The Weiner Component #40 – The Water/Money Pump

Franklin D. Roosevelt

Cover of Franklin D. Roosevelt

Before we had in-house sinks and faucets from which water could freely run and after we used buckets in wells to bring up the liquid, we had the mechanical water pump that allowed people to pump water up from a sealed well.  If you wanted the water pump to work you had to prime it with water, pour some water into the pump to break any air locks, otherwise nothing flowed through it.

Unfortunately the same principle applies to money in the society.  If you want a level of prosperity for all the citizens there has to be enough money available in circulation to hire and pay them.  Once they all work they spend their earnings to supply their needs and wants and there is an ever-increasing flow of money through the economy, the same currency being used by different people numerous times.  Everyone, on all levels of society, benefits from this growing cash flow.  But without this infusion of currency there is stultification within the society, massive unemployment, very limited economic growth, and basically hard times for a large percentage of the people within the country.

During the Great Depression of 1929 John Maynard Keynes wrote The General Theory of Employment, Interest, and Money. He propounded what became known as Keynesian Economics, which supported large-scale government planning and spending to promote employment during times of recession or depression.  This was watering the trough of unemployment with government funds to bring about recovery.  It was argued that during times of prosperity the National Debt could be reduced but during a period of economic decline the government must step in and spend.

This is what Franklin Delano Roosevelt did with his New Deal program from 1933 on, helping to bring about recovery.  However since the concept was new the Roosevelt Administration was not able to spend enough to bring about full recovery.  This did not happen until World War II.

Keep in mind that since 1933 in the United States and shortly after that in all other industrial nations money was paper, printed by the government presumably as needed.  At first there was the fiction that there was gold behind the paper dollar but that totally ended in 1969 in the U.S. when the last smidgen of gold was removed from supposedly being behind the dollar.  After that date there was nothing behind the dollar but the word of the government.  This is true for all currencies of all nations today.

What then is the problem of not printing more currency when the country needs it to properly function?  There are two reasons for this.  The first and primary reason is the great fear that exists of run-away inflation, that is, the extent to which currency is available throughout the entire economy.  If far more money is circulated then there are goods and services available in the society then prices are bid up and the currency decreases in value.  It can descend to a point where it becomes worthless as it did in Germany in the early 1920s.  If that occurs the entire economy goes berserk and the people can revert to a form of barter and there is economic chaos.  A balance is needed in each country.  There has to be enough money in circulation so there is full employment and full production of all the goods and services needed by the population with very low, if any, inflation. 

If, at any time, prices begin to rise rapidly then there is too much money available in the National Cash Flow and we are moving toward a run-away period of inflation.  The government has to restrict the amount of in the Flow and bring it in line with the needs of the country.

The second reason for limiting the amount of currency in circulation is the fact that money had been actual gold up until 1933 when the U.S. left the gold standard and went completely over to paper money.  All the gold coins, with the exception of a few that people could keep for souvenirs, were collected, melted into heavy blocks, and buried in places like Fort Knox.  Most people still maintain the myth in their minds that money is gold.  It is to the extent that one ounce of gold, which in 1933 was a twenty dollar gold piece weighinf one ounce and is now worth between sixteen and seventeen hundred dollars an ounce.  We have to pass beyond this mythic notion.

Today the Federal Reserve monitors all spending within the entire country, recording daily what is happening throughout the entire economy.  They essentially know what the nation needs to attain and maintain a level of prosperity; but only partially and indirectly do they control the instruments that allow them to do this. 

The Federal Reserve affects the economy through Monetary Policy.  It, more or less, controls through various means the money supply within the United States.  The term “more or less” is used because there are limits upon this control.  The FED cannot add money to the economy by directly adding to the National Debt but it can buy government debt on the secondary market from individuals or entities that have previously purchased these bonds, like private corporations or the Bank of China or Japanese individuals or companies.

For, at least, the last year the FED has been utilizing Monetary Policy by purchasing monthly 40 billion dollars worth of government paper (bonds) from primary purchasers and by buying 45 billion dollars worth of mortgage paper.  This has both added needed funds to the economic currency flow and created a shortage in housing, which, in turn, has created a housing shortage and allowed for new construction throughout the nation.  In May of 2013 the Fed announced that it might increase its purchases in the future.

The effect of this has been to allow for economic growth in the country even though the sequester and other state and Federal legislative actions have caused economic shrinkage by reducing spending in both Federal and state governments.

The other entity that the Federal Government uses during an economic contraction of the economy, which was used in 2009 when President Obama took office and the Democratic Party had a majority in the House of Representatives, was fiscal policy.  This action saved the country from going into a deep depression from the Real Estate Fiasco caused by the major Financial Institutions in the country.

Since the Republicans took the leadership of the House of Representatives in 2011 there has been no application of fiscal policy even though a section of a fifty-year-old bridge collapsed and the country’s infrastructure is badly out of date and needs massive repair and renewal.  I heard comments over TV that the Republicans are willing to spend whatever is necessary to fight additional wars in Syria, Iran, and even North Korea but they are unwilling to spend anything to upgrade the United States and create jobs for a percentage of the unemployed.

In terms of controlling the economy the Federal Reserve is supposed to use Monetary Policy and Congress and the President should utilize fiscal policy. It is interesting to note that any improvements in the condition of the country would accrue to President Obama and the Democratic Party but additional wars would add to the overall glory of the United States.

Somehow the basic function of Congress has been lost in the current yearning for power by the leaders of the Republican Party.  The welfare of the country and its people has become secondary.  The Republican goals have been to curtail Federal spending and strangely enough to limit the control women have over their own health, with the Republicans acting as father figures to a goodly percentage of the female population.  Economic prosperity has become lost.

The House of Representatives met in 2012 for 120 out of 365 days; in 2013 it will meet for 125 days.  Thirty-nine of those 120 days were devoted to continually getting rid of the Affordable Health Care Act (Obama Care) even though that bill will never come up in the Senate and would be vetoed by the President.  At least one day was spent officially declaring that “in God we trust” is whom we trust.  Currently a bill is coming up in the House making abortions illegal after twelve weeks and accepting the concept that pregnancy, in cases of rape, is truly rape only when that rape is reported officially to the police at the time it happens.  An interesting comment on the ability of all women in the United States!

Isn’t it time for Congress to get back to its original purpose, passing laws for the welfare of the people in the United States!  The mechanical water pump required, requires priming for the water to flow.  The same is true of the economy.  It needs priming.  The government has to spend money to generate a new flow of cash and welfare throughout the United States.

The title page to Keynes' General Theory.

I suppose if nothing happens before the Mid-term Election of 2014 then the People of the United States, state by state, can decide what they want over the next two years: a return to prosperity or more of what we have now.

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