe should place the $100,000 in his demand deposit account and that account is in the same bank as made the loan to Pete, the bank now has $100,000 of additional reserves and the Fed M1 is increased by $100,000 and, since M2 equals M1 plus time deposits, M2 is also increased by $100,000.
Alternatively, should Joe place the $100,000 in a time deposit account, only M2 is increased, by $100,000. But regardless of where Joe places his $100,000, demand deposit account or time deposit account, the bank's reserves are increased by $100,000.
By law the bank much retain reserves against its demand deposit accounts but not necessarily against its time deposit accounts. If for example, the required reserve ratio is 0.2, the bank must retain 20 percent cash against its demand deposit accounts. The bank can then lend $80,000 against this $100,000 Joe placed in his demand deposit account; and, if that $80,000 was also placed in the bank's demand deposit accounts, the bank could make another loan, this time of $64,000; and so on assuming that money was returned in this manner to the bank. The bank can continue to do this as its loans are returned as demand deposit accounts. The final amount of its loans against this $100,000 would be $500,000. And if we go back to the original loan to Pete of $100,000, it is concluded that the bank prior to this loan held in excess reserves $120,000. Hence the total amount of loans drawn from this $120,000 is (120,000/0.2=) $600,000.
Alternatively, should the loan come from the bank's time deposit accounts, then after loaning Pete $100,000 the bank would have in excesses reserves $20,000, as there is no reserve requirement behind such loans. Now if Joe should deposit his $100,000 in the bank as a time deposit account, the bank can loan the full amount of the $100,000 and can go on doing this without limit providing those receiving these monies through this loan process continue to place them back in the bank in time deposit accounts.
To express this more clearly: consider that a bank has $10,000,000 in demand deposit accounts and $50,000,000 in time deposit accounts then the amount of reserves the bank needed would be $2,000,000. This meets the 0.2 reserve ratio, i.e., $2,000,000 divided by $10,000,000. However, the bank's reserves to its total loans as a ratio are then (2,000,000/60,000,000=) 0.0333.
This is the means by which money is created under our present financial system and in form is the same that existed prior to the Great Depression. The difference is that prior to the Great Depression, these accounts stood bare with respect to money. That though changed with the Federal deposit insurances, the principle component of the Glass-Steagall Act. In consequence of the means by which this Act is applied in adjudicating these accounts in insolvent banks, not only are all accounts in the banks made secure (beyond the cited limit, at present $250,000), but all of the banks' liabilities are also made secure.
the Definition of Money and Moral Hazard
It should be noted that money loaned from time deposit accounts, as the title of this account acknowledges, has a time factor. In other words, the money-time quantity in the bank's time deposit account should balance with the bank's loan-time contracts. In this way, the saving part of the bank's operations is not creating money, as the money is simply passed on and then is only used by the last one holding it. In this process, the bank is an intermediary.
But as presently practiced, the time factor on many of these time deposit accounts is extremely short or in the case of Negotiable Order of Withdrawal or NOW accounts, it is effectively zero, as a certain amount in checks can be drawn against these accounts at any time. A further point is that all of these time deposit accounts are government insured. In this sense, the majority of these accounts play the role of money, as they seemingly can be drawn on at any time and they are held without risk. These are two important properties of money: security and liquidity.
The government absorbing the risk on time deposits accounts is an obvious serious flaw in the nation's financial system, as it leads to Moral Hazard but it in essence transfers control on money to the banking system and its customers. As to Moral Hazard, it was well understood in 1933 when the Glass-Steagall was passed. In fact, according to Norbert J. Michel, it nearly drew President Roosevelt's veto:
"This was a contentious decision – the FDIC provision even drew veto threats from President Franklin D. Roosevelt. President Roosevelt himself recognized the moral hazard that would come with taxpayer-backed deposit insurance. In a 1932 letter to the NY Sun shortly before his election, Roosevelt wrote:
"'It would lead to laxity in bank management and carelessness on the part of both banker and depositor. I believe that it would be an impossible drain on the Federal Treasury to make good any such guarantee. For a number of reasons of sound government finance, such plan would be quite dangerous.'" Italics added.
President Roosevelt's concerns came to pass in a most egregious way in the financial crisis of 2008. Rather than correcting the underlying cause of this crisis, Congress immediately authorized $700 billion to bailout the investment banks and other financial institutions. This was followed by the Fed's Quantitative Easing programs, that as far as can be determined was little more than passing low (0%?) interest loans against the banks' toxic assets. But 2008 was only one of many such events since the passage of Glass-Steagall: The stagflation of the 1970s that led to the deep recession of 1979-82 and then the savings and loan debacle that led to the similar deep recession of 1990-92, though only two of many prior to the Great Recession of 2008, were the most destructive since the passage of the original Glass-Steagall act, or the Banking Act of 1933 as it was titled.
However Moral Hazard is only one of the serious flaws in this law that has seen many modifications since its inception in 1933. The second serious flaw in Glass-Steagall, in spite of its many modifications over the years, is the impossibility of defining that that serves as money, the circulating currency, and the obvious inability to rationally manage something that cannot be defined. Fed Chairman Alan Greenspan testified to this obvious fact before Congress on February 2, 2000 when questioned by Congressman Dr. Ron Paul.
"Mr. GREENSPAN. Let me suggest to you that the monetary aggregates as we measure them are getting increasingly complex and difficult to integrate into a set of forecasts.
"The problem we have is not that money is unimportant, but how we define it. By definition, all prices are indeed the ratio of exchange of a good for money. And what we seek is what that is. Our problem is, we used M1 at one point as the proxy for money, and it turned out to be very difficult as an indicator of any financial state. We then went to M2 and had a similar problem. We have never done it with M3 per se, because it largely reflects the extent of the expansion of the banking industry, and when, in effect, banks expand, in and of itself it doesn't tell you terribly much about what the real money is.
"So, our problem is not that we do not believe in sound money; we do. We very much believe that if you have a debased currency that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employ is whether it gives us a good forward indicator of the direction of finance and the economy. Regrettably none of those that we have been able to develop, including MZM, have done that. That does not mean that we think that money is irrelevant; it means that we think that our measures of money have been inadequate and as a consequence of that we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes until we are able to find a more stable proxy for what we believe is the underlying money in the economy.
"Dr. PAUL. So, it is hard to manage something you can't define.
"Mr. GREENSPAN. It is not possible to manage something you cannot define." 
In other testimony, Greenspan admitted that the Fed had no control over M3. It is not clear if Greenspan meant M3 or M3-M2. If it is the former, Greenspan is in effect saying: "The Fed has absolutely no control over money and therefore no control over the financial system." But either way, Greenspan is correct: The Fed has, in its essence, no control over money or the financial system. That leaves the creation of money solely to these financial institutions, which they do mainly through their customers' time deposit accounts. This is solely in consequence of government guarantees of all accounts in commercial banks and other forms of financial institutions. The most evident of these guarantees is FDIC.
Of more than passing interest is that nowhere in his testimonies did Greenspan identify the reason the Fed cannot define money. Obviously if one cannot define the components of a system one cannot solve the problems inherent in the system. But if one goes to the Internet one can find gobs of publications on this new "invention", MZM, Chairman Greenspan mentions in his testimony but nowhere do these publications go to the source of the problem: Federal Government guarantees on time deposit accounts!
Money And Debt in Numbers
Tables 1 through 4 document the Fed money items M1, M2, M3 and MZM, and the Currency in circulation and Demand deposit accounts between 1946 and 2014. Tables 5 through 7 document: Household debt; Business debt; State and local government debt; Federal government debt; Total private debt; and Total debt for these same years. The gaps in these tables reflect their sources.
It should be noted that in Tables 1 through 4, M1 is equal to currency in circulation plus demand deposit accounts. From the founding of the Federal Reserve System in 1913 through the Great Depression and World War II and for several years after, M1 constituted the circulating currency (note the circulating currency is different from currency in circulation, the latter being the coins and notes held by the public). However, sometime later the Fed changed its description of that that constituted the circulating currency.
The Fed made a somewhat similar change in its descriptions of M2 and M3. During this earlier time, M2-M1 was defined as time deposits in commercial banks and M3-M2 as time deposits in other depository institutions, e.g., Mutual savings banks and savings and loan associations. The more recent Fed descriptions relate to their relative liquidities. How these measures of liquidity are determined seems to remain somewhat mysterious, at least to this writer.
Not clear but, as is apparent from these tables, the Fed's difficulty in defining that that constituted the circulating currency likely began to be problematic in the early 1950s and probably came to a head in the 1960s. This is particularly evident in Table 3, which shows M1 and M2-M1, relative to GDP, to drop continuously from 1946 on: M1 for essentially the whole of this time frame changing only with the financial crisis in 2008; and M2-M1, relative to GDP, continued to decrease into the early 1960s but has gained substantially since.
Not shown in these tables but which can be derived from them is that M2 relative to GDP was 1.07 in 1946 but continually dropped to where it had a value of 0.504 in 1965. In 1970, its value was 0.568. From thence on it continued to increase to where its value in 2014 was 0.820. That is higher than the 2014 value of MZM, which is 0.720. How MZM is defined seems also somewhat of a mystery although Wikipedia seems to show it as M1 plus saving deposit accounts. However as Tables 5 through 7 show, it is likely its description too has changed variously over the years and probably is still in flux, as that was Greenspan's testimony in 2000.
The Stated Goal of Congress - Truth or Fiction
Following World War II, Congress passed the Full Employment Act, which President Truman signed into law on February 20, 1946. The act was: "To declare a national policy on employment, production, and purchasing power and for other purposes...
"Sec. 2. The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy, with the assistance and cooperation of industry, agriculture, labor, and State and local governments, to coordinate and utilize all its plans, functions and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment opportunities, including self-employment for those able, willing, and seeking to work and to promote maximum employment, production and purchasing power." Italics added.
President Truman said in signing the Full Employment Act into law: "I have signed today the Employment Act of 1946. In enacting this legislation, the Congress and the President are responding to an overwhelming demand of the people. The legislation gives expression to a deep-seated desire for a conscious and positive attack upon the ever-recurring problems of mass unemployment and ruinous depression."
Few could agree with logic and truth that the Federal government has even come close to honoring this act since 2008, notwithstanding the large deficits beginning in that year and continuing with no end in sight. This condition the nation has now come to in 2016 was progressive, as told by the numbers in the above tables. The cause is as obvious as these numbers tell: the nation's dysfunctional financial system, the centerpiece of which is this privately controlled debt based monetary system with the total of the system made secure by Federal government account guarantees.
As to why this financial system has had such long staying power in spite of it being so obviously dysfunctional and costly in a multitude of ways and the solution so obvious and simple is most revealing in Tables 5 through 7, as it is these large debts they show that are the vehicles that transfer large amounts of the nation's wealth mainly from those that produce this wealth to those holding these debts. But before giving a measure of this transfer, a brief discourse on these tables and the stories they tell is in order
Whereas household and business debts from 2010 on did not grow at the rate they did prior to 2008, they did not reduce as state and local government debt did. Why the latter did and the former did not may not be a great mystery. Obviously, all of the factors influencing these debt changes remain at best cloudy. However, a recollection from my commentary on the 2008 financial bailout is in order, as it evidences the predictability of the usage of money passed to the states and local governments, as was done as part of the 2008 financial bailout and for all of the years after. Following is an extraction from that essay:
"…under the system we have today, any money transferred to the states and local governments would go mainly to nonproductive areas, the principal one being to make these state and local government pension plans reasonably whole. But it was attempts in part by the managers of these inadequately funded pension plans that brought on the financial crisis that we now have. Sending money to the states and local governments is not the answer to reviving the economy, certainly in reviving that real sector of the economy where most of our (physical) wealth is produced."
Table 5 shows State and Local government debt to have decreased by $110 billion from 2010 to 2014, which indicates that Federal money passed to the states was disproportionately applied to these debts. But these were minor drains on these monies transferred from the Federal government to these states, as from the Internet we find total financial assets for state and local government employee defined benefit retirement funds for the respective years of 2009 and 2015 (4th Quarter) of $4.285 trillion and $5.610 trillion. This is a growth rate of 4.59 percent per year. In comparison, the growth rate of GDP during this six-year period (3rd Quarter of 2015) was 3.48 percent per year. That increase in these retirement funds and debt retirements are over 25 percent of the Federal government deficits less that held by intergovernmental agencies and the Federal Reserve System during this six-year period.
Clearly the state and local governments are not where money should go if it is to be beneficial to all the people not just those in these government entities. But not only is passing Federal money to these entities not very effective in reviving a faulting economy, it undermines the democratic process. Beyond this is the mere fact that any intercourse between the states and the Federal government by its very nature is constitutionally wrong in consequence of the supremacy of the latter in such relations.
This relationship between the Federal government and the states is analogous to the parent-child relationship, which can only be judged coercive or irresponsible on the part of the Federal government. This is why any reasonable interpretation of the constitution finds it wrong. That was the view of all of the presidents of the antebellum period, as judged by their actions and many of the Supreme Court decision with respect to the early programs offered by the Roosevelt Administration. But the Federal government can and often does act in a coercive manner in dealing with the states and it often does this against the wellbeing of the People.
A point that presently seems never to be remembered but one that should never be forgotten is that the Federal Government derives its sovereignty from: "We the People of the United States…" not from the individual states, as was so with the Confederation. The importance of this is that money or other forms of wealth that the Federal Government commands belong to the people. Hence money that is to be made available to the states that is generated by the Federal Government must pass first to the People, most inclusive is seigniorage as part of the regulation of the money quantity.
Grossly Dysfunctional And Costly to the Extreme
Exposed here is a financial system that is grossly dysfunctional. But beyond being dysfunctional, it is costly to the extreme. This can be gauged simply from multiplying the debt numbers in Table 1 by the prevailing interest rates. Although that was not done in any detail in this brief study, a cursory examination was made that shows this transfer is in the trillions of dollars. For example, the interest rate on conventional mortgages for 2005 was 5.86 percent. Simply applying this rate only to household debt indicated a transfer of $694 billion; this is solely for this one debt item for this particular year.
The difficulty in judging the amount involved in this form of wealth transfer is in determining the associated interest rate. For example, the prime interest rate since the 2008 financial crisis has been at an all-time low as has been the Federal Funds rate, the former at or near 3.5 percent and the latter zero or a quarter percent. However, during this same period, credit card debt averaged 15 percent or higher. Whereas the prime interest rate had this low value, there were surely many households and businesses that had far higher interest rates on household loans issued before 2005 and still in existence at the time of the 2008 crisis that were higher than 5.86 percent. But even if we were to assume an interest rate of 5 percent on the 2014 total private debt, this transfer payment would be $1.45 trillion.
This estimate of $1.45 trillion needs to be added to the interest paid by the Federal government on the privately held portion of its debt, which is to a certain extent unknown but probably over $300 billion. Moreover, these interest transfer payments for 2014 only represent a minor portion of the money transferred through the control of money, as beyond debt are returns on corporate ownership. The ownership, if judged to be three times GDP, would be $51 trillion for 2014. Some of this value is in business debt but if a low return of 5 percent is used in part to compensate for this debt, then this transfer is $2.55 trillion. The total of these transfers then is (1.45+0.3+2.55=) $4.3 trillion. That is a very hefty part of the goods and services available for consumption, which is probably about 60 percent of GDP after government waste and other losses are taken into account.
