False Choice or Real Possibilities

By J.D. ALT

The essential ploy in politics is to give people a false choice. For dinner tonight, you can have fried potatoes—which are what I am serving—or you can have watered-down potato gruel, which is what my opponent is serving. Never mind that, if we take time to look, the larder is actually stocked with tomatoes, corn, zucchini, string-beans, hams and pork bellies.

The political false choice is usually quite subtle, and invariably involves whether you want to be taxed or not. The example I continuously stumble upon is Barak Obama’s 2015 State-of-the-Union proposal for universal child-care in America. However eloquently he may have framed it, the choice President Obama eventually gave was this: pre-school child-care for every American family paid for by the federal government—coupled with a new tax on cigarettes—OR hit-and-miss pre-school child-care paid for by private welfare, struggling individual families, and desperate single moms. Never mind looking in the larder to see if there are unemployed resources in America which—without raising additional taxes—could not only provide the child-care services, but could be employed to do so, thereby contributing not only to the gross domestic product and aggregate demand for Main Street businesses, but to the well-being and success of our nation’s school-children. But instead of looking in the larder to see what was possible, we were given Obama’s false choice.

The book I am currently immersed in, Evicted, by Matthew Desmond, brings to life the tragic and anguishing consequences of this particular false choice. While pre-school child-care is a daily logistical and budgetary stress-point for middle-class American families in general, it is an existential dilemma for unemployed, or marginally employed, single moms. These women, many of whom have no reliable housing situation, or consistent funds for family food, clothing and medicine, are clearly stressed beyond any reasonable point of rational existence. Many, if not most of them, are addicted to cigarettes as an integral part of their daily desperation. So now they can choose…. It is even likely that most of these single, smoking moms would choose to go cold-turkey on the cigarettes if they could be assured of a safe, pre-school setting to put their kids in everyday, but this decision is co-opted by the American tobacco industry which considers an exclusive tax on their product an unfair and unacceptable burden on free-enterprise—and by a naïve and ignorant conservatism that insists on a false connection between federal tax revenues and the creation of collective goods. False choice on top of false choice­—but is anyone capable of asking the simple question: What’s actually in the larder?

Historically, probably the most amazing larder discovery in human history occurred in the United States during World War II. On September 1, 1939, when the German army invaded Poland with the world’s first motorized “blitzkrieg,” the United States was deeply mired in the Great Depression. Unemployment was approaching 20%. Bread lines and soup kitchens were struggling to prevent large scale malnutrition. Main Street struggled to find customers and manufacturing plants closed shop, unable to keep operating without orders for their production. Bank failures were endemic, substantially eliminating America’s family savings and nest-eggs. At the same time, the U.S. military was virtually non-existent. The entire U.S. army could be seated in Chicago’s Soldier’s Field football stadium. The Navy had mostly ships left over from World War One. The U.S. Air Force didn’t even exist.

The Speech FDR Didn’t Give

What President Franklin Roosevelt didn’t do was give the American people a false choice. He did not go on the radio and say, “My fellow Americans, now is the time for you to reach deep into your pockets and the paltry savings accounts you have left, because the federal government is going to have to borrow virtually all the dollars you have in order to then pay them back to you to build and man the army, navy and air-force we are now going to need.” (How many heads would have been scratched if he’d even, accurately, framed it like that?) What he did, instead, was open America’s larder to see what was actually there to be put to use.

The question FDR asked, obviously and historically, wasn’t where are we going to get the dollars to pay for all the things we’re going to need—the question he asked, instead, was where are we going to get all the things the federal government is going to need to pay for? Was there enough steel, FDR wanted to know, to build the ships the U.S. Navy was going to need? Was there enough aluminum for the necessary aircraft? Did we have in our university and industrial laboratories enough engineers and technicians to design the planes and their systems? Was there enough rubber to build the tires for the planes and jeeps and trucks that would supply the army―no? Was it possible, then, to engineer and fabricate a rubber substitute? How quickly could that happen? Was there adequate refining capacity to produce the fuels required for the ships and planes? Did we even know how to create fuels for high-powered aviation engines?

