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February 2008  

This blog is a commentary on contemporary business, politics, economics, society, and culture, based on the values of Reason, Rational Self-Interest, and Laissez-Faire Capitalism. Its intellectual foundations are Ayn Rand's philosophy of Objectivism and the theory of the Austrian and British Classical schools of economics as expressed in the writings of Mises, Böhm-Bawerk, Menger, Ricardo, Smith, James and John Stuart Mill, Bastiat, and Hazlitt, and in my own writings.

The contents of the blog are copyright © 2008 by George Reisman. All rights reserved. Permission is hereby granted to reproduce and distribute individual articles below electronically and/or in print, other than as part of a book. (Email notification is requested). All other rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.


Thursday, February 21, 2008

The Nature of Environmentalism

In my previous post, “A Word to Environmentalists,” I wrote "the first step you need to take is to stop using the same word `environmentalist’ to describe both them [advocates of mass destruction and death] and you. So long as you do use the same word, people cannot help but think of you all in the same terms.”

In reply, a respected colleague of mine at the Mises Summer University, wrote the following:

I'm not sure I buy that argument. It seems to assume something like the following premise: “If many of the most prominent people who embrace the label `X-ist’ have advocated bad stuff, then one shouldn't call oneself an `X-ist.'” But that premise seems to have some odd con-sequences, as follows:

Many of the most prominent people who embrace the label "atheist” (e.g. Stalin, Pol Pot) have perpetrated great evil, so Ayn Rand shouldn't have called herself an atheist.

Many of the most prominent people who embrace the label “liberal” (e.g. Woodrow Wilson, FDR) have perpetrated great evil, so Ludwig von Mises shouldn't have called himself a liberal.

Many of the most prominent people who embrace the label “capitalist” or '”free-marketer” (e.g. the GOP) have perpetrated great evil, so George Reisman shouldn't call himself a capitalist or a free-marketer.

Many of the most prominent people who embrace the label "egoist” (e.g. Max Stirner, Nikolai Chernyshevsky), while not exactly perpetrators of evil, have at any rate advocated some pretty dubious stuff, so Ayn Rand shouldn't have called herself an egoist.

And so on.

I mean, why let the bad guys set the meanings of all these terms?

I have quoted my colleague not so much in order to answer him in particular, but because his response provides a good starting point for providing a further explanation of the profound and inherent evil of environmentalism and why a reasonable person should no more call himself an environmentalist than he would call himself a Communist or Nazi.

It should be realized first of all that “environmentalism” is in a very different category than the examples of the advocacy of atheism, liberalism, et al. by authors who also propound clearly destructive ideas. This is because atheism, liberalism et al. in themselves do not represent a philosophy or program that is evil on its face or that necessarily implies evil. (In this connection, it should be recalled that Stalin and Pol Pot committed their atrocities not in the name of atheism, but in the name of Communism.) In addition, in all of the examples cited there are also prominent supporters of the doctrines who go out of their way to present theories and programs that demonstrably promote human life and well being. Thus both Ayn Rand and Mises were atheists, liberals, pro-capitalist and pro-free market, and were egoists. Their writings serve as far more than a counterweight to the wrong or dubious ideas of other supporters of these doctrines and, indeed, make a compelling case for why these doctrines themselves in fact serve to promote human life and well being.

However, there are no counterparts to Rand and Mises in the advocacy of environmentalism. (Nor could there be.) No one in environmentalism rises to challenge the evils that its leaders and spokesmen advocate or to show that environmentalism is the opposite of what they claim.

By way of contrast, consider the following case. Imagine that someone known as a prominent supporter of Austrian economics wrote an article or gave a speech in which he advocated the enactment of wage and price controls or the nationalization of industry. I think that everyone affiliated with the Mises Institute, certainly myself included, would be all over this person and make it as clear to the world as possible that his views not only did not represent those of Austrian economics but were in complete and total opposition to everything Austrian economics stands for.

Now imagine that a prominent environmentalist writes an article or gives a speech in which he expresses the wish for a virus to come along and wipe out a billion people. What will be the reaction of the environmental movement? Will that individual be denounced for misrepresenting the movement? Will the rest of the movement’s leaders rush to assure the world that that individual was so far from representing environmentalism that he actually represented the diametric opposite of its principles?

Not at all. There will be no negative reaction of any kind from within the movement, not even a raising of eyebrows. I can say this with the utmost confidence, because such statements have already been made, and made repeatedly. And there has been no outrage, no negative response of any kind from within the environmental movement.

Here’s David M. Graber, in his prominently featured Los Angeles Times book review of Bill McKibben’s The End of Nature: “McKibben is a biocentrist, and so am I. We are not interested in the utility of a particular species or free-flowing river, or ecosystem, to mankind. They have intrinsic value, more value—to me—than another human body, or a billion of them.… It is cosmically unlikely that the developed world will choose to end its orgy of fossil-energy consumption, and the Third World its suicidal consumption of landscape. Until such time as Homo sapiens should decide to rejoin nature, some of us can only hope for the right virus to come along.”

And here’s
Prince Philip of England (who for sixteen years was president of the World Wildlife Fund): “In the event that I am reincarnated, I would like to return as a deadly virus, in order to contribute something to solve overpopulation.” (A lengthy compilation of such statements, and worse, by prominent environmentalists can be found at Frightening Quotes from Environmentalists.)

There is no negative reaction from the environmental movement because what such statements express is nothing other than the actual philosophy of the movement. This is what the movement believes in. It’s what it agrees with. It’s what it desires. Environmentalists are no more prepared to attack the advocacy of mass destruction and death than Austrian economists are prepared to attack the advocacy of laissez-faire capitalism and economic progress. Mass destruction and death is the goal of environmentalists, just as laissez-faire capitalism and economic progress is the goal of Austrian economists.

And this is why I call environmentalism evil. It’s evil to the core. In the environmental movement, contemplating the mass death of people in general is no more shocking than it was in the Communist and Nazi movements to contemplate the mass death of capitalists or Jews in particular. All three are philosophies of death. The only difference is that environmentalism aims at death on a much larger scale.

Despite still being far from possessing full power in any country, the environmentalists are already responsible for approximately
96 million deaths from malaria across the world. These deaths are the result of the environmentalist-led ban on the use of DDT, which could easily have prevented them and, before its ban, was on the verge of wiping out malaria. The environmentalists brought about the ban because they deemed the survival of a species of vultures, to whom DDT was apparently poisonous, more important than the lives of millions of human beings.

The deaths that have already been caused by environmentalism approximate the combined number of deaths caused by the Nazis and Communists.

If and when the environmentalists take full power, and begin imposing and then progressively increasing the severity of such things as carbon taxes and carbon caps, in order to reach their goal of reducing carbon dioxide emissions by 90 percent, the number of deaths that will result will rise into the billions, which is in accord with the movement’s openly professed agenda of large-scale depopulation. (The policy will have little or no effect on global mean temperatures, the reduction of which is the rationalization for its adoption, but it will have a great effect on the size of human population.)

It is not at all accidental that environmentalism is evil and that its leading spokesmen hold or sanction ideas that are indistinguishable from those of sociopaths. Its evil springs from a fundamental philosophical doctrine that lies at the very core and deepest foundations of the movement, a doctrine that directly implies the movement’s destructiveness and hatred of the human race. This is the doctrine of the alleged intrinsic value of nature, i.e., that nature is valuable in and of itself, apart from all connection to human life and well being. This doctrine is accepted by the movement without any internal challenge, and, indeed, is the very basis of environmentalism’s existence.

As I wrote in
Capitalism, “The idea of nature’s intrinsic value inexorably implies a desire to destroy man and his works because it implies a perception of man as the systematic destroyer of the good, and thus as the systematic doer of evil. Just as man perceives coyotes, wolves, and rattlesnakes as evil because they regularly destroy the cattle and sheep he values as sources of food and clothing, so on the premise of nature’s intrinsic value, the environmentalists view man as evil, because, in the pursuit of his well-being, man systematically destroys the wildlife, jungles, and rock formations that the environmentalists hold to be intrinsically valuable. Indeed, from the perspective of such alleged intrinsic values of nature, the degree of man’s alleged destructiveness and evil is directly in proportion to his loyalty to his essential nature. Man is the rational being. It is his application of his reason in the form of science, technology, and an industrial civilization that enables him to act on nature on the enormous scale on which he now does. Thus, it is his possession and use of reason—manifested in his technology and industry—for which he is hated.”

Thus these are the reasons that I think it is necessary for people never to describe themselves as environmentalists, that to do is comparable to describing oneself as a Communist or Nazi. Doing so marks one as a hater and enemy of the human race.

Whoever believes that it is possible to be a “free-market environmentalist” is guilty of a contradiction in terms. The free market rests on a foundation of human life and well-being as the standard of value. Environmentalism rests on a foundation of the non-human as the standard of value. The two cannot be reconciled. It’s either-or.

I know that these conclusions are upsetting to many people. It’s got to be upsetting to realize that one is advocating destruction and death. But fortunately, there’s a simple and ultimately happy solution: just stop doing it. Stop being an environmentalist!


Tuesday, February 19, 2008

A Word to Environmentalists

The “extremists” among you openly call for the death of 1 to 6.4 billion human beings. The “moderates” among you openly call for the forced reduction in carbon dioxide emissions of 90 percent within a few decades, which would serve to reduce energy use almost to the same extent. Such a severe reduction in energy use follows from the fact that there are no presently existing large-scale viable alternatives to fossil fuels other than atomic power, which is regarded by most members of your movement as a death ray and is opposed more vehemently than fossil fuels. Furthermore, the likelihood of ever finding and developing such alternatives will be greatly reduced by destroying the energy sources we do have and need to increase. So what your movement advocates is mass death or, at the very least, dreadful mass impoverishment whose outcome will be tens or hundreds of millions of unnecessary deaths and a life of misery for those who survive.

If your motivation in calling yourself an environmentalist is merely such things as that you like to see flowers bloom on open meadows, and love trees, whales, and polar bears, and the like, then you owe it to yourself to put as much intellectual and moral distance as possible between you and those who advocate mass impoverishment and mass death.

The first step you need to take is to stop using the same word “environmentalist” to describe both them and you. So long as you do use the same word, people cannot help but think of you all in the same terms.

Don’t think you can solve the problem by calling yourself a “free-market environmentalist.” That’s like calling yourself a “free-market Communist” or a “free-market Nazi.” They’re contradictions in terms.

The free market exists to promote prosperity and human life, and that is what it has accomplished, splendidly, with breathtaking brilliance. In the industrialized world, the average person today enjoys a standard of living superior to that of kings and emperors of the past. The whole world’s population is capable of enjoying the same marvelous results, if it adopts economic freedom. But if you call yourself an “environmentalist,” you mark yourself as sharing the goals of mass destruction and death. A socialist dictatorship is the vehicle for achieving those goals, not a free market.

It is true that many American businessmen, some of them extremely talented and successful, now call themselves “environmentalists” and are stumbling over themselves in a race to prove how “green” they are. In the early 1930s, many talented and successful German businessmen did essentially the same thing when they began to call themselves “Nazis” and raced to prove their devotion to National Socialism. It’s possible for people to be geniuses in one area of their lives and fools, or worse, in other areas. In any event, the outcome for the German businessmen, and for all other talented individuals who joined either the Nazis or the Communists, was that they ended up as accomplices of mass murderers. The same will be true in the United States, if the environmentalists succeed in imposing their agenda.

If you care about your moral character, don’t place an indelible stain on it by supporting a movement that seeks to destroy Industrial Civilization and all the human lives and human well-being that depend on it. Accept moral responsibility for the ideas you propound and stop standing in the service of mass destruction and death.

Do not come back with the argument that if we uphold individual freedom, our great grandchildren will have to live in an uninhabitable planet, one that is either too hot or too cold. Sooner or later Nature itself will make the climate considerably warmer or considerably colder than it is today (most likely colder). The only significant question is what is the best method of coping with such change? Is it the free market or a centrally planned dictatorship that reaches down into every detail of everyone’s personal life and productive activities, that, indeed, wants to control the carbon content practically of every breath that anyone draws?

Even if you are absolutely convinced that human activities are responsible for global warming and, if nothing is done, will ultimately result in an intolerable rise in temperature, there is a very simple test that you need to apply. Pretend, for just a moment, that that same global warming is coming about independently of human activities, that it is strictly the product of natural forces. Then ask yourself, what would be the best fundamental method of coping with it? Maintaining a free market or establishing a centrally planned socialist system?

More fundamentally, what is the appropriate method for Man to use in dealing with Nature in general? Is it the motivated and coordinated human intelligence of all individual market participants that is provided by a free market and its price system? Or is it the unmotivated, discoordinated chaos in which one man, the Supreme Dictator, or a handful of men, the Supreme Dictator and his fellow members of the Central Planning Board, claim a monopoly on human intelligence and on the right to make fundamental decisions?