But the numbers told here only begin to measure the cost of this grossly dysfunctional financial system. The other costs are in the destruction it does to our social political economic life. The direct cost to our economy is drawn from the trade cycles that are so much a part of this dysfunctional financial system. Some idea of these costs is given in Chapters XI, XII and XIII in A Plan For America. The first of these chapters is a moderate discourse on the Great Depression, the second is on World War II and the last is on the decades of the 20th Century following World War II. Beyond this are the many wars the nation has engaged in throughout much of the last century and for the total of this century that too have costs that go far beyond their direct effect on the nation's economy.
The following is extracted from a talk, with minor edits, given at The Basic Income Earth Network’s (BIEN's) Congress at Montreal, Canada, June 26-29, 2013 with a final comment on why a national dividend is imperative to any restructuring of the financial system.
the Justification For A National Dividend
Mark Pash in his introductory remarks drew attention to possibly the greatest contradiction in human history: destitution for a great majority of the human race in a World of unlimited bounty, the former being the result of the great technical advancements mankind has made over these past two centuries and is still making. Clearly this is the most pressing problem facing human kind. Its solution must carry with it a reasonably fair means of distributing this abundance while maintaining sustainability of this economic system that allows this great productivity. To achieve this reasonably fair means of distributing this abundance requires a minimal amount of money by all members of society.
The preferred means of achieving this objective is a National Dividend for a variety of reasons beginning with the fact that it is rooted in the American Declaration of Independence, the cornerstone of our political system: We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — It is also inherent in our Federal Constitution through the general Welfare clause.
In consequence of these great advancements in technology that has become our society over the last near two centuries, we have now a fully integrated industrialized economy. In such a society as we now live, there can be no right more unalienable than an equitable and sound monetary system. For it is through this most unique form of accounting that we call money that we have economic intercourse with society. Hence, without such, many amongst us are destitute making life itself most tentative, and Liberty and the pursuit of Happiness are then words without meaning.
There are many facets to an equitable and sound monetary system. Foremost is that it must be of a form that allows each of us some reasonably minimum amount, as it is (almost fully) through money that we access the goods and services of society that sustain life. The National Dividend is the means by which this is achieved. There is coupled to the National Dividend the obvious axiom, as many have argued: that the natural resources from which the wealth of the nation is created and the knowledge applied thereto belong to all the people.
Without going too far afield, we may identify these natural resources: First is the earth itself: the land we stand on and on which our shelters are built, and the farms and ranches that produce the food and fiber that sustains us; the rivers, lakes and oceans that are also sources of our food and fiber but are more as they are large sources of the fluid that sustains life itself as well as serving as avenues of transportation and areas of recreation; the air we breathe but also that which too is a great avenue of communication and transportation.
To continue with that which nature bestowed upon us: the earth also holds many elements that through knowledge and technology are a fundamental part of our modern way of life. But added to that which nature provides is the knowledge and technology brought forth by those who have gone before that has so much enhanced our way of life over that a mere two centuries ago. In almost all cases, that knowledge and the useful inventions derived there-from has since passed the monopolistic right assigned by law to the one that first brought such knowledge forth. But this applies not solely to invention as derived through patent law but also knowledge passed through copyright law.
These are the things we all have rights to. But in consequence of our industrialized world and not simply the reasonableness of but the necessity for John Locke’s ideas of the protection of private property as an essential facet of our economic system, we all must have some means by which we can enjoy the fruits of our world as they are defined here. One obvious means is that which some amongst us have on occasion referred to as “economic rent”. Here this right of the governed through their government to this base of revenue is referred to as “economic rent”.
However, many of those that accept this sound argument for “economic rent” then proceed to wrongly claim it solely for the administration of government, not for the people themselves. In making this claim, they argue support from such eminent individuals as Henry George. But as Mr. George brought forth this concept of “economic rent” it was only to apply to land and then only on that land whose value was being enhanced as the local community increased in population and wealth. Only secondarily does it appear that this “economic rent” was suggested by Mr. George as a means of support of government and then presumably only that of the states and local governments where this value was being enhanced.
Additionally, when Mr. George brought forth his concept of “economic rent” the nation was passing through a far different age, one that did not have near the theft that our present governments have. But even if those that administer our governments had not engaged this theft, this argument of using this “economic rent” for government administration would not fit in a universal ownership of the earth, as for example postulated in the phrase: “The earth belongs to all.”
To better see the wrongness of this view of “economic rent” solely for support of government and not for return to the people, we might draw an analog to an agent of a landlord who collects the rent from the tenant and then keeps the proceeds arguing that he in doing so best serves the interest of his employer. This done without the consent of the landlord is an obvious perversion of this agent’s charge and it is reasonably presumptive to conclude that such an act would be done without direct intercourse with the owner. When those charged with the authority of governments act in this manner, it is reasonably presumptive to conclude that they too do these things without direct intercourse with the People (the electorate).
But if done now and even at the state and local government levels it would be after those in these governments have perverted our governmental system with permanent employment, pensions, and other privileges clearly not available to those of us that remain in the non-governmental sectors. This perverted theft and its consequences, as it has taken place, mainly over the last half century, is explicitly shown in the national accounts in the article: “Federal Money – The Corruption Of The States”. It is these facets of our present governments at all levels that cause a clear separation between the governing and the governed. That is opposite to President Lincoln’s famous parlance that ours is a government of the people, by the people and for the people.
The proper means is of course to place this “economic rent” directly in the hands of the People through the Federal government as the agent of collection and disbursement although not denying the states and local governments some similar but not overlapping right. That is the object of the National Dividend. But meeting the National Dividend will require a large amount of money. For example, if the National Dividend was $10,000 per each electorate per annum and there were 240 million, this amount would be $2.4 trillion.
Financing A National Dividend
The main source of revenue to the Federal government for this direct disbursement to the People is obtained through the seigniorage of money creation and the Federal revenue system. With congress properly exercising its constitutional power, the amount of money derived from the seigniorage from money creation would be roughly 2.5 percent of the nation’s Gross Domestic Product or about 20 percent of the amount put forth for the National Dividend: $500 billion. The remaining roughly 80 percent would be obtained largely through a highly progressive income tax, not so different from that existing during the recovery years of the Great Depression and World War II and shortly after supplemented with consumer taxes on nonrenewable resources and possibly other sources.
With a Federal government budget, equal to 20 percent of GDP, as it presently is, then for a GDP of $20 trillion, Federal revenues would be $4 trillion (this does not include the seigniorage). This would leave $2.1 trillion for its mandated expenditures. Clearly the existing budget would require considerable modifications, including such programs as Medicare and Social Security and Defense. In the transformation to an equitable and sound monetary system coupled to a National Dividend, budgetary expenses for Medicare and Social Security were assumed to be unchanged whereas Defense spending was reduced by one half. The analyses for this transformation are in Table 1.
A highly progressive income tax has many claims though the importance of these is not necessarily in the order cited. We might begin with the mere fact that much of the large earnings by the richest amongst us come from the transfer of money through charges on money and/or rent on physical assets. Transferring money through the ownership of money, often and properly referred to as usury, has been acknowledged by almost all major religions as wrong for the total in which we have a record of history. Only with the more recent propaganda, mainly by the sycophants that serve the interests of the constitutionally illegal financial industry, has this wrongness been perverted as something sacred. In future, these returns will be greatly reduced, but still they can be significant.
A second claim, which associates closely with this first cited claim, is that the personal income tax fairly disburses money obtained through monopolistic means. Entertainers, for example, sports stars, movie stars, and even heads of the mega corporations fall into this category. Clearly this source of income by these “stars” is drawn from a large segment of society seeking to enjoy the performance of the “best” amongst us in these somewhat silly endeavors. In truth, this large gain for this small number is only through a somewhat natural monopolistic position.
We may see this better from our competitive professional sports teams and by understanding that the skills of those participants that gain in the tens of millions of dollars over many years are only nominally more skilled than those that gain a few hundred thousand dollars and then for only a few years. In fact, the skill differences of the participants are not perceptive except through direct competition for when the very elite of the participants are removed from their profession new “stars” arrive and the former fade into history. Hence, it is not farfetched to suggest that if these elite “stars” never existed, the “games” would continue to draw as they now do. Thus, it is reasonable to conclude that those that draw these fantastic monetary gains do not provide even a remote contribution to the wellbeing of society.
A third claim is that allowing large quantities of the nation’s money to remain in the hands of the few distorts the money to loan ratio, as expressed by the equation: M1/(M3-M1). It also defeats the purpose of the first claim, as it remains an unfair source of income recognized by all major religions throughout the record of history as immoral. Associated with this claim is the great mischief done through the false knowledge that comes forth from the many think tanks and others that draw succor from these members of society engaged in these immoral dealings. We may couple onto this the great mischief that comes from their lobbyists and other more overt means of corrupting high government officials, elected and otherwise, that now serve these demons with wealth rather than the people at large.
Unquestionably a highly progressive income tax would draw large revenues and would do much to reduce this repulsive transfer of wealth through immoral charge on money, particularly in the near future. But we also need to look to means of harboring the earth’s resources, particularly those that are clearly non-renewable. This can most effectively be done through a consumptive tax. Foremost in this is a tax on fossil fuels beginning with a tax on liquid fuel that would cause a unit price similar to that in many European countries. The return from this tax on resources by its very nature belongs to the whole community and as such is to be shared with the whole community in accordance with our basic principle of government: equality before the law.
We have strong empirical evidence to draw on in support of a highly progressive income tax as most beneficial to the great number of society in the first decades following World War II. Most importantly this was when the nation experienced its greatest economic growth and its fairest distribution of its created wealth: In 1949, M1/(M3-M1) was near 1.83 with M1 approximately 41.5 percent of GNP and M3-M1 22.7 percent of GNP while the top income tax bracket was at 90 percent.
It is through a proper management of the monetary system, a progressive income tax, a direct tax on certain resources, particularly those that are non-renewable, foremost is petroleum, that a National Dividend can be achieved.
A Final Comment On The Need For A National Dividend
In the early years of the Republic, it was land that connected the People to the Federal government, at least north of the Ohio. Today the land is owned by less than one percent of the population. This transfer of the land from the many to the few has been taking place over the full of the last century and more so during the last fifty years, in part with the aid of Federal government grants. Hence, today there is no physical element to connect the great majority of the People and their Federal government.
The consequence of this disconnection and the failure of the Nation to come to grips with its flawed financial system was the strong growth of the Federal government, changing it from a federal government to solely a central government beginning with the Great Depression but most effectively so with the Great Society programs that each administration has advanced since its initiation by the Johnson administration in the early 1960s. To compensate for this flawed financial system, the Federal government has transferred money directly to the states and local governments (and preferred others), a significant portion drawn through deficit spending, which is Keynesian economics.
The consequence of this transfer is that the People have not only lost control of the Federal (central) government but also of their states and local governments. A National Dividend is now the only means by which the People can regain this connection with their governments. Without that connection, there is no democracy but rather a popularity contest one day every two and four years between handpicked politicians by the ruling elites who then serve these elites treating the remaining of us as their subjects.
But this is what it has become, a popularity contest, which is not what it was meant to be - a democratic republic: The Declaration of Independence in stating: Governments are instituted among Men, deriving their just powers from the consent of the governed most fittingly defines our democratic republic. This statement is consistent with the more inclusive dictionary definition of a democratic republic: "A political order in which the supreme power lies in a body of citizens who are entitled to vote for officers and representatives responsible to them." And in our republic, the citizens that have obtained the age of eighteen in good standing are equal in the possession of this supreme power.
Clearly passing money to the states and other preferred interests disavows the rightful owners of this supreme power and in doing so makes us not citizens but something different, more like subjects. But that was what the War for American Independence was all about, changing the status of the People from subjects to citizens; stated otherwise, from being solely the consequence of this power to being the sole source of this power. So to be blunt, those that do these wrong acts and those that support them in these wrong acts can be seen no other way than traitors to the government the Founders bestowed "to ourselves and our Posterity"!
Stated otherwise, sovereignty is held by the people and with that sovereignty goes all the power and wealth of the governments. This is a point that presently seems never to be remembered but one that should never be forgotten. Those selected from amongst us to administer this wealth must do so in a manner that does best that set forth in the Preamble to the Federal Constitution, with full attention to: We the People of the United States...to establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity...
This applies most directly to our Federal government but clearly none of our governments do for we the People as set forth in the words of these two fundamental documents that define our political system. That we must change, which we can only do by first adhering to the words of these two documents in correcting foremost our Federal government, as only then will we be able to correct our state governments which by law contain our local governments. But to properly correct our Federal government we must first correct our financial system, which we can do by a return to 1933 and the Chicago Plan, with appropriate modifications, and a National Dividend.
Hence, an important purpose of a National Dividend is to break this illegal connection between the Federal government and the states and other preferred interests that receive this money that support this flawed political and dysfunctional financial system and reestablish these governments with the People. Its other important purpose is more obvious: to give the People direct control over their economic well being.
In summary, we pay high tribute for a circulating currency that should be freely issued by our government only to have it miss-managed by a privileged private entity that charges high interest rates on an excessive quantity of loan money far in excess of what would be loaned with a proper issuance of the circulating currency, solely money, and a proper tax structure. So, to repeat, those that do these wrong acts and those that support them in doing so are traitors to the government the Founders bestowed "to ourselves and our Posterity"!
COMPLEMENTARY PAPER # 5
A POOR DAY'S WORK
THE TEACHINGS OF CONVENTIONAL ECONOMISTS
Conventional economists and those that follow them do a Poor day's work in their teachings on Aggregate Demand and aggregate supply. Beyond that they imply that these teachings follow John Maynard Keynes ideas. To some extent that may be true but they do not follow that set forth in Chapter 21 and places elsewhere in The General Theory. Typical of these teachings are by Roger K. Strickland, Jason Welker, and others. Their presentations of this false construct for aggregate demand (AD), aggregate supply (AS) and a long run aggregate supply (LRAS) line are depicted in Figures 1 and 2.
Figure 1 - Roger K. Strickland's depiction of the Aggregate Demand and aggregate supply functions. The dark curved line is a reflection of the Phillips Curve (described below). But it also is a trace of Keynes law of effective demand. The sloped line is the aggregate demand function in conventional economic teachings. Roger Strickland is a Professor in the Economics department at Santa Fe College, Gainesville, Florida.Associated with these depictions is the equation for aggregate demand: AD=C+I+G+Xn; Where: C is consumption, I is investment, G is government expenditures and Xn is net of exports over imports. Also associated with these presentations is the false concept of a "natural rate of unemployment" that corresponds with the LRAS line.
This expression used by economists for Aggregate Demand is a definition, referred to as an identity in the economics literature. That though is not Keynes law of effective demand, which may be set forth in the form given for aggregate demand in the above equation. But it may also be expressed as PQ, as is commonly part of the quantity theory of money equation. Its form in the economics literature is: MV=PQ; Where: M is money, V is the number of times money turns over in a year; P is price; and Q is products and services produced in a year.
In the national accounts, Aggregate Demand is equal to national income; hence it is also equal to PQ, defined by Keynes as effective demand. However, if repair and replacement of physical capital, RR, is included in the equation for aggregate demand and in Keynes expression for effective demand than AD=PQ=C+I+G+Xn+RR. This equation now is equal to the Gross Domestic Product (GDP), or Gross National Product (GNP), as set forth in the national accounts for the Great Depression. But it remains a definition, an identity.
Keynes Law of Effective Demand
But the quantity theory of money, as commonly expressed in the economics literature, is not Keynes law of effective demand, as it implies that it is economic activity, i.e., AD, GDP, etc., that draws money rather than money that drives economic activity. But it goes further in assuming that the economy is always at full employment or has a tendency to full employment without external stimulus. In this sense, all that a change in money quantity does is change prices; hence the quantity theory of money equation then too is an identity: between price and money.
But the real economy is not always at full employment nor does it have a tendency toward full employment, as proven historically. It is this condition, amongst other things, that Keynes addressed in The General Theory:
"To elucidate the ideas involved, let us simplify our assumptions still further, and assume (1) that all unemployed resources are homogeneous and interchangeable in their efficiency to produce what is wanted, and (2) that the factors of production entering into marginal cost are content with the same money-wage so long as there is a surplus of them unemployed. Thus if there is perfectly elastic supply so long as there is unemployment, and perfectly inelastic supply so soon as full employment is reached, and if effective demand changes in the same proportion as the quantity of money, the quantity theory of money can be enunciated as follows: 'So long as there is unemployment, employment will change in the same proportion as the quantity of money; and when there is full employment, prices will change in the same proportion as the quantity of money'." Italics added.
The key statement in this extraction is: "… employment will change in the same proportion as the quantity of money;…" Hence when money is added to a less than fully employed economy, the quantity theory of money can be enunciated as: "… employment will increase in exact proportion to any increase in effective demand brought about by the increase in the quantity of money…" In other words, according to Keynes, as told in this part of The General Theory, it is money that drives economic activity up to the point where there no longer are unused-resources, mainly employment. Hence, the proper form for the quantity theory of money equation is: PQ=VM. But in consequence of PQ being set equal to GDP, it may also be written as: GDP=VM. This is Keynes law of effective demand mathematically stated.
The quantity theory of money equation is now, not an identity between money and price, but rather a functional (behavioral) relationship between money, employment and production. It is this behavioral relationship that conventional economists deny. But that denial goes against the national accounts of the Great Depression that prove beyond any reasonable doubt the truth of this relationship postulated by John Maynard Keynes some eighty years ago. This proof, drawn from Table 1, is in graphical form in Figure 3, which presents correlations between GDP and Real GDP and M1 for the early recovery years of the Great Depression. The second part of this proof, in graphical form, is in Figure 4, which presents the corresponding correlation between Real GDP and employment.
These expressions described in Figures 3 and 4 drawn on the national accounts of the Great Depression for the early recovery years, 1933-37. They have: respective correlation coefficients between money, the Fed M1, and GDP and Real GDP of 2.80 and 2.20 and respective coefficients of determinations of 0.984 and 0.993; and a correlation coefficient between employment and GDP of 3.45 (billion dollars of increased Real GDP per million employed) and a coefficient of determination of 0.987.
Obviously the accounts on which the traces in Figures 3 and 4 were drawn from are in very good agreement with Keynes enouncement that: "…employment will increase in exact proportion to any increase in effective demand brought about by the increase in the quantity of money…" This is formal proof of Keynes hypothesis, which may now be stated as Keynes law of effective demand. It prescribes the supply function that is coincident with the demand function, the latter to the limit set by the money quantity.
This needs a little explanation: Aggregate demand is the total of goods and services purchased within the period in question. But, possibly less clearly, aggregate demand is not necessarily the total goods produced (or services available). During the Great Depression animals were slaughtered and cash crops plowed down by farmers, all in consequence of a lack of (effective) demand in spite of the dire need for these products by many in society.
And the cause of this lack of effective demand: lack of money by those in need of these products. Obviously, the amount of goods produced did not match with the amount purchased. The only thing that matched was the goods sold and the goods brought. This unsold production was the condition when money was being removed from the economy. But this removal of money was first felt on the demand side, as is obvious from the fact that production exceeded effective demand.
When money is being added to the economy, if done in a manner in which those in need of these products and services receive that money, then that money will go to added purchases or if products are not available, it will drive up prices. Again, this effect is first on the demand side, which is to say: The economy is demand driven!
But if there are unused resources, mainly labor, entrepreneurship will respond and it may have to pay higher wages immediately to meet this demand. Also as effective demand approaches the limit of the productive capacity of the economic system, mainly as reflected in full employment, prices will rise, as shown in the next section. Hence, it is demand that ultimately forms the shape of the curves identified in Figures 1 and 2 as SRAS, for Short Run Aggregate Supply, which is the Phillips Curve.
the PHILLIPS CURVE – AN EXPRESSION OF THE SUPPLY FUNCTION
The above extraction, drawn from The General Theory, describes an L-shaped form not the hockey-stick-shaped form of the Phillips curve shown in Figure 5. In Figure 5, the horizontal axis is identified as the unemployment rate. But that is simply the negative of the employment rate but moderately distorted. Hence, this axis would be more accurately identified if it was employment. But since employment is a linear function of Real GDP, this axis could also be identified as Real GDP. But the parameter that is proportional to employment and Real GDP is circulating currency, M1 (to a point), as is clearly evident in Figure 3.
Figure 3 - Relationships between gross domestic product, GDP, and Real GDP and the circulating currency, the Fed M1, for the early recovery years of the Great Depression. The price inflation during the early recovery years, from 1933 inclusive of 1937, averaged 1.9 percent per year. The coefficients of determination for the relationships of GDP and Real GDP with respect to the Fed M1 are respectively 0.981 and 0.996. The offset of the 1938 data point from the trace defining the relationship between these two variables likely is due mostly to drops in wages - this is more evident in Figure 4.
Keynes acknowledged the conditions that shape the Phillips curve as full employment is approached. This he did immediately following the above-cited paragraph where he in essence describes the Phillips curve some 20 years before William Phillips brought it forth. The Phillips curve is reproduced here in Figure 5 for the American economy for the years 1913-59. To do this as Keynes did at this time is great insight. So to teach otherwise is to defame this brilliant insight on how the real economy functions. Here is this brilliant insight extracted from The General Theory:
"Having, however, satisfied tradition by introducing a sufficient number of simplifying assumptions to enable us to enunciate a quantity theory of money, let us now consider the possible complications which will in fact influence events:
"(1) Effective demand will not change in exact proportion to the quantity of money.
"(2) Since resources are not homogeneous, there will be diminishing, and not constant, returns as employment gradually increases.
"(3) Since resources are not interchangeable, some commodities will reach a condition of inelastic supply whilst there are still unemployed resources available for the production of other commodities.
"(4) The wage-unit will tend to rise, before full employment has been reached.
"(5) The remunerations of the factors entering into marginal cost will not all change in the same proportion.
"Thus, we must first consider the effect of changes in the quantity of money on the quantity of effective demand; and the increase in effective demand will, generally speaking, spend itself partly in increasing the quantity of employment and partly in raising the level of prices. Thus, instead of constant prices in conditions of unemployment, and of prices rising in proportion to the quantity of money in conditions of full employment, we have in fact a condition of prices rising gradually as employment increases. The theory of prices, that is to say, the analysis of the relation between changes in the quantity of money and changes in the price-level with a view to determining the elasticity of prices in response to changes in the quantity of money, must, therefore, direct itself to the five complicating factors set forth above."
This is why M1 is the preferred parameter for the abscissa in Figure 5, as it is the force that drives economic activity and furthermore it is the only variable in the quantity theory of money equation that is subject to external control. Stated otherwise, it is the independent variable in our economic model leaving aggregate demand as the dependent variable. The data in Table 1 provides a reasonably good reflection of these "complicating factors", as Keynes described them in the immediate above paragraphs. This is seen in Figure 6, which presents relationships between GDP and Real GDP and M1 for the years 1938 through 1942, as was done in Figure 4, but drawn directly from the data in Table 2, which chains Real GDP to 1938 dollars. The last of these years was when price and wage controls and rationing of scarce items began to be effective in controlling inflation. Hence the national accounts up to and inclusive of 1941 and a part of 1942 are considered free of these forms of controls.
To elaborate: Figure 6 exposes a separation between GDP and Real GDP beginning to form at the beginning of 1940, with GDP beginning its upward slope. This separation with the upward sloping GDP represents the beginning of inflation, not unlike the upward sloping curve in Figure 5, beginning at an unemployment rate of about 6 percent. Whereas Figure 5 infers inflation through increases in hourly earnings, the traces in Figure 6 exposes this inflation through the separation in the traces describing Real GDP and GDP. This separation reflects the consumer price index (CPI), which is the direct measure of inflation, as it is the CPI that is used to compute Real GDP from GDP.
Not shown in graphical form is the labor force and unemployment that corresponds to these periods shown in Figure 6, as was done in Figure 4. But they are in Table 3, which includes the official unemployment numbers for the respective years of 1940, 1941 and 1942 but also unemployment numbers adjusted for those in such as the Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC) for these same years.
This adjustment changes the respective unemployment numbers for 1940, 1941 and 1942 from 14.6, 9.9 and 4.7 to 11.4, 7.7 and 3.7. The inflation percentages for these respective years are: 0.71, 9.16 and 14.71. Assuming that the percent increase in hourly earnings represents a significant portion of the inflation, drawn from the CPI, then the latter of these adjusted numbers fall to the right of the trace for GDP in Figure 5, although the value for 1942 is very close, only one percent different, which possibly reflects price and wage controls. How much the transformation from peacetime to wartime production influenced these inflation numbers obviously is not known but it certainly had to be a factor, particularly the greatly increased rate at which money was added after 1939
Partly what these adjusted unemployment numbers show is that the unemployment was not as severe as the official numbers suggest during the latter years of the Great Depression but also that a transfer from the WPA, CCC and other similar work programs into the formal work force was taking place, as the Nation was gearing-up for World War II. Whereas Table 3 implies a transfer of those in these work program into the formal work force, some of these likely were drafted into the military, as the military had grown from 54 thousand in 1940 to 1.62 million in 1941 and 3.97 million in 1942. Still these adjusted number are probably more representative than the official numbers with respect to actual unemployment.
But rational studies that relate economic activity to money and employment should use the employment numbers rather than the unemployment numbers because it is money that draws employment and it is employment that creates products and services. Beyond this is the fact that the unemployment numbers derive from both the estimated work force and the actual work force, leaving added room for more distortion in representing the real economy. Table 4 addresses this condition in providing the adjusted employment numbers together with GDP, Real GDP and M1.
The above analyses were directed to defining the effect of money on economic activity and its draw on employment. But unemployment is an important social issue and that that is acceptable to societal needs to be achieved with very minor inflation if reasonable price stability is also to be achieved. The data points in Figure 5 with their large scatter, which includes those from the national accounts used in these analyses, suggest such may be achieved. But the question remains: How?
The cause for this departure from the L-shaped form Keynes assumed in his initial description of his effective demand function is mainly in his Item (3) in his description of how the real economy functions: "Since resources are not interchangeable, some commodities will reach a condition of inelastic supply whilst there are still unemployed resources available for the production of other commodities." Hence to draw the hockey-stick-shaped form of the Phillips curve nearer this L-shaped function, it is necessary that critical commodities be more compatible in reaching: "a condition of inelastic supply whilst there are still unemployed resources available for the production of other commodities."
The best evidence in understanding how the real economy functions is drawn from these accounts of the Great Depression and leading into World War II for a variety of reasons: foremost is the impossibility of defining the circulating currency following World War II in consequence of Government guarantees on both demand and time deposit accounts. Prior to the Great Depression, there was to some extent a clearer definition of the circulating currency than we now have but this period lacks the completeness in the national accounts that is available for the Great Depression.
The obvious conclusion here is that the national accounts for the Great Depression and for entry into World War II are reasonably complete and that this period had a reasonably clear definition of the circulating currency; hence, the conclusion that these accounts confirm Keynes law of effective demand: Figures 3 and 4, the former in displaying near perfect correlations between economic activity and money and the latter between economic activity and employment for conditions fairly removed from full employment; and Figure 6 and Tables 3 and 4 for condition that approach full employment.
Although the conditions for which Figures 3 and 4 were drawn were peacetime, that is not so for those expressed in the latter part of Figure 6, as from 1940 on, a significant portion of the economy was directed to the war effort. As previously noted, how these conditions influenced economic activity of that time, as reflected in the relatively high inflation for 1941 and 1942 while unemployment was still relatively high, remains to speculation. However, reasonable expectation is that under reasonably normal peacetime conditions and with a money supply having a reasonably stable growth the various components of production will adapt to a more stable agreement with their demand.
Hence it is reasonable to further conclude that there will be a much sharper shape to the Phillips curve at some reasonable measure of full employment than expressed in both Figures 5 and 6. In other words, the trace of the aggregate supply curve will approach something closer to the L-shaped form that describes Keynes simplifying assumptions in his first description of the law of effective demand than is drawn from the traces in Figures 5 and 6.
the Cause of Instability in the Money Supply Growth
The above addressed the misleading teachings of conventional economists that hides, if not outright denies, the fact that money drives economic activity through aggregate demand. Stated otherwise, these teachings deny Keynes law of effective demand. Also lost in conventional teaching is that the banks under the auspices of the Federal Reserve System are incapable of effectively regulating the money supply: In good times they place too much money into the economy, which they did most recently between 2002-07; and in hard times, they actually withdraw money from the economy, which they seemingly have done since 2007 and clearly did during the Great Depression. Column ∆M1+deficit in Table 1 exposes this fact most clearly:
During the inclusive years 1930-33, this extraction totaled $12.06 billion, which was mainly through failure of some 4,000 banks but also through loan retirements exceeding loan issuances in solvent banks. To explain: $8.20 billion was from lost demand deposits; hence, the remaining $3.86 billion had to come from loan retirement exceeding loan issuances. From 1933 through 1939, the amount of the circulating currency removed by the banks totaled $5.54 billion. The net of this removal was $4.47 billion, inconsequence of the $1.07 billion added by the banks to the circulating currency in 1935. As the banks were now made secure, this removal was almost solely by the banks' loan retirements exceeding their loan issuances.
Other than 1935, only in 1940 and 1941 did the banks add money to the economy: $1.42 billion in the former and $0.70 billion in the latter. This was when the Nation was gearing up for World War II, which likely made these loans, in effect, Government guaranteed. One interesting factor exposed in Table 1 is the large negative value of ∆M1+deficit for 1942, $14.20 billion. This loan retirement was not a conscientious act on the part of the banks to conserve their reserves in conjunction with limiting their risks, which was largely the reason for retiring loans beyond their loan issuances from 1933 through 1939, but rather the desire on the public's part to remove debt, which it then could in consequence of the large government expenditures in that year coupled with rationing of scarce items.