The results of this categorized accounting of the nation’s larder were, even by today’s standards, astonishing: Between 1940 and 1944 (a time period of only 48 months!) something so extraordinary took place it defies the imagination. The U.S. federal government spent (in 2011 dollars) 4.1 trillion dollars to build the largest and most advanced military machine in world history, employing over nine million previously unemployed citizens in the process. Where did those 4.1 trillion dollars come from to pay all those ship-builders, air-plane fabricators, armament factory workers, welders, pipe-fitters, steel-makers, aluminum smelters, fuel refiners, electricians, scientists, engineers, soldiers, sailors and airmen? Where did the dollars come from? Did President Roosevelt arrange to borrow the dollars from China?

It is essential to answer this question—not just sort of answer it, but to actually confront what the answer is, and what it means. Obviously, the dollars did not exist for the federal government to either tax or borrow. So what could it do? There is only one possible answer: The federal government must have issued the necessary dollars by fiat, out of thin air. In other words, the money was “printed.” Before you gasp and choke at the thought, however, consider that, in fact, this is how all sovereign currency (our money) gets created. It cannot, by law, be created in any other way. (This fact, and why it works, is explained in my book The Millennials’ Money.)

The most important thing to consider, however, is this: What were the consequences of FDR’s “dramatic” course of action? We are counseled, on a regular basis by Congressional leaders and political economists, that if a government simply “prints” dollars when it needs dollars to spend, the results will be catastrophic—the hyper-inflation of the currency, the collapse of the economy. Here we have an actual historic example, so it is useful to recall what actually panned out in reality.

First of all, did the issuing and spending of 4.1 trillion new U.S. dollars in only 48 months generate inflation? Yes, of course it did! The U.S. inflation rate went from near zero in 1941 to nearly 12% in 1942. But it’s important to acknowledge the difference between the U.S. inflation of WWII and the infamous examples of catastrophic hyperinflation—Weimar Germany after WWI, Zimbabwe in the 1990s and, possibly, Venezuela today. In each of these cases, the underlying cause of the inflation was the collapse of the productive capacity of the national economy. The money still existed, but there were fewer and fewer things being produced for the money to buy.

This is not what occurred in the United States. During the period of 1940-1944, the U.S. economy was producing more goods and services than any human economy had produced in history. Inflation became a problem because the things being produced—naval ships, airplanes, bombs and bullets—were not things the now fully employed (and well-paid) U.S. citizens could buy with their expanding wallets and savings accounts. This lack of things to buy was exacerbated by the rationing of virtually every useful resource and commodity within the U.S. borders—rubber, butter, nylon, gasoline. All those dollars in people’s pockets chasing what little there was to buy created an inflationary pressure, FDR understood, that was threatening to get out of hand. What brought things under control? What prevented the inflationary disaster we are so often cautioned against?

War Bonds and Income Taxes

In 1940 only 7% of the U.S. population paid income tax. By 1944, dramatic and necessary changes in the tax code had increased that percentage to 64%. Just as inflation began to get out of control, in other words, the federal government began draining large amounts of dollars (taxes) from the citizen’s aggregate spending power. At the same time, a major campaign was implemented to encourage the citizens to use some of their newly earned fiat dollars to buy War Bonds, effectively taking those dollars out of circulation. Many employees were required to accept War Bonds as part of their regular paychecks—deferring their ability to spend those dollars to a future time. Between 1942 and 1945 these efforts succeeded and U.S. inflation subsided to 2.3% (approximately what the Federal Reserve’s current target rate is).

Did the issuing and spending of 4.1 trillion new U.S. fiat dollars between 1940 and 1944 cause the U.S. economy to come close to collapse? Obviously, the opposite is the case. Going into 1940, American families and businesses were on the ropes, struggling to climb out of the Great Depression. Coming out of the war 48 months later, the American economy—and, in many ways, American society itself—had been completely transformed. Entire new industries and private business opportunities had been created. Unemployment had been virtually eliminated. It was a shining instance of what was, in retrospect, a profoundly “teachable” moment.

