The Weiner Component V,2 #34 – The Concept of Money: Part 2

One of a number of posters created by the Econ...

One of a number of posters created by the Economic Cooperation Administration to promote the Marshall Plan in Europe (Photo credit: Wikipedia)

Logo used on aid delivered to European countri...

Logo used on aid delivered to European countries during the Marshall Plan. (Photo credit: Wikipedia)

Marshall Plan

Marshall Plan (Photo credit: Wikipedia)

If one draws a horizontal line in United States history both before and after World War II one gets an interesting perspective.  Before the war the U.S. was a poor country still working its way out of the Great Depression with a large lower class, a small middle class, and a smaller upper class.  After the war the country still had a lower class but it was much smaller than it had been before the war, a large ever-growing middle class, and a smaller upper class.  What happened was an infusion of paper money during the Great Depression, World War II and afterwards which reconstituted the nation as it had never been before and turned it into a middle class country.

 

After the war there was also intensive government spending in the form of free education for veterans, the GI Bill.  Veterans were also funded who didn’t go to school, so they could start their own businesses and buy homes.  There was continued intensive government spending.  Also from 1948 this was added to, with the Marshall Plan or European Recovery Plan, for the next four years.  The European countries rebuilt their infrastructures with goods from the United States.

 

Where did all this money come from?  It came from the Federal Government printing presses.  What it did was unleash the productive capacities of the population.  Specifically it was the tool that allowed massive production of goods and services which freed the labor potential of the people within the country and helped create the new growing middle class.  The spending greatly increased the National Cash Flow throughout the nation and also brought in an immense increase, on all levels, of taxes.  We were by this process a much richer nation.

 

There had been rationing during the war.  Not much had been made available to the general public, most of the goods produced went overseas to the armies fighting the war.  Excess money had been put into war bonds; many of these were now cashed in.  There were new industries, like television; radio had existed before the war; now there were two major home entertainment entities.  Only military vehicles had been manufactured during the war.  As the automobile industry was converted to civilian use people bought new cars for the first time in years.  There were jobs or new businesses for the returning veterans.  It was a new era.

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To move to an earlier period: during the Civil War money had been gold and silver coins.  The Federal Government bought and minted all the gold that was mined in the United States.  Consequently the legal tender that existed in society at that time was both the gold and silver that could be mined and minted.  Since wars are expensive and their cost generally exceeds the amounts of money that exists or could be collected in taxes or minted, the government had an immediate need for more cash.  This problem was solved by issuing paper currency called greenbacks.  The reason they were called greenbacks was because one side was green and they were legally made into currency.  There was nothing behind these bills except the word of the U.S. Government.  From 1861 through part of 1862 they were Demand notes.  From 1862 through 1865 they were United States notes.  After the war the greenbacks were gradually retired, replaced by gold and silver coins.

 

Since more money had been needed to fight the Civil War the Federal Government had arbitrarily created it and spent it fighting the war.  Once the war was over the Government gradually withdrew and replaced that money with gold and silver coins.  It was actually a form of no interest borrowing.  But this process began the growth of the Industrial Revolution in the United States.  After the war we were a much richer country than we had been before it started.

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Toward the end of World War II from July 1 through July 22, 1944, the Bretton Woods Conference or the United Nations Monetary and Financial Conference met at Bretton Woods, New Hampshire.  It consisted of 730 delegates from 44 Allied nations.

 

The basic currency in the world then and during the post war period was the American dollar.  All the Allied currencies were pegged against the dollar, generally taking their value as a percentage of the dollar.   Bretton Woods established the rules for international trade that would continue from the end of World War II on.  After the Marshall Plan all these nations functioned on a higher plain than they had before the war.

 

It should be noted that none of these nations, with the exception of the United States initially had any gold.  All the currencies of all these nations were based upon the productive ability of each of the nations.  Their currencies values nationally and internationally were based upon their credit.

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In addition another thing to keep in mind has been and is population growth.  According to the U.S. Census Bureau on July 1, 1929, the year the Great Depression began the United States population consisted of 121.77 million people.  By 1933, when Franklin D. Roosevelt became President it had grown to 125.58 individuals.  By 1945, the end of World War II, it had reached 139.93.  By July 1, 1970, it was 205.05 million people.  By 1980, the year Ronald Reagan was elected President, the population was 227.22 million people.  By the year 2,000, when George W. Bush was elected to the presidency it was 282.16 million people.  By 2010 the population was 309.35 million people.  By July 1, 2017 the Census Bureau estimates the population in the United States to be 325.34 million people.  Also keep in mind that in every official census introduction there is an apology for the people who were somehow missed, that is, not counted.  The estimate in 2010, admitted by the Census Bureau, was that they had missed millions of homeless people throughout the country and the estimate was much closed to 350 million people.

 

While we are not considering the fact here the world population has also phenomenally increased.  It is estimated today to be somewhere above 7 ½ billion people.  It is also continuing to grow.

 

The overall count in the United States has tended to increase each year by about 2 ½ million.  This includes deaths, births, and immigration.  According to the Census Bureau there is one birth every 7 seconds; one death every 12 seconds; one international migrant every 32 seconds.  The net gain is one additional person every 12 seconds.  And this includes periods of peace and war.

 

In order for the country to function properly as the population grows there has to also be an increase in the amount of money available in the National Cash Flow otherwise the country would be facing a gradual growing deflation, seeing the amount of money available per person decreasing in amount and increasing in value.

 

The Federal Reserve controls the money supply.  It can increase or decrease the amount of money available in the general society by its open market operation and otherwise.  From 1987 to 2006 Alan Greenspan was Chairman of the Federal Reserve.  He had stated that it was not his job to deal with the money supply.

 

To be fair the powers of the Federal Reserve have evolved from its founding in 1915 to the present.  Certain powers have been granted to it by Congress over the years, other powers it has taken on.  Under Alan Greenspan it choose not to deal with the need for more money within the society.

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The banks, which operate for a profit, have the power to expand or contract the amount of currency available to the general public.  Probably beginning slowly sometime in the 1970s the banking houses gradually created a new type of hedge fund based upon the value of homes owned by people throughout the United States; they began using mortgages as investment securities.  In the 1980s, with the Reagan Administration supporting Free Markets or theories of pure capitalism, these hedge funds took off and the country underwent a binge of refinancing that would not explode until the Housing Crash of 2008.  Homeowners were encouraged to use their homes as bank accounts that they could freely spend. By doing this they caused the homes to shoot up in value while massively expanding the economy and the value of their homes.  In the process a housing bubble was created which gigantically inflated the values of the houses allowing many people to constantly refinance their homes during this period.  When the crash finally came in 2008 a large number of people were underwater on their homes; that is, they owed more on the mortgages than the properties were worth.

 

Many, if not most, of the banking houses began foreclosing on these properties until it was discovered that the banks didn’t own the mortgages on these houses, they merely serviced them.  They belonged to the hundreds of people who had shares in these Hedge Funds.  Actually they didn’t belong to anyone because numerous Hedge Funds, each consisting of hundreds of owners, actually owned the houses and there was virtually no way of discovering who held 50+ percent of an individual property.  Virtually all the banks paid hundreds of millions of dollars in fines for their illegal seizures and sales of these properties.  It should be noted that the banks solved their illegal behavior totally with fines; no one went to jail for these illegal acts by the banks.

 

It was an unbelievable mess that defied straightening out.  For a period of a little over two years the Federal Reserve, under Chairman Ben Bernanke, with the support of President Barack Obama, bought up 50 billion dollars’ worth of mortgages a month and also added 50 billion dollars a month directly to the National Cash Flow.  At the end of this period the new Chairperson, Janet Yellen ended the practice gradually over a period of months by systematically decreasing the amount of the monthly purchase until it reached zero.

 

If we ask what happened to all the mortgage pieces that the Federal Government purchased at this time?  Logistically the cost of matching up all the multitudinous pieces of mortgage paper would have been impossible.  And the government did not want to put any additional hardships upon these people.  The mortgage paper was destroyed.  Nobody whose paper the government held was foreclosed upon.  If a house was deserted because it was under water it would eventually be sold for back taxes.  If the people stayed in the house no one foreclosed upon them as long as they paid their property taxes.

 

The problem was that the Federal Government made no announcement about what it had done or was doing.  People found that they could live in their former home without making any further payments.  Many tended to generally spend the money they would have used toward their mortgages.  There was an increase in overall spending due to the generosity of the Federal Government.  People couldn’t sell their homes because they no longer owned them but they could continue to live in them as long as they paid their property taxes.  If they were elderly and eventually passed on the homes would eventually be sold for back taxes.  Some people who had cash and figured this out made a lot of money.

 

Were these funds the Federal Government spent added to the National Debt?  The probability is negative.  These funds were just added to the Cash Flow.  They supplied needed money to the economy and helped the country get out of what was called The Great Recession.  They also helped avoid a greater depression than that of 1929.

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The level of the National Debt today is over 19 trillion dollars and continuing to grow.  The Federal Government has added additional billions of dollars to the National Cash Flow which were not counted as part of the National Debt.  This was from the period of the Great Depression on, through World War II, the post war period, and particularly through the Obama Administration.  By and large the country has moved forward positively during all this going from being a lower class nation to a middle class one.

 

The basic problem that seems to exist is that the understanding of the general public, and seemingly most members of Congress and even a good percentage of the ruling administrations, still have an early Twentieth Century concept of money being an object of wealth rather than a tool that allows the society to operate.  Money defines an individual’s level of wealth but it is not viable until it is used.  This has and can cause confusion in national development.  A true understanding of money and of the true wealth of the nation throughout the country would make a significant positive difference.

The Weiner Component V.2 #33 – The Concept of Money: Part 1

Various Federal Reserve Notes, c.1995. Only th...

Various Federal Reserve Notes, c.1995. Only the designs of the $1 and $2 (the latter not pictured) are still in print. (Photo credit: Wikipedia)

English: USA annual GDP from 1910-60, in billi...

English: USA annual GDP from 1910-60, in billions of constant 2005 dollars, with the years of the Great Depression (1929-1939) highlighted. Based on data from: Louis D. Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth, 2008. (Photo credit: Wikipedia)

Perhaps one of the most misunderstood terms in the world today is money.  Practically all people understand it to be what it was one hundred years ago.  Money can be used as a commodity; whereby it can earn more money.  But it has always had that ability.  Mainly, however, it is a means of exchange.  It allows goods and/or services to be transferred into other goods and/or services.  By itself today it has no intrinsic value.

 

Most people think of it as having an intrinsic value that it had up to the end of the first third of the 20th Century when it mainly consisted of precious metal.  The problem with money being a precious metal like gold or silver is that it makes two unrelated entities dependent upon each other.  These two entities are never in balance.

 

For the economic system of a nation or nations to work properly there must always be enough precious metal available to equal the required amount of exchange of goods and services.  This condition has almost never existed.  With the exception of the 16th Century, when there was too much gold available in Europe because of the looting of the New World, there has never been enough precious metals available to match the needs of the business world.  Today all money in every country consists of valueless tokens generally printed by the Government controlling each particular nation.  This allows for a reasonable exchange of goods and services.

 

The wealth of a nation is not its money supply; it is the human productivity of a fiscal year, twelve months.  Since it is a measurement the value of the goods and services are expressed in terms of dollars or whatever the monetary measurement is of the particular country.  It is the Gross Domestic Product, the GDP.

 

Today money is a tool, having no value in itself, that allows for the exchange of goods and services within each nation.  Its effectiveness is determined by the sophistication of the nation utilizing it.  The amount needed within the society is ever changing.  The ability of each particular nation to determine these changes and continually bring them about determines the level of sophistication.  It is not an easy process.

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Little is actually known about the specific origins of money but the probability is that it was first used by the Phoenicians in the pre-Christian era (1500 to 300 BC).  They were one of the first known merchant groups, trading along the shores of the Mediterranean Sea.  Initially goods were traded for other goods (barter) or for valuable metals, gold and silver.  Presumably scales were used to measure the gold or silver that was traded.  At some point, during this period, someone came up with the idea of taking a small weight of the metal and stamping its weight upon it.  Eventually this would be replaced by some sort of image, probably a side view of the ruler.  These would be the first minted coins.  Less expensive metals could be used for smaller amounts.  The development of this process could have taken hundreds of years.  The value of money would be universal and largely equal, making the coins equally usable in virtually any nation.

 

This type of trade would continue into the early 20th Century.  With time and the development of technology, coins would become sophisticated but the methods of international trade would remain essentially the same.  During the 14th and 15th Centuries Letters of Credit would become available with financial institutions having offices or banks in a multitude of countries making international trade easier.  The use of checks would develop later.

 

When the Great Depression began in 1929, the Republican, Herbert Hoover was President of the United States.  Hoover believed in the Free Market making all economic decisions and kept waiting for prosperity to return.  The depression continued, growing deeper.  In 1933, the Democrat, Franklin Delano Roosevelt was elected President.  He had promised the nation a New Deal.  His program was Relief, Recovery, and Reform.  Suddenly in various ways the Federal Government began providing for people who couldn’t provide for themselves.