The very obvious conclusion drawn from this analysis is that during hard times banks remove money from the economy when the economy is in most need of money notwithstanding Glass-Steagall. Although Glass-Steagall has secured all bank deposit accounts, it has not and cannot prevent banks from acting in this manner that so adversely impacts economic activity during depressed times. The obvious further conclusion is that banks should be immediately removed from their charge to regulate the value of money - a charge that is clearly assigned to congress in its fifth enumerated power: To coin Money, regulate the Value thereof.
the Cure For Economic Instability
The trade cycle by definition is a cyclic instability in economic activity. According to conventional economic teaching, it is a consequence of periodic erratic conditions arising in the real sector of the economy. But the facts are something different, as simply revealed in the historical record of events since World War II:
Inflation throughout the early post world War II years, culminating in the stagflation of the 1970s; the deep 1979-82 Recession followed by the savings and loan debacle of the 1980s; the 1990-92 Recession; the Dot.com bubble in the early part of this century; and most recently the 2008 financial crisis, which we have still not recovered from in spite of increasing the national debt by over $8 trillion since 2008; all entered through the financial sector and all were in consequence of our dysfunctional financial system. These events, with the exception of the 2008 Financial Crises, are discoursed on in Part IV of A Plan For America, cited above. The first two chapters address the Great Depression and World War II.
This does not deny businesses' participation in the trade cycle. Chapter XI, The Great Depression in A Plan For America in its introduction exposes the influencing role business had in bringing on a decline in economic activity in the latter part of the 1920s. The important point though is that had demand deposit accounts been backed by 100 percent reserves, all that was necessary to secure the circulating currency, that event would have been a minor recession, not the Great Depression. Furthermore, recovery likely would have taken place not so different than the classical economists argue. However, still with a properly managed monetary system, as described here, recovery would have been quicker and far less disruptive to society than any recovery experience in history.
In A Plan For America is a section in Chapter VII titled: The Trade Cycle - Its Cause And Cure. Its relevance to the issue at hand is of such importance that it is reproduced here in total to the end of this section:
Economists present the trade cycle in line with theories that infer businesses as the cause of such events: Overproduction during good times and during hard times, businesses not seeking the loans necessary for business expansion. And only after the confidence in the business community changes does businesses seek the loans that the commercial banks then willingly grant. But certain of the facts are much different, as told in subsequent chapters. For example, the recession of the early 1990s was solely in consequence of the banks and other lending institutions' unwillingness to issue loans until after the Resolution Trust Corporation had done its dirty work in cleaning up the savings and loan debacle. The recession of the early 1980s was in consequence of an outrageously high interest rate set by the Fed as its means of stemming inflation or more appropriately, controlling stagflation.
During the whole of the 1930s, the banks were not simply lacking in their role of monetary expansion through loan issuance, not because of a lack of demand for money. We all know of the notorious bank robbers of the Great Depression era: John Dillinger, Bonnie and Clyde, Ma Barker, Pretty Boy Floyd, Baby Face Nelson, the more notorious of these members of society that took extreme measures to satisfy their demand for money. Clearly, money was in demand during this period, it simply was not entering the economy through the banking system's loan issuances but rather was being extracted through retirements of previously issued loans. We could go on citing the many panics of the 19th Century and other recessions of the 20th Century. But we simply would find more of the same. So now we may take a saner look at the trade cycle then what our economists have told us.
Our measure of economic activity is in terms of the Gross National Product: business growth by a rise in GNP and business decline by a drop-in GNP. The GNP may be supplemented with the Consumer Price Index (CPI) or other measures that reflect inflation and real productivity. The fact is that from the Quantity Theory of Money, GNP is equal to the product of price and product, which in turn is equal to the product of money quantity and money velocity. As much by definition, as otherwise, GDP rises during economic expansion and is static or declines during economic downturns. This is the business or trade cycle. Hence, either money quantity increases and/or money velocity increases during economic expansion and the opposite occurs during economic downturns. But we find generally that velocity of money remains more or less stable over the course of the more normal trade cycles, those we experienced during the latter half of the 20th Century.
Economists argue, seemingly in accord with the conventional wisdom, that the cause of economic downturns is the drop-in demand for money, hence the decrease in money quantity. In other words, economic activity leads money, not the other way around. But if we do assume it to be the other way around and we make money the lead, we need speculate little, at least from a mathematical perspective, that if we maintain money quantity growth constant, independent of the so-called 'demand for money', we will maintain the growth in GDP reasonably constant subject only to changes in money velocity, which we should expect to be minor. Hence, periods of real economic growth and real economic decline would be defined mainly by the price change: real economic growth corresponding to price decreases, deflation, and real economic decline corresponding to price increases, inflation. But what we have described here is contrary to our expectations, and we should add, to our experiences.
We know that during economic expansion, velocity of money if it changes at all will usually increase, and during recessions, velocity of money tends to decrease. Hence, what we should expect to find is moderate inflation during times of real economic expansion and moderate deflation or stable prices during times of real economic decline, as we do in the trade cycle. But if we find money velocity and prices reasonably constant during these expected differing economic periods, as we have witnessed in the past, then we conclude that we have solved the problem of the trade cycle simply by allowing money to lead economic activity and not the other way around, as is presently so.
The argument of what comes first, money or economic growth, is clearly the argument of the chicken and the egg. In scientific terms, it is the argument of which are the dependent and which are the independent variables in our analyses. If we seem still confused after these arguments and analyses we may experiment in a more expedient manner: We have tried the so-called 'demand for money' and have found it most wanting. It would seem time to try a reasonably constant money growth, which we can achieve through direct disbursement to the electorate; those who we should say are the equal and sole owners of the Federal government and the wealth it commands.
We have here something far more than mere presumption in our suggested solution to the trade cycle; we have scientific evidence in the form of Keynes law of liquidity preference as a contributing facet of the trade cycle: To recall, as our incomes increase our consumption increases but not so much, leaving our savings larger. More clearly, as the trade cycle progresses both production and incomes increase but not so much as consumption with the obvious consequence that consumer goods began to backup. An increase in money quantity reflective of the increased economic activity equitably disbursed to the electorate would override this negative effect of the trade cycle, which impacts most harshly on those members of society who have yet to reach the point where their income has risen to meet their demands on consumption and their need for debt retirement.
We also have considerable experimental evidence as to the causes of the trade cycles, as is shown in the next parts of this book. The adverse influence on economic growth in consequence of the failure of the commercial banks to grant loans, the only means by which the money quantity can be expanded independent of Federal government deficit spending, is most in evident in the brief examination of the Great Depression. Similarly, the expansion of economic activity is most in evident from the studies of World War II from Federal government deficit spending. But our examination of history tells us much more than the causes of the trade cycles, as we see in the next two parts to this book.
the False Construct of the Supply Function
The construct of a series of aggregate supply curves, as shown in Figure 2, is an essential part of conventional economic teachings. Reproduced here are extractions from the first three pages of Chapter 18 of The General Theory, as these pages describe the productive components of the economic system. Hence, they define the supply curve. But these pages also provide the essence of Keynes Theory and in doing so, they expose the confusion and errors Keynes' embedded in his theory. For this reason, these extractions are taken from the section: Introduction To Keynes Theory Constructed in Chapter V of A Plan For America, as accompanying these extractions are comments that addresses these issues.
In describing the economic system, Keynes applied concepts of system engineering. This was over a decade before these concepts were formalized into this discipline. Although his application was flawed, it evidences foresight, if not brilliance, still not appreciated by the economics profession. The most serious of these flaws was his choice of interest rates as the primary independent variable rather than money. The wrongness of this choice comes from the fact that interest rate is a measure not a substance. However that wrongness has been carried forth for the past eighty years and it is just one of the serious wrongs that govern our dysfunctional financial system. Following are the extractions with commentary (only the extractions from The General Theory are in quotations):
"We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour and of the activities of supervision and organization, as well as the social structure including the forces, other than our variables set forth below, which determine the distribution of the national income..."
These are the components comprising the economic system; in more technical terms, they are the system variables. The significance of these components in this brief expose is that they alone form the supply function. These are entities that only change through an evolutionary process: changes from technology, custom, etc. and the impact the economic system puts on its own structure. Also to a certain extent, they are subject to engineering design, which, from a political perspective, is expressed mainly in the tax structure and regulations. Obviously, such changes in the supply function are not consistent with the shifts in the supply function, as it is depicted in Figure 2 above over any reasonable time frame.
So now having defined the supply function what happens to price as economic activity shifts? The answer seemingly again can be found in the national accounts for the Great Depression. For example, an aggregate demand shift from Point Pc on the curve identified as SRAS in Figure 2 to Point P1 may be viewed as the change in Real GDP from $104.40 billion in 1929 to $95.10 billion in 1930 with a corresponding drop in price of 4.2 percent. This point is shown in Figure 7 as part of the plot of price against Real GDP for the inclusive years of 1929 through 1942. Corresponding to this change in Real GDP is a decrease in M1 from $26.18 billion to $25.08 billion. This is Keynes law of effective demand acting in reverse of that described above and as depicted below in Figure 8 for the years 1929 through 1933. But it remains the law of effective demand expressed mathematically as: PQ=VM.
We may continue exploring this drop in aggregate demand, depicted in Figure 7, to 1933 where real GDP is $76.4 billion and price is 24.5 percent lower than it was in 1929. The corresponding value of M1 in 1933 is $19.17 billion, which is $7.01 billion less than it was in 1929.
There are those, the Austrian School as a prime example, that claim that had Hoover not intervened in the economy it would have soon recovered. Simply withdrawing the deficit numbers for 1931 and 1932, which together was $3.20 billion, from the economy and extrapolating in accord with the trace for Real GDP in Figure 7 provides a final value of Real GDP of about $62 billion for 1933 and a further drop in price of about 7 percent for a total price drop of about 32 percent. This extrapolation assumed no further bank failures, an unlikely probability. What this analysis clearly exposes is the nonsense of this claim by the Austrian School.
Figure 8 shows traces of GDP and Real GDP as a function of M1, similar to that shown above in Figures 2 and 6, for the on-set years of the Great Depression, 1929-33. The difference between Figures 3 and 6 and Figure 8 is that associated with the decline in economic activity is the greater price change, shown in Figure 7: price deflation between 1929 and 1933 averaged 6.1 percent per year whereas the average price inflation between 1933 and 1937 was 1.9 percent per year and between 1938 and 1940, it was essentially zero.
Although the velocity of M1 was not much different during the decline then during the recovery, averaging 3.17 during the former and 2.93 during the later: the big difference was the effect the change in M1 had on the decline over the growth in Real GDP, for the latter it was 6.91; whereas for the former it was 2.20. In other words, for each $1.00 billion removed from M1 was a drop in Real GDP of $6.91 billion whereas for each $1.00 billion added to M1 there was a growth in Real GDP of $2.20 billion.
Not clear but seemingly taking place was a change in liquidity preference: those with money held it far tighter during the decline than the increased spending that took place during the recovery. In planer words, there was much more hoarding during the decline than splurging during the recovery, which are natural expectations.
To continue this extraction from Keynes General Theory but as presented in A Plan For America, as it allows a more complete expose of the economic system and hopefully a better understanding by those that may aid in correcting the financial system either through teachings and/or the political process:
"Our independent variables are, in the first instance, the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest...
"Our dependent variables are the volume of employment and the national income...
"The factors, which we have taken as given, influence our independent variables, but do not completely determine them...but there are certain other elements which the given factors determine so completely that we can treat these derivatives as being themselves given...
"...Thus we can sometimes regard our ultimate independent variables as consisting of (1) the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital assets, (2) the wage-unit as determined by the bargains reached between employers and employed, and (3) the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income...and the quantity of employment...
"…Our present object is to discover what determines at any time the national income of a given economic system and (which is almost the same thing) the amount of its employment; which means in a study so complex as economics, in which we cannot hope to make completely accurate generalizations, the factors whose changes mainly determine our quaesitum. Our final task might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live." Italics added.
Keynes in the final sentence quoted in the second to last paragraph above alludes strongly to but fails to identify explicitly the only true independent variable: Money, the force that drives economic activity, as most clearly exposed in Figures 3 and 6 (and as Keynes clearly revealed in his Chapter 21). Those components Keynes defines as independent variables: - the wage-unit, the propensity to consume, the attitude to liquidity and the expectation of future yield from capital assets - I would define far more as system variables, as they are components of the system with reasonably set characteristics, although to a limited extent subject to some engineering design, but they are also to some extent dependent variables, as they are influenced by economic activity.
Although the wage unit is different from the other three: it at times being partially in the realm of the dependent variables but also partially in the realm of the independent variables as well as having the characteristics of a system variable. But overall, these are not so different as Keynes givens: "…the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour and of the activities of supervision and organization…" These define the system, hence are true system variables and as such form the supply function.
Keynes' choice of employment and national income as dependent variables is proper as they respond to demand on economic activity, which responds to money. But they are incomplete: investment, an important component of the economic system, also responds to economic activity, as does consumption, but it is our money balances, as they respond to economic activity, that determines the amount we are willing to invest. Investment is different from Keynes' schedule of the marginal efficiency of capital, which fits somewhat as a system variable during the short term but is truly a dependent variable over the long term. Through all of this we have the rate of interest that too responds to economic activity. Hence, it is correctly considered a dependent variable.
This breakdown between system variables and dependent and independent variables as I have defined it here is far more consistent with concepts of system engineering, a discipline far better developed some eighty years later. Moreover, it makes far more sense from an analyses perspective: the system variables defining the system; money driving the system; employment and productivity - expressed as national income - being the output of the system. When we speak of analyses, what we really should mean is our understanding of the system, as it is an empirical system that requires constant monitoring and adjustments, the success of the latter being based on our understanding.
A further note: by lumping money with "...our propensity to consume, our attitude to liquidity and our expectation of future yield from capital assets...", Keynes seems to have viewed money, as determined by the (then) action of the central bank, more as a system variable than as an independent variable. But, as told in Chapter 21 in The General Theory, Keynes clearly identified money as the drive on economic activity, which is confirmed in Figures 3 and 6 drawn from the national accounts of the Great Depression.
Not to depart from the purpose of this section, to demonstrate the relative stability of the supply function as opposed to the teaching displayed in Figure 2, we might question why Keynes included interest rates rather than money as his independent variable? The answer seems more to have been a political choice, as may be judged from his comment: "Our final task might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live." Italics added.
From this we may conclude Keynes was not ready to attack the "system in which we actually live" unlike that group of economists drawn mainly from the University of Chicago that offered the Chicago plan to the Roosevelt administration in the early 1930s. And maybe Keynes saw that such a change, as important as it would be to the Nation and the World, could not be achieved without more support from the economics profession. And maybe this is where we are today. But that support will not come until these false teachings are amended.
the LRAS - Another False Construct
The vertical long run aggregate supply line, according to conventional economic teaching, is where the economy is in equilibrium with all available means of production, particularly employment. Hence along with this concept is the "natural rate of unemployment". This "natural rate of unemployment", according to conventional teaching, is a fixed number and many economists will claim it to be at approximately 5 percent. It is this teaching by economists that "in the long run, the economy achieves full employment" and it will do so independent of any external influence. The only difference in the various teachings is the time required in arriving at this "natural rate of unemployment" but even that remains nebulous.
But this teaching too has no connection with reality, as best judged from the official records: During the years 1943, 1944 and 1945, the official unemployment numbers were respectively, in percentages: 1.7, 1.0 and 1.6. For the years 1923 through 1929, the official unemployment numbers, also in percentages, were respectively: 3.2, 5.5, 4.0, 1.9, 4.1 and 4.4 with an average of 3.9. During this earlier time, inflation, as measured by the CPI, was essentially zero. What it would have been during World War II is not known in consequence of price and wage controls and rationing of scarce items. However official inflation rates, drawn from the CPI, for 1941 and 1942 were respectively 9.1 and 13.4 percent.
Both of these events were conditions where employment was totally voluntary, drawn solely by payment for labor's services. The demand on those services for the years 1923-29 was obviously a consequence of entrepreneur's expectations of profits on the future sale of their products to the public. That is a truth in conventional economic teaching. The demand on those services for the World War II years may also have been entrepreneur's expectations of profits. But a large part of that production was war materials sold to the Federal government, far more than the Federal government purchases of infrastructure products during the early recovery years of the Great Depression.
The six years preceding the Great Depression was a rare event, as historically the only other times the economy has been at full employment was during major wars. That was the first of the above conditions cited in the previous paragraph. Furthermore, the belief ingrained in the minds of many in the economics profession was that depressions followed wars, as evident from the prediction of a post-World War II depression by many of its members. The obvious reason for this prediction was the historical record (sometimes even economists look at the historical record even though they cannot acknowledge, if they understand, its cause and effect).
But from the historical record, as best we can judge, we should conclude that more often than not in peacetime, the economy operated at less than full employment and only reached full employment at the end of the trade cycle when it then goes back into recession (in pre-World War II years, it was called depression). The most catastrophic of these events, of which we have a reasonably concise record, is of course the Great Depression, when at its depth unemployment had reached 25 percent in the US and more in some other countries, unemployment in German for example may have exceeded 30 percent. The historical record of this economic event in the US is depicted in graphical form in Figure 9.
But there were many more such events in the 19th Century that were not unlike the Great Depression, if we can accept the historical writings that describe these times. The first of these, prior to the Civil War, began with the Panic of 1819, some hint at the conditions that followed can be drawn from the condition of President Jefferson's estate at the time of his death in 1826; The second major event began in 1837 and lasted into the mid-1840s; the next depression followed the Panic of 1857. In between these events were the Mexican War followed by gold discoveries in California.
Beyond these periodic disruptions of the economy was the period following the Civil War to near the end of the 19th century, which contained much labor unrest. In fact, historians and possibly some economists refer to the period from the early 1870s to the mid-1890s as the Long Depression. The official beginning of that event likely was the Panic of 1873. The labor unrest during nearly the total of this event obviously evidenced something different than full employment.
But we can skip forward too far more recent times: The 1979-82 Recession and the 1990-92 Recession. The historical traces for GDP for these events and their recoveries are shown respectively in Figures 10 and 11. The employment numbers corresponding to these events are in Table 5.
As depicted in Figure 10, the trade cycle began with the 1979-82 Recession and lasted to 1988. Drawing from Table 5, unemployment in October 1978 was 5.77 percent but by December 1982 it had risen to 10.85 percent when recovery began. However, employment did not drop below 6 percent until November 1987 and then reached its lowest value of 5.24 percent in August 1989 when the next trade cycle began with the 1990-92 Recession.
As to the source of this recovery: some economists claim that it was Reaganomics. According to the Concise Encyclopedia of Economics: Reaganomics had four major policy objectives: (1) reduce the growth of government spending, (2) reduce the marginal tax rates on income for both labor and capital, (3) reduce regulations, and (4) reduce inflation by controlling the growth of the money supply. The expected outcome of this program, amongst other things, would be a balanced budget and reduced inflation.
How successful was Reaganomics with respect to growing the economy and reducing inflation during Reagan's two terms? Judging by the numbers, mixed: GDP grew from $2.86 trillion in 1980 to $5.25 trillion in 1988 or at an annual rate of 7.88 percent. However, the average inflation rate was at 4.41 percent meaning the Real GDP grew at the rate of 3.42 percent. But the big number was in the deficit, averaging a little over four percent of GDP. The total deficit over this eight-year period was $1.34 trillion or 32 percent of the average GDP.
The trade cycle depicted in Figure 11 began with the 1990-92 Recession and lasted to 2000. Again, drawing from Table 5, unemployment in August 1989 was 5.24 percent and dropped to 7.82 percent in June 1992 when recovery began, dropping to 5.88 percent in September 1994. The lowest employment was 4.01 percent, which occurred in January 2000 when the Dot.com Bubble began. Shortly after the Dot.com Bubble was the beginning of the Housing Bubble, the obvious solution to the Dot.com Bubble. But the building of the Housing Bubble was not enough, as it was supplemented with deficits totaling $2 trillion between 2000 and 2008. The deficits between 1989 and 2000 totaled $1.24 trillion.
Say's Law - The Source of the LRAS
The evidence drawn from the national records that document how the real economy functions clearly describes something quite different than an equilibrium Long Run Aggregate Supply position and a "natural rate of unemployment". This false construct of a LRAS, as representative of full employment, is simply a graphical statement of Say's law. Hence, a brief comment on Say's law is in order.
Simply stated, Say's law says that: "Supply creates its own demand." From Wikipedia is drawn something a little more formal: "Say's law, or the law of markets, in classical economics, states that aggregate production necessarily creates an equal quantity of aggregate demand. The French economist Jean-Baptiste Say (1767–1832) introduced the idea in 1803, in his principal work, A Treatise on Political Economy (Traité d'économie politique):
"A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value and as each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase."
The telling aspect of Says law is the time of its introduction, in the midst of the Napoleonic Wars. During such times, there should be little question that the public will buy that that is available. That is why the US Government introduced price and wage controls and rationing of scarce items during World War II. This condition hardly was different in France and Britain during the Napoleonic Wars than in the US during World War II.
But following that war and following all major wars with the exception of World War II in the US there have been major depressions. The depression following the Napoleonic Wars, particularly in Britain, likely was the worst of those of the modern age. But to continue:
Say was a Frenchman and undoubtedly drew on the conditions of the French economy during that 20-year war. Not discovered here were these conditions but they likely were not too different from those of the British economy during this period, as Britain was France's main foe in these wars. Drawing from the British accounts: From 1797 to 1822, the Bank of England suspended redemption. During that period, the Bank employed a managed money of account that grew the national money supply at a rate probably in excess of 6 percent per year up to 1815. At the end of that period, the money quantity (the circulating currency) likely had expanded by 3-fold.
Corresponding with the increased money quantity was a similar increase in the national product: From 1801 to 1811, the national product, in constant prices, grew from £138 million to £168 million. This is an average annual growth rate of 2.0 percent per annum. For the period between 1790 and 1800, prices increased at the average rate of 3.75 percent per annum. Growth in national income in current money was approximately 6.35 percent per year. The growth in current and constant money terms during the subsequent decade was slightly less but similar.
These are obviously conditions that draw the full employment of a nation. With the war effort drawing 20 to 25 percent of the national product, there would remain a scarcity of consumer goods. Under such conditions, it is difficult to see something other than these goods being consumed as quickly as they were produced. Hence, here is Say's law: supply creates its own demand. But the war ended in 1815 and with that was a general price slump that affected industry and agriculture. To quote Dr. Weber, an American historian of the recent past:
"…after the wars had ceased…peace brought with it a general economic slump and, in the decade that followed - while export trade to Europe and America fell by a third - agriculture, the heavy industries, and textiles alike suffered from severe depression. In 1815, wheat prices fell catastrophically from 126s. 6d. a quarter to 65s. 7d, and although Parliament immediately passed a Corn Law which imposed heavy duties upon foreign grains, domestic prices recovered very slowly and never completely. In rural areas, this brought hardship to all classes and ruin to tenant farmers and yeomen who had over extended their operations. As for the agricultural laborer, deprived by enclosures of the means of having a plot of his own or even keeping a pig or some geese on the village commons, he saw his wages forced down implacably and found himself confronted with the choice between misery on the land or flight from it."
After 1815, as Dr. Weber tells further, workers were being "...dismissed by the thousands...and those who were kept on were forced to work long hours under appalling conditions for wretched wages." The worsened wage conditions were caused in part by the disbandment of the military forces after the war and the continual immigration of Irish workers to the industrial centers of England and Wales. These continued to add to the already over abundant labor force. The result was that "…the industrial towns of England in the first years of the peace became centers of squalor and want, while the country side was filled with able-bodied paupers and unemployed handicraftsmen."
The conditions Dr. Weber described were brought about by an intentional contraction of the circulating currency, argued to return the nation to the gold standard. Drawing from Deane and Cole, a rough estimate of the national income for Great Britain at the end of the war in 1815 was £330 million and in 1822 it was £285 million. The price levels for these respective dates were 72.0 and 99.4. In other words, prices and national income in 1822 were 72 percent and 86 percent of these respective values in 1815. This would suggest a drop-in employment of 14 percent but that does not account for the soldiers released from duty and the immigrants from Ireland.
Without the national records the actual unemployment is unknown. From the evidence available, it obviously is difficult to judge in consequence of factors that accompanied such conditions: reduced wages beyond the reduction in prices; possibly increased efficiency in labor productivity in consequence of advances in technology; and growth in population, etc. The information from Dean and Cole bears out Dr. Weber's narrative.
A contraction of the circulating currency would drive interest rates up and labor wages down. And it seems that following all wars, from the Napoleonic Wars forward, following cessation of hostilities, the monetary authorities would engage a contraction of the currency. This happened in Britain following the Napoleonic Wars, in the US following the Civil War, in Britain and the US following World War I, although in the US the contraction was for a very short duration. It did not happen in the US following World War II. But based on this previous record, the projections by most conventional economists were that a depression would follow World War II.
This brief analysis exposes the falseness in the concept of equilibrium Long Run Aggregate Supply positions and a "natural rate of unemployment". Simply from a cursory examination of our economic history, drawn solely from observations, should convince the naivest amongst us of the falseness of these concepts. Yet these false concepts hold sway amongst the public, which can only be attributed to these false teachings by the economics profession and others that follow them in their teachings.
This essay began with the phrase: Conventional economists and those that follow them do a Poor day's work in their teachings on Aggregate Demand and Aggregate Supply. Aggregate Demand, Keynes' Effective Demand, is the total of all economic activity and the drive on it is simply money (or the appearance of money). By keeping this fact hidden, as these false teachings do, prevents solving the economics problem: the periodic trade cycles, the egregious distribution of wealth and its companion - poverty, the excessive consumption of nonrenewable resources, the degradation of the natural environment, and even the many wars and the great destruction they do to life and property.
To argue equilibrium LRAS as only needing time to cure, is to lay a cruelty beyond anything civilized. This is most evident from the historical narratives by such as Dr. Weber. But it is more evident from the historical record of the Great Depression documented in pictures, narratives, and in the national accounts: The traces in Figure 8, reproduced from the latter, help expose the cause of the misery and destruction told in that documentation.
The worst of the Great Depression took place during its onset, between 1930 and 1933, as it was during that time that official unemployment increased from 4.4 percent to 24.7 percent of the labor force. Associated with this loss in employment was destruction of untold wealth and the misery that went with it for so many. The cause of this most destructive event, the loss in M1, the circulating currency, from $26.18 billion in 1929 to $19.17 billion, is clearly exposed in the traces in Figure 8: from 1929 to 1933 GDP dropped from $104.40 billion to $56.00 billion and Real GDP dropped from $104.40 billion to $74.20 billion. It is the latter that reflects the drop in economic output but it is the former that reflects the drop-in labor's wages that went with the drop in employment.
As told above, this loss in M1 - the circulating currency, was directly the consequence of demand deposit accounts un-backed by money, however it is expressed being certificates and metals stamped by the Government. These accounts accounted for $22.28 billion of the $26.18 billion or 85 percent of the circulating currency in 1929. Of this $22.28 billion, the banks held in reserve, as best that can be estimated, only $2.70 billion or 12.1 percent of this $22.28 billion. It was this flaw in the banking system that was directly responsible for this most destructive event called the Great Depression.
The solution was obvious: require the banks retain 100 percent reserves behind their customers demand deposit accounts and have the Government create and issue the money that forms these reserves, as is its constitutional charge: "to coin money, regulate the value thereof…" That solution, referred to as the Chicago Plan, was obvious to those economists that brought it before the Government in 1933. The reason it did not come forth was not due to lack of effort on their part but rather to those that were in control of the financial system, which included the power over the creation of money. This they would not give up and with this power, they were able to keep this solution hidden from the public.
The main reason this solution has been kept hidden from the public for these many decades is directly traceable to these false teachings that are still being carried on by the economics profession and those that follow those teachings. Do these economists and others that teach these false concepts that take attention away from the proper solution do so with intent or with ignorance? But does it make a difference? The best answer to this question seems to be: Maybe:
It is not likely that Roger Strickland, a Professor in the Economics department at Santa Fe College, Gainesville, Florida, a second level institution of higher learning, has sought to understand no more in his teachings than he drew from textbooks such as Frederic Mishkin's: The Economics of Money, Banking, and Financial Markets. In other words Strickland and others like him, Jason Welker, from which Figure 2 was drawn, teach that that is set before them by those that lead in the economics profession, accepting these things as truth without question. But that is where the great damage is being done.
But Strickland and Welker are joined by many more, which can be found by simply going to YouTube and searching: aggregate demand, aggregate supply: among these are found: Jacob Clifford under the rubric ACDCLeadership, a teacher at the advanced secondary level in Southern California; Tyler Cowen and Alex Tabarrok Professors at George Mason University under the rubric: Marginal Revolution University; etc. These, making these presentations, are, like Strickland and Welker, from the heartland of the Nation not from the prestigious colleges and universities where the authors of these textbooks such as Mishkin's reside.
But the authors of these textbooks from which these presentations are drawn have either served as high ranking members of or consultants to the Federal government and the Nation's highest-level financial institutions. Textbooks by these commonly known personalities of the Mishkin stripe include such as: Economics and Macroeconomics, By Paul Krugman and Robin Wells; Principles of Microeconomics, by Robert Frank and Ben Bernanke; Macroeconomics: Principles and Policy, by William J. Baumol and Alan S. Blinder. These few listed here are just the tip of the iceberg. But they represent those that control economic thought and beyond that the implementation of this wrong thought at the highest levels of Government and finance. It was these Keynes undoubtedly had in mind when he penned in the preface to The General Theory:
"The matters at issue are of an importance which cannot be exaggerated. But, if my explanations are right, it is my fellow economists, not the general public, whom I must first convince. At this stage of the argument the general public, though welcome at the debate, are only eavesdroppers at an attempt by an economist to bring to an issue the deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory, and will, until they are resolved, continue to do so."
Though Keynes was most successful in drawing world attention to this most valuable work he was clearly not so in convincing his "fellow economists" nor those that followed to this day of his ideas. Maybe this was partly because he buried money behind interest rates. But in Chapter 21, he is explicit in identifying money as the drive on economic activity. So clearly it is something far more that keeps these ideas hidden from the general public and the great value they can provide to the Nation and the World.
But since the economics profession has not been able after eighty years: "to bring to an issue the deep divergences of opinion between fellow economists which have…almost destroyed the practical influence of economic theory, and will, until they are resolved, continue to do so", the general public must join the debate and many amongst them must become knowledgeable about the things Keynes brought forth and more if we are ever to correct this dysfunctional financial system and the great damage it has and is fostering onto this world.
 In A Plan For America, The Means to Economic Health And Preservation of Our Democratic Republic, as told by an Entrepreneur (Pg. 198-199 in Amazon, and 145 in my notes) and many other of my writings, including the first paper presented in this book, money is defined as: a unique accounting system consisting of markers and entries in a series of accounting ledgers made secure by the people through the fiat of their government. In other words, money only comes into existence by law. To not acknowledge this fundamental concept of money is a most egregious wrong of the economics profession.
 Money held by the public is called currency in circulation, as opposed to circulating currency, which is defined as that which serves a community as the means by which payment is made. Hence, currency in circulation is a part of the circulating currency.
 Irvine Fisher tells of the Chicago Plan in: "100% Money and the Public Debt", published in 1936. In doing so, Professor Fisher also tells the cause of the Great Depression: "The most outstanding fact of the last depression is the destruction of eight billion dollars-over a third-of our 'check-book money'-demand deposits. This was the natural result of our unstable short-reserve system and the principal reason for the great severity of the depression." Ibid. (Pg. 9). This is an important book in understanding the proper solution to our dysfunctional financial system. It can be accessed on the Internet at: http://realmoneyecon.org/lev2/images/pdfs/100percent_money.pdf.
 Commercial bank deposit account insurances administered through the Federal Deposit Insurance Corporation was authorized by the Banking Act of 1933, more formerly known as Glass-Steagall. The act also included provisions for separating commercial banks from investment banks.
 One of the early acts of the Washington administration, after the appointment of Alexander Hamilton as Secretary of Treasury, was to establish the First Bank of the United States. It was this Administration through this instrument that began the undermining of this most important power of congress: to coin money, regulate the value thereof. Almost all of the following administrations continued in this negative direction and those few that attempted to arrest this direction, all failed. Hence, if the Trump administration were to achieve control of the Nation's monetary system in general accord with the Chicago plan with a National Dividend for its proper disbursement, it will have achieved that that no other administration could. Furthermore if Mr. Trump is to keep his campaign promise to remove the national debt and grow the economy he must do this, as under the existing financial structure the national debt cannot be brought down if the Government is to grow the economy. This is made evident beyond any reasonable doubt in Complementary Paper # 1.
 A National Dividend, as set forth here, is a set quantity of money annually disbursed to the eligible electorate for the sole reason that it belongs to them.
 Had we not such a confounded financial system, mainly in consequence of FDIC, this effect on the recovery from the Great Recession would have been far clearer.
 John Maynard Keynes, "The General Theory of Employment, Interest, and Money," Harcourt, Brace and Company, 1936, Chapter 21, Part III.
 This essay is an extension of Chapter XI in A Plan For America, The Means to Economic Health And Preservation of Our Democratic Republic, as told by an Entrepreneur (anewplanforamerica.com).
 A Plan For America cited above (Pg. 198-199 in Amazon, and 145 in my notes).
 Circulating currency is different from currency in circulation, the latter being defined as that portion of the circulating currency held by the public. Bank notes issued by the state banks prior to the Civil War formed part of the circulating currency and possibly a portion of the currency in circulation. However, following the Civil War, the currency in circulation was almost solely money, as defined herein. Possibly the most memorable example where the circulating currency was completely void of money was that used in Germany immediately after its defeat in World War II when packages of cigarettes served as this medium of exchange.
 Since the Banking Act of 1933, more commonly known as Glass-Steagall, and the means used to adjudicate bank failures, the circulating currency is solely money, as made clear in Complementary Paper # 3. Hence in these studies, for conditions after 1933, the circulating currency is money and often referred too correctly as such. The problem is in distinguishing between the circulating currency and loan money, as FDIC and similar Government account guarantees cover both demand and time deposit accounts with very short terms on the latter. This is a violation of Keynes law of liquidity preference and is in large part the cause of the dysfunctionality of the financial system. Clearly to establish a proper circulating currency requires knowledge of this very important law of macroeconomics. It is described in several of my writings drawing from John Maynard Keynes' Chapter 13 in The General Theory of Employment, Interest, and Money, Harcourt, Brace and Company, specifically in Chapter V in A Plan For America. The Glass-Steagall Act can be accessed on the Internet: https://archive.org/stream/FullTextTheGlass-steagallActA.k.a.TheBankingActOf1933/1933_01248#page/n1/mode/1up.
 Irvine Fisher, although not from the University of Chicago, was possibly the strongest proponent of the Chicago Plan. "100% Money and the Public Debt" was published in 1936. It can be accessed on the Internet at: http://realmoneyecon.org/lev2/images/pdfs/100percent_money.pdf.
 Ibid. Pg. 9. Note that in this extraction, Fisher uses the term "check-book money" in describing demand deposit accounts; where, in fact, prior to 1933, these were something different from money, as defined here.
 The Banking Act of 1933 is more commonly known as Glass-Steagall. It can be accessed on the Internet at: https://archive.org/stream/FullTextTheGlass-steagallActA.k.a.TheBankingActOf1933/1933_01248#page/n1/mode/1up. It is prescribed in a very extensive and complex document but its foremost part was to secure the deposit accounts of the banking institutions. As stated in its preamble: "To provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes." Obviously, a commercial bank's deposit accounts constitute by far its larges assets. However, as often presented by the media, this foremost part is overlooked, citing only the attempt at separating commercial banks from investment banks: "…to prevent the undue diversion of funds into speculative operations…" Its complexity seemingly was in its attempt to secure these accounts and still maintain the private banking system as the means of regulating the circulating currency. This, it succeeded in doing but the system it preserved has failed to do the chore assigned, as is so obvious from the historical record (see Chapter XIII in A Plan For America for evidence of these failures). Beyond that is the immense costs to the public in a multiple of ways, as told throughout these Complementary Papers and elsewhere in my writings.
 All data is from: Historical Statistics of the United States Colonial Times to 1957 or in a more recent Internet document with the same title but ending with 1970. The Internet document can be accessed in pdf form at: https://fraser.stlouisfed.org/docs/publications/histstatus/hstat1970_cen_1975_v2.pdf. The charts and statistical analyses here are complementary to Chapter XI in A Plan For America.
 The Gross National Product was the main record of national economic activity during this period. However, its value is normally within a percent or so of the Gross Domestic Product, which is the more common measure in more recent years. Hence here Gross Domestic Product and its acronym, GDP, are used although the record is of Gross National Product.
 The corresponding units are billion dollars GDP and Real GDP per billion dollars M1. These coefficients represent the velocity of money (the number of times M1 turns over in a year) in the law of effective demand, as Keynes describes it in Part III, Chapter 21, The General Theory cited above. This relationship is referred to as either the Equation of Exchange or the Quantity Theory of Money in the economics literature.
 Real GDP is chained to 1933 dollars in Figure 1 and 1929 dollars in Table 1.
 It is shown graphically in Figure 4 in: Complementary Paper # 2, The Truth From Science About Free Trade The Great Depression And Keynesian Economics.
 CCC and WPA are acronyms respectively for Civilian Conservation Corps and Works Progress Administration. Both of these were public works projects established by the Federal Government to reduce the hardship of unemployment on the Nation's young men and other unskilled workers. According to Wikipedia, the WPA employed as many as three million men and women and the CCC another three hundred thousand. As far as can be determined these numbers are not included in the employment numbers Information on these programs and some of their accomplishments can be accessed on the Internet at: https://en.wikipedia.org/wiki/Works_Progress_Administration and https://en.wikipedia.org/wiki/Civilian_Conservation_Corps.
 Correlations between some of these parameters and GDP and employment would provide correlations greater than 0.7 but they would not provide anything close to the agreements they have with money.
 This conclusion is drawn from anecdote sources, not from formal documentation.
 These inflation and deflation numbers are based on the average of the annual consumer price index change for these respective years.
 In A Plan For America, cited above (P. 108 in Amazon, P. 77 in my notes), drawing from Joan Robinson in a brief discourse on the fact that the Monetarists, then led by Milton Friedman, never really accepted a functional relationship with money "...for if they had, they would have joined the money cranks in the great slump and proclaimed: 'It can all be done with a fountain pen.'" The national accounts for the Great Depression, presented in Figures 1 and 2 and Table 1, prove beyond any reasonable doubt that: "It can all be done with a fountain pen.” Today it would be computer entries, which even Ben Bernanke, a few years back, admitted too.
 Typical of these government purchases during the recovery years of the Great Depression were the Golden Gate Bridge, the San Francisco-Oakland Bay Bridge, Hoover Dam, Shasta Dam, and other major water projects throughout the Western states, the Tennessee Valley Projects, and many minor projects such as schools, community centers, road improvements, airports, etc. Many of these were contracted directly by the Federal Government.
 This expression that money serves more as a veil rather than what it is, the essential element in all economic transactions, is not unique here. Victoria Chick, Emeritus Professor of Economics, University College London, in addressing the question: "Why Don't Academics Understand Money?" (https://www.youtube.com/watch?v=EObtwxpDSzk), at Minute 9:12, waves her hands in the air and says: "Money is imagined to be only a veil thinly drawn across the real economy, and not affecting anything. And anybody who thinks that it does affect anything is subject to money illusion, which is a terrible mental illness. Now how does this happen? What is the appeal of this way of analyzing the economy, when we know actually, if we keep our common sense about us, that money does affect everything." Chapter III in A Plan For America, particularly in the Section: Genesis Of Classical Economists' Demeaning Of Money provides an historical expose on this failure of the economics profession to accept the importance of money in economic activity.
 See Complementary Paper # 5, A Poor Day's Work, The Teachings of Conventional Economists for an expose of the more egregious of these false teachings.
 Between 1930 and 1933, this extraction of money was mainly in consequence of bank failures that resulted in the destruction of the accounts they held. However, since then this extraction has been almost totally due to loan retirements exceeding loan issuances, as all bank accounts are secured by Federal Government guarantees making them immune to bank failures.
 During the Great Depression, this "borrowed" money was clearly created, as many say: "Out of thin air". However, in more recent recessions, it may have been truly borrowed, as it likely existed as time saving accounts lying idle in the banks. In a recent speech, General Wesley Clark acknowledged this fact in his statement: "There's two trillion dollars of capital on wall street looking to do something." (Global Impact Economy Forum - General Wesley K. Clark (Ret.), Published on May 4, 2012 [https://www.youtube.com/watch?v=pH4SxH_4a8w] Minute 24:52). A further point is that the only reason time saving accounts can be viewed as money is in consequence of FDIC and other similar forms of Federal Government account guarantees.
 According to the website for Office of Management and Budget (https://www.whitehouse.gov/omb/budget/Historicals), the last time the Federal government ran a surplus was in 1968 and before that it was 1957.
 Table 3 in: The Truth From Science About Free Trade, The Great Depression And Keynesian Economics; expands on this analysis in showing in tabular form the decay in effectiveness of Government deficits to increase employment in recoveries from these depressed economic times.
 Complementary Paper # 5, A Poor Day's Work, The Teachings Of Conventional Economists, provides a short expose on Say's law and its genesis.
 Possibly the most egregious of these are the Clintons, whose wealth increased from a few hundred thousand dollars when they left the White House in 2001 to in the tens of millions of dollars by 2016.
 Chapter XV in A Plan For America provides a moderately through discourse on the principal Court cases that addressed the Legal Tender issue.
 The government absorbing the risk on time deposits accounts leads to Moral Hazard, which was well understood when Glass-Steagall was being debated and presumably drew veto threats from President Roosevelt. President Roosevelt's concerns came to pass in a most egregious way in the financial crisis of 2008. This history is briefly discussed in the essay: Historical Tables Of Money And Debt – Understanding Money Creation With Fractional Reserve Banking. Also, described in this essay is the means by which money is created through time deposit accounts.
 This document can be accessed on the Internet at: http://eml.berkeley.edu/~cromer/great_depression.pdf.
 This quote is taken from "Popular Lectures and Addresses", Page 73 (https://archive.org/stream/popularlecturesa01kelvuoft#page/n7/mode/2up).
 David Friedman & Bob Murphy - The Chicago Vs. Austrian School Debate - PorcFest X, August 2, 2013 (https://www.youtube.com/watch?v=l2RByG_vutE).
 The first response from the audience, at Minute 45:25, provides a just criticism of this lack of the scientific method and should be well heard.
 Complementary Paper #1, The Great Depression And Keynesian Economics, Exposing the Most Blatant of National Wrongs exposes the consequence of this lack of science in economics. But many of my other writings do also. To a certain extent, they can be traced through references in these writings.
 Money and the circulating currency are not always the same, although they are often used interchangeably: Here and in A Plan For America, The Means to Economic Health And Preservation of Our Democratic Republic, as told by an Entrepreneur (Pg. 198-199 in Amazon, and 145 in my notes, money is defined as: a very unique accounting system consisting of markers and entries in a series of accounting ledgers made secure by the people through the fiat of their government. In contrast, the circulating currency is that which serves a community as the means by which payment is made. A failure to distinguish the difference in these two terms is undoubtedly a large part of the problem society has had in understanding the concept of money. This confusion is a trap that even this writer has on occasion fallen into. Herein where M1 is used it always refers to the circulating currency and only during the recovery years of the Great Depression is M1 considered to be reasonably synonymous with money.
 A clear proof of the law of effective demand is in: Complementary Paper # 1, The Great Depression And Keynesian Economics, Exposing the Most Blatant of National Wrongs. That proof draws on the national accounts from the early recovery years of the Great Depression, from which a coefficient of determination between GDP and money, M1, of 98.1 percent is drawn. The coefficient of determination between Real GDP and M1 was even better: 99.6 percent. The coefficient of determination between employment and Real GDP was 98.7 percent.
 This is a take on the phrase "man will be what he was born to be: free and independent." delivered by President John F. Kennedy at the Waldorf-Astoria Hotel on April 27, 1961 (https://www.youtube.com/watch?v=dZvqnOZKCfI). Although not directly relevant to this study other than this statement that gives us this most important guidance, it is a valuable talk that should be listened to by all. As to this guidance, that is in essence that told in the last section of the last chapter in A Plan For America: A Final Statement - The Goal Of Mankind.
 These accounts are examined in Complementary Papers # 1 and 5.
 These accounts are now effectively money, as they are Government insured. This is true regardless of the limits of the account insurance in consequence of the means the Government uses to adjudicate the law when banks holding these accounts become insolvent.
 This article was originally accessed at: http://www.cooperativeindividualism.org/zarlenga-stephen_on-economics-as-a-science.html; however, it no longer shows on the Internet.
 Historical Statistics of the United States, Colonial Times to 1970, Series F 186-191, Page 236.
 International labor comparisons, August 9, 2013 (http://www.bls.gov/fls/ichcc.pdf). Figure 1 does not include manufacturing wage rates for China. However, they are in the Bureau of Labor Statistics (http://www.bls.gov/fls/china.htm): International Labor Comparisons, which has an urban hourly rate of $2.85 for 2009. The chart from which this number was drawn has data back to 2002 when this wage rate was $0.95.
 http://www.cato.org/publications/commentary/seven-moral-arguments-free-trade. The word "moral" in this title is at best an oxymoron.
 My unpublished manuscript, Peak Oil and Energy Consumption, CO2 Emissions - The Other Side And What To Do About It, exposes many of the problems the World now faces. Possibly the most critical of these is the rapidly growing scarcity of moderately easily accessible petroleum. That scarcity is in consequence of our excessive use of this most valuable natural resource. But coupled to this usage is the excessive production of CO2. And why are we doing this? The best answer seems to be: For the insane idea of maintaining this dysfunctional financial system that is undoubtedly important, or at least viewed so by some, in maintaining these high corporate profits. Unquestionably it does that but it also makes for great inefficiencies in producing the wealth, the goods and services, which sustains the rest of us, and for many amongst us, in a manner not conducive to even reasonable happiness.
 The definitions assigned here were those in vogue during this period.
 Here is a loose usage of the term: money, as about 85 percent of M1 was demand deposit accounts secured only by the banks' accepted collateral in consequence of fractional reserve banking.
 It would be more appropriate to use the term currency rather than money, except that this is the common expression in this usage.
 This is taken from Chapter XI in A Plan For America, cited above. That in quotation marks was extracted from Friedman and Schwartz: A Monetary History of the United States.
 The consumer price index shows almost no change from 1922 to 1929, meaning that prices were stable and almost constant for this period.
 Chapter V in A Plan For America provides a brief discourse on this important economic concept.
 It should be noted that M1 held by all banks is not changed in this process because fractional reserve banking works in reverse. Complementary Paper # 1, Historical Tables Of Money And Debt – Understanding Money Creation With Federal Deposit Insurances and Fractional Reserve Banking gives a more detailed exposure on the mechanics of this process.
 Posted by ducati998 under dow jones (https://leduc998.files.wordpress.com/2008/05/graph1920-1929.gif).
 Series 517-530 Historical Statistics of the United States Colonial Times to 1970, Page 1007.
 This statement is made at Minute 53:20. It is followed by Murphy's explanation of the Austrian School's explanation on why the Great Depression lasted as long as it did. He offers no factual basis for this position, which he cannot, as it is contrary to all physical evidence.
 The consumer price index was essentially constant over this seven-year span, indicating neither inflation nor deflation.
 My recollection is that John Kenneth Galbraith, possibly in The Great Crash, 1929, identified bank loans of $5 billion that went into stock purchases. If this were true, theses loans likely would have come from time deposit accounts, not from established demand deposit accounts. This may be confirmed.
 Time deposits in commercial banks had to be involved in the growth of the stock market, as there seems to have been a connection between the crash of the stock market and the subsequent weakening of these banks. But the mere fact that M2-M1 grew at 7.8 percent per year and the stock market at 30.6 percent per year suggests that the greater part of this growth was from over the counter trading not from bank loans.
 In 1929, of the $26.18 billion that constituted M1, $3.90 billion was held by the public and $2.7 billion was held by the banks against $22.28 billion of demand deposit accounts. That left $19.58 billion of these deposits secured only by the banks' accepted collateral; meaning that $19.58 billion was something other than money.
 To recall, the drop in demand deposits went from $22.28 billion to $14.08 billion between 1929 and 1933, or by 36.8 percent. This much higher percent than the percent of failed banks suggests that more larger banks failed than smaller banks, suggesting further that if there was a connection between the stock market and the commercial bank failures it was more with the larger banks.
 Loren Gatch, Local Money in the United States During the Great Depression, Essays in Economic & Business History, Vol. XXVI, 2008 (http://www.ebhsoc.org/journal/index.php/journal/article/viewFile/6/6) expounds on the use of local currencies during the Great Depression as a substitute for money in local communities, which gives rise to the fact that many in the Nation recognized the importance of the circulating currency in formal economic activity even if the economics profession of today does not.
 The best evidence seems to be that loans drawn from time deposit accounts were the connection to the stock market and that it was some of these loans that went sour when the crash hit in October 1929 or maybe in mid-1930, as the stock market showed a gain following the October 1929 crash only to crash again. However, it was nearly a year later that banks began to fail, which seems to suggest that the banks were weakened by this event but still viable but with the weakening economy, evident in the national accounts, some became insolvent. Here we are left with speculation but that is not so as to the proper action that should have been taken, which a group of economists from the then Chicago School of economics well knew.
 Irving Fisher, 100% Money and the Public Debt (http://realmoneyecon.org/lev2/images/pdfs/100percent_money.pdf).
 Ronnie J. Phillips, The 'Chicago Plan' and New Deal Banking Reform (http://www.levyinstitute.org/pubs/wp/76.pdf).
 The Fed has very little control on the financial system. That is historical. That fact is exposed in analyses herein and in companion studies reference herein and, to some extent, are also exposed the reasons it does not have this control. But what the Fed did (and does do) is provide the funds, simply through computer keyboard entries, that prevent large financial institutions from failing. It does this through such as quantitative easing and other forms of corporate asset purchases and low interest loans. Had the Fed not done this following the 2008 financial crises, several of the large commercial banks that closely associate with the large investment banks, referred to in the vernacular as Wall Street, would likely have failed. This would then have exposed the wrongness of Federal Government insurances of commercial bank deposit accounts, as repair of the financial system would then have fallen to the commercial banks and these accounts. Yet, this was (and apparently still is) the argument for establishing (and maintaining) the Fed in 1913 (and retaining it as a private institution to this day). That is an obvious false argument, as it contradicts one of the main tenets of capitalism: the allowance of failure of private business entities as well as their success.
 A note on the work force numbers: the most consistent change seems to be for the early recovery years of the Great Depression where an increase in the work force always shows a positive number although this increase is at a decreasing rate, which is obviously contrary to reasonable expectations. Hence the logical conclusion is that these numbers do not fully reflect a work force for a continuously fully employed economy. The change in the work force numbers for the 1979-82 Recession recovery years are all positive, as they are for the 1990-92 Recession, but they actually decrease from 1984 to 1985. That is so also with the 1990-92 Recession recovery years from 1994 to 1995 but this decrease in this latter period is far more drastic than for the former. But when we look at these numbers for the Great Recession, we find that between 2012 and 2013 there was actually a negative growth in the work force. Clearly the means of recording the work force, which extends to the official unemployment numbers, has changed over the years.
 Wasteful expenditure can boost an economy in depressed times, as it did during the build-up to World War II. But that was when the velocity of money was about 2.5. Today we don't know what this number is because of the mixing of demand and time deposit accounts but it likely is far less, probably close to 1.4, as that was the inverse of MZM in 2014. This slowing down in the velocity of the circulating currency is also part of the reason deficit spending has lost its efficiency over the years in boosting a faltering economy.
 Table 4 was taken from this study, where it is presented as Table 7. This study includes tables of the various money and debt items from the end of World War II to 2014. In addressing the wrongs in passing money to the states and local governments and various privileged groups and the harm these money passages cause whether they are to revive a faltering economy or otherwise, it brings out the mere fact that the Federal Government's sovereignty derives from: "We the People of the United States…" not from the individual states, as was so with the Confederation. The importance of this is that money or other forms of wealth that the Federal Government wishes to make available to the states must first pass to the People.
 Quantitative easing is not part of this essay. But what can be said about it is that it is in its most base form an attempt to stuff the economic beast at its top with the hope that some of the stuffing will trickle down to the working level. That is supply side economics. The column: ∆M1+deficit in Table 1 in Complementary Papers # 1 and 5 proves the failure of this attempt at reviving a faulting economy.
 Drawing from these numbers is that the costs for each additional employee, strictly from the deficits, for the four respective events in Table 3, are: $2,147.21; $101,801.80; $157,264.96; and $845,714.29. The rather evident conclusion seems to be that government directed employment is not a very efficient means of introducing money into the economy and is becoming less efficient with each passing event.
 This essay is complementary to Chapter XIX in A Plan For America, cited above. It is also complementary to the essay: The Great Depression And Keynesian Economics, Exposing the Most Blatant of National Wrongs.
 From: A Program For Monetary Reform, by Paul H. Douglas, et. el., 1939, Page 1. Douglas was one of the chief authors of the Chicago plan presented to the Roosevelt Administration in 1933. This document can be accessed on the Internet at: http://sensiblemoney.ie/data/documents/A-Program-for-Monetary-Reform-.pdf. This is an excellent document, authored by some of those that brought forth the Chicago Plan. It definitely requires the full attention of all Patriotic Americans.
 The Fed M2 and M3 have gone through various definitions since their introduction by the Federal Reserve System. That assumed here is more in line with that existing during the Great depression. During this earlier time, M2-M1 was simply time deposit accounts in commercial banks and M3-M2 was time deposit accounts in saving and loan institutions. Today these respective entities are different measures of liquidity more or less independent of the nature of the institution that holds them.
 Many books on money and banking present this fractional reserve money creation process as a geometric progression series, which it is, but then present the money as being deposited in other banks. Whereas other banks likely receive money from such loans and maybe they receive the majority, there is nothing against this money being deposited into the first issuing bank. Moreover, when it is told in this manner, the fact that the banks create money from its loans becomes beyond obvious. Thomas Mayer, James S. Duesenberry, and Robert Z. Aliber, in Chapter 12 of "Money, Banking and the Economy", W. W. Norton & Co., 1981, use the multiple bank scenario in their example. They also display this series in equation form. Milton Friedman, in the video: "Milton Friedman on The Gold Standard [https://www.youtube.com/watch?v=MvBCDS-y8vc], uses this multiple bank form of transactions in creating money through the fractional reserve system. In this video, he suggests that bankers don't believe they create money because the process is concealed from the individual banker. I question Mr. Friedman's view that bankers do not know they create money through fractional reserve banking. But be that as it may, this is a worthwhile video for reasons beyond the fractional reserve system and its devastating effect on the US and world economies. However, it also contains serious errors, mainly by omission of important relevant facts.
 There is a requirement on banks equity.
 The bank is still free to loan this quantity through the fractional reserve process even though it was placed in the bank time deposit account, as once it is passed into the bank it is part of the bank's reserves.
 As can be drawn from the money tables below, this ratio of demand deposits to time deposits is essentially that that existed for the U.S. banking system in 2014. However, if the reserve ratio used in this analysis was 0.1, as is more appropriate today, the bank’s reserves to its total loans would be 0.0167. But from Table 1 below we find demand deposit accounts equal to $1.595 trillion and M3 equal to $17.7 trillion. Now if we use a reserve ratio of 0.1, the required reserves would be $159.5 billion and the ratio of the bank’s reserves against its total deposits is (0.1595/17.7=) 0.00901. The Federal Reserve Bank of St. Louis (https://research.stlouisfed.org/fred2/series/VAULT) reported bank vault cash on October 2014 of $54,648 million or a ratio with respect to M3 of .00308.
 The phrase: "To big to fail" applies to the large Wall Street banks, which draw succor from the large commercial banks. But the fact is that insolvent commercial banks with Federal deposit insurances, rather than being adjudicated, as nonfinancial institutions are, are combined with solvent banks or other type financial institutions through the actions of the Federal Deposit Insurance Commission (FDIC). In fact the main if not the sole purpose argued for forming the Federal Reserve System was to prevent failure of commercial banks, which are privately owned entities. But its failure to achieve this following the Wall Street crash of 1929, Federal deposit insurance was introduced. A little deliberation on this issue should make clear to all that the Federal Reserve System and FDIC and a multitude of other similar Federal government institutions for such purpose contradicts the principle theory on which free market capitalism is based.
 This is clearly the largest source of the banks loans and may explain why bankers view their role as intermediaries not money creators.
 Not knowing the time on these accounts is a limitation on this analysis. Clearly the longer the time factor the less these accounts play the role of money but since NOW accounts are in essence money accounts from their availability suggest that they have a short time factor.
 MZM, in Table 1 below, seems to be the Fed's best measure of the circulating currency in consequence of its liquidity. It is 72 percent of M3; the latter is the largest of the Fed's M-series money items but no longer recorded by the Fed since 2006. A point drawn from this high value of MZM is that much of the time deposit accounts are extremely short term, as that is a requirement of their near liquidity.
 Norbert J. Michel, Ph.D., "The Other Glass-Steagall: The FOMC And The FDIC"
(https://fraser.stlouisfed.org/scribd/?item_id=15952&filepath=/docs/historical/ny%20circulars/1933_0124.pdf#scribd-open). The hearings preceding the act can be accessed at: htps://fraser.stlouisfed.org/scribd/?item_id=22458&filepath=/docs/historical/senate/operation_bankingsys/operation_s71_pt2.pdf#scribd-open.
 Money and the circulating currency should be synonymous. The problem is that with Government guarantees of all bank accounts, money extends beyond the circulating currency, in fact in consequence of the means of adjudicating insolvent banks; it extends to, in essence, the total of the financial system's liabilities. This extension is reflected in the "too big to fail" institutions that reach far beyond the commercial banks.
 This was originally found at the Internet source: http://www.usagold.com/gildedopinion/greenspan-gold.html.
 Internet source: http://www.freemarketnews.com/WorldNews.asp?nid=49168,
 Data inclusive of 1946 and 1970 for all tables except Federal debt was taken from Historical Statistics of the United States, Colonial Times to 1970. All of the Federal debt numbers were taken from Treasury Direct (https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm). Prior to and including 1975, they were at mid-year and, after 1975, they were at end of September. Monetary data for later dates was taken from the Federal Reserve Bank of St. Louis, Economic data. State and local government debt for 1975-2015 from US government Spending (http://www.usgovernmentspending.com/year_spending_2015USbn_17bs2n#usgs302). Household, business and state and local government debt from 1985-2014 were from Federal Reserve Statistical Release, December 10, 2015 Page 5 (http://www.federalreserve.gov/releases/z1/current/z1.pdf). There is reason to question the debt quantities for the latter years, as for example, Gretchen Morgenson - "Three Years After the Meltdown - Where Do We Stand?" (https://www.youtube.com/watch?v=W5KATesnwyo) suggests households for the years since 2000 may be as much as 40 percent more than shown in the tables herein.
 During the recovery years of the Great Depression, World War II, and for a short period after, the Fed acted, in its essence, as an arm of Treasury. However, that changed in 1951 with the Accords. The Korean War and a heavy hand by the Fed and its supporters brought the Accords about. But those that brought the Accords about had to move slowly, mainly in raising interest rates as the means of controlling currency if they were not to draw the wrath of the public. This they did, hence serious problems did not arise until the mid to late 1960s. For a brief discourse on the Accords, see APFA Paper # 10 in Extracts From and Supplements To.
 Wikipedia, Money supply (https://en.wikipedia.org/wiki/Money_supply).
 Henry Steele Commager, Editor, "Documents of American History, Since 1898, Volume II, 9th Edition", 1973, Prentice-Hall, Inc., Englewood Cliffs, New Jersey. (Vol. II", Pg. 514).