It’s unclear exactly how we transitioned from that moment to where we stand today with both parties of the U.S. Congress and the President having so completely unlearned the lessons of that historical experience with modern fiat money. Today, amazingly, Congress and the President can only battle over the false choices of a fiscal policy that can’t even agree to repair our highway bridges, fix our contaminated water systems, or mount an effort to eradicate a mosquito-borne virus that threatens the very survival of our infant grandchildren.

Granted, WWII was not business as usual. But if that is so, it begs the following questions: Is “business as usual” our most powerful American model? Is it what we want? Is it even, anymore, what we can afford to strive for? Given the overall results of the U.S. experience with dramatic, targeted efforts of sovereign spending in World War II, given the proof that the federal government and central bank have the means to effectively manage and maintain the value of the U.S. currency in spite of massive expenditures of government fiat money, given the fact we know, from experience, all this can be done without “nationalizing” the economy—and that, in fact, the doing of it, if properly managed, will produce an unprecedented expansion of private innovation, investment, business creation, and employment opportunities for American citizens—given that we historically know all of this, why should we not feel comfortable to undertake, once again, substantial sovereign spending programs to achieve critical collective objectives? And if, indeed, we should do that, why don’t we?

10 Responses to False Choice or Real Possibilities

  1. Neoliberalism stands in the way, an ideology supported by the Clintons and the Republican Party. Neoliberals want to hide the fact that money is the easy part and resources are the difficult part. If the resources are available then the money is always there to use the resources. We are wasting an incredible amount of resources with the neoliberal mind set of letting the bean counters impose limits on spending.

  2. James Cooley

    Thank you D. J. for an example that anyone can read and understand. Some might argue that the U S was under an existential threat during WW II, but that threat didn’t materialize until Dec, 1941. We might also ask if global climate change is not also an existential threat to the United States, and to the entire world. Is not a similar response warranted?

  3. Blue Pilgrim

    You point to a problem I have noiced and thought about, but I don’t have the economics education to find a solution in the standard forms: the problem of the high level of abstraction and disconnect between money and real wealth (as in resources, socially necessary labor, or so forth).

    I’ve descriptions of it with GDP, for example, where if I pay you to dig a hole, and then pay you again to just fill it up, that counts as economic production although no wealth was produced. Derivatives, interest, skimming workers surplus value, etc. is similar. So my question is, how do bring money — which should be ‘keeping score’ of production — in line with tangible wealth, or how do we devise a system as an alternative measure that is bound to actual wealth produced in the real economy, which does not measure the unnecessary non-productive labor or the scams or Ponzi schemes? Is there an existing, systematic, accounting system that does this?

  4. Nat Uerlich

    ” . . . why don’t we?”

    Sad to say, Michal Kalecki may have provided a pretty good answer to your question in the early 1940s. See “Political Aspects of Full Employment” at http://mrzine.monthlyreview.org/2010/kalecki220510.html .

    • Nat, thanks for the link to Kalecki’s piece. This is really interesting and useful. Have to read it a couple more times and assimilate. It is talking about a lot of the things I was exploring for the first time in “The Millennials’ Money.” My first read is that this informs our present situation in many ways–e.g. explains much of the neoliberal issues identified in earlier comment above. Will certainly think upon it!

  5. On September 1, 1939, when the German army invaded Poland with the world’s first motorized “blitzkrieg,” the United States was deeply mired in the Great Depression. Unemployment was approaching 20%. Bread lines and soup kitchens were struggling to prevent large scale malnutrition. Main Street struggled to find customers and manufacturing plants closed shop, unable to keep operating without orders for their production. Bank failures were endemic, substantially eliminating America’s family savings and nest-eggs.

    This is very wrong concerning the economic status of the USA in September 1939. The US was not “deeply mired” in the Great Depression. Unemployment was 11.3% in 1939 according to the Darby numbers, which still probably overstate it a bit. The more common “Lebergott” numbers are based on the absurdity of counting millions of people with decent jobs as unemployed.

