Asymmetric Pluralism

Andrew Jackson created the concept of pluralism. William Appleman Williams in Contours of American History argues that Herbert Hoover did nearly a century later, but the elements of Hoover's notion that labor and management represent distinct interests that require representation through the state were very much present in Jacksonian democracy. Jackson saw the Democratic Party as the means by which common economic interests could be galvanized or represented against the institutionalized power of paper money and speculation. His creation of the party system along disciplined lines was meant to form resistance to the tendency of economic elites to establish central banking and fractional reserve systems. In this, the spoils system provided economic incentives to party activists that paper money inflation provided to speculators and economic elites. The party system evolved into bossism. Elites were able to characterize it as corrupt, but paper money as altruistic or not corrupt. This was accomplished by identifying paper money issuance with agriculture in the late nineteenth century. This attempt failed in part because the remnant of the Jacksonian philosophy was sufficient to resist it. In the Democratic Party this was through the Bourbon Democrats of Grover Cleveland and in the Republican Party it was through the Mugwumps, the philosophical descendants of Adam Smith and Jackson. The reversal of roles is a pattern seen elsewhere in American political history. For example, in the early twentieth century the Republicans came to advocate reform and progressivism, but by the 1930s this became the pretense of the Democratic Party and the Republicans were painted as the party of business.

The failure of pluralism with respect to the working class in both its major forms, the party or spoils system of the 19th century and the labor movement of the late 19th and 20th century has forestalled the ability of American democracy to be representative. That is, as Jackson foresaw, the "monied" interests have a natural incentive to support banking and paper money, but the working class has a looser interest in institutionalization of its interests. This is in part because the interests of workers are not so well defined and are subject to fluctuation because of changing economic arrangements so that institutionalization is quickly outmoded. It is also the case that the working class has less organizational ability and so allows its representative institutions to be co opted and often corrupted.

There has never been a stigma associated with advocacy of paper money as there was with political bossism or with labor unions. Yet, paper money and fractional reserve banking involve a greater degree of deception and fraud than either of these institutions. Labor unions are depicted not only as corrupt (as in the cases of the Teamsters, longshoring, hotel and restaurant and various construction unions) but also violent. The violence of labor unions is not contrasted with the systematic fraud of fractional reserve banking and paper money. Likewise, the political boss system was painted as corrupt.

The Progressives were the ones largely responsible for attacking the patronage and boss system. This began with the Mugwumps in the 1880s and the Pendleton Act, the establishment of the federal civil service. All states followed suit. This was done in the name of expertise. It is questionable that government bureaucrats have any special expertise or that if Bernanke was replaced by a random name taken from the Albuquerque phone book that the Fed would do any worse than it has. A key result of the emphasis on expertise was the severance of direct incentives to fulfill working class needs from the political leadership. Finding a job for a constituent no longer could be a priority because jobs were now to be filled through rational methods, namely civil service exams. Favors for constituents could now be viewed as corrupt.

The case of Robert Moses in New York illustrates the class-driven asymmetry of Progressivism and its sister movement the New Deal with respect to rationalization. On the one hand, a series of bureaucracies utilizing rational hiring methods was established to build the bridges, parks, highways, housing complexes and tunnels that Moses built. On the other hand, strategic choice concerning where to build, the nature of housing and urban redevelopment continued to occur on the basis of personalistic choice, cronyism and the spoils system.

This is equally true of the Federal Reserve Bank. The Bank claims to scientifically or rationally determine the quantity of money, but the distribution of new money to specific banks is purely due to special interest capture and caprice. A pretense of science overlays the asymmetric spoils system.

Over time, American pluralism has fashioned two forms of representation for the working class. The first, Jacksonian democracy, indeed forestalled the central bank. Until the late 1890s American workers saw rising real wages. The system did not work well for business, property or farm owners, who saw asset values depreciate due to inflation. Populism was a movement of farm and other asset owners, it could not have been otherwise for farm labor had no stake in credit availability. Populism was a movement of land speculators, failed or otherwise, but it also served the interests of Wall Street and business owners, who had been complaining of overproduction for several decades in the late nineteenth century. This was occurring because of innovation and because of deflation, which increased labor's savings (its "demand for money). In turn, labor was able to withstand layoffs because it had savings.

William Jennings Bryan proposed to overturn the Jacksonian system in 1896. McKinley, an advocate of high tariffs, defeated the Populist platform. It was not until 1933 that free silver found its quiet adoption in hyper-charged form via Franklin D. Roosevelt's abolition of the gold standard and illegalization of ownership of gold. This was accomplished with little fanfare because by then the media had been completely co opted and the notion that "experts" could better derive decisions in areas like money and banking had been hammered in the public discussion and in increasingly utilized schools for several decades. As well, the establishment of the Federal Reserve Bank in 1913 inured the public to the use of paper money. The class interest involved in adoption of a pure paper money system was ignored both by the media and by Roosevelt's supporters, who argued, as did John Maynard Keynes, that reduced wages were in workers' interest. They argued this in somewhat arcane terms such as the claim that "aggregate demand" needed to to stimulated. This would be accomplished by eliminating savings by reducing interest and increasing the money supply. The Keynesian system is silent as to the chief issue inherent in paper money issuance--who gets the new money. By default, Keynesianism is a class-based, elitist philosophy that subsidizes banks at public expense. It does so by claiming, as does William Greider in his book Secrets of the Temple, that low real wages are good because they help owners of construction companies and land owners. Greider's book is rife with the double talk characteristic of the Keynesian argument, such as that on the one hand billions are given to interests like the Hunt brothers, corrupt foreign governments like those of Mexico and even more is squandered on frivolous investment and speculative schemes on Wall Street, but that nevertheless inflation helps the poor and middle class, as though the large sums handed to banks come from thin air.

Progressive pluralism thus hobbled the working class in two steps. First, it attacked the ward and spoils system, the basis for working class participation in party politics. It did not eliminate the spoils system for elite jobs but rather for the jobs that would attract working class activism. Second, it created labor unions as representative institutions. This was essential to the Progressive agenda of the National Civic Federation in the early twentieth century, the employer association in which "responsible" big business, labor unions and the public claimed to be represented; it was advocated by Theodore Roosevelt; and it was codified in the 1920s by the Railway Labor Act and in the 1930s by the National Labor Relations Act and the National Recovery Act.

Progressives believed that labor unions would represent workers' interests as employer lobbying, employers' associations and government institutions like the Fed represented employers' interests. However, this was not to be. The Department of Labor is an ineffectual bureaucracy, not a money-printing machine like the Fed. Labor unions were saddled with a primary responsibility of representing workers through collective bargaining and a secondary responsibility of representing their interests in the public policy process. There is an inherent conflict of interest across workers. Public works, for instance, subsidize construction and public sector workers but are paid for by private sector workers. Many workers do not conceptualize themselves as part of a bargaining unit subject to collective representative but rather as individual agents and either part of management or with distinct professional interests. The bargaining responsibilities are inherently at odds with the pluralist responsibilities. Moreover, and most importantly, employers have an incentive to oppose unionization at the shop floor level. There is no such incentive with respect to employers' organizations. Workers have no reason to oppose the ability of the National Association of Manufacturers to represent small industrial firms. But employers have an economic incentive to oppose labor representation of workers because collective bargaining costs the employers in two ways: through loss of profitability and through loss of discretion. Thus, Progressivism never did provide workers with a symmetric voice in the pluralistic process.

Elastic or Inelastic Money Supply?

Constance writes:

>Prof Langbert,

I have just started to “self-educate” on economics and have found your blog very useful. I am currently reading a book by Jesus Huerta de Soto called “Money, Bank Credit, and Economic Cycles’. He is of the Austrian school and supports sound money backed by precious metals and a 100% reserve requirement for demand deposits. In his book he argues that a gold-backed money would be inelastic and would prevent serious deflations as experienced during the Great Depression. I have always heard that one of the advantages of our present economic system (fractional reserves and a central bank) was that the Fed could “manage the money supply” which I take to mean expand or contract the supply of money.

If you had the time and inclination, it would be great if you could write a blog post on the advantages/disadvantages of an elastic versus inelastic money supply.

My reply (edited for the blog):

There is no need for an elastic money supply. I will put de Soto on my list, but I do not believe that deflation is as important a problem as he says.

I'll be glad to answer but let me give you a little background about myself. I'm not really an economist. I studied labor issues in graduate school and teach business and human resource management. I finished my Ph.D. in 1991 and have taught management ever since. In the 1970s I had gotten involved in the libertarian movement in New York City right after Murray Rothbard dropped out of what was then called the Free Libertarian Party. There I met Howard S. Katz who has written a great deal about the money issue on his blog http://www.thegoldbugnet.blogspot.com..

Since 2004 I renewed my interest in this subject because of current events. What seemed bad in '04 has turned into a worst case scenario over the past year. I decided to pursue a new research topic concerning decentralization. I decided to make the monetary issue a part of that topic, so I have begun to familiarize myself with it. Perhaps we can form a study group!

