Commentary Magazine


The Paper Economy

In our October issue, Mr. Bazelon will examine the major American economic institutions and the people who run them, and in November he will conclude this series with an analysis of the social and political issues arising from the conflict between “paper” and production.

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In time, immutable rules of conduct enforced under progressively changing conditions should logically result in a muddle.

Thorstein Veblen

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There are immense changes under way in our social economy, as everybody senses; but through this whole earthquake alteration of circumstance, our ideas about the structure of our society have hardly mellowed, much less developed in a rough tandem with events. The muddle is upon us, and the days grow shorter.

The approaching crisis has been occasioned by the awful advance of technology; for the technology which has not been prepared for (or is not soon accommodated socially) is no blessing at all, but the deepest ironic disaster of the human race. The human being today stands poised to be destroyed by his primary biological blessing—his propensity to develop and his capacity to use technique: there is a direct line from the prehensile thumb to the nuclear bomb.

The political essence of the approaching crisis is that we have not been able to make our great power felt by non-military means, either at home or abroad. The domestic source of this impotence derives, for example, from such ritualistic activities as budget-balancing, devotion to the supposed stability of the dollar, fear of inflation (or federal action to forestall it), and accompanying under-use of productive facility and talent. Under-use and mis-allocation of our great industrial and technological power, except under and by virtue of military purpose, flow directly from the predominant bookkeeping considerations which go by the names of money, profit, price, return on investment, etc.—that is, existing property rights, all of which and the system comprising which, I will here call “paper.” Taken as seriously and devoutly as it has been and still is today, the paper system is inadequate to insure full production at home and to fight the cold war on non-military terms. So this is the nature of the domestic crisis: we must achieve a political posture whereby we can take the Paper Economy less seriously in order to be able to modify it according to non-paper considerations. If we fail to do this, we will surely forsake the promise of the future and also fail in the cold war. Or worse, we will trap ourselves into fighting it out on military grounds, which could well be the end of all of us.

The traditional way out of an American crisis is no longer available to us. For one thing, you don’t win the cold war (unless you are Senator Goldwater), you just keep the nuclear holocaust from occurring. For another thing, it is increasingly obvious that the war in which we are engaged is not to be fought with military hardware: the military part of it is simply a stand-off operation which allows the true conflict to go forward elsewhere and by other means. We could mobilize the economy for a World War II-type effort of several years duration: but to mobilize the social economy for the kind of conflict in which we actually are engaged requires structural changes in our society, and these changes will be permanent. Indeed, they will be continuing and cumulative. There’s the rub—to accept or resist this new experimental form of mobilization.

It is a hard irony of history that calls upon the conservative leadership of the most conservative great nation in the world to choose freely the pursuit of a permanent social revolution. However, analysis and reflection reveal over and over again, and finally compel the conclusion, that this is the contour of the crisis—and that just such an unreasonable demand is now being made by our history.

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Money and Scarcity

Money is not real. What made it seem real for so long was its scarcity. Since money is supposed to be spent on things, its scarcity can truly reflect reality only when that reality is made up of a general scarcity of things. It no longer is, except mostly by intention. Since the scarcity of money no longer mirrors the scarcity of things, and since money that is not scarce is not exactly money, the whole meaning of the symbol has changed profoundly.

We are the most productive society in history, and consequently are daily threatened by cumulative non-scarcity. In 1961, the Secretary of the Treasury said:

We are no longer in a time of shortages. There is unusual—and under-utilized—capacity everywhere in our land today; in steel, in autos, in housing, in textiles, in chemicals—indeed, everywhere we look. We also—and unfortunately—are under-utilizing our labor force, which stands ready and willing to operate the unused capacity of our industrial plant.

Because capitalism and its paper world were based on actual scarcity, the drama of the system was to contend heroically with this condition. But the whole point about the new freedom, the new technology, is that it has made scarcity absurd. So our society can no longer dare to be based on it, heroically or otherwise.

The paper system is still conceived in terms of scarcity—still founded upon that concept. Since scarcity no longer occurs naturally in this country (unless the Paper Economy just as we have it today is considered “natural”), we are quickly approaching the point where the nation will have to make a fundamental decision about whether it can do without the whole baggage of historical ideas which were outgrowths of previously existing scarcities—the psychological basis of the Paper Economy. I think there is no question that man’s sense of himself, and the traditional psychology accompanying it, have been substantially conditioned by these earlier scarcities. Consequently, the final result of the technological revolution will be a new conception of man.

This need disturb no one, since economics has always been based upon a psychological image of man—on some model of motivation. In this sense, what we are faced with is a revolution in motivation, and the conservatives don’t want it—because they see it as an attack on their personalities. Indeed, it is frightening, as well as exhilarating. What on earth will we do with ourselves if making a dollar loses its allure? If “hewing to the line” no longer really matters? If the traditional idea of sacrificing the present for the sake of the future becomes fatuous? (The reason President Kennedy keeps asking for “sacrifice” from the nation is not that any real ones are needed, but because he shrewdly understands that the nation yearns for the mood.) How, then, will we face up to the prospect of a decent life?

American business prefers to call itself The Free Enterprise System—or even more expansively, The American Way of Life. The latter designation is so accurate that it leaves nothing to be discussed; but the former is a Big Symbol that can and has been discussed endlessly. This talkathon has been greatly facilitated by the fact that “free enterprise” cannot possibly be defined for reasonable people as something actually happening between New York and Los Angeles. Apart from everything else, the idea assumes a minuscule role for the federal government—and everybody knows better than that. No, the only existential meaning of enterprise is what businessmen generally happen to be doing at the moment, and free is merely the accompanying demand that they be left alone to do it.

Industrialism, the network of technology and productive industry, is not to be identified with free enterprise or capitalism or any other control-system which at a particular historical moment stands astride and determines how and why men shall operate the industrial complex. Capitalism is not the same thing as industrialism, any more than capital means the plants, machines, and other subjects and objects of technology which shape the physical world under industrialism. Capital is not Things—and neither are enterprises, free or otherwise. Capital is assets; and enterprises are more or less organized and more or less purposeful collections of assets. An asset is a money-value: another symbol-on-paper, in this instance that Torah of the Paper Economy, The Balance Sheet. But you could spend a whole day walking through the mammoth Fairless Works of the United States Steel Corporation without seeing the slightest piece of balance-sheet profit perched expectantly in the vicinity of a furnace. All the pieces are hidden in the heads of the personnel—in some heads more than other heads, but all of them in one head or another. In the early commercial days, before machine technology got moving, capital referred to a stock of goods. But now goods can be produced so quickly by machines that capital refers for the most part to the machines themselves, while goods are called “inventory.” Goods are now felt by producers to be a liability as often as they are an asset. You control the machines, but you just move inventory. Indeed, you have to move inventory.

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Competition?

The central idea of business ideology is Competition, because that makes all sorts of difficult, questionable, and downright unpleasant matters come out all right in the end. As J. K. Galbraith has engagingly put it: “Like marital fidelity, decent plumbing, or clean underclothing, competition is a prerequisite of respectability in our society.”

The Idea of Competition asserts that competitive markets are the exclusive regulators of all practical and moral relations in society. The result has been that all conscious human intervention in the economic process, or planning, is accepted only as disaster threatens; and once its agonizing birth has been effected, the high priests of paper propriety revoke its birthright by denying or ignoring its existence. The Idea of Competition (not the occasional fact) is one of the most mindless notions ever to dominate the supposed thinking of a society of grown men.

The issue is not whether at some times and places competition functions as an effective allocative factor. It does, but look at it this way: in any fresh, unorganized situation you are going to have unorganized activity—“competition”—until someone is able at last to organize the thing on some rational basis. Most of our great business heroes—Rockefeller, Carnegie, Morgan—were men of capacity who dramatically carried forward this process of organization. They recognized that competition was a dangerous form of internal warfare, of benefit to no one, and exactly the kind of senseless feuding which it has been the role and the justification of the state since time immemorial to suppress. So they suppressed it, and did a very good job of it for that time and place. Of course they were not the state de jure, but that was not an important matter.

American business relies on the Idea of Competition, along with a deep animus toward federal power, because it is bitterly embattled today. The business system is fighting a rear-guard action against the continuing transfer of power from private to governmental hands. That it is a cynical, hopeless, rear-guard action has been revealed by the recently-lived-through eight years of “Modern Republicanism.” It turns out that American business interests are not counter-revolutionaries, but only determined saboteurs of a reasonable adjustment to the change. David Riesman has said: “We have been trained for a world of scarcity and we have developed an image of man under the psychology of scarcity.” Our ruling business groups are extremely reluctant to modify the training or abandon the image.

Business has not and will never recover from its 1929 failure to run the society with a minimum of decency and competence. It had all the power it needed, and all the freedom in the world to use it—but the hand was overplayed, and the business system revealed itself once and for all to be incapable of resisting the easy exploitation of the money-credit-price mechanism. The Great Depression was the melodramatic end of effective private government in the United States.

Since then the federal government has underwritten the entire functioning of the economy. That is what the New Deal meant; that’s all it meant; and that meaning stands under Modern Republicanism. The traditional underwriters—investment and commercial bankers, utilizing the central banking authority of the Federal Reserve System, and allied with corporate power in key industries—were unequal to the task. They were not able to fulfill their obligations. So, in 1933 a new underwriter was called in. The terms of the new underwriting contract were stated generally, the details being left to future needs and contingencies, and “arrangements” to be made with the former underwriters—as in any major bankruptcy. It is these details of the contract, of our new unwritten constitution, that make up the issues of our political life. But the remnants of private government are not negotiating in good faith with us, their creditors, nor are they acting reasonably with regard to the common enterprise. Rockefeller, Carnegie, and Morgan would never have behaved so badly.

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What Is Property?

The ordinary idea of property is that it is made up of Things. A man’s property is what he owns—and he looks about him and sees a house, some furniture, clothes in the closet, a car in the garage, and his mother’s amber beads. His property. But wait a minute: there’s an insurance policy, some cash in his pocket, a bank account, and maybe even ten shares of AT & T. That’s property, too. But of a very different kind. He doesn’t own AT & T but only ten out of many millions of shares—which share only after some billions of dollars of debt. In fact, his ten shares have to be carefully punched out on an IBM card not to be lost sight of entirely. The stock certificate, the deposit, the policy, the cash are all paper. He just owns the paper—he doesn’t own AT & T, the insurance company, the bank, or the Federal Reserve System. So his property consists of some things and some paper. But wait a minute again: he lives in the house, everybody on the block will tell you it’s his house, but as a matter of fact the Nickel Savings Bank of Lower Sandusky has a greater right to the house than he has—it’s worth $15,000 and his equity comes to only five as against the bank’s mortgage of ten. Likewise the car, and mechanical trinkets in the house. (Maybe even the clothes on his back.)

Where does all that leave us with the idea of property? Well, the truth is that if you are talking about things, you hardly need the idea of property at all—until somebody tries to take some of it away from you. Property is not the thing, it is rights in and to the thing. Consequently, the ordinary notion of property, as being made up of things, is almost exactly wrong. Most frequently, property ends up being a right to force someone to act or refrain from acting in a certain way toward a certain thing, or to pay for the privilege of refusal—pay in that biggest of all forms of property, money, the great common denominator.

The generic form of property is a contract, an agreement, a promise. (I won’t bother going into the textbook definition of a contract—let it suffice that contracts are made up of mutual promises, with the added proviso that in law a man may “promise” by his course of conduct, without opening his mouth and uttering that ringing law-school phrase, which still raises the hair on my neck, “I accept!”) The right to enter into contracts “freely” is the substance of the free market competition notion—a market being the place, or the habitual pattern by which, contracts of purchase and sale are supposed to be entered into freely. Economists have always been blinded by the glamor of the equilibrium of the free market. But when you look at the same phenomenon from the point of view of freedom of contract—the lawyers’ point of view—you are much more apt to see this freedom for the lopsided license to steal that in large part it was. And it was freedom of contract rather than the free market that served as the first grand bastion of defense to be raised by business, and then to fall in the course of the popular onslaught against unbridled capitalist plunder in the 19th century. Freedom of contract justified almost any predatory practice; the free market serves mostly to justify unfettered pricing power. The main reason that freedom of contract has never been as free as it is advertised—and it is a painfully obvious reason—is that sellers and buyers are not equal in bargaining power. This means that the terms of sale will simply reflect the power, or lack of it, that each party brings to the market place. So a market is also a financial slaughterhouse, where the strong chop up the weak.

The right of the dominant seller or buyer to his dominance in the market place is enforced by the state. Indeed, that is one of the chief functions of the state under capitalism. This big fact has been obscured in a big way by the historical circumstance that the bourgeois state supplanted autocratic monarchies, and in the course of the struggle, the bourgeoisie developed a non-state or anti-state, almost anarchistic, ideology. But when control of the state had been achieved, the new ruling class did not pursue its own anarchistic principles. To say the least.

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Uses of The Property Idea

Many economists who are not lawyers, and most lawyers who are not especially conscious of what they are doing, see the world of production and things as controlled by the encompassing universe of money and credit; the independent concept of property may be lost somewhere in between. This is unfortunate, because the truth is that money-and-credit are simply the most generalized and therefore the most obvious form of property. It is the whole properly system, not the money-and-credit system alone, that decisively represents our society’s attempt to control and rationalize the real world of things and the people, pari passu thingified, who live in it.

In the massive corporate economy, the old market equilibrium theory is thoroughly bankrupt, whether or not supplemented by Keynes’s money-manipulation notions. (Keynes’s theories, as applied, are not adequate for a full production economy: he was an exceptionally clever and completely English dialectician who modified received theory no more than necessary for his purpose at the time. He did not revise economics in the light of corporate market power; he accepted existing theoretical baggage and then merely outlined a role for the government to save the whole works—in special circumstances—by monetary and fiscal maneuvering. And he buried the gold standard, that shining relic of pre-1914 confidence in the lightness of all things.) This market theory—which at best offers a passable description of certain aspects of the 18th and 19th centuries—is, along with Keynes’s techniques for keeping a depression from downright destroying us, the basis of fateful governmental policy. It gives one pause.

In the new social economy, all rights-property is paper—and all the paper in the Paper Economy must be considered if a Keynesian effort to influence or control the real world of things is attempted. All the paper—not just federal debt and the money in central banks. But because of the stale distinction between “property” and money/credit, we don’t usually take all the paper into account. As a consequence, we are trying quite unsuccessfully to deal with a runaway technology within the framework of an archaic business-profit system. The result is under-used and mis-used plant capacity, a circumstance covered over—just barely—by a puerile public relations culture which is almost impossible to bear, even by its beneficiaries.

We have sown a 19th-century dream, and are reaping a whirlwind of 20th-century paper.

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The Paper Dream

Money is a dream. It is a piece of paper on which is imprinted in invisible ink the dream of all the things it will buy, all the trinkets and all the power over others; a kind of institutionalized dream which, along with its companion dream institution of Success, constitutes the main fantasy on which our way of life has been built.

But the old, pure money-dream is dying in America; we are passing through a purgatory (or, if you prefer, a child’s garden) of fantastically shaped automobiles and ineluctable electric can-openers, and what our new dream will be no one knows. But at least, before we begin again, we will have touched down for a time and even have lived a little in our current consumers’ paradise.

The main point is this: the money that figures so prominently in the dream of money is not money for spending. You don’t ever buy anything with it. It’s for earning more money. And after you really get moving, you don’t even buy anything with the money you earned on the money you used to earn it, and so on.

But what is money? Well, it is not just a dream. It is also not wealth, which exists in reality and is not merely a symbol. The paper in the world of paper we live in is supposed to order the creation and use of our wealth; but it is not itself wealth. This is an essential point, and is probably the most difficult idea to come to terms with in the whole discussion of property, money/credit, and the Paper Economy.

For one thing (closer to the facts), money is a contract—the freest, most gorgeous contract of them all. Money is somebody else’s promise to pay, to give me what I want, when I want it: the fully alienable contract for anything, anytime, anywhere. Whatever else history may say of the Western bourgeoisie, this honor must be accorded them: They perfected modern money, which is a contract with parties unknown for the future delivery of pleasures undecided upon.

Gold as cash is irrelevant (except internationally, because we are so primitive in that arena); cash is paper immediately and universally exchangeable, also called currency; currency is a contract right currently accepted; and all such contract rights are based on credit of one kind or another (you only enter into a contract with someone you “credit” with the capacity to fulfill the contract). Therefore money is credit. And credit is based on reputation. So money is a function of reputation. And everybody knows what reputation is. Reputation, as a matter of fact, is what everybody knows about somebody. There you have, quickly, the story of money.

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How it All Began

The whole paper show began historically with two great events, both growing out of the emergence of trading in Europe, the medieval fairs, etc., etc. The first event occurred when the first seller transferred his goods to a buyer, who at the time had no goods to trade and no gold to substitute for goods. This pioneer seller said to his buyer, probably in disgust, “OK, give me two pigs or one gold ducat next year—and if you don’t show, I’ll come and get you. And write it down on this piece of paper here, so there won’t be any argument.” The second great event begins like the first but adds a new twist—which turns out to be a creative act on about the same level as the invention of the wheel. Same scene, same characters, but when the seller goes home he’s still boiling because he’s stuck with a “worthless” piece of paper; his buyer may be dead next year, or impressed into military service, or go into another line of business somewhere else, or any number of things. He feels maybe he’s been taken, and as so many people before and subsequently have done in that uncomfortable circumstance, he looks around for somebody to take in turn and so cut his loss, resolving firmly in his heart never to be taken again. Wonder of wonders, he finds a real patsy (he thinks) who is willing to take the buyer’s paper in exchange for a half-ducat of gold payable immediately. This “patsy” happens to know that the buyer is a big man in a far country, vigorous and powerful, and well-respected: a man of good reputation. The gold is exchanged for the paper, and the Paper Economy is born.

Once we get past barter—the direct exchange of things—we are stuck with gold or something like it until men begin to write down their promises and accept these instead of gold. But gold is a very limiting factor—there never was enough of it—so it was absolutely necessary to create something “as good as gold.” The closest thing to gold-today is gold-tomorrow, and that’s how the system was born. All of our paper today is ultimately gold due in a tomorrow that never comes. And just as well—there isn’t enough to go around.

Now most people, I should imagine, accept checks as money because they are under the impression that banks are loaded with real money. It is true that you can take a check to a bank and get some engraved paper for it, if you want to be fancy, but it would be a very long day indeed for the fellows operating the government printing presses if any large number of people had this idea at the same time. No, banks are mostly just like us—all they have is bank deposits. From where do they get them, you ask? They create them—that’s their business. Nice business, you say? Yes, it’s not bad. It used to be rather nerve-wracking, but the New Deal took all the worry out of it. (I suppose that’s why bankers loved FDR so much.)

So how does a bank begin? One line of banking started out in Europe with the goldsmiths, who knew all about gold, had a lot of it in their possession one way or another, and just naturally became bankers as the popular belief in gold and the need for banks joined to provide one basis for the money/credit system without which capitalist-exchange would have remained a gleam in our forefathers’ eyes.

But if you are rich, or people think you are, they will assume you own gold or something “as good as gold,” and such individuals became bankers, too. If they had a sufficient air of affluence, the banking customers-to-be did not bother to demand to see the color of their coin, but assumed it was a full, rich yellow. This Mr. Big did not have much gold around the house—if he had any at all it was certainly out working for him—so his stock in trade became gold-tomorrow. All you have to do to become a banker is to go into debt. Mr. Big’s promises to pay gold-tomorrow circulated as money, especially when endorsed by other leading citizens.

If enough people leave their money with a banker, his notes can circulate at par without being endorsed by other wealthy men—their deposits are endorsement enough. At this stage of the game, bankers can engrave their notes on special paper and we are well on the way toward the fantastic shambles of 19th-century American banking. And not a moment too soon, either, because all the gold, faith, deposits, hope, paper engraved and otherwise, and pure charity that the new banker-merchants have sopped up and agglomerated will hardly be enough gold-tomorrow on which to build the railroads, the steel mills, and the rest of our great industrial establishment. The people engaged in that enterprise will, besides, find it incumbent upon them to print their own money. And even that won’t suffice: they will unfortunately find it necessary to steal from the government and even, on very black days, from each other.

So they played out the hand, and everybody in on it got very rich. But they wanted central banking in some more viable form than that offered by the House of Morgan. After enough of the wrong people had been hurt in enough financial panics, and after Congressman Pujo’s investigation of the banking system in 1905 had smelled up the atmosphere, the quaint Federal Reserve System was allowed to enter the union in 1913, half-slave and half-free, a compromise use of government power on behalf of private banking. Thus the paper created in the course of raping a continent was canonized. You might say the policeman waited in the hall until he was needed.

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Credit Is Wonderful

The phenomenon of credit is one of the most profoundly engaging in the whole rainbow range of social life. Its significance, once grasped, is truly startling.

There is a lot of talk these days about status in our society. Well, compared to credit, status is about as exciting as Calvin Coolidge in deep thought. Because the point about status is rather obvious—the details can be fascinating and funny in revealing our nonsense to ourselves—but the thing itself is just there. Status is static, but credit is dynamic. As a matter of fact, credit is the active arm of status, it is status on the go, status in current use to effect some purpose in the world besides mere display: credit is status capitalized. (It is worth while to stop and realize that Veblen’s most famous book was The Theory of the Leisure Class, a very perceptive and amusing cartoon on the subject of status, but that his most important and brilliant work all revolved around his insights into the function of credit in America—what he called the price system. The fact that the cartoon has impressed the American intellectuals so much more than his epochal thinking on credit does no due respect either to them or to Veblen.)

Under capitalism, the reputation of individuals has been commercialized—literally turned into money. Indeed, that is mostly what money is. Under prior aristocratic societies, all power felt to be necessary was achieved or maintained by the display of status, by a grand here-I-am gesture, and it was not the usual thing actively to “trade on one’s reputation.” To trade on one’s reputation is to secure credit on it—that is, issue debt—which means to commercialize or capitalize it.

It is the reputation of individuals and institutions that holds society together, and makes the wheels run. Reputation is what-a-thing-is-known-for. That is, what it is believed to be. There has never been a society based on what-a-thing-is, and the closest approach to it is the society of modern physical scientists, the creators of our technology; or the tiny society of you and me when we are in agreement, and so can dispense with the troublesome distinction between what a thing is and what it is known for, and go forward on the basis of what we agree it shall be known for. (Physical scientists don’t agree on anything—they allow only experience to confer the blessed quality of agreement.)

One sometimes wonders, however, what the leading people in our society think they have achieved by so completely commercializing their reputations. Most of the money they get in exchange for the respect due them is not for buying anything, and a great deal of it does not even lead to the creation of real national wealth. The process therefore becomes circular—reputation creates money and money creates reputation, and not enough happens in the meanwhile. In past societies, great reputations fulfilled a much more creative social function.

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Behind the Debt

The question of collateral is fundamental to the whole marvelous business of reputation and borrowing, and, consequently, to the story of the Paper Economy. We all love money (or currency, metaphysically conceived), and money is debt—but who gets a leg up on going into debt? That is the question. The answer begins by reference to this idea of collateral—the what-with behind the debt. Now recollect that you earn on collateral, and pay on a debt. But you are allowed to get into debt because you have some kind of collateral. That is hypothecation or capitalization (as a matter of fact, that is life-as-hypothesis—or capitalism). In the typical case, first you make a profit (earn) or appear to be doing so, then you capitalize that apparent profit-making. The most substantial collateral for further credit is a recent success: the pre-belief that you will win again.

The standing (read, status) of successful buck-chasers substitutes for any more substantial collateral—just as in England the gentleman’s overdraft is a loan secured by collateral no firmer than his proper gentlehood. Whether or not, in this process, engraved paper called stock or bonds is used, is a matter of indifference. What is being collateralized or hypothecated or capitalized is a reputation for making money. The engraved paper simply makes it easier for the lender in turn to sell the debt or borrow against it—because that debt is now money, if anybody will accept it as such. And if your name is General Motors, they certainly will. (That’s how consumer financing was born.)

Now in order to make all this collateralizing come out happily, it is repeatedly necessary to raise prices on goods in order to increase profits in order to make borrowing worthwhile. But everybody understands this necessity, and the important people involved are even quite knowledgeable in noting exactly the proper moment when the existing game has been played out at a particular level and another boost is in order. If necessary, production can be induced to drag its feet for a few months, everybody gets nervous about a possible deflation, and the Federal Reserve Board finally loosens up the process of creating money, thus making a rise in prices absolutely irresistible, and, with a national sigh of relief, they are once again upped. The ante having been raised, a new hand is dealt. The better technique is to blame the unions when raising prices for profit-and-credit reasons, because in that case it is not necessary to frighten everyone to death by sabotaging production; but it appears that this bit of public relations business has about had it.

The beauty of a bank is that in pooling reputations it creates a new and more glorious reputation for itself, without absolutely tying up the reputations collected in the pool. These are still more or less free to be used elsewhere. Notice how wonderfully circular this can become: individuals lend their reputations to a bank, which can even use the reputation thereby created to guarantee the paper of these individuals, its depositors—vide, cashier’s check, banker’s acceptances, etc. Consequently, I would suggest that central banking, which exists in one way or another in all advanced capitalist credit economies, is a form of underwriting. The central bank and its depositors underwrite each other’s promises.

Underwriting is the greatest credit invention of them all, after alienable paper itself (gold-tomorrow). Really all it amounts to is endorsement or guaranty—one man’s credit standing behind, “written under,” another’s. Here, reputation becomes superbly generalized—nothing at all is promised, that is, put on the line, except the promise to pay if the first fellow doesn’t. This tones up the quality of the paper to a wonderful degree (and it can be quite lucrative for the underwriter, too). The more people who put their names on paper, the better it is; and the bigger their reputations (for paying when due, or earning all along, or just plain having it), the better than better it is. That’s underwriting, and it doesn’t cost very much unless everything goes to pot. And, of course, that doesn’t happen anymore.

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The Age of the Big Underwriter

The biggest underwriters in the world used to be the moneymen in the City of London. Then their American correspondents, like Morgan, took over—at first in America, but later being called upon to shore up the mother-lode during the First World War. Finally, Morgan and other similarly situated underwriters defaulted in 1929—the situation had gotten out of hand—and then the central government of the United States became the primary underwriter. It still is today. Now when you underwrite one-half of the civilized world, you do not accomplish this by endorsing a check. In principle, yes; but the actual process is much more complicated.

Today, the federal government stands behind all our paper—and like any competent underwriter, it intervenes in the actual processes of reality on occasion (when it can) in order to insure the validity of the various make-believe promises concerning that reality. It particularly intervenes, by specific guaranty or even de facto receivership, in all unprofitable activities which are nevertheless necessary for the functioning of the economy.

Big corporations, being in control of the actual production of goods and administering the prices of same according to their own convenience, are in effect their own best underwriters. They are the ones who underwrite paper by actual reference to their dominant position in existing social reality. So they are the great source of new paper, or the cause of increase in the value of old paper.

Probably what happened during the 20′s which made the situation unmanageable and led to the default of the financiers was that the basic creative power in the business system had, without anyone clearly recognizing the significance of the fact, shifted decisively from the old-paper centers to the producing corporations themselves. As financial institutions, the corporations ended up making the big banks look like corner grocery stores.

“In the business world the price of things is a more substantial fact than the things themselves,” said Veblen. The great power of our great corporations is not their magnificent capacity to produce goods, but the taxing authority inherent in the power to raise prices. If the basic purpose of these corporations was to produce goods—to create real wealth—then they would just produce and produce and produce, as they did during the Second World War for a few years, and there would be so much wealth lying around and the bother of dumping it in the ocean would be so great that the alternative of distributing it “unprofitably” to the people who could use it would become downright attractive. In order to avoid such an unpleasant alternative, the big corporations act more reasonably and view their essential power as the princely prerogative to create more paper-value. This is done periodically by raising prices, and continuously by not lowering them as costs are reduced—which they continuously are under modern technology.

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Price Is the Thing

The bridge between the make-believe world of money/credit and other paper, and the real world of the production and exchange of things for other things, is price. The paper system rests absolutely on the price level, and the only way out of our paper-chasing madness is through rational control of the price level.

If prices are held steady, demand can be fed into the economy until the limits of supply (short-term) or technological capacity (long-term) are reached. The result is full production—full use of our productive capacity. The “demand” referred to is easily created by printing presses: it is just paper. Prices are not supposed to go up until demand, of whatever source, outdistances supply-capacity—and it just doesn’t anymore, except rarely and in special circumstances. The reason prices go up anyway, thus insuring under-use of our plant, is that the people controlling them want them to go up. They prefer profit-paper to demand-paper—and it is they who control the printing presses of the Paper Economy, so to speak.

The whole awesome structure of conventional theory, including the sterilized Keynesianism of the Federal Reserve Board, is based on the assumed ubiquity of price competition. But in the most important sectors of the economy—especially where the big manufacturer stands astride the raw material supplier and the ultimate consumer—there just isn’t enough price competition. Which raises a very serious problem.

The Paper Economy is like a balloon, which is why the key terms are inflation and deflation. The hole where the air goes in is labeled “Price—Blow Here.” And they sure do. During the 50′s it has been figured that the dollar lost value at the rate of 2¼ per cent a year—while the rest of the smart paper gained.

Now there is a great deal to be said on the subject of inflation, and most of it has already been said more than once. The Official Morning Line on inflation is simple and clear-cut: governments spend too much and workers get too many raises. Since governments and workers are the best spenders-on-things and the slowest creators-of-paper, the Official Morning Line is exactly wrong—and one can only hope, as usual, for better post-time comprehension.

There is no inflation in the real world of things, only allocation. Real values do not get inflated, they get allocated; only paper and balloons get inflated.

Inflation is the very essence of the paper system which capitalism has never even dreamed of living without, or even significantly altering, except in moments and for moments of extreme crisis, like World War II. Inflation is raising prices (it is not any particular theory as to why they are raised). Prices go up, they don’t go down: since the 30′s they haven’t even dipped very much. This used to be called progress and now it is called inflation. The difference is that now it has become frightening, even to those who benefit most from it. Inflation, we were told endlessly in business advertisements, is the “cruelest tax of all.” So was the previous progress, also known as the accumulation of capital.

Inventory is important in understanding modern inflation because it constitutes a sensitive contact-point between the two worlds of paper and things. If the price of an inventory-thing goes up, it is better to have a lot of it; if it goes down, money is better. Now most of the postwar recessions have featured inventory-panics among businessmen (these substitute for the financial panics of our early capitalist history, the last of which we shall ever see having occurred—along with much else—in 1929). Why should this be? The more inventory we have, the more “backing” there is to all the paper that’s around. If inflation is blamed on too much spending-money and not enough things to spend it on, then why, as soon as there are enough things, do we have a recession? Because in such a situation more paper to buy goods must either be handed to those who will use it, or the price must be lowered so that the goods can be moved with the given quantity of purchasing-paper. But the price cannot be lowered without disturbing the value of all the non-purchasing paper which is sustained by it—and for the same reason there is a reluctance to raise either wages or taxes, which would also increase the quantity of purchasing-paper. The new inflation-recession cycle results from the continuing chase after paper-profit in a circumstance where too much product is too easily produced. The paper system is simply not adequate any longer to the job of clearing the shelves.

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On the Downside

The other face of inflation is deflation, and that’s like scarcity—it’s in short supply.

There are no losers anymore. Prices don’t go down, they only go up. Important quantities of paper-value are not wiped out any longer. The federal government has underwritten the Paper Economy—and the underwriter will not permit a really effective deflation.

Ah, but the old days were wonderful. Somebody yelled “Cheezit, the cops!” and everybody started to scamper around frantically trying to collect all debts at the same time. Quite a sight. The show amounted to a heretical worship of the ritