Week in Review
Why did the Europeans become the dominant people in the world? Why did their colonies become some of the richest and most affluent nations? Because when the Europeans entered those ships to cross the oceans they were farmers. Having given up their hunter and gatherer past long ago (see DNA analysis solves the mystery of how Europeans came to be farmers by Steve Connor posted 4/24/2014 on The Independent).
It was the biggest cultural shift in European prehistory but the Stone Age transition from a lifestyle based on hunting animals and gathering wild berries to one built on farming and livestock was largely a mystery – until now.
A detailed analysis of the DNA extracted from the bones of 11 prehistoric Scandinavians who lived thousands of years ago around the Baltic Sea has shown that the transition from hunting to farming was more of a one-way takeover than previously supposed.
The genetic makeup of the people who lived through this cultural revolution has revealed that the incoming migrant farmers from southern Europe subsumed the indigenous hunter gatherers of the north, rather than the other way round, scientists said.
Farming people are more advanced than hunters and gatherers. Because it takes knowledge and organization to master their environment and not live at its mercy. Which is what hunters and gatherers must do. As they travel across great expanses looking for food. Food they can only eat if nature provides it. And they can find it. Whereas farmers can grow food and raise livestock. On small farms. And they can grow a surplus. To carry them through winters. And bad growing seasons. While hunters and gatherers can only go hungry. And die.
So farming societies are more advanced than hunter and gatherer societies. Their knowledge and organization created food surpluses. And economic activity. Which created wealth. This is why the Europeans went on to dominant the hunter and gatherers they met in the Americas, Australia, etc. And why the transition from hunting to farming was a one-way takeover. For advanced people have the knowledge, organization and wealth to dominant less advanced people who must live at the mercy of their environment.
Tags: advanced people, Europeans, farmers, food, food surplus, hunter and gatherer, knowledge, mercy of their environment, organization, tools, wealth
(Originally published October 18th, 2011)
We can Ultimately Blame Neanderthal’s Demise on the Hunter and Gatherer System
We’re Homo sapiens. Neanderthals were here before us. By a few hundred thousand years. Give or take. We have fossil evidence of their existence. And we’ve been able to put them into the historical timeline. But we’re not sure what happened to them. For they were stronger than us. And they had a similar brain size as ours. Stronger and just as smart, you’d have to give them the edge when Homo sapiens met Neanderthal. Yet here we are. Homo sapiens. Wondering what happened to Neanderthal man.
There are theories. Neanderthal was adapted to live in the cold. And he hunted cold-adapted mammals. But then an ice age came. And the temperatures fell. It became too cold even for the cold-adapted. The climate change pushed the 4-legged mammals south. In search of food ahead of the advancing glaciers. And Neanderthal followed. Moving into what were at one time warmer climes. Bumping into warmer-clime Homo sapiens.
The climatic change was rather sudden during this period. One theory says that this rapid changing changed the environment. Creating different plant and animal species. And Neanderthal was unable to adapt. Another theory says that as the glaciers advanced they just forced more people into a smaller area. And they fought over a smaller food supply. When the glaciers retreated, Homo sapiens then followed Neanderthals north. And expanded into their hunting grounds. Until they displaced them from the historical timeline.
Whatever happened one thing is sure. We can ultimately blame their demise on the hunter and gatherer system. Because this system requires large hunting grounds for survival. Advancing glaciers reduced those hunting grounds. Putting more people together in a smaller area. Competing for limited food resources. And they ultimately lost that competition.
The Hunter and Gatherer Culture Continued to do things as they had During the Stone Age
We can see a more recent example of the demise of a hunter and gatherer people. In North America. During the European colonization of that continent.
The North American continent is huge. Much of it remains uninhabited to this date. But it wasn’t big enough for the North American Indians and the Europeans. Why? The Indians were hunters and gatherers. They needed a lot of land. Each tribe had ‘braves’. ‘Warriors’. Soldiers. Because they were a fighting people. They had a warring culture. They followed food. Taking land from other tribes. And protecting land from other tribes. So they needed large numbers of warriors. Which required large amounts of food. And great expanses of land to hunt that food.
The Europeans, on the other hand, were farmers. They could grow a lot of food. And grow large populations on very small tracts of land. They had higher population densities on their land. They were better fed. And they had a middle class thanks to a healthy food surplus. Which created new technologies. And provided tools and equipment to advance their civilization. While the hunter and gatherer culture continued to do things as they had during the Stone Age.
Food Surpluses Created a Middle Class which allowed Advanced Civilizations
Hunters and gatherers live at the mercy of their environment. Whereas farmers have taken control of their environment. Creating food surpluses. Which led to a middle class. And to advanced civilizations. Which is why they became the dominant civilization. And displaced hunter and gatherer people from the historical timeline. Simply by being a much more survivable people. Because they took control of their environment.
Tags: advancing glaciers, civilization, climate change, climatic change, environment, Europeans, farmers, food, food supply, food surplus, glaciers, historical timeline, Homo sapiens, hunters and gatherers, hunting grounds, ice age, Indians, middle, Neanderthals, tools
(Originally published October 24th, 2011)
The Division of Labor gives us our Houses, Food, Cars, Televisions, Smartphones, Laptops and the Internet
We can’t do everything ourselves. It’s not efficient. And most times not even possible. We don’t build our own houses. Grow our own food. Build our own cars. Manufacture our own high-definition televisions. Smartphones. Laptops. And we don’t build our own Internet. No. Instead, people everywhere across the economy specialize in one thing (i.e., work for a living). And together these specialists fit into the big economic picture. Which gives us our houses, food, cars, televisions, smartphones, laptops and the Internet.
It started with the most basic division of labor. Prehistoric women raised their young. While prehistoric man hunted. Which was necessary for the propagation of the species. And us. For if they all hunted and no one nursed the young the young would have died. And with them the species of man. For there was no formula back then.
The next great leap forward on the civilization timeline was the indispensible plough. The prime mover of civilization. With the food problem managed, famines were more the exception than the rule. And with fewer people needed to produce a food surplus, people could do other things. And they did.