 

The program had to be paid for.  The GDP had decreased as unemployment increased.  The government couldn’t raise taxes.  What the Roosevelt Administration did was to collect all the money in the country; that is, collect all the gold coins.  Many people objected, the government sued them and won every case.  The coins were melted down into gold blocks and paper gold certificates were issued and kept by the Federal Government.  Presumably, based upon the gold certificates paper money, Federal Reserve Notes, were issued in place of the gold coins.  In addition the government legally changed the value of the gold from sixteen dollars an ounce to thirty-two dollars an ounce.  The Federal Government doubled the money supply and kept half of the newly created money to pay for its programs.

 

One dollar and five dollar bills were silver certificates, ten dollar bills up were Federal Reserve Notes.  The question arises: Did the Federal Government carefully monitor the amount of paper money it issued to perfectly match the gold certificates it held.  The answer, I suspect, would be, No.  I remember, as a child, in the late 1930s hearing how good the money was because of the gold certificates.  But I never heard of anyone questioning the issue.  It was just assumed.  In point of fact, the probability is that money was issued as needed.  The gold certificates, while they did exist as the basis of money were essentially a fiction.

 

World War II ended the Great Depression.  The United States became the “Arsenal of Democracy;” it essentially supplied all its allies with the materials they needed to fight the war.  Initially the allied nations sent their gold to the United States for safe keeping.  But as the war continued they used that gold to buy food and materials to fight the war.  In time they spend all the gold and were still fighting the war.  Roosevelt came out with his “Lend Lease” plan, which was to continue to supply the Allied Nations in their fight against Germany, Japan, and Italy; the Axis Nations.

 

Actually the U.S. wanted to avoid the mistakes made during W.W.I.  Then, America lent money to the Allied Nations in its war against the Central Powers, Germany and Austria Hungary.  Most of that money was never repaid and led to bad feelings between the U.S. and its war allies.  Lend Lease was actually a gift to the Allied Nations.

 

It is estimated that the United States spent 1,075 trillion 1945 dollars in fighting W.W.II.  Where did all this wealth come from?  The answer would be from the Federal Reserve printing presses.  The amount of money merely denotes the productivity that was needed to win the war.

 

The Federal Government raised taxes and sold war bonds to raise money.  It rationed almost everything so that there was very little upon which to spend money.  After the war ended there was a burst of spending upon almost everything.  That and the government paying for many veterans to finish their education avoided the recession that followed W.W.I.

 

Basically what the government did was to print money as needed.  The gold certificates still existed even though they were basically a fiction.  No one questioned the situation because economic prosperity existed throughout the country.  The so-called process of paying for the war got the country out of the depression and brought about economic prosperity.

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When World War II ended in 1945 those areas where the war had been fought were a shambles.  They had undergone massive destruction from bombing and battles fought during the war.  Their infrastructure and much of their cities of Europe had been destroyed during the six years of warfare.

 

Politically the world emerged in 1945 with two political systems: one largely capitalistic led by the United States and one communistic led by the Union of Soviet Republics or Russia.  Russia was attempting to dominate the world by spreading its influence over non-communist countries.  It was felt in the United States that Russian efforts could be successfully countered by helping the war-torn countries return to prosperity.

 

The Marshall Plan or European Recovery Program (ERP) was introduced by George Marshall, the United States Secretary of State in June 1947 in an address at Harvard University.  It came into being by law on April 8, 1948.  Its objective was to rebuild war-devastated regions, remove trade barriers, modernize industry, make Europe prosperous once more, and prevent the spread of communism.  The United States gave over $13 billion.  This would be $130 billion in 2016 dollars to help rebuild Western Europe.  Approximately 26% went to the United Kingdom, 18% went to France, and 11% went to West Germany.  18 countries received Plan benefits.

 

In the United States taxes were not increased.  It did not increase the National Debt.  Where did this money come from?  The United States printed and issued it.  Actually what they issued to the different European countries were checkbooks with amounts of money that could be spent in the United States.  The Marshall Plan lasted four years.  Its result was to not only return Western Europe to prosperity it was also to maintain prosperity in the United States where most of this money was spent.

 

By arbitrationally issuing this money the United States brought prosperity to Western Europe and expanded it in the United States.  There were no financial upsets and no real inflation.  The basic money supply of U.S. currency was simply increased.  The conclusion this leads to is that this money was needed not only by the United States but also by the rest of the world.  It allowed for a massive expansion in national and international production.