 Statement by the President Upon Signing the Employment Act (http://www.presidency.ucsb.edu/ws/?pid=12584). For further information on this Act and its importance in the welfare of the nation, see Chapter XVI in A Plan For America.
 Here reference is made to Chapters X, XI and XVI in A Plan For America, of particular importance here is the Section: The Crux Of The Private Credit Monetary System in Chapter X.
 APFA Paper # 8, A Commentary On The Recent Government Bailout Of The Financial Industry in: Extracts From And Supplements To A Plan For America, The Means to Economic Health And Preservation of Our Democratic Republic, as told by an Entrepreneur. In addition to this extract, there is commentary on how the banks would fail to respond to the Nation's monetary needs following the bailout. That too came to pass, as predicted. That left the Federal government running deficits in excess of a trillion dollars as the only means to counteract the extraction of money from the economy by the banks. But as told in this essay and as we now find six years later, those trillion dollar passages were far less effective in reviving the economy than the passages from lesser deficits, as a ratio of GDP, then in reviving previous recessions. Table 7 in the unpublished paper: The Truth From Science About Free Trade, The Great Depression And Keynesian Economics, shows this efficiency at 0.975 for the Great Depression and at 0.203 for the Great Recession. That is roughly a five-fold loss in efficiency in this means of reviving a depressed economy. This means is more formerly known as Keynesian economics.
 These underfunded pension plans, as they existed prior to the 2008 financial crisis, are also briefly explored in A Plan For America, mainly in Chapter XIX.
 Federal Reserve Statistical Release, December 10, 2015, State and Local Government Employee Retirement Funds Defined Benefit Plans (http://www.federalreserve.gov/releases/z1/current/accessible/l120.htm).
 Excel sheets documenting various government accounts that contain the information used in this estimate can be accessed at: https://www.gpo.gov/fdsys/browse/collection.action?collectionCode=BUDGET&browsePath=Fiscal+Year+2016&searchPath=Fiscal+Year+2016&leafLevelBrowse= false&isCollapsed=false&isOpen=true&packageid=BUDGET-2016-TAB&ycord=822.
 The source for these interest rates is: Selected Interest Rates (Daily) - H.15, Board of Governors of the Federal Reserve System (http://www.federalreserve.gov/RELEASES/h15/data.htm).
 Mark Pash Speaks at the American Monetary Institute 11th Annual Conference (https://www.youtube.com/watch?v=2pqRHUqCSnU). This video is well worth listening to, not only as it contains much told in this paper about the importance of money but because of Pash's experience with our political leaders, particularly his telling of their lack of knowledge on the Nation's financial system.
 Ours is a republican form of government, the key feature of such a government is that sovereignty derives from the people. Hence its people are citizens. That is different from the political system, our Founders extracted themselves from, which being a monarchy, its sovereignty resides solely in the government and its people are subjects of the government. Clearly many amongst us, both in government and elsewhere, confuse this fundamental feature.
 APFA Paper # 23: Federal Money – The Corruption Of The States in Extracts From And Supplements To A Plan For America.
 It may be noted from Table 1 that in addition to a disbursement of $12,000 to each electorate and with other adjustments in the budget there remained sufficient money to reduce the outstanding portion of the debt to $1.52 trillion. This analysis chose $9.77 trillion to establish the circulating currency. That amount is consistent with the M1 to GDP ratio existing in the latter recovery years of the Great Depression and immediately following World War II. Another facet of this analysis includes the complete removal of the grants programs, which are mainly money-transfers to the states and special interests. As regards this facet, a point that presently seems never to be remembered but one that should never be forgotten is that the Federal Government derives its sovereignty, not from the states, as was so with the Confederation, but from the People. Hence all money and other forms of wealth commanded by the Federal government, and in fact that commanded by all levels of government, belongs to the people.
 These money parameters are defined in A Plan For America cited above. As used here, their meaning follows that prescribed by the Fed more or less prior to the 1970s, more specific to the 1930s.
 With the restructuring of the financial system following the Chicago plan and the establishing of a National Dividend and other reasonable and proper political changes, there quite likely will be a return of many to the land. This is important, as it is the land that most needs proper husbanding, which can only come from far more than the one percent or so that now own it. A further point is that this concentration of land ownership is not a natural event, as many in the mainstream would like us to believe. For more on this unnatural land concentration, see Part II of the unpublished document in my files: Peak Oil and Energy Consumption, CO2 Emissions - The Other side And What To Do About It.
 The Free Dictionary Farlex online (http://www.thefreedictionary.com/republic) defines a republic as: "A political order in which the supreme power lies in a body of citizens who are entitled to vote for officers and representatives responsible to them."
 According to the web site: The Wyvern 66 (http://thewyvern66.blogspot.mx/p/on-teaching-economics.html), Roger K. Strickland is a Professor of Economics for 30+ years at Santa Fe College, Gainesville, Florida. Strickland's presentations are reasonably representative of these false economic teachings although possibly a little more formal than others.
 Taken from Jason Welker, An Introduction to Aggregate Supply (https://www.youtube.com/watch?v=kdAQhvyco4s). The best I can determine is that Welker is an economics teacher at the Zurich International School and was educated at Whitworth University, Spokane, Washington, US. His teachings are neo-classical presenting a stickiness of wages due to minimum wages, labor unions, unemployment benefits, etc; but, in time, the economy self-corrects and returns to full employment: In Welker's words: "But then over time, high unemployment started to put downward pressure on wages causing short-run aggregate supply to increase or move downwards or to the right graphically. As firms began hiring workers again, at the new lower wage rate, output returned to its full employment level…" Like Strickland's presentations, Welker's are reasonably representative of these false teachings.
 M is the circulating currency, which may or may not be money (see Complementary Paper #1). But this is the nomenclature used in the economics literature; hence, its continual use here.
 This is Say's law. Simply stated, it means that: "Supply creates its own demand", meaning that money is not relevant in economic activity. More is told on Say's law in a subsection.
 In fact, as told nominally in a subsection, the only times the economies of the industrialized world seem to have been at full employment, with the exception of the six years preceding the Great Depression in the US, were during major wars: The Napoleonic Wars, the American Civil War, World War I and World War II are the best examples. But in between these wars were extreme depressions, as followed the Napoleonic Wars, as followed the American Civil War, and as occurred in 1930-33, but even when the economy was not in such a state, as occurred in the 1930s, there was much labor unrest as occurred in the US over the last third of the 19th Century.
 John Maynard Keynes, "The General Theory of Employment, Interest, and Money," Harcourt, Brace and Company, 1936 (Pg. 295-96).
 The Gross National Product was the main record of national economic activity during this period. However, its value is normally within a percent or so of the Gross Domestic Product, which is the more common measure in more recent years. Hence here the acronym for Gross Domestic Product is used although the record is of Gross National Product.
 These charts are taken from Complementary Paper # 1: The Great Depression And Keynesian Economics, Exposing the Most Blatant of National Wrongs, where their development is more formally treated and the source referenced.
 This seems to be the explanation for the moderately higher price increase between 1933 and 1934 than for the subsequent three years, as can be drawn from Figure 7 below. In fact, during the first of these subsequent years, prices actually declined, which reflected entrepreneurship stabilizing productive growth, in labor's wages and labor's efficiency. A similar set of conditions followed the 1938 economic decline.
 The Phillips curve expresses the supply function, as is evident in Items 2 through 5 in this extraction from The General Theory; but it is more evident in Keynes' definition of the economic system, as told in Complementary Paper # 1.
 Ibid. (Pg. 296).
 This diagram was taken from Paul A. Samuelson and Robert Solow, "Analytical Aspects of Anti-Inflation Policy”, American Economic Review, May 1960 (Pg. 188).
 Keynes, in defining the economic system on Pages 246-247 of The General Theory, places money as one of the independent variables: "...Thus we can sometimes regard our ultimate independent variables as consisting of (3) the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income...and the quantity of employment..." This extraction is elaborated on in a subsection in exposing the erroneous construction of the supply curve seen in Figure 2.
Clearly of these three independent variables Keynes enunciates, money is dominate and, furthermore, under a properly managed monetary system, easily controlled. This is told in the section: The Crux Of The Private Credit Monetary System in Chapter X in A Plan For America, The Means to Economic Health And Preservation of Our Democratic Republic, as told by an Entrepreneur. But on Page 245 of The General Theory, Keynes hides money behind interest rates although with some reservation: "Our independent variables are, in the first instance, the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest..."
We may only speculate why Keynes did this but reasonable speculation is that he was not ready to disturb the existing financial structure. But it may also be that he used this means to elucidate his idea that the economy divides into two parts: the real and the financial sectors; and that interest rates, being in the financial sector, were not the same as return on investments, the latter being drawn from the concept Keynes titled The Marginal Efficiency Of Investment, which is in the real sector of the economy. Joan Robinson, who was with Keynes when he was writing The General Theroy seems too to suggest this speculation. Keynes attempted to elucidat this aspect of his theory is in Chapter 18 of The General Theory but it is a very confusing attempt. See Chapter V in A Plan For America for more on this and hopefully a clearer discourse than Keynes gives in his Chapter 18.
 The adjustment numbers for the WPA, CCC and others were taken from Historical Statistics of the United States, Colonial Times to 1970, Pg. 357.
 If one were addressing unemployment as a social issue, the inclusion of unemployment in the analysis would be appropriate. But even in such usage it would be necessary to understand the effect of money on employment, which is the object here.
 As discoursed on in my notes: Peak Oil and Energy Consumption, CO2 Emissions - The Other side, And What To Do About It, this idea of jobs creation that is so embedded in our culture needs to be revisited. As concluded in that study, many of these government sponsored jobs simply draw on our labor and our nonrenewable resources and in the process, adds to the destruction of our environment without adding to our needs and comforts. Seemingly lost in our culture is the purpose of the economic system, which obviously is to fulfill our needs and comforts (or ought to be) with reasonable efficiency in the use of our labor but possibly more so in the use of scarce resources. That study also concluded that a National Dividend, as part of a properly restructured and managed monetary and tax system would far better meet the people’s needs that is sought in this idea of jobs creation.
 Chairman Greenspan in public testimony before congress in 2000 admitted to this impossibility of defining the circulating currency but failed to identify the cause. He also referred to the circulating currency as money, which it is. But in a certain sense so are insured time deposits of short duration, as they can be made liquid without little effort. The essay in Complementary Paper # 2 provides a brief extraction of this testimony that includes this admission. Although the conditions discoursed on here represent those post-1933 years when Federal government introduced insurances on both demand and time deposit account, the reasonable expectation is that these insurances were accepted by the public far more as security on their demand deposits than on their time deposits.
 This is incomplete, as bank loan money drawn from time deposits has its place in a properly functioning financial system. But these accounts must be free of government guarantees, for otherwise they will take on a character of money. For more, see the twelve (in my notes fourteen) points that form A Plan For America.
 This suggest to this writer that with a National Dividend, as described in the companion paper: A National Dividend, much of this money early on will go to buying down debt.
 Chapter V in A Plan For America cited above, in the section: A Graphical Construction Of Keynes Theory exposes most clearly the separation of the economy into its two inherent parts: the financial sector and the real sector. The latter is where all production occurs, whereas the former is the drive on production through money.
 One may view this comment as somewhat farcical. But it was the bankers that were given (more by their choice) the responsibility to provide the nation with sufficient money to carry on its commerce. During the Great Depression and even for the whole of our national history they failed in this most important responsibility. Given the conditions of the Great Depression, it should be difficult to draw a conclusion other than that the acts of these bank robbers were a positive effect on society; whereas those of the bankers were a negative effect. But many amongst us will not view these acts in this light. Such is likely so because many of us do not understand the importance of money in economic activity; hence, we fail to see the negative effects from the banker's inability to honor their charge. But we do know that bank robbing is wrong; whereas we do not (seem) to know that an economy deprived of money it needs to forestall the adverse effects of a depressed economy often is far worse on the social fabric of the nation. And that is solely in consequence of our privately controlled debt based monetary system.
 We might argue that there is an exception to this trend, to which we have given the title: stagflation. That exception has other facets to it, as told in Chapter XIII of A Plan For America, when understood, does not detract from the brief discourse here.
 The section: The Functional Form in Chapter IV in A Plan For America, in describing a simple physical system and its means of analysis, illustrates the application of system engineering concepts.
 Throughout this period, the Fed M1 was an appropriate measure of the circulating currency and as such was considered as money; hence the usage of the term money in this narrative.
 From the Internet (http://www.wikidiff.com/measure/substance): "As nouns the difference between substance and measure is that substance is physical matter; material, while measure is the quantity, size, weight, distance or capacity of a substance compared to a designated standard. As a verb, measure is to ascertain the quantity of a unit of material via calculated comparison with respect to a standard." A measure may be argued to be at best a property of a substance. But it remains something different than a substance.
 A Plan For America (Pg. 128-129 in Amazon and Pg. 91-92 in notes; original extracted from Pg. 245-247 in The General Theory).
 The monetary authority, as represented by the Federal Reserve System, in attempting to use interest rates as the means to regulate the economic system violates this basic mathematic tenet. Why those representing the monetary authority do not understand this defies reason. But then maybe some of them do! This does not deny that at the micro level, one having money to loan will set the interest rate. But when money quantity is set at the macro level, the basic interest rate will follow.
 Ibid. (Pg. 247).
 Figure 7 is taken from Chapter XI in A Plan For America.
 Figures 8 and 9 are taken from Chapter XIII in A Plan For America.
 Reaganomics, By William A. Niskanen (http://www.econlib.org/library/Enc1/Reaganomics.html). Another objective of Reaganomics was to restore healthy financial markets. The success of this objective may be judged from the stock market crash of October 19, 1987.
 There obviously are different expressions of Say's law. Keynes in The General Theory (Pg. 18) used this one although he did not directly identify Say as the source but rather wrote: "From the time of Say and Ricardo the classical economists have taught that supply creates its own demand - meaning by this in some significant, but not clearly defined, sense that the whole of the cost of production must necessary be spent in the aggregate, directly or indirectly, on purchasing the product."
 This information is taken from my historical notes, which is titled: The Historical Record That Forms The Underpinnings Of A Plan For America (Pg. 93-94).
 The US national accounts for World War II show employment as low as one percent; hence this is a very real expectation.
 Dr. Weber, "Europe in the 19th Century", Packet # 1192, HIST 337, spring 1991, Krishna copy Center, Long Beach, (Pg. 33).
 Ibid. (Pg. 93).
 Phyllis Deane and W. A. Cole, "British Economic Growth, 1688-1959", 1962, Cambridge at the University Press, Page. 166, Table 37. This was taken from my history notes but it needs to be checked.
 These were drawn from Historical UK inflation rates and calculator (http://inflation.stephenmorley.org/). Information in Dean and Cole suggest a much greater drop in prices than drawn from this Internet source, more like 50 percent rather than 72 percent.
 In fact the construction in Figure 2 is in essence a carbon copy of that Mishkin presents in Chapter 26, Aggregate Demand and Supply Analysis.
 Unquestionably these false teachings are simply reflections of those throughout the Nation's schools, colleges, and universities.