    The USA in 1939 was recovering from the 1937-38 Roosevelt Recession, a temporary setback. Bank failures, far from being endemic in 1939, were almost nonexistent. This paragraph describes the state of the USA before FDR & the New Deal. Unfortunately these misconceptions are not uncommon, for even “liberal” histories of the era are usually awful – to the extent that they wouldn’t be publishable by reputable publishers – on the economics of this era, on (unconsciously) propagating a Big Lie that the New Deal did not greatly improve things, before the war.

    • Calgacus, thanks for these historical revisions. Not being a historian, the numbers I use to generate my essays are taken from google searches on various topics. My google search has U.S. unemployment in 1940 pegged at 14.5% trending down from near 20% in 1939. I have great trust, however, that NEP readers/commentators will set the details straight, so I see no point in quibbling. In spite of the details, the point of the essay, it seems to me is still more than valid: massive sovereign spending of new fiat dollars to address massive collective challenges did not come close to “destroying” the U.S. economy; to the contrary, it literally created the economy we have today. So by what logic do we now deny ourselves that same opportunity?

      • J. D. Alt: Yes, those numbers are still the ones almost always seen. They are a good test of the (un)reliability of a source = almost all modern “experts” & books on the Depression. (The best general one is probably Robert McElvaine’s, but it it is not a specialist economic history – no acceptable one exists.) The problem is that they measure employment in a ridiculous way which is unique to the US and unique to that period – and surprise, surprise, makes the performance of FDR & the New Deal look much worse than it was. And so makes everyone’s ancestors look like idiots for having (re-)elected ineffectual idealists.

        The various New Deal programs employed millions of people. Those numbers simply count them as unemployed – and the much better, Darby numbers still don’t count absolutely all the New Deal programs. Marshall Auerback, who doesn’t post here much any more has emphasized this point & New Deal history. Here is an old comment on mine with some links.

        Such details only add to the strength of your points.

        Larry:Calgacus, I believe that you may overstate the US recovery in the period preceding the war. Before Roosevelt began his war preparation, the US recovery under his admittedly beneficial fiscal stimulus package and job creation scheme was rather anemic, even after 1938. It was only when Roosevelt began preparations for war that his New Deal became truly Keynesian.

        Nope, no overstatement. The most robust peacetime recovery in US history ever was anemic? The standard, revisionist story is insupportable, wildly at variance with basic facts – and of course is highly confused theoretically. Parguez linked to above argues that the US became less Keynesian – meaning that while the First New Deal was the most Keynesian ( in the sense of MMT/circuitism/Keynes himself) approach to a depression ever, anywhere, WWII (excepting its inflation-control measures) was more like postwar “Keynesianism”. Samuelson himself wrote that what converted him to Keynes – was the strength of the First New Deal recovery, which nothing else could explain.

  6. JD, I think it would have been helpful had you mentioned that FDR, during the period in question, had earlier taken the US off the gold standard, replacing what was an interim currency system in 1946 by the Bretton Woods system. It is during this brief period from about 1934 or so to 1946 that the US truly operated a fiat currency system, which under Bretton Woods it no longer did. It could be inserted after your mention of your new book.

    I think it is also useful to know, though I realize this was not part of your brief, that the Bretton Woods system was not truly Keynesian in character. Samuelson called it neoclassical synthesis Keynesianism, his perspective in fact, and Joan Robinson referred to it as bastard Keynesianism. The system was primarily constructed by Harry Dexter White, who while he admired Keynes did not entirely agree with him, especially where Keynes’ views conflicted with what he took to be American interests. The result was that the Bretton Woods system was an American construction designed primarily to enhance American interests and secondarily to try to avoid another depression. That it clearly failed to do the latter should be a lesson for our times. That it isn’t should be a scandal.

    I should also like to say that the reasons you give for viewing hyperinflation as a false flag are the clearest and most succinct I have read in a long time.

  7. Calgacus, I believe that you may overstate the US recovery in the period preceding the war. Before Roosevelt began his war preparation, the US recovery under his admittedly beneficial fiscal stimulus package and job creation scheme was rather anemic, even after 1938. It was only when Roosevelt began preparations for war that his New Deal became truly Keynesian.