The Division of Labor let us Create Surpluses in Food, Ploughs, Shoes, Tools, Harnesses, Etc.
The division of labor gave rise to artisans. The first skilled trades. Made possible by a food surplus. As other people grew the food the artisans made the tools and crafts the farmers used. They specialized in plough making and designed and built better and better ploughs. Lots of them. Shoemakers made shoes. Lots of them. Metal workers made tools. Lots of them. Leatherworkers made harnesses. Lots of them. See the pattern?
The food surplus gave us surpluses in ploughs, shoes, tools, harnesses, etc. The division of labor let us create these surpluses. Specialists made continual improvements in their areas of specialization. Producing better things. And more of them. Which led to another key to the advanced civilization. Trade.
The shoemaker didn’t have to grow food. He could trade shoes for food. Ditto for the plough maker. The metal worker. The leatherworker. And the farmers didn’t have to make any of these things because they could trade food for them. So we became traders. We created the market. And traders took their goods and/or services to these markets to trade for other goods and/or services. First by foot. Then by animal. Then by boat. Then by train. Then by truck. Then by airplane. Artisans (i.e., workers) traded their specialization for the product and/or services of another’s specialization. Then. And now.
The Division of Labor made the Complex Simple and our Lives Rather Comfortable and Fun
The division of labor gave rise to the artisan. The skilled trade worker. The middle class. People who can specialize in one thing. And trade that one thing for the other things he or she wants. Whether it be a skilled blacksmith hammering out farming tools. A tool and die maker working in a factory. An accountant. Or a software engineer. We have a skill. Our human capital. And we trade that skill to get the other things we’re not skilled in. The end result is a modern, bustling, free market economy. An advanced civilization. And a high standard of living.
All thanks to the division of labor. Which made the complex simple. And our lives rather comfortable. And fun. Unlike prehistoric man. Who knew of no such things as iPhones. Indoor flush toilets. Movie theaters. Or restaurants. No, he didn’t do much other than survive. Which was no easy thing. But he did. And for that we are grateful.
Tags: advanced civilization, artisans, civilization, division of labor, Economics, economy, farmers, food, food surplus, free market, free market economy, market, middle class, plough, skilled trades, specialists, specialization, specialize, trade, traders
Week in Review
Our public schools are teaching our children that capitalism is evil and unfair. That government is needed to prevent business owners from making too much profit at the people’s expense. Our public schools teach our kids this because the left controls our public schools. And the left hates capitalism. They would love to replace capitalism with socialism. An egalitarian system that puts people before profits. Because putting people before profits is the only way to truly increase the quality of life. Unless you actually live in a place where they put people before profits (see NKorean farmers planting rice with profits in mind by AP posted 5/31/2013 on Yahoo! News).
Farmers say they have begun working under the new policies, which are designed to boost production by giving managers and workers financial incentives. Foreign analysts say the moves to spur North Korea’s moribund economy suggest Pyongyang is taking cues from Beijing on how to incorporate free market ideas within its rigid socialist system…
Impoverished North Korea suffers chronic food and power shortages and has not released economic data for decades. South Korea’s central bank estimates the North’s gross national income, an indicator of the average standard of living, was $1,250 per person in 2011 compared with $23,400 in South Korea.
In the past, the North Korean state set workers’ salaries. Under new measures announced April 1, the managers of farms, factories and other enterprises have been given leeway to set salaries and offer raises to workers who help drive up production…
Beijing dismantled its centrally planned economy slowly. In the 1970s, it began allowing farmers to keep more of their harvests, giving them an incentive to grow more to sell on newly permitted free markets. Food production soared.
In the mid-’80s, the government gave state enterprises the authority to link bonuses and salaries to better performance. Those changes were mostly aimed at managers, but they cracked a communist-era preference for egalitarianism.
New rules in the early 1990s gave state enterprises full flexibility to set wages, widening the use of performance incentives. In that decade, China truly broke away from its centralized “iron rice bowl” system of guaranteed employment and state-set incomes…
At the Tongbong farm in the eastern city of Hamhung, farmers are in the midst of a busy rice planting season after a long, cold winter.
A long, cold winter? Guess there’s no global warming in North Korea.
North Korea’s “rigid socialist system” has impoverished and starved her people. As well as left them in the dark as they don’t have the energy to light up the night. This is egalitarianism. Everyone’s life is equally miserable. This is what socialism gets you. Countries like North Korea, Cuba, the former Soviet Union and China under Mao. Countries notable for their abject poverty. And occasional famine. This is what the left wants America to be. Egalitarian. Where we put people before profits. Where no one has any incentive to do anything. Because working harder than the next guy doesn’t improve your lot in life. So you don’t work harder. You do the minimum. Because why work harder when the outcome is always the same? Misery.
No doubt the American left disapproves of North Korea’s introduction of market forces. And the profit incentive. For it puts profits before people. They’d rather see another layer of bureaucracy. And another 5-year plan. Where brilliant government elites think brilliantly to solve the nation’s problems. Instead of leaving it to the chaos of the free markets. For what did the chaos of the free markets ever do for the people? Other than give them an obesity problem while socialism gives her people famine. Free markets give her people smartphones and the Internet. While Socialism can’t even light up the night. And free markets give her people peace and happiness. While socialism gives her people fear and intimidation.
Of course, the American left doesn’t have a problem giving fear and intimidation to some people. As the IRS persecution of conservatives shows. Which is perhaps why the American left admires socialism so much. Why they insist that we put people before profits. Because when we do we move closer to a police state like they have in North Korea. Something the American left no doubt would like. For it would make it easier for them to persecute their political enemies.
