Page 3 of 5 THE FOLLY OF INTERVENTION, Part 1 The zero interest rate trap
By Henry C K Liu
British Crown and would quickly dissolve into anarchy. It was to the great
credit of the founding fathers that they were able to create a new democratic
republican government that would combine freedom with order, and local
self-government with national unity. The achievement was the more remarkable in
view of the deep socio-economic and ideological conflicts among the American
people on contradictions between individualism and collectivism, democracy and
oligarchy, conservatism and liberalism, and agrarianism and mercantilism.
The democratic ideal was represented early on by Sam Adams, Patrick Henry and
other Sons of Liberty. Among constitution drafters, democratic ideals were
represented by Thomas Jefferson. In the 1820s, democratic politics found
expression in
the new Democratic Party headed by Andrew Jackson. These early democrats
believed that government should be controlled by the people and that its power
should be strictly limited and its economic policy should aim at protecting the
interests of the average citizen rather than the wealthy elite.
This democratic attitude was natural to economic conditions of abundance of
land and self-development opportunities that formed the virgin political canvas
on which to paint a new city on the hill from 18th century liberalism. Before
the formation of economic classes, the US representative democracy was based on
geographic regions focusing on sectional interests rather than class interests.
This early liberalism was fundamentally different from 19th century liberalism
and 21st century neo-liberalism under which the working class, while emerging
as the majority of the population, was systemically underrepresented
politically as control of all political machinery was captured by the moneyed
class, as predicted by Alexis de Tocqueville, who warned in his Democracy in
America published in 1836 that the loss of "general equality of
condition" would threaten equality in American society.
Alexander Hamilton was the spokesman of the American aristocratic movement,
representing large landowners, foreign trade merchants and international
financiers. Hamilton, a forerunner supply-sider, believed that wealth can be
created only by the energetic financial elite, who, through their superior
intelligence and character, are natural entrepreneurs and innovators and so can
better mobilize the ignorant and undisciplined masses for high national purpose
than the contented agricultural landed gentry.
Politically, Hamilton thought the people could not be trusted with power and
that majority rule without strong minority rights would lead to confiscation by
the undeserving poor of the wealth created by the deserving rich. Hamilton
favored a strong central government controlled and run for the public good by a
well-born, educated elite of principle and property.
Thomas J DiLorenzo in his new book, Hamilton's Curse: How Jefferson's Arch Enemy
Betrayed the American Revolution - and What It Means for America Today,
argues that, regarding the stipulation that policies must promote "the public
good", "no government policy can be said to be for 'the public good' unless it
benefits every member of the public". More often than not, the "public good"
turns out to mean good only for special interests. The argument put the test
for legitimate government intervention on the populist effect of government
policies.
Hamilton rationalizes state intervention on the basis of high national purpose.
His view of government control of the economy is more appropriate for emerging
economies, such as the US economy in the 1860s, the Japanese economy in the
1950s or the Chinese economy today. Henry Clay's "American System" after the
War of 1812 took Hamilton's elitist program of economic nationalism away from
the upper class and offered it to the masses by making federal authority the
champion of the people, rather than a captured machine for narrow sectional
interests.
Through representative democracy as advocated by Jefferson, Clay promoted
measures designed to strengthen the young nation, enhancing its economic
independence from foreign economic and financial dominance with protective
tariffs, and promoted national unity by developing a reciprocal relationship
between agriculture and industry and through the establishment of a nation bank
to finance domestic development.
Daniel Webster, representing New England internationalist shipping interests in
Congress, opposed Clay's populist economic nationalism. Clay's ideas of
economic nationalism are similar to Chinese economic policy today, albeit
adjustments need to be made regarding the difference in historic conditions and
political culture in the two countries. (See
US-CHINA: QUEST FOR PEACE - Part 1: Two nations, a world apart, Asia
Times Online, December 9, 2003.)
Economically, while all Americans in the mainstream believe in the protection
of private property by the state, Hamilton advocated the concentration of
wealth in the hands of those who will profitably use it to build a strong
nation, and that it not be distributed widely as advocated by believers of
economic democracy. Modern-day neo-liberals are not Hamiltonians, in that they
willingly compromise economic nationalism in support of empire-building
globalization in the name of free trade.