Suppose even that the warming caused by Nature were such that what was required to deal with it was some sort of space program, perhaps emitting thousands of tiny mirrors that would prevent some sunlight from reaching the earth by reflecting it back into space. Suppose further that as a practical matter, given our present state of social organization, the only realistic means of carrying out such a program was through governmental action—a kind of public works project, as it were. In which circumstances, would such a program be more likely to be feasible: in those of the primitive economies characteristic of third world countries or in those of advanced industrial economies? And would they not be more likely to be feasible in an economy substantially more advanced than our own is at present?

The answer to the question of how best to cope with intolerable global warming caused by Nature is obviously the maintenance of the free market, not its replacement by Socialist central planning. Indeed, the answer is to make the free market freer than it now is—as much freer as is humanly possible. This is because while the primary reason for advocating a free market is the greater prosperity and enjoyment it brings to everyone in the course of his normal, everyday life, a major, secondary reason is to have the greatest possible industrial base available for coping with catastrophic events, whether those events be war, plague, meteors from outer space, intolerable global warming, or a new ice age.

In effect, what the environmentalists would have us do as the means of preparing for coping with a coming global warming is analogous to the imaginary absurdity of the United States in the 1930s having reduced its economy to the level, say, of Poland’s economy. Then, when World War II came, our country would have had to fight the war with horses instead of tanks and planes. In the same way, the environmentalists would have us cope with global warming by waving little fans instead of using air conditioners, refrigerators, and freezers.

Now what, if anything, changes if we assume that global warming is an unintended by-product of the human productive activities that make life possible and enjoyable? How does it possibly follow from this that the only means of stopping this much-less-than-certain outcome is by suffering the absolutely certain impoverishment and death that will come from the destruction of most of our present sources of energy?

Is there absolutely no other way to deal with global warming than the destruction of our economic system? Is that how we would deal with it if global warming were the product of Nature, and not the by-product of our activities? Would the environmentalists then ask us to engage in what in the circumstances would be a merely ritual sacrifice incapable of accomplishing anything beyond itself?

If they would not do that, then they would have to look for other alternatives as the means of coping with global warming. Why aren’t they looking for those other alternatives now? Why on earth should the first and only solution for global warming as a by-product of human activity be the scuttling of our energy base? Do we deserve to be exterminated for our unintended by-products? Must we really choose to live in poverty and misery, surrounded by death, in order to avoid excessive heat? Can absolutely no other way be found? (The likely answer is actually no more complicated than having the greater energy base required to build and power bigger and better air conditioners.)

Do you environmentalists who do not want to think of yourselves as misanthropes, as recycled Communists or Nazis, do you really want to entrust your lives and material well being, and the lives and material well being of everyone who may matter to you, to the power of government officials to tax carbon emissions and to limit the total of such emissions? Are you willing to entrust this power to today’s President (who at least has the good sense not to want it)? Do you want to entrust it to any of the candidates with a realistic chance to succeed him (who do want this power and may even crave it)? Do you want to entrust it to the members of the United States Congress? To the members of the United Nations General Assembly?

Do you want them to decide how much man-made energy is to be available to you in every aspect or your life, by their imposing carbon taxes and carbon caps? These will be taxes and constraints on you that are tantamount to adding extra dead weight to your body and to restricting your power to move your own limbs. And they will go on increasing in severity, to the point that you, or your children or grandchildren, will drop from exhaustion. For the effect of every loss of energy use is a corresponding imposition on the meager power of human muscles and the human frame. And if the impositions cannot be borne, the products that depended on the lost energy use can no longer be produced. If the environmentalist agenda is imposed, the day will come when your descendants, if they have any awareness of it at all, will look back on our time as a mythical Golden Age never to be achieved again.

Is that what you want?

It’s not too late for you to change your mind, abandon any support you may have been giving to environmentalism’s program of impoverishment and death, and come over to the side of the values of human life, wealth, and happiness—the values Mises fought for under the banner of genuine Liberalism.


Sunday, February 17, 2008


Here's the essential common core of hatred and destruction in the doctrines of Communism, Nazism, and Environmentalism. Only the concretes differ, not the fundamental principle of hatred for human life and happiness.

Communism: The pursuit of individual self-interest causes monopolies, depressions, and exploitation of workers by capitalists. It must be replaced by self-sacrifice for the benefit of the working class and the Socialist State. Capitalists and landowners must be exterminated for the benefit of the proletariat.

Nazism: The pursuit of individual self-interest causes racial impurity, national decline, and exploitation of German workers by Jewish capitalists. It must be replaced by self-sacrifice for the good of the Aryan master race and the National Socialist State. Jews, Gypsies, and Slavs must be exterminated for the benefit of the German Nation.

Environmentalism: The pursuit of individual self-interest causes global warming, acid rain, and ozone depletion. It must be replaced by self-sacrifice for the good of other species—our "fellow biota"—and for the good of the planet, under the auspices of international treaties and a nascent Global Socialist State: the UN. Most of the human race must be exterminated for the benefit of exploited species and the planet. (This is what the environmentalist “extremists” already openly say. The “moderates” merely want to reduce carbon dioxide emissions by 90 percent and thereby reduce the American standard of living to that of a third world country, with a third world country’s infant mortality and life expectancy.)


Wednesday, February 13, 2008

Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending

[This article is based on a portion of Chapter 15 of the author's Capitalism: A Treatise on Economics.]

According to the prevailing Keynesian dogma, consumption is the main form of spending in the economic system, while saving is mere non-spending and thus a “leakage” from the spending stream. This dogma underlies much of government economic policy in the United States, including the so-called economic stimulus package that has just been enacted. In this article, I prove, to the contrary, that consumption is not the main form of spending in the economic system and that the source of most spending is, in fact, saving. I prove my claims by starting with the very formulations of the expenditure aggregates presented by the Keynesian doctrine itself.

Thus, the simplest, core accounting relationship of Keynesian economics is that national income, which is essentially the sum of profits plus wages, is equal to the sum of consumption expenditure plus net investment.

It is only a small step from national income to gross domestic product (GDP). Essentially all one does is add business depreciation allowances to profits on the left-hand side of the equation and to net investment on the right-hand side. This last raises net investment to what contemporary economics calls gross investment. The sum of consumption plus gross investment is held to equal GDP.