I recommend these books to begin your pursuit of understanding money:

Hans Sennholz, Money and Freedom, available through the von Mises Institute (www.vonmises.org)
Murray Rothbard, The Mystery of Banking and What Has Government Done to Our Money?
Howard S. Katz, The Paper Aristocracy

I read William Greider's book Secrets of the Temple last fall. Greider is a Keynesian and the book is full of inconsistencies (such as that the Federal Reserve system helps the poor but the banks lend hundreds of billions to big business boondoggles; inflation is good for the middle class, etc.).

Business and banking interests have always said that flexibility in money, an elastic money supply, is desirable. However, the history of the nineteenth century was that when money was tightest, from 1879 to 1900, progress was most rapid in technology and innovation. The three central banks that existed before the Fed, The Bank of North America, The First Bank of the United States and The Second Bank of the United States, were all associated with corruption, high inflation and economic dislocation.

Business interests favor central banks because the banks create money out of thin air and then lend it to favored business interests. The business interests can make investments at pre-inflation levels, and as the money filters through the economy and the banking system multiplies it, prices go up as do asset values. The businesses repay their loans in depreciated dollars and enjoy increased asset values and diminished loan values (because the loan is for a fixed dollar amount but the asset goes up with inflation). The gain in real wealth that the business interests enjoy has to come from somewhere. It generally comes from those who own the least assets, average workers whose wages lag the inflation.

Thus, the real hourly wage (not family income--families have compensated for declining real wages by holding multiple jobs) has been in decline since the gold standard was abolished in 1971. However, the stock market has climbed steadily higher. This is because artificially low interest rates boost the stock market but the inflation caused by monetary expansion reduces workers' real (inflation-adjusted) wages. Thus, central banks allocate money from the average worker to hedge fund managers and stock holders. It is telling that one of the themes of William Greider's book is that inflation hurts asset owners. That would be true if asset owners held their assets in bank accounts, which hasn't been true in 100 years. Greider's book is testimony to my long standing belief that the left's aim is to support Wall Street and the wealthy at the expense of those whom it claims to represent, the poor. Thus, leftists are granted academic posts and are hired by capital to dominate the mass media and expatiate on why inflation is good for the poor.

Children like candy, and if you asked a nine year old whether they should have cake and ice cream for breakfast they would say "Yes, an elastic diet is good for me. You let me eat cake and ice cream when I choose." Naturally businesses like cheap credit. But if you look historically, the late nineteenth century was when most of the American innovation occurred, and it was a period of deflation. Competition is painful to business but it breeds productivity. No pain no gain. Today's business executive is a self-indulgent, other-directed narcissist who pays himself a high salary in order to move plants overseas and cannot come up with new ideas to save his or her life.

Also, there was proportionately more immigration into America the late nineteenth century despite the depressions of the 1870s, 1880s and 1890s. Yet real wages were rising. Yes they were. Despite cheap immigrant labor in the late nineteenth century, there was more innovation than at any other time in history and rising average real wages but deflation. Yet, most economists you hear on television tell you that deflation is the worst thing imaginable. If you can find it in a library, a great book on that topic is David Ames Wells' Recent Economic Changes published in 1889.

The pro-inflation position has been the mainstream view of the economics profession. Not coincidentally, the economics field enjoys benefits from the banking industry. For instance, many economists find work there, banking interests donate to universities and the like. The mass media only gives air time to the Keynesian viewpoint, there are almost never Austrian or monetarist economists on TV these days.

The ideas of John Maynard Keynes came out of the Populist movement in America. In the late nineteenth century there was deflation. The deflation hurt property owners. Farmers formed a mass movement to protest the gold standard. Earlier in American history there had been a bi-metallic standard. Historians who study this topic do not ask the right questions. They look at the income level of the farmers but not their asset holdings. They conclude that the Populists were low income farmers who needed loans to finance their crops. But it is likely that many of the Populist supporters were land holders who had obtained land via the land grant acts of the mid nineteenth century. Holding land might have represented hope for a good investment to many, but deflation made farming much less attractive. It is difficult to know the extent of that phenomenon. In general, falling food prices help workers but hurt farmers. Historians paint the picture that falling food prices were bad because the farmers didn't like them, but they ignore the effects on other kinds of workers. Also, it is not clear that real wages of agricultural labor were falling. There is a difference between farm profit and farm wages. Profits in general were falling in the late nineteenth century, and much of the protest about the gold standard was from business owners who resented deflation that caused falling profits. Perhaps farming was no different. As laborers, farmers may have been receiving increasing wages, but as real estate investors farmers may have been suffering even bigger losses.