Tags: abject poverty, capitalism, Communist, egalitarian, Egalitarianism, famine, farmers, farms, free markets, incentive, North Korea, people before profits, profit, profit incentive, rigid socialist system, socialism
(Originally published March 20, 2012)
Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties
Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard. Even renowned monetarist economist Milton Friedman agrees. Though that’s about the only agreement between Keynesians and Friedman. Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard. And adopted Keynesian policies. Deficit spending. Just like they did in the Seventies. The decade where we had both high unemployment and high inflation. Stagflation. Something that’s not supposed to happen under Keynesian economics. So when it did they blamed the oil shocks of the Seventies. Not their orgy of spending. Or their high taxes. And they feel the same way about the Great Depression.
Funny. How one price shock (oil) can devastate all businesses in the US economy. So much so that it stalled job creation. And caused high unemployment. Despite the government printing and spending money to create jobs. And to provide government benefits so recipients could use those benefits to stimulate economic activity. All of that government spending failed to pull the country out of one bad recession. Because of that one price shock on the cost of doing business. Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.
Herbert Hoover may have been a Republican. But he was no conservative. He was a big government progressive. And believed that the federal government should interfere into the free market. To make things better. Unlike Warren Harding. And Calvin Coolidge. Who believed in a small government, hands-off policy when it came to the economy. They passed tax cuts. Following the advice of their treasury secretary. Andrew Mellon. Which gave business confidence of what the future would hold. So they invested. Expanded production. And created jobs. It was these small government policies that gave us the Roaring Twenties. An economic boom that electrified and modernized the world. With real economic growth.
If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business
The Roaring Twenties was a great time to live if you wanted a job. And wanted to live in the modern era. Electric power was spreading across the country. People had electric appliances in their homes. Radios. They went to the movies. Drove cars. Flew in airplanes. The Roaring Twenties was a giant leap forward in the standard of living. Factories with electric power driving electric motors increased productivity. And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution. This modernization even made it to the farm. Farmers borrowed heavily to mechanize their farms. Allowing them to grow more food than ever. Bumper crops caused farm prices to fall. Good for consumers. But not those farmers who borrowed heavily.
Enter Herbert Hoover. Who wanted to use the power of government to help the farmers. By forcing Americans to pay higher food prices. Meanwhile, the Federal Reserve raised interest rates. Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties. So they contracted the money supply. Cooling that real economic growth. And making it very hard to borrow money. Causing farmers to default on their loans. Small rural banks that loaned to these farmers failed. These bank failures spread to other banks. Weakening the banking system. Then came the Smoot-Hawley Tariff. Passed in 1930. But it was causing business uncertainty as early as 1928. As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%. Basically adding a 30% tax on the cost of doing business. That the businesses would, of course, pass on to consumers. By raising prices. Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff. Putting a big cramp in sales revenue. Perhaps even starting an international trade war. Further cramping sales. Something investors no doubt took notice of. Seeing that real economic growth would soon come to a screeching halt. And when the bill moved through committees in the autumn of 1929 the die was cast. Investors began the massive selloff on Wall Street. The Stock Market Crash of 1929. The so-called starting point of the Great Depression. Then the Smoot-Hawley Tariff became law. And the trade war began. As anticipated.
Of course, the Keynesians ignore this lead up to the Great Depression. This massive government intrusion into the free market. And the next president would build on this intrusion into the free market. Ignoring the success of the small-government and tax cuts of Harding and Coolidge. As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover. The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time. Causing uncertainty like never seen before in the business community. It was an all out assault on business. Taxes and regulation that increased the cost of business. And massive government spending for new benefits and make-work programs. All paid for by the people who normally create jobs. Which there wasn’t a lot of during the great Depression. Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc. Oil shocks of the Seventies? If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same. And worse. Far, far worse. Which is why the Great Depression lasted 10 years. Because the government turned what would have been a normal recession into a world-wide calamity. By trying to interfere with market forces.
Only Real Economic Growth creates Jobs, not Government Programs
The unemployment rate in 1929 was 3.1%. In 1933 it was 24.9%. It stayed above 20% until 1936. Where it fell as low as 14.3% in 1937. It then went to 19.0%, 17.2% and 14.6% in the next three years. These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling. Or spending money. None of the New Deal programs had a significant effect on unemployment. The New Deal failed to fix the economy the way the New Dealers said it would. Despite the massive price tag. So much for super smart government bureaucrats.
What finally pulled us out of the Great Depression? Adolf Hitler’s conquering of France in 1940. When American industry received great orders for real economic growth. From foreign countries. To build the war material they needed to fight Adolf Hitler. And the New Deal programs be damned. There was no time for any more of that nonsense. So during World War II businesses had a little less uncertainty. And a backlog of orders. All the incentive they needed to ramp up American industry. To make it hum like it once did under Harding and Coolidge. And they won World War II. For there was no way Adolf Hitler could match that economic output. Which made all the difference on the battlefield.
Still there are those who want to blame the gold standard for the Great Depression. And still support Keynesian policies to tax and spend. Even today. Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge. We’re right back to those failed policies of the past. Massive government spending to stimulate economic activity. To pull us out of the Great Recession. And utterly failing. Where the unemployment rate struggles to get below 9%. The U-3 unemployment rate, that is. The rate that doesn’t count everyone who wants full time work. The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%. Which is above the lowest unemployment rate during the Great Depression. Proving once again only real economic growth creates jobs. Not government programs. No matter how many trillions of dollars the government spends.
So much for super smart government bureaucrats.
Tags: Adolf Hitler, assault on business, benefits, Calvin Coolidge, Coolidge, cost of business, cost of doing business, economic activity, electric, farm, farm prices, farmers, FDR, free market, gold standard, government benefits, government spending, Great Depression, Great Recession, Harding, Herbert Hoover, high taxes, inflation, interfere with market forces, investors, job creation, Keynesian economics, Keynesian policies, Keynesians, New Deal, New Deal programs, oil shock, Progressive, real economic growth, recession, Roaring Twenties, small government, Smoot-Hawley Tariff, spending, stock market crash, tax cuts, trade war, uncertainty, unemployment, unemployment rate, Warren Harding, World War II
Food Surpluses allowed Everything that followed in the Modern Age
Humans were hunters and gatherers first. When the environment ruled supreme. Then something happened. Humans began to think more. And started to push back against their environment. First with tools. Then with fire. Bringing people closer together. Eventually settling down in civilizations. When the human race embarked on a new path. A path that would eventually usher in the modern age we enjoy today. We stopped hunting and gathering. And began farming.