In a slightly more complex formulation, government expenditure is stated as a third component of expenditure, alongside of consumption and investment. In yet a still more complex formulation, net exports are also included. These expenditure items, whether two, three, or four, are understood as paying the national income or GDP.

For the sake of simplicity, I’ll ignore net exports, which, rounded off at minus $1 trillion, represents the smallest of the four items. By far the largest single item of expenditure reported is personal consumption expenditure, which is currently running at an annual rate of about $10 trillion. The next largest item is government expenditure, currently running at roughly $3 trillion. Gross private domestic investment is reported as slightly more than $2 trillion.

These numbers add up to approximately $15 trillion, which is a rough approximation of today’s annual rate of GDP. Business depreciation allowances of roughly $1 trillion, imply net investment in the amount of approximately $1 trillion and a national income on the order of $14 trillion.

Now government expenditure is itself a species of consumption expenditure. But with or without the inclusion of government expenditure, consumption spending appears as the overwhelming source of GDP and national income: $10 trillion out of $15 trillion and $10 trillion out of $14 trillion respectively. Count government spending in with private consumption, and the figures rise to $13 trillion out of $15 trillion and $13 trillion out of $14 trillion.

It is data such as these that lead commentators routinely to make such statements as “consumption accounts for two-thirds of GDP.” The clear implication of such statements is that consumption expenditure, private or private plus government, is what constitutes the overwhelming bulk of spending in the economic system and pays the overwhelming bulk of the incomes of the economic system.

Nevertheless, this proposition is not in fact supported by the various formulas used in aggregate economic accounting. The formulas are all mathematically correct. For example, national income does in fact equal consumption plus net investment. And it is true that consumption spending almost always dwarfs net investment. Indeed, on occasion, net investment might even be zero or, still more extreme, a negative number. Yet in no case is it true in a modern economic system that consumption is the main form of spending and pays most of the incomes. The belief that it does rests on a radically incomplete, highly superficial understanding of the formulas.

Most Spending in the Economic System Is Concealed Under Net Investment

The truth is that the great bulk of spending and income payments in the economic system is concealed under net investment! Net investment is analogous to an iceberg, nine-tenths of whose volume is concealed beneath the surface. Only in the case of net investment, what is concealed can easily be much more than nine-tenths.

Net investment is the difference between two enormous monetary magnitudes, which are never radically different from one another in size and sometimes may even be approximately equal. Indeed, occasionally the one that is subtracted may even be larger than the magnitude it is subtracted from, which gives rise to negative net investment.

The monetary magnitude that is subtracted in the determination of net investment is the aggregate of all of the costs that business firms report in their income statements as subtractions from their sales revenues in calculating their profits, namely, depreciation cost, cost of goods sold, and selling, general, and administrative expenses. The monetary magnitude from which the costs are subtracted has no name in contemporary economics. I call it productive expenditure.

Productive expenditure is expenditure for the purpose of making subsequent sales. It is the expenditures made by business firms in buying capital goods of all descriptions and in paying wages. Capital goods include machinery, materials, components, supplies, lighting, heating, and advertising. In contrast to productive expenditure, consumption expenditure is expenditure not for the purpose of making subsequent sales, but for any other purpose. In the terminology of contemporary economics, consumption expenditure is described as final expenditure. Productive expenditure could be termed intermediate expenditure. Implicitly or explicitly, productive expenditure is always made for the purpose of earning sales revenues greater than itself, i.e., is made for the purpose of earning a profit.

I now must demonstrate just why net investment is in fact the difference between productive expenditure and business costs. My demonstration consists of two parts. First, a demonstration that the definition of national income as the sum of profits plus wages implies that national income also equals the sum of consumption and productive expenditures minus business costs. Second, a demonstration that the difference between productive expenditure and business costs is in fact net investment.

Let me begin with the proposition that national income equals the sum of profits plus wages. This proposition can be taken as true simply as a matter of definition. There are profits, there are wages, and the sum of the respective aggregates of each across the entire country is what we call national income.

Restatement of National Income as Sales Minus Costs Plus Wages

Now a simple but critical step is to recognize that profits are the difference between the sales revenues and the costs of business firms. The aggregate profit earned in an entire country in a year is equal to the sum of the sales revenues of all the business firms of the country for the year minus the sum of all of the costs that those business firms subtract from their respective sales revenues in calculating their respective profits.

Stating profits as sales revenues minus costs allows us to reformulate national income as the sum of sales revenues minus costs plus wages.

The next step in my demonstration is based on the realization that every dollar of business sales revenues and every dollar of wages received represents an identical dollar of expenditure by those who pay the sales revenues or wages. Thus the sales revenues of a steel company, say, represent expenditures on the part of such buyers as automobile companies. Wages received are wages paid by employers of one description or other.

From this point forward, we must look at sales revenues and wage incomes from the perspective of the buyers who pay them. In paying sales revenues or wages, the buyers can have only one or the other of two basic purposes in mind. They can be paying the sales revenues or wages for the purpose of themselves making subsequent sales. Or they can be paying the sales revenues or wages not for the purpose of themselves making subsequent sales.

Sales revenues and wages paid for the purpose of the buyer himself making subsequent sales constitute productive expenditure. Sales revenues and wages paid not for the purpose of the buyer himself making subsequent sales constitute consumption expenditure.

Examples of sales revenues constituted by productive expenditure are all the sales revenues paid by one business firm to another. It is the receipts from the sale of steel to automobile companies and of iron ore to steel companies, receipts from the sale of flour to baking companies and of wheat to flour millers. It is receipts from the sale of all goods purchased by retailers at wholesale, And, of course, it is receipts from the sale of all newly produced machines and equipment purchased by one business from another.

Examples of sales revenues constituted by consumption expenditure are the sales revenues of grocery stores, clothing stores, movie theaters, restaurants, and the like. However, even here, some portion of the sales revenues may be productive expenditures, as when a restaurant buys supplies in a supermarket or a business buys work clothes for its employees.

Examples of wage payments that are productive expenditures are all of the wages paid to the employees of business firms, from the wages of field hands, miners, and factory workers, to the wages of office secretaries, advertising executives, bank tellers, and sales clerks—the wages of all workers paid for the purpose of the employer making subsequent sales. (All wage payments and purchases of goods that are necessary to the existence or functioning of a business enterprise are to be conceived of as made for the purpose of making subsequent sales, for that is the purpose of the business enterprise itself.)