There were two investment bankers who picked up on the Populist inflationist concept, I forget their names but the title of their book was something like "Road to Plenty". They argued that inflation could create wealth. The banker Mariner Eccles made similar arguments and FDR later appointed him head of the Fed. John Maynard Keynes wrote his General Theory after the Populists, the Road to Plenty guys and Eccles had written about inflation stimulating investment and social welfare. No one denies that Keynes derived his ideas from these movements.

The history of the Fed was that it was established Christmas week 1913 and it is likely that neither Wilson nor the Congressmen who voted it in totally understood it. They believed the "elastic" argument. Within two years World War I began and the Fed initiated its first inflation, leading to a contraction and depression of 1920. There was a mild inflation in the 1920s, and there was a second credit contraction in the late 1920s which led to the Great Depression. During the 1920s there was increased use of consumer credit in the form of car loans and margin buying on stocks, and neither of these had existed before.

The Great Depression began with Roosevelt illegalizing ownership of gold and abolishing the gold standard. He re-inflated in 1933 and there was a 75% stock market rise in 1933. He appointed Eccles to be Fed chairman and the recovery was stopped in 1935 or 6 by another Fed contraction. The massive inflation of World War II ended the Depression. Since then, there has been consistent inflation. The result has been a considerable degree of economic miscalculation. Excessive real estate construction, one corporate boondoggle after the next, excessive financing of corporate waste. For instance, the Hunt Brothers' attempt to corner the silver market in 1980 was bank financed and could not have happened without the Fed. Likewise, the Latin American debt crisis in the 1980s, the tech bubble, Long Term Capital Management. Oh, and did I mention the stagflation of the 1970s? Who paid for all this waste? Not university professors, who live off fresh Fed money funneled through government grants. Not Wall Street bankers and business executives who were responsible for one incomprehensible business boondoggle after the next, but the average American, who has passively racked up big credit card bills while allowing the Fed and its academic boosters to run amok. This generation of Americans is a disgrace to the memory of Andrew Jackson.

If you're ambitious, the next book I plan to read is : Ludwig von Mises, Theory of Money and Credit.

Hope that helps!

19th Century Land Policy and the Fed

The Land Act of 1796 allowed purchasers of public land a minimum of 640 acres, one square mile at $2 per acre with one half of the purchase price being able to be deferred for a year. The large size of the plots prohibited most Americans from purchasing public land. These minimums were reduced over the ensuing 66 years, resulting in an increase in agricultural output.

Under federal land policy, the minimum was reduced to 320 acres payable over four years in 1800. In 1820 80 acres could be purchased at $1.25 per acre, and in 1832 parcels of 40 acres could be sold. Especially after 1830 squatters were granted rights and in 1841 the "Log Cabin Bill" allowed squatters preemption rights of up to 160 acres. The Graduation Act put up land unsold for 30 years for sale at 12.5 cents an acre. During the Civil War, in 1862, the Homestead Act granted 160 acres and 320 per married couple as long as they lived on the land or cultivated it for five years. Thus, the population of the western states grew from about one million in 1810to about 14.8 million in 1869, or from 15% of the US population to 47.1%.*

From 1870 to 1890, corn output increased from 1.125 billion bushels to 1.650 billion bushels, an increase of 46.7%. Land used for corn increased from 38.4 million acres to 74.8 million acres, an increase of 94.8%. Because the newly granted land was less fertile than the land that settlers purchased first (since settlers chose the best land first) productivity fell from 29.3 bushels per acre to 22.1 bushels per acre. A slightly different pattern applied to wheat, whose output increased 76.8% between 1870 and 1890 and whose land increased by 75.5%. Because of expanding output, real farm income per capita rose by only .8% from 1869 to 1879 and .7% from 1879 to 1889.**

According to Walton and Rockoff***, "it is alleged that the rapid distribution of the public domain laid the groundwork for modern agricultural problems by inducing too much capital and labor into agriculture, thereby impeding the process of industrialization."

"...Partially as a result of this rapid addition of resources, the new West produced crops at such a rate that consumers of foodstuffs and raw materials enjoyed 30 years of falling prices. Furthermore, according to Robert Fogel and Jack Rutner, average rates of return on investments in land improvements, livestock, farm buildings and machinery equaled or exceeded returns on other contemporary investments, and real incomes in the new agricultural areas outside the South grew at rates comparable with those in manufacturing."