Throughout history life has been precarious. Due to the uncertainty of the food supply. Especially when the environment ruled our lives. That changed with farming. When we started taking control of our environment. We domesticated animals. And learned how to grow food. Which lead to perhaps the most important human advancement. The one thing that allowed everything that followed in the modern age. Food surpluses. Which made life less precarious. And a whole lot more enjoyable.
Producing more food than we needed allowed us to store food to get us through long winters and seasons with poor harvests. But more importantly it freed people. Not everyone had to farm. Some could do other things. Think about other things. And build other things. Artisans arose. They built things to make our lives easier. More enjoyable. And when these talented artisans and farmers met other talented artisans and farmers they traded the products of all their labors. In markets. That became cities. Enriching each other’s lives. By allowing them to trade for food. For things that made life easier. And for things that made life more enjoyable.
We settled on using Precious Metals (Gold and Silver) for Money for they were Everything Money Should Be
As civilizations advanced artisans made a wider variety of things. Putting a lot of goods into the market place. Unfortunately, it made trading more difficult. Because while you saw what you wanted the person who had it may not want what you had to offer in trade. So what do you do? You look for someone else that has that same thing. And will trade for what you have. And when the second person doesn’t want to trade for what you have you look for a third person. Then a fourth. Then a fifth. Until you find someone who wants to trade for what you have.
This is the barter system. Trading goods for goods. And as you can see it has high search costs to find someone to trade with. Time that people could better spend making more things to trade. What they needed was a temporary storage of value. Something people could trade their things for. And those people could then use that temporary storage they received in trade to later trade for something they wanted. We call this ‘something’ money.
We have used many things for money. Some things better than others. In time we learned that the best things to use for money had to have a few characteristics. It had to be scarce. A rock didn’t make good money because why would anyone trade for it when you could just pick one up from the ground? It had to be indestructible and hold its value. A slab of bacon had value because bacon is delicious. But if you held on to it too long it could grow rancid, losing all the value it once held. Or you could eat it. Which would also remove its value. It had to be divisible. A live pig removed the problem of bacon growing rancid. However, it was hard making change with live pigs. Which is why we settled on using precious metals (gold and silver) for money. For they were everything money should be.
The Key to Economic Activity is People with Creative Talent to make Things to Trade
Money came first. Then government monetary systems. Traders were using gold and silver long before nations established their own money. And when they did they based them on weights of these precious metals. The British pound sterling represented one Saxon pound of silver. The U.S. dollar came from the Spanish dollar. Which traces back to 16th century Bohemia. To the St. Joachim Valley. Where they minted private silver coins. The Joachimsthaler. Where the ‘thaler’ (which translated to valley) in Joachimsthaler became dollar. The German mark and the French franc came into being as weights of precious metals. People either traded silver or gold coins. Or paper notes that represented silver or gold.
We used silver first as the basis for national currencies. Then with new gold discoveries in the United States, Australia and South Africa gold became the precious metal of choice. Using precious metals simplified trade by providing sound money. And it also made foreign exchange easy. For when the British made their pound represent 1/4 of an ounce of gold and the Americans made their dollar represent 1/20 of an ounce of gold the exchange rate was easy to calculate. The British pound had 5 times as much gold in it than the U.S. dollar. So the exchange rate was simply 5 U.S. dollars for every British pound. Which made international trade easy. And fair. Because everything was priced in weights of gold.
The pure gold standard, then, was part of the natural evolution of money. The state did not create it. It does not require an act of legislation. Or political decree. The pure gold standard existed before the state. And states based their currencies on the monetary system that already existed. Using weights of precious metals as money. That is, a pure gold standard. Central banks and fiat money are only recent inventions of the state. And bad ones at that. For the thousands of years that preceded the last hundred years or so there were only traders mutually agreeing to trade their goods for precious metals. Using these precious metals as a temporary storage of wealth. To temporarily hold the value of the things they made. So the key to economic activity is people with creative talent to make things to trade. And a sound money like gold and silver to facilitate that trade. Not a central bank. Or monetary policy.
Tags: artisans, barter, barter system, central bank, coins, dollar, economic activity, exchange rate, farmers, farming, food, food supply, food surpluses, foreign exchange, gold, gold and silver, Joachimsthaler, market place, markets, monetary policy, money, pound, precious metals, search costs, silver, temporary storage of value, thaler, trade
The Federal Reserve increased the Money Supply to Lower Interest Rates during the Roaring Twenties
Benjamin Franklin said, “Industry, perseverance, & frugality, make fortune yield.” He said that because he believed that. And he proved the validity of his maxim with a personal example. His life. He worked hard. He never gave up. And he was what some would say cheap. He saved his money and spent it sparingly. Because of these personally held beliefs Franklin was a successful businessman. So successful that he became wealthy enough to retire and start a second life. Renowned scientist. Who gave us things like the Franklin stove and the lightning rod. Then he entered his third life. Statesman. And America’s greatest diplomat. He was the only Founder who signed the Declaration of Independence, Treaty of Amity and Commerce with France (bringing the French in on the American side during the Revolutionary War), Treaty of Paris (ending the Revolutionary War very favorably to the U.S.) and the U.S. Constitution. Making the United States not only a possibility but a reality. Three extraordinary lives lived by one extraordinary man.
Franklin was such a great success because of industry, perseverance and frugality. A philosophy the Founding Fathers all shared. A philosophy that had guided the United States for about 150 years until the Great Depression. When FDR changed America. By building on the work of Woodrow Wilson. Men who expanded the role of the federal government. Prior to this change America was well on its way to becoming the world’s number one economy. By following Franklin-like policies. Such as the virtue of thrift. Favoring long-term savings over short-term consumption. Free trade. Balanced budgets. Laissez-faire capitalism. And the gold standard. Which provided sound money. And an international system of trade. Until the Federal Reserve came along.