Hamilton's idea reflected the need of a new, young nation of rich undeveloped
resources for capital formation in a world beginning to enter the industrial
capitalist age. In the 17th and 18th centuries, the agricultural economy of the
US faced a labor shortage that gave rise to the institution of slavery. The
agrarian South prospered until challenged by the capitalist industrial North.
The Civil War settled more than the socioeconomic issue of slavery. It set the
US economy irreversibly on the path of industrial capitalism. After 1850, early
industrialization solved the labor shortage problem by attracting immigration
from the underprivileged masses of Europe who formed the beginning of a
laboring class, a large segment of the population whose main economic function
was to provide labor to an industrial economy. The opening of the West brought
about servitude immigration from China, which was in decline under conditions
not much more liberal than slavery.
As the process of industrialization in late 19th century reduced demand for
labor through mechanization while immigration continued as an established
policy, unemployment became a major socioeconomic issue in the US. The end of
slavery after the Civil War also added to an oversupply of wage-earners in a
not-so-free labor market. Unemployment has since become a structural component
in capitalism as fundamental as interest charges on the use of money.
During the age of feudalism, finance was not an arena for the elite in Europe.
The US, founded only in 1776, did not experience a feudal economy. In the age
of industrial capitalism, industrialists were in control of the US economy,
while relying on passive financial institutions for capital. Henry Ford
(1863-1947) was disdainful of bankers. Industrialists and inventors such as
Ford and Thomas Edison (1847-1931) did not consider themselves as capitalists,
even though they operated under capitalism.
As finance capitalism replaced industrial capitalism, financiers wrestled
control of the economy from the industrialists. Standard Oil and General Motors
were financial trusts built around economic sectors through acquisition of
companies to form monopolies. Financiers such as JP Morgan and John D
Rockefeller were trust builders, not industrialists. Financial engineering, a
euphemism for financial manipulation, emerged as the center for profit in which
the aim of economic activity became that of making profit to provide return on
capital, rather than producing goods to satisfy consumer needs.
To allow more capital formation, financial capitalism disconnects profit from
fair return on production cost to what the money market will bear. Excess
profit requires low wages and leads inevitably to overinvestment in relation to
market demand. On the observation of this relationship, Karl Marx formulated
his concept of surplus value. The monetization of surplus value became the
basis of capital formation. As capital assumed dominance over labor, finance
became the core of capitalism.
Overcapacity resulting from overinvestment combines with stagnant market demand
resulting from low wages and structural unemployment to cause recurring crises
in market capitalism, known as business cycles. After the Great Depression of
the 1930s, social security introduced as part of the New Deal created a new
reservoir of wealth in pension funds of workers. In World War II, war demands
soaked up all overcapacity and wage-price equilibrium was established to
facilitate war production.
With the growth of pension funds, capital came increasingly from forced savings
of the working masses. Yet control of capital continued to stay in the hands of
the financial elite. While entrepreneurship flowered democratically through
social mobility and openness, it took almost two centuries after its founding,
until after the end of World War ii, before the US would admit children of poor
families into finance professions, mostly due to the GI bill in support of
education for returning World War II veterans. Large numbers of Wall Street
leaders today owed their opportunity to education provided by the GI Bill.
While the entrance to the arena of wealth management is now more democratic,
the institutions that operate the machinery of wealth manipulation remain
fundamentally biased in favor of capital against labor, even though
overcapacity from overinvestment has become clearly a structural problem that
can only be solved by workers being allowed to get a fairer share of the wealth
they essentially create.
Central banking, in its adherence to monetarism that aims to protect the value
of money at the expense of fair wages, is a strategic bastion against a
much-needed new financial order to address this imbalance between the labor
theory of value and the theory of marginal utility of supply and demand in a
market economy. The modern economy requires fair spreading of wealth for the
common good by maintaining a balance between supply and demand.
Exchange rate and monetary
policy Like the federal funds rate target,
currency exchange rate is not a product of market forces. It is always,
directly or indirectly, the product of national policy. Although exchange rate
policy has become a crucial component of monetary policy after the 1971
collapse of the Bretton Woods regime of fixed exchange rates based on a
gold-pegged dollar at $35 per ounce, the Treasury retains responsibility for
setting exchange rate policy as a matter of national economic security. On
exchange rate issues, the Fed follows policies set by the Treasury with no
questions asked.
The Federal Reserve controls three traditional tools of monetary policy: 1)
open market operations, 2) the discount rate and 3)
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