Nevertheless, despite the Fogel and Rutner findings, it would seem that Populism was related to falling agricultural prices. Moreover, the culture of farming was likely one that included an element of speculation. As Richard Hofstadter points out in Age of Reform****

"Frequent and sensational rises in land values bred a boom psychology in the American farmer and caused him to rely for his margin of profit more on the process of appreciation than on the sale of crops. It took a strong man to resist the temptation to ride skyward on lands that might easily triple or quadruple their value in one decade and then double again in the next...The penchant for speculation and the lure of new and different lands bred in the American farmer a tremendous passion for moving--and not merely, as one common view would have it, on the part of those who had failed, but also on the part of those who had succeeded...Mobility among farmers had serious effects upon an agricultural tradition never noted for careful cultivation: in a nation whose soil is notoriously heterogeneous, farmers too often had little chance to get to know the quality of their land; they failed to plan and manure and replenish; they neglected diversification for the one-crop system and ready cash...In a very real and profound sense, then, the United States failed to develop (except in some localities, chiefly in the east) a distinctively rural culture...What differentiated the agricultural life of these regions...was that it was so speculative, so mobile, so mechanized, so 'progressive', so thoroughly imbued with the commercial spirit."

Moreover, increasing agricultural productivity put additional pressure on commodity prices. Walton and Rockoff point out that+

"Thanks to the research of Olmstead and Rhode we have a greater appreciation of changes in plant varieties, irrigation systems, fertilizers and other biological inventions that greatly impacted the use of land for planting. These changes worked along two lines: (1) the discovery of new wheat varieties (and hybrids) that allowed the North American wheat belt to push hundreds of miles northward and westward and (2) researchers and farmers who found new methods of combating insects and diseases, some of which came from experimentation with new varieties (seeds) from Europe and elsewhere..labor productivity grew dramatically in wheat and corn over these decades. According to Robert Gallman, labor productivity in these two crops grew at a rate of 2.6 percent annually between 1850 and 1900."

As well, point out Walton and Rockoff, mechanization due to McCormick's reaper as well as thresher, mowers, horse rakes, seed planters, grain cleaners, portable grist mills, corn-shellers and similar devices enhanced labor productivity on farm.

The result was of course increasing competition and economic stress on farmers, who had to adapt, "to run faster just to hold ground". Such rapid change creates anxiety, which in turn leads to the demand for political fixes. For farmers, this was Populism. Of course the alternative, retaining primitive agricultural methods, would have prohibited industrialization. "In 1870 Americans spent one third of their current per capita income on farm products. By 1890, they were spending a much smaller fraction, just over one-fifth...Thus, although the real incomes of the American population rose during the period, and although Americans did not spend less on food absolutely, the proportion of those incomes earned by farmers declined." On the other hand "the value of agricultural exports rose from $297 million in 1870 to more than $840 million in 1900.++

Added to this mix was the "rapid increase in the supply of agricultural products. All over the world, new areas were entering the competitive fray. In Canada, Australia, New Zealand and Argentina as well as in the United states, fertile new lands were becoming agriculturally productive."+++

The Fed was not established purely because of Populism, but Populism was certainly a contributing factor. Fed apologists like William Greider in his Secrets of the Temple emphasize agitation among farmers because of falling commodity prices. Greider neglects to mention that falling commodity prices were great for workers. But they were bad for farmers, including moderate-to-poor income ones, who were landholders or speculators. In his book, Greider does not mention the relationship of federal land policy to falling agricultural prices. He merely paints falling agricultural prices as a monetary issue--in other words he takes the Populists' economic reasoning at face value. Nor does he raise the question as to whether farmers-as-speculators or farmers-as-workers dominated the Populist movement.

As Walton and Rockoff point out:

"Farmers were not inclined to see their difficulties as the result of impersonal market forces. Instead, they traced their problems to monopolies and conspiracies: bankers (some thought that Jewish bankers were particularly to blame) who raised interest rates, manipulated the currency, and then foreclosed on farm mortgages; grain elevator operators who charged rates farmers could not afford; industrialists who charged high prices for farm machinery and consumer goods; railroads that charged monopoly rates on freight; and so on."++++

Greider's book provides an excellent example of the inability of the public to debate questions concerning money dispassionately. A good example is his discussion of the Populist movement.


*Gary M. Walton and Hugh Rockoff, History of the American Economy Tenth Edition. South-Western-Cengage Learning, 2005, pp. 145-148
**Ibid, p. 288
***Ibid.
****Richard Hofstadter, Age of Reform: From Bryan to FDR. New York: Vintage Books, 1955
+Op. cit., pp. 290-1
++Op. cit., p. 294
+++Op. cit., p. 293
++++Op. cit., p. 294