The Federal Reserve (the Fed) is America’s central bank. In response to some financial crises Congress passed the Federal Reserve Act (1913) to make financial crises a thing of the past. The Fed would end bank panics, bank runs and bank failures. By being the lender of last resort. While also tweaking monetary policy to maintain full employment and stable prices. By increasing and decreasing the money supply. Which, in turn, lowers and raises interest rates. But most of the time the Fed increased the money supply to lower interest rates to encourage people and businesses to borrow money. To buy things. And to expand businesses and hire people. Maintaining that full employment. Which they did during the Roaring Twenties. For awhile.
The Roaring Twenties would have gone on if Herbert Hoover had continued the Harding/Mellon/Coolidge Policies
The Great Depression started with the Stock Market Crash of 1929. And to this date people still argue over the causes of the Great Depression. Some blame capitalism. These people are, of course, wrong. Others blamed the expansionary policies of the Fed. They are partially correct. For artificially low interest rates during the Twenties would eventually have to be corrected with a recession. But the recession did not have to turn into a depression. The Great Depression and the banking crises are all the fault of the government. Bad monetary and fiscal policies followed by bad governmental actions threw an economy in recession into depression.
A lot of people talk about stock market speculation in the Twenties running up stock prices. Normally something that happens with cheap credit as people borrow and invest in speculative ventures. Like the dot-com companies in the Nineties. Where people poured money into these companies that never produced a product or a dime of revenue. And when that investment capital ran out these companies went belly up causing the severe recession in the early 2000s. That’s speculation on a grand scale. This is not what happened during the Twenties. When the world was changing. And electrifying. The United States was modernizing. Electric utilities, electric motors, electric appliances, telephones, airplanes, radio, movies, etc. So, yes, there were inflationary monetary policies in place. But their effects were mitigated by this real economic activity. And something else.
President Warren Harding nominated Andrew Mellon to be his treasury secretary. Probably the second smartest person to ever hold that post. The first being our first. Alexander Hamilton. Harding and Mellon were laissez-faire capitalists. They cut tax rates and regulations. Their administration was a government-hands-off administration. And the economy responded with some of the greatest economic growth ever. This is why they called the 1920s the Roaring Twenties. Yes, there were inflationary monetary policies. But the economic growth was so great that when you subtracted the inflationary damage from it there was still great economic growth. The Roaring Twenties could have gone on indefinitely if Herbert Hoover had continued the Harding and Mellon policies (continued by Calvin Coolidge after Harding’s death). There was even a rural electrification program under FDR’s New Deal. But Herbert Hoover was a progressive. Having far more in common with the Democrat Woodrow Wilson than Harding or Coolidge. Even though Harding, Coolidge and Hoover were all Republicans.
Activist Intervention into Market Forces turned a Recession into the Great Depression
One of the things that happened in the Twenties was a huge jump in farming mechanization. The tractor allowed fewer people to farm more land. Producing a boom in agriculture. Good for the people. Because it brought the price of food down. But bad for the farmers. Especially those heavily in debt from mechanizing their farms. And it was the farmers that Hoover wanted to help. With an especially bad policy of introducing parity between farm goods and industrial goods. And introduced policies to raise the cost of farm goods. Which didn’t help. Many farmers were unable to service their loans with the fall in prices. When farmers began to default en masse banks in farming communities failed. And the contagion spread to the city banks. Setting the stage for a nation-wide banking crisis. And the Great Depression.
One of the leading economists of the time was John Maynard Keynes. He even came to the White House during the Great Depression to advise FDR. Keynes rejected the Franklin/Harding/Mellon/Coolidge policies. And the policies favored by the Austrian school of economics (the only people, by the way, who actually predicted the Great Depression). Which were similar to the Franklin/Harding/Mellon/Coolidge policies. The Austrians also said to let prices and wages fall. To undo all of that inflationary damage. Which would help cause a return to full employment. Keynes disagreed. For he didn’t believe in the virtue of thrift. He wanted to abandon the gold standard completely and replace it with fiat money. That they could expand more freely. And he believed in demand-side solutions. Meaning to end the Great Depression you needed higher wages not lower wages so workers had more money to spend. And to have higher wages you needed higher prices. So the employers could pay their workers these higher wages. And he also encouraged continued deficit spending. No matter the long-term costs.
Well, the Keynesians got their way. And it was they who gave us the Great Depression. For they influenced government policy. The stock market crashed in part due to the Smoot Hawley Tariff then in committee. But investors saw the tariffs coming and knew what that would mean. An end to the economic boom. So they sold their stocks before it became law. Causing the Stock Market Crash of 1929. Then those tariffs hit (an increase of some 50%). Then they doubled income tax rates. And Hoover even demanded that business leaders NOT cut wages. All of this activist intervention into market forces just sucked the wind out of the economy. Turning a recession into the Great Depression.
Tags: Andrew Mellon, Austrian, bank failures, banking crises, banks, Benjamin Franklin, capital, capitalism, capitalists, cheap credit, Coolidge, depression, economic activity, economic growth, expansionary policies, farm, farmers, farming, FDR, Federal Reserve, Founding Fathers, Franklin, frugality, full employment, gold standard, Great Depression, Harding, Herbert Hoover, Hoover, industry, interest rates, John Maynard Keynes, Keynes, Keynesians, laissez faire capitalism, mechanization, Mellon, monetary policy, money, money supply, perseverance, prices, real economic activity, recession, Roaring Twenties, speculation, tariff, the Fed, wages, Warren Harding, Woodrow Wilson
Week in Review
The Left believes the government can make capitalism better. And fairer. In the Eighties they liked to point to Japan. And the incredible economic growth they had thanks to government partnering with business. Before their deflationary spiral and their Lost Decade. Thanks to all that government partnering with business. But that was yesterday’s news. Today they like to point at the economic juggernaut that is China. And say, “See? That’s what strong government can do.” For they believe China can get things done because they don’t have to deal with that pesky democracy. All of those elections. And being answerable to the people. In China the government rules. And the people quake in their boots. Which lets China get things done. And make a better society for all Chinese (see The forbidden public toilets of Beijing by Justin Rowlatt posted 9/8/2012 on BBC News Magazine).