Examples of wage payments that are consumption expenditures are the wages paid to maids and baby sitters by housewives, and, among the very rich, the wages paid to butlers, personal cooks, and chauffeurs. These wages, of course, are obviously trivial in comparison with the wages paid by productive expenditure. The one substantial example of wage payments constituted by consumption expenditure are the wages of government employees. Those wages are not paid for the purpose of the government making subsequent sales.

Revenue/Expenditure Subcomponents

What we’ve done at this point is conceptualize national income in terms of its revenue/expenditure subcomponents. We’ve seen that profits plus wages equals not only sales revenues minus costs plus wages, but also, and more precisely, that it equals the sum of that part of sales revenues that is constituted by productive expenditure plus that part of sales revenues that is constituted by consumption expenditure, minus costs, plus that part of wages that is constituted by productive expenditure plus that part of wages that is constituted by consumption expenditure. The revenue/expenditure subcomponents are, of course, the two constituent parts both of sales revenues and of wages from the perspective of their respective types of expenditure, i.e., productive expenditure or consumption expenditure.

At this point, the revenue/expenditure subcomponents are grouped according to the type of revenue they represent, i.e., sales revenue or wages. National income is conceived as representing the addition of all four revenue expenditure/subcomponents, with costs subtracted from the two that are grouped together as business sales revenues.

What we need to do now is simply regroup the revenue expenditure subcomponents according to expenditure type rather than revenue type. Thus we will add that part of business sales revenues constituted by consumption expenditure to that part of wages paid by consumption expenditure. When we do this, we obtain total consumption expenditure, i.e., the “C” in the equation “National Income Equals C + I.”

We must also regroup that part of business sales revenues constituted by productive expenditure with that part of wage payments constituted by productive expenditure. When we do this, we obtain total productive expenditure, which, as I’ve said, has no designation in contemporary economics.

If we now subtract from productive expenditure the same costs that up to now we’ve subtracted from business sales revenues, the result will be net investment, the “I” in the equation “National Income Equals C + I.”

Why Net Investment Equals Productive Expenditure Minus Costs

All that remains to be shown is why productive expenditure minus costs does in fact equal net investment. At a superficial level we already know that it must if we’ve accepted the proposition that national income equals consumption plus net investment in the first place. This is because we began with what was unquestionably national income (the sum of profits plus wages) and have shown that that sum can logically be reformulated exactly as we’ve reformulated it. Thus if it’s true that national income equals consumption plus net investment and also true that it equals consumption plus productive expenditure minus costs, it follows inescapably that productive expenditure minus costs equals net investment.

However, we can do much better than this and show that the very nature of net investment implies that it equals productive expenditure minus costs. All we need do is break down productive expenditure and costs into three exhaustive subcategories respectively. Thus, we will have that part of productive expenditure which is capitalized into plant and equipment accounts, that part of productive expenditure which is capitalized into inventory/work in progress accounts, and finally that part of productive expenditure which is not capitalized but deducted as a cost from sales revenues immediately.

With respect to costs, we will have that part of costs which is depreciation cost, that part of cost, which is cost of goods sold, and that part of costs which represents productive expenditure that is deducted as a cost from sales revenues immediately. Obviously the difference between this third component of cost and the third component of productive expenditure must always be zero, since they are necessarily identical.

At least for some readers, a few words are necessary about the meaning of capitalizing productive expenditures and the relationship of such capitalized expenditures to costs. When productive expenditures are made for plant and equipment, they do not immediately appear as a cost deducted from sales revenue. Instead, they are added into a balance sheet account usually described as “gross plant and equipment,” or something very similar. A $1 million expenditure for new computers, say, is treated as a $1 million addition to this account. The computers may be depreciated over a three year period. In this case, one-third of a million dollars will appear as depreciation cost in the firm’s income statement for each of three years.

As depreciation cost is incurred in the firm’s income statement, the same amount of depreciation is added into another balance sheet account, known as “accumulated depreciation reserve,” or something very similar. Yet a third balance sheet account appears as the result of the subtraction of accumulated depreciation from gross plant. This account is the “net plant and equipment” account.

At the beginning of the first year of the computers’ depreciable life, the value of the net plant account, as far as these computers are concerned, is $1 million, representing $1 million of gross plant minus zero of accumulated depreciation. At the end of the first full year of the computers’ depreciable life, however, the net plant account will be down to $666,6667, owing to the subtraction of $333,333 of accumulated depreciation from the $1 million of gross plant. At the end of the second year, the net plant account will be down to $333,333, owing to the subtraction of twice as much accumulated depreciation from the gross plant account. At the end of the third year of the computers’ depreciable life, the value of the net plant account, as far as these computers are concerned, will be zero, because the accumulated depreciation reserve will then equal the part of the gross plant account that represents the purchase price of the computers.

The essential point here is to recognize that, other things being equal, productive expenditure for plant and equipment represents additions to the net plant accounts of business, while depreciation cost represents subtractions from the net plant accounts of business. To the extent that in the economic system as a whole the totality of such additions exceeds the totality of such subtractions, there is an increase in the aggregate value of net plant and equipment accounts. This increase is net investment in plant and equipment.

Of course, it is possible that in a given year, productive expenditure for plant and equipment might be less than the depreciation cost incurred in that year. In that case, net investment in plant and equipment would be a negative number, just as it is a negative number in the second and third years of our example concerning the purchase of computers.

The case of inventory/work in progress is similar. When expenditures are made on account of inventory, the sums in question are added into yet another balance sheet account, known as “inventory/work in progress” or something similar. Thus, for example, when a furniture retailer purchases furniture from a furniture manufacturer and brings that furniture into his warehouses or showrooms, the purchase price of that furniture is added into the retailer’s inventory account. Only as and when the furniture is sold and leaves the premises of the retailer, does a cost item appear in the retailer’s income statement. It appears as “cost of goods sold,” which is an excellent, literal description of it.

Just as purchases on account of inventory add to the inventory account, so cost of goods sold represents subtractions from the inventory account. A furniture retailer who has purchased, say, 100 sofas at a price $1,000 per sofa adds $100,000 to his inventory account. Each time he sells a sofa, he subtracts $1,000 from his inventory account and deducts that $1,000 as a cost of goods sold in his income statement. (The same principle applies to more complex cases, such as General Motors’ purchases of steel sheet. The purchase price of the steel sheet is added to GM’s inventory/work in progress account and only as the automobiles into which that steel sheet enters are sold, does GM incur cost of goods sold and make an equivalent deduction from its income statement.)

Here the essential point is to recognize that, other things being equal, productive expenditure on account of inventory/work in progress constitutes an addition to the balance sheet account “inventory/work in progress,” while cost of goods sold constitutes a subtraction from that account. To the extent that productive expenditure on account of inventory et al. exceeds cost of goods sold, the value of the inventory account is correspondingly increased and there is thus net investment in inventory (or inventory/work in progress). To the extent that productive expenditure on account of inventory et al. falls short of cost of goods sold, the value of the inventory account is correspondingly reduced and there is thus negative net investment in inventory (or inventory/work in progress).

So, hopefully, it is now clear to every reader why productive expenditure minus costs does in fact equal net investment: net investment in plant and equipment plus net investment in inventory.

Productive Expenditure Exceeds Consumption Expenditure

Productive expenditure, the sum of the expenditures for capital goods and labor by business firms, almost certainly not only exceeds consumption expenditure but does so by a wide margin. The truth of this proposition can be inferred from common knowledge about the size of business profit margins. A profit margin, of course, is the ratio of profit to sales revenues.

In the case of supermarkets, profit margins are often as low as just 2 percent. In instances of highly capital intensive investments, such as electric utilities, they may be as high as 20 percent. We will not go far wrong if we assume that on the average profit margins are 10 percent.

If profit margins are 10 percent of sales, it follows that costs are 90 percent of sales and thus that the productive expenditures that gave rise to these costs are also 90 percent of the sales. If we assume that those productive expenditures on average were divided between capital goods and labor in the ratio of 5 to 4, then for every $1 spent in buying a consumers’ good, there were 50¢ expended in buying the capital goods needed to produce it, and 40¢ expended in paying the wages of the workers needed to produce it.

However, the same story is repeated in the production of the capital goods that sold for 50¢ of productive expenditure. They will have a cost of production of 45¢, broken down into 25¢ of productive expenditure for earlier capital goods and 20¢ of productive expenditure for earlier labor. As we trace the process further and further, we reach a point at which the cumulative expenditure for capital goods itself approaches $1 and the cumulative expenditure for labor approaches 80¢ (i.e., 50¢ + 25¢ + 12.5¢ … = $1, and 40¢ + 20¢ + 10¢ … = 80¢).

These expenditures can be taken as representing not only the productive expenditures of earlier years but also as indicating the productive expenditures of the present year. Some part of today’s productive expenditures is devoted to producing consumers’ goods. Another part is devoted to the production of the capital goods that will produce consumers’ goods at a later date. A third part of today’s productive expenditure is devoted to producing the capital goods that will serve in the production of the capital goods that will serve in the production of consumers’ goods, and so on.

In any event, what we have in the present case is $1.80 of productive expenditure for every $1 of demand for consumers’ goods. And, for the reasons explained, such a relationship must be considered as typifying the economic system in any given year.

Keynesian Macroeconomics Plays with Half a Deck: Inadequacy of GDP

What all of the preceding discussion implies is that Keynesian macroeconomics is literally playing with half a deck. It purports to be a study of the economic system as a whole, yet in ignoring productive expenditure it totally ignores most of the actual spending that takes place in the production of goods and services. It is an economics almost exclusively of consumer spending, not an economics of total spending in the production of goods and services.

An accounting aggregate that would be far more appropriate to a genuine macroeconomics is what I have called gross national revenue (GNR). This is the sum of all business sales revenues plus wage payments. It also equals the sum of the consumption and productive expenditures that actually pay it.

Imagine an equation in which the sales revenues and wage incomes that constitute GNR appear on the left-hand side, while the consumption and productive expenditures that actually pay those sales revenues and wages appear on the right-hand side. If one then subtracts the aggregate of the costs that appear in business income statements from the left-hand side of the equation, sales revenues reduce to profits, and GNR thus reduces to national income. If one subtracts these costs from the right-hand side, productive expenditure reduces to net investment, and consumption expenditure plus productive expenditure reduce to consumption plus net investment.

Now if, instead of subtracting all costs on both sides, one subtracts all costs with the exception of depreciation, GNR reduces to GDP. That is, on the right-hand side, it will reduce to consumption expenditure plus what contemporary economics terms gross investment (a “gross” investment, incidentally, one of whose components is explicitly described as the net change—the net investment—in inventories).

Thus, it turns out that GDP falls far short of a measure of the aggregate expenditure for goods and services. If falls short by an amount equal to the sum of all costs of goods sold in the economic system plus all of the expensed productive expenditures in the economic system. It is these costs which must be added to GDP to bring it up to a measure of the actual aggregate amount of spending for goods and services in the economic system.

Adding cost of goods sold to contemporary economics’ “gross investment” would bring it up to true gross investment: that is, not only gross investment in plant and equipment but also gross investment in inventory as well. Adding expensed productive expenditures to this true gross investment would raise the latter up to productive expenditure.

Saving as the Source of Most Spending

My substitution of a radically new approach to aggregate economic accounting for that of the Keynesian approach, has numerous major implications. One of them pertains to the role of saving in the economic system. In Keynesian economics, saving appears as mere non-spending. This is because essentially the only spending that Keynesian economics recognizes is consumer spending. Thus, if funds are earned and are saved rather than consumed, it appears to Keynesians that they are simply not spent, i.e., are hoarded. It is on this basis that Keynesian economics describes saving as a “leakage.”

Yet the truth is that the only way that funds expended in the purchase of consumers’ goods can ever subsequently show up as productive spending for capital goods and labor is if and to the extent that the business recipients of those funds do not consume them. Only by saving the funds in question can they have them available to make productive expenditures of any kind. Productive expenditure depends on saving.

And because productive expenditure is the main form of spending, most spending in the economic system depends on saving. Even consumption expenditure depends on saving, inasmuch as saving is the basis of the payment of the wages out of which most consumption takes place.

The purchase of expensive consumers’ goods, such as homes, automobiles, major appliances, vacations, indeed, anything whose price exceeds more than a significant fraction of the income earned in one pay period, can be purchased only on a foundation of saving. Virtually no one buys a home out of current income, not even the income of an entire year. Likewise, very few people can buy a new automobile out of a year’s income, let alone out of the proceeds of just one pay check. And the same is true of many other goods. Saving is essential to the purchase of all such goods—if not the saving of the purchaser himself, then the saving of those from whom the purchaser borrows.

Implications for the “Economic Stimulus Package”

The dependence of productive expenditure on saving in turn has major implications for the so-called economic-stimulus package that has just been enacted. So too does the understanding we have developed of net investment and the role of cost of goods sold in connection both with net investment and with profits.

The supporters of the stimulus package assume that all that is necessary to increase the demand for goods and services all up and down the line, that is, at all stages of production from retailing to wholesaling, through manufacturing, to mining and agriculture, is to increase the demand for consumers’ goods—essentially by printing money and giving it to various consumers to spend. Yet if all that happened were that people spent the new and additional money in purchasing consumers’ goods, there would not be any additional demand for capital goods and labor whatever based on that new and additional money.

To demonstrate this, imagine that, precisely in accordance with the wishes of the supporters of the stimulus package, some consumer somewhere receives a thousand-dollar tax refund that is financed by the government’s creation of new and additional money. He cashes his refund check and proceeds to a nearby large shopping mall, where he buys $1,000 worth of furniture, say.

The owner of the furniture store happens to be on the premises, and, like a model Keynesian consumer, with a “marginal propensity to consume of 2/3,” he proceeds to withdraw $666.67 from his till and walks down the hall to a nearby men’s clothing store, where he spends that amount for new clothes.

The owner of the clothing store also happens to be on the premises, and he too, like another perfect Keynesian consumer with a marginal propensity to consume of 2/3, takes $444.44 out of his till and walks to a third store in the mall, where he spends that sum in buying a new television set. The owner of this store, in turn, removes two-thirds of his additional receipts and telephones his wife and in-laws to come and have dinner at a restaurant in the mall.

If this process kept on going, over and over again, there would ultimately be $3,000 of additional consumer spending. The Keynesians believe that this $3,000 would constitute new and additional net income and would increase the demand for labor and employment to that extent back through all of the stages of production leading up to the presence of consumers goods on the shelves of retailers

The spending multiplier and the alleged benefits to the demand for labor and thus employment would be even greater, according to the Keynesians, if the marginal propensity to consume were three-fourths instead of two-thirds, and greater still if it were nine-tenths instead of three-fourths. The multiplier and its benefits are allegedly restrained only by the disappearance of funds into the “leakage” constituted by saving.

Now the truth is that in order for additional consumer spending to constitute equivalent additional income, as the Keynesians believe, the only type of additional income that it could possibly constitute would be business profits, specifically the profits of the sellers of the various consumers’ goods. It would not constitute any additional wage income or the employment of any additional workers. This is because all that is present is additional business sales revenues. The income earned on sales revenues is profit, and if the additional income is to equal the additional sales revenues, it means that there will be additional profits equal to the additional sales revenues.

A further implication is that the prices of the consumers’ goods must rise, thereby depriving other buyers of consumers’ goods of the ability to buy them. This follows from the fact of more money being spent to buy the same quantity of goods.

Of course, the Keynesians will be quick to object that more goods will be sold, not the same quantity. Sellers will reduce their inventories to meet the additional demand. To the extent that this happens, prices need not immediately rise. But the reduction in inventories implies an increase in cost of goods sold and thus profit income rising at each point of additional consumer spending by equivalently less than the increase in such spending.

Thus, for example, if the seller of the furniture incurs $500 of additional cost of goods sold when a purchaser spends $1,000 in his store, his additional profit income will be only $500, not $1,000. His consumption, as a model Keynesian consumer, will therefore be only two-thirds of that amount. And similarly for all other sellers in the chain of spending and respending. The alleged “stimulus” will be radically less than the Keynesians expect and desire, e.g., not only $333.33 instead of $666.67 but also $111.11 instead of $444.44, and so on, with each subsequent round of spending reflecting not only the alleged “leakage’ of funds into saving but the effects on profit income of having to subtract cost of goods sold.

If the sellers practiced Keynesianism to the hilt, they would ignore the little matter of additional cost of goods sold and accompanying inventory depletion and simply consume in proportion to their additional sales proceeds, as though it were additional income, as Keynesianism assumes and teaches. In that case there would be $3,000 of consumption, and $1,500 of inventory decumulation.

Such behavior would set the stage not only for there being no additional demand for capital goods and labor but for there being less such demand than there was before, with the result of an actual increase in unemployment.

This is because if at some point the sellers, wanted to replace the goods they had sold, they would find that their ability to do so would be diminished, because they had consumed part of their capital. To replace that capital they would need either to raise additional capital from outside or to withdraw capital that they themselves had been advancing to others. Either way less capital would be available somewhere in the economic system and where less capital is available, business activity must shrink. The consequence is more unemployment not less.

In order for the new and additional money injected into the economic system through additional consumption expenditure to find its way back to earlier stages of production, the sellers must not consume their additional sales proceeds to any great extent. To the contrary, they need to save them to the greatest extent possible. If the furniture store owner saves and productively spends his $1,000 of additional sales revenues, he will be able give some “stimulus” to his suppliers. If they in turn save and productively expend the great bulk of their additional sales revenues, they will be able to give some stimulus to their suppliers, and so on back. Along the way, the demand for labor and employment may increase. But any such result will depend on additional saving and productive expenditure, not consumption expenditure.

The fact that if accompanied at all stages of production by heavy saving out of sales revenues, an increase in consumer spending financed by inflation can serve to increase the demand for capital goods and labor at all the stages is not a sufficient basis for recommending such a policy. In fact, what it represents is an effort to reestablish the same kind of misdirected, wasteful production that leads to a recession or depression in the first place and which then creates the appearance of a need for stimulus.

It should never be forgotten that our present problems originated in an arrangement whereby a very large amount of production, i.e., the construction of hundreds of thousands of new houses, was taking place for the benefit of people whose own production was grossly insufficient ever to allow them to pay for those houses. It is a positive good thing that that wasteful, inherently loss-making production has now ceased.

The solution is not to now attempt to create another such loss-making arrangement to take its place. Another arrangement under which producers will produce goods for the benefit of people whose own production is insufficient to enable them to afford the goods in question—people who will buy the producers’ output only with “refunds” of taxes they never even paid. The problems created by building houses for “sub-prime” borrowers cannot be corrected by now producing goods of all descriptions for “sub-prime” consumers in general.

A real solution requires making it possible for production to be directed to the needs and wants of those whose own production is sufficient to enable them to pay for the production of others.

Summary and Conclusions

I’ve shown that contrary to superficial appearance, in the most literal sense of the word “superficial,” consumption expenditure is not the main form of spending in the economic system and does not pay the national income or gross domestic product. I’ve shown that most spending in the economic system is in fact concealed under the head of net investment. However modest in size, including possibly being actually negative, net investment represents the true source of most revenue and income. That source is productive expenditure, which, I showed, is expenditure for the purpose of making subsequent sales and is represented by the spending of business firms for capital goods of all descriptions and for labor. (Consumption expenditure, in contrast, I showed is expenditure not for the purpose of making subsequent sales.)

The role of productive expenditure is concealed because net investment is the difference between it and business costs, the same costs that appear in business income statements in calculating business profits, and which do not differ very greatly from productive expenditure in size. Thus only a very small portion of the actual magnitude and importance of productive expenditure is ever revealed in conventional, Keynesian national income accounting.

I demonstrated the presence of productive expenditure behind net investment by means of a step-by-step logical demonstration of the equality between profits plus wages on the one side, and consumption plus net investment on the other. The crux of the demonstration was the restatement of profits as sales revenue minus costs, and then the breakdown both of sales revenues and wage incomes into productive expenditure and consumption expenditure. I called the resultants of the breakdown “revenue/expenditure subcomponents” and showed how the equality of profits plus wages and consumption plus net investment resulted simply from changing the order of addition of those subcomponents, from one based on revenue and income type to one based on expenditure type.

I showed on the basis of elementary business accounting principles why productive expenditure minus costs is the sum of net investment in plant and equipment and net investment in inventory. I then demonstrated why and how productive expenditure exceeds consumption expenditure and does so by a wide margin.

I presented gross national revenue (GNR) as the appropriate measure of total spending that constitutes revenue or income payments in the economic system. I showed GNR as equal to sales revenues plus wages on the left and consumption expenditure plus productive expenditure on the right. I showed how by means of the subtraction of business costs from sales revenues on the left and productive expenditure on the right, GNR reduces to national income on the left and consumption plus net investment on right. I showed the deficiencies of GDP as a measure of total spending in comparison to GNR.

And finally, I’ve shown the radical difference between my analysis and the conventional, Keynesian analysis for understanding the role of saving as a source of spending in the economic system, and have shown its relevance to the so-called economic stimulus package that has just been enacted.

Sunday, February 03, 2008

Re: A Creditors' Protection Bill: The Legitimacy of Inserting a Gold Clause in Existing Contracts

My recent article "A Creditors' Protection Bill" has been criticized because of its call for the insertion of a partial gold clause into existing contracts, with or without the consent of debtors. The criticism is that this would be an interference with the freedom of contract.

This claim is made on the grounds that the parties may have contracted precisely on the basis of the government's having arbitrary power over the purchasing power of the monetary unit and one of them (the debtor) may want it to continue. In the words of one critic, "Lots of people contracted with the intention of taking advantage of inflation, and the counter parties are responsible for evaluating their own risk. Changing the rules of the game is cheating someone."

This criticism, which appears to be the assertion of some sort of divine right to the continuation of inflation, is based on a failure to understand what the actual rules of the game are today. Superficially, the rule is that contracts are payable in fixed sums of dollars, the purchasing power of which the government steadily depreciates through the use of its power to increase the money supply.

More fundamentally, however, the actual rule of the game today is that the purchasing power of what is paid and received in the fulfillment of contracts is determined by the government. This wider, more fundamental and abstract rule of the game remains unchanged when the government inserts a gold clause into existing contracts. And it was this rule which the parties implicitly accepted when they signed contracts in a world in which the government determines the purchasing power of money.

What the insertion of gold clauses into existing contracts signifies is the use of government power to determine the purchasing power of what is paid and received in the fulfillment of contracts in a way that diminishes the further such use of its power. Henceforth its power of money creation will not serve to enrich debtors at the expense of creditors, or at least not to the same extent. Creditors will have a measure of protection from the exercise of the government's power. The case is analogous to the government using its power to enact and maintain a Bill of Rights.

Furthermore, the fact is that no creditor has ever entered into a contract payable in a fixed sum of paper money in anticipation of the purchasing power of that money so radically declining that what he will receive is likely to be of substantially less purchasing power than what he lent. If that were the anticipation, credit markets would soon cease to exist in that money.

The existence of credit presupposes a monetary unit whose future purchasing power can be more or less be reliably estimated. When the government accelerates inflation even to the level seen in the United States in the 1970s, credit markets break down, as witness the virtual disappearance of long-term fixed rate mortgages in 1979, after a few rounds or prices rising more rapidly than could be compensated for by inflation premiums in interest rates. The market was beginning to form the idea that no inflation premium would be sufficient, because, however high, inflation could soon be even more rapid.

The implication of this is that once inflation becomes more than modest, it necessarily violates creditors' rational understanding of the terms of the contracts into which they entered. It thus represents a defrauding of creditors and therefore a violation of their freedom of contract. Stopping that process is not a violation of the freedom of contract but an attempt to uphold it.

I find it the very height of gall for anyone to believe that his freedom is any way violated because he is deprived of such opportunities as being able to pay the proceeds of a life insurance policy with less purchasing power than is required to pay for the postage stamp needed to mail said proceeds. (This is an example out of the German inflation of 1923.) If he borrowed money in this kind of expectation, then he deserves to be disappointed. His freedom is certainly not violated because he his prevented from fulfilling it. To the contrary, the freedom of those whose wealth an unrestrained policy of inflation would have brought him is given a measure of protection.


Postscript: It may be objected that the insertion of any kind of gold clause into existing contracts would serve to protect the rights of creditors only by means of shifting the violation of rights to debtors, who, in some cases at least, might be obliged to suffer unanticipated real and substantial additional burdens of debt. This objection falls if it is held in mind that the proposal I made was for the introduction only of a partial gold clause. The example I used, purely for the sake of illustration, was a 25 percent gold clause that at a price of gold of $1,000 per ounce would impose a contingent gold debt of 250 ounces on the borrower of $1,000,000. Such a gold clause would not increase the number of dollars actually owed unless and until the price of gold reached $4,000 per ounce. Twenty-five percent may be too high a percentage. Ten percent might be a better number. In that case, starting at $1,000 per ounce, the price of gold would have to reach $10,000 per ounce before the number of dollars owed by any debtor actually increased.

Such an arrangement would give debtors ample time to join with creditors in opposing increases in the quantity of paper money of such magnitude as to drive the price of gold beyond $10,000 within the life of existing contracts. It would serve simply to remove debtors from the category of a vulture-like pressure group seeking to feast on every last scrap of meat left on the financial bones of creditors. Hopefully, it would gradually serve to make debtors join with creditors in demanding an end to inflation, which would then be perceived as harmful to both groups instead of to just one.

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