Jeff Sun is the scion of one of China’s new rich and the founder of the “China Super Car Club”. He has got so many he cannot even remember them all…
We met Jeff while reporting on the yawning chasms of inequality that have opened up in Chinese society.
We filmed in some of the poorest communities I have ever visited – Chinese villages where no-one has ever owned a car and where they still till their fields using a single donkey, shared between dozens of farmers.
A better society for all Chinese? Granted there are those on the Left who would love to see a world where no one owned a car. But one donkey shared between dozens of farmers? That doesn’t sound like a fairer society. Not when there are rich people elsewhere who have so many cars that they can’t remember them all. So apparently this state-capitalism (or as they say in China, communism) isn’t as egalitarian as the Left would like to believe. For in America there is more capitalism than communism. And yet American farmers don’t share donkeys. No. In America farmers own their own tractors. Which seems to be a bit more egalitarian than communist China. But it gets worse.
The journalists’ rule of thumb is that you cannot report the so-called three Ts – Tiananmen, Taiwan or Tibet.
We inadvertently discovered a fourth T.
In an article in the country’s English language newspaper, China Daily, I came across an editorial featuring stinging criticism of China from the WTO. Not the World Trade Organisation, this was the less well-known World Toilet Organisation.
This WTO had ranked China as having the worst public toilets in all Asia. The paper explained how, in response, Beijing had introduced rigorous new hygiene standards – now no more than two flies are now allowed in any public toilet.
The paper was in no doubt about the importance of the issue. “Clean public toilets are the symbol of a civilized society,” it thundered. The controversy made me chuckle and I mentioned to our government minder that I wanted to cover this storm in a toilet bowl.
It was Mr Chen’s job to ensure we did not break any reporting rules. He had been a cheerful, relaxed companion throughout our three-week journey, but now his face darkened.
“I do not think that would be a good idea,” he said gravely…
Mr Chen vanished for a few moments. When he returned his manner was forbidding.
“I am sorry Justin but I have to tell you cannot report this story at all.”
The human rights issue of Tiananmen, Taiwan or Tibet may be a sore spot for China as well as the liberals who so admire their way of governing. But the worst public toilets in all Asia? That affects everyone. At least those who have to drop trou in their busy day away from home. Not to mention the tourists. The Chinese government may not know a good, quality public toilet but people traveling to their country no doubt do. Oh the shame. Oh the humanity. Oh the inequality. No wonder the sensors will allow journalists to report about the severe inequality in Chinese society. For what is a village of farmers having to share one donkey compared to embarrassing public toilets? For we all know every country judges another by the quality of their public toilets. For few things are so sacred, so personal, as copping a squat when out on the town.
And this is the governing style the Left would have the US follow. For it is more egalitarian. Even though the masses must use the worse public toilets in all of Asia while the new Chinese rich no doubt enjoy a squat on the finest porcelain known to mankind. And probably follow that up with a refreshing bidet cleansing. No. This isn’t equality. This is a toilet aristocracy. Which simply doesn’t exist under laissez faire capitalism. Where going to the toilet in public isn’t a privilege. It’s just so expected in capitalist societies that it is taken for granted.
Tags: capitalism, China, Chinese, Communism, donkey, egalitarian, farmers, government partnering with business, inequality, public toilets, Taiwan, Tiananmen, Tibet
America’s First Tax was a 25% Excise Tax on American Whiskey made from Corn
Thomas Jefferson held a dinner party where he, Alexander Hamilton and James Madison met to resolve some issues. Hamilton was stressed out. He was facing strong opposition for his assumption plan. Secretary of the Treasury Hamilton wanted to assume all the states’ debts and lump them into the federal debt. To get the nation’s finances in order. Establish good credit. And raise revenue for the new nation. The Virginians, Jefferson and Madison, offered their assistance if Hamilton would give them the nation’s capital. Hamilton got his assumption. And the Virginians got the nation’s new capital on the Potomac River. Across from Virginia. Where they could keep a close eye on the nation’s business. And everyone lived happily ever after.
Well, not exactly. There was already growing discontent across the land. Hamilton understood business and commerce. And banking. Farmers don’t like bankers. Or commerce. Or business. Many in the south and on the frontier worked the land. As yeoman farmers. Families working small farms that they owned. They believed, as Jefferson believed, that the most honorable work in America was farming. And that America’s future was the growth of farming. Small farms. Owned by families working the land. Yeoman farmers. Proud. Pure. And wholly American. This despite Jefferson being a member of the slave-owning planter elite. Who indulged in little physical labor.
So the south and the frontier were no Hamilton supporters. They didn’t like his high finance ideas for the new nation. And they especially didn’t like his whiskey tax. A tax of 25% on western corn products. Which you made whiskey from. The new American alcoholic beverage of choice after they eschewed beer. The beverage of choice before the rebellion. When they were all content British citizens. But an excise tax on corn products was little different from the excise taxes that caused the colonies to rebel against Great Britain in the first place. Sure, there was one subtle difference this time. The whiskey tax was taxation with representation. And, technically speaking, legal. But on corn? The new tax seemed to fall unfairly on the West. Which had a corn economy. And used the whiskey they made from it for money. So these frontier people were not just going to sit idly by and take this new taxation without a fight.
The Washington Administration took Decisive Action in Suppressing the Whiskey Rebellion
This first tax was to help finance Hamilton’s assumption. But it was more important than the revenue it would raise. The whiskey tax was a matter of principle. It was probably poor policy. And probably not the smartest thing to do. Picking a fight with the toughest and most fiercely independent people in the country. Frontier people. Who lived off the land without any of the city comforts enjoyed back east. But the tax was the law. And the first test of the new nation. If the government retreated in the face of opposition to a law passed by Congress their experiment in self-government would fail. For as unpleasant as taxation was it was the reason they formed a new nation in 1787. To levy taxes so they could pay their past debt. And their current bills. So President Washington and Hamilton hunkered down on the tax.
And the riots came. The Whiskey Rebellion. Around Pittsburg. Kentucky (aka bourbon country). The backcountry of the Carolinas. And elsewhere. They refused to pay the tax. And attacked the tax collecting apparatus. Even the courts. It was war. The spirit of ’76 was alive again. Protesting a distant central power trying to impose a tax on them. Washington offered amnesty if they just dispersed and went home. They refused. So Washington raised an army of some 13,000 strong. Larger than any army he commanded during the Revolutionary War. And led the army west with Hamilton to meet the insurrection. The first and only time a sitting president led an army. As the army approached resistance melted away. So Washington handed command over to Henry “Lighthorse Harry” Lee (a Revolutionary War veteran and hero) and returned to the capital in Philadelphia. Hamilton remained with the army. As the army arrived the insurrection collapsed. The army caught some rebels and tried them. And two received death sentences. Who Washington later pardoned.
Score one for the rule of law. Washington was pleased with the outcome. Hamilton, too. They took decisive action to subdue an insurrection. The people in general were happy that they restored peace. And that the country didn’t collapse into anarchy. All in all a win-win for the people and the government. Almost. Not everyone saw it in this light. Some saw a king leading an army against his own people. A professional army. Little different from British redcoats. Or Oliver Cromwell’s New Model Army a century or so earlier. A professional standing army squashing those who disagreed with the government. And Jefferson did not like it. Nor did a lot of those in the south. Or on the frontier.
President Washington issued a Proclamation of Neutrality in the New War between Great Britain and France
Seeing Hamilton ride at the head of an army only reinforced Jefferson’s opinion of him. A power-hungry, British-loving puppet master. And the puppet was President Washington. The dislike between Hamilton and Jefferson turned into outright hostility. They had two different visions of America. And these two visions were mutually exclusive. Cabinet meetings became insufferable as Hamilton and Jefferson constantly fought. And the French Revolution didn’t help matters any. The radical Jefferson supported the radical French. Who he knew and sat with in the Jacobin clubs while he was in France. Jefferson was all for overthrowing monarchies. So when the French and British declared war on each other it was a no brainer who to support for Jefferson. Vive la France!
Of course there was only one problem with that position. About 75% of U.S. exports went to Great Britain. Even more of her imports (approximately 90%) came from Great Britain. And then there was the Royal Navy (RN). Who still ruled the high seas. And all the international trade routes. In addition to the RN there was the British Army. Who still occupied forts on the American western frontier. And who were still in contact with their Indian allies from the Revolutionary War. Couple this with the fact that the U.S. had no comparable army or navy. And was already having trouble on the frontier with the Indians (from the influx of settlers into the western territories). So siding with France against Britain was not the smart move. Yes, the French were instrumental in helping the Americans achieve their independence from Great Britain. But America was a country emerging from 8 years of war that just had to suppress a tax rebellion over a sin tax. She did not have the wealth to enter a European war. Besides, the Americans were supported by the monarch (King Louis XVI) the French were overthrowing. Which complicated matters.
Washington and Hamilton saw things differently than Jefferson. More like realists than the idealist Jefferson. The Revolution was over. The British and Americans were no longer enemies. But important trade partners. That shared a common British past. Of laws and traditions firmly established in what was once British America. So Washington issued his Proclamation of Neutrality (1793). They would support neither in this European war. Which infuriated the French. And Jefferson. For though they were neutral it was clear that their neutrality would favor the British. As well as Hamilton. And it did. But it also favored America’s best interests. For another long war would have probably bankrupted the nation. And perhaps resulted with her partitioned among the European nations. For the French Revolution lasted for a decade. And the Napoleonic Wars it begot lasted another 11 years. Which let us not forget the French lost. In large part due to the Royal Navy. And Great Britain’s wealth generated by her international trade. Something the Americans could not have altered had she entered the war on France’s side. A wise foreign policy call by President Washington (and yet another time he saved his country). But it was one that tore his administration apart. Firmly establishing the opposition party. With Jefferson at its head. With but one purpose. To destroy Hamilton. And to lead the nation away from where Hamilton was taking it.
Tags: Alexander Hamilton, assumption, Britain, British, British Army, corn, excise tax, farmers, France, French, French Revolution, frontier, Great Britain, Hamilton, James Madison, Jefferson, Madison, President Washington, Proclamation of Neutrality, professional army, Revolutionary War, RN, Royal Navy, standing army, tax, tax rebellion, Thomas Jefferson, Washington, whiskey, Whiskey Rebellion, whiskey tax, yeoman farmers
The Roaring Twenties gave us Automobiles, Electric Power, Radio, Movies, Telephones and Air travel
In 1921 there were 9 million automobile registrations. That jumped to 23 million by 1929. An increase of 156%. That’s a lot more cars on the roads. In the Roaring Twenties we made cars out of steel, paint and glass. Inside we fitted them with lumber, cotton and leather. We put rubber tires on them. And filled their fuel tanks with gasoline. So this surge in car ownership created a surge in all of these industries. Extraction of raw materials. Factories and manufacturing plants to build the equipment to extract those raw materials. As well as the machinery to build these automobile components. And the moving assembly lines in assembly plants to assemble these automobiles. The plants, warehouses and automobile dealers created a surge in the construction industry. And all the industries that fed the construction industry. Including the housing industry to house all these gainfully employed workers.
And this was just the auto industry. Which wasn’t the only industry that was booming during the Roaring Twenties. Thanks to the hands-off government policies of the administrations of Warren G. Harding and Calvin Coolidge businesses introduced us to the modern world. Electric power came into its own. By 1929 about 80% of all installed horsepower was electrical. And it entered our homes. Electric lighting and electric appliances. Vacuum cleaners. Washing machines. Refrigerators. All of this required even more raw material extraction from the ground. More manufacturing equipment and plants. More wholesale and retail construction. And more housing to house all of these workers earning a healthy paycheck.
And there was more. The Roaring Twenties gave us broadcast radio in our electric-powered homes. Free entertainment, sports broadcasts and news. Paid for by the new industry of advertising. Competing with radio was another growing industry. Motion pictures. That by the end of the Roaring Twenties were talkies. And speaking of talking there was a lot of that on the new telephone. In our homes. Interconnecting all of these industries was ship, rail and truck transportation. Even air travel took off during the Twenties. More raw material extraction. More equipment. More manufacturing. More construction. And jobs. More and more jobs. The hands-off government policies of the Harding and Coolidge administrations created the great Bull Market of the Twenties. Explosive economic activity. Real economic growth. Creating low-cost consumer goods to modernize America. Increase her productivity. Making her the dominant economic power in the world. The Europeans were so worried about America’s economic prowess that they met in 1927 at the International Economic Conference in Geneva to discuss the American problem. And how they were going to compete with the American economic juggernaut. Because the free market capitalism of the New World was leaving the Old World in the dust.
Herbert Hoover was a Republican in Name Only that FDR once Admired but Calvin Coolidge Despised
This was real economic growth. It was not speculation. This wasn’t artificially low interest rates creating an asset bubble. Working Americans bought homes and cars. And furnishings. Businesses produced these to meet that demand. They had growing sales. And growing profits. Which increased their stock prices. Investors wanted to own their stocks because these companies were making money. And with the world modernizing these stock prices weren’t going anywhere but up in the foreseeable future. Unless something changed the business environment. Well, something did.
Despite the roaring economy Calvin Coolidge did not run for a second term. Which was a pity. For his successor, Herbert Hoover, was a Republican in name only. He was a big time progressive. Who wanted to use the power of government to make the world perfect. A devout believer in the benevolence of Big Government. He added about 2,000 bureaucrats to the Department of Commerce. FDR at one time admired him (before he ran against him for president). Coolidge despised him. Under Hoover the federal government intruded into the private sector. His economics were Keynesian. He, too, worshipped at the altar of demand. He believed high wages were the key to prosperity. For people with more money buy more. And all that buying created demand for businesses to meet. Even during a recession he believed wages should not fall. Despite the fact that’s what recessions do on the back side of the business cycle. Lower prices and wages. And lay off people.
By the Twenties American farmers were mechanizing their farms. Allowing them to grow more food than ever before. Agriculture prices fell. At first this wasn’t a problem as there were export markets for their bumper crops. Thanks to a war-devastated Europe. But eventually the European soldiers returned to the farm. And the Europeans didn’t need the American food anymore. Even places tariffs on U.S. imports to their countries to help their farmers get back on their feet. Add in a bad winter that killed livestock. Some bad insect infestation in the summer. Add all this together and you had the beginning of the great farm crisis. Debt defaults. Bank failures. And the contraction of the money supply. Which the Federal Reserve (the Fed) did not step in to compensate for by expanding the money supply. Which was sort of their purpose for being in existence. As there was less money to borrow business could longer borrow to continue their growth. Because of the time factor in the stages of production to expand production required borrowing money. To make matters worse the Fed was actually pulling more money out of circulation. Because they looked at the rising stock prices and concluded that speculators were borrowing money to invest in the stock market. Thus inflating stock prices. But it wasn’t speculators running up those prices. It was an economic boom that was running up those stock prices. Until the government put a stop to that, at least.
Bad Government Policy didn’t Create the Roaring Twenties but Bad Government Policy ended Them
The Smoot-Hawley Tariff was close to becoming law in the fall of 1929. It was moving through committees on its way to becoming law. This tariff would raise the tax on all imports by about 30%. The idea was to protect domestic supplies and manufacturers. But even in 1929 it was a global economy. A lot of imports entered the stages of production. Which meant costs would be increasing throughout the stages of productions. Greatly increasing the input costs of all those businesses enjoying those high stock prices. Which would raise their prices (to cover those higher input costs). Reducing their sales. And slashing their profits. Add this to the contracting money supply and it painted a very bleak picture for business.
With demand sure to fall due to a massive new tariff that was about to become law businesses cut back. To get rid of what was about to become excess capacity. For they were smart. And understood what affected their businesses. And you know who else were smart? Investors. Who looked at this tariff and saw a locomotive engineer about to slam on the brakes. And if Congress passed this into law after 1928 Coolidge wasn’t going to be there to veto the law. So they all came to the same conclusions. The bull market was coming to an end. And they wanted to sell their stock to lock in their stock gains. Which caused the great sell-off of 1929. And the stock market crash. Starting the Great Depression.
People still debate the cause of the Great Depression. A popular argument is that greedy investors caused it by speculating in the stock market. Or that greedy businesses out-produced demand. But the economics of the Roaring Twenties don’t support this. This wasn’t people buying big houses because interest rates were low. This was the electrification of America. Cars. Telephones. Radio. Movies. Air travel. This was broad and real economic growth. Bad government policy didn’t create it. But bad government policy ended them. And it was the expectations of even worse government policies that yanked the rug out from underneath the economy. By causing a business contraction and stock market sell-off. Much like Obamacare is doing to businesses today. Scaring the bejesus out of them. For they have no idea what their future costs will be under Obamacare. So they are doing their best to prepare for it. By not expanding their businesses. By not hiring anyone. And sitting on their cash. To prepare for the worst. Much like businesses did in 1928. Which explains why the Great Recession lingers on.
Tags: 1929, air travel, automobile, Bull Market, bumper crops, Business, businesses, Calvin Coolidge, cars, construction, Coolidge, economic boom, electric power, extraction of raw materials, factories, farm, farmers, FDR, Federal Reserve, Great Depression, hands-off government policies, Harding, Herbert Hoover, imports, Keynesian, machinery, manufacturing plants, money supply, Obamacare, profits, radio, real economic growth, recession, Roaring Twenties, sales, Smoot-Hawley Tariff, speculators, stages of production, stock market, stock market crash, stock market sell-off, stock prices, tariffs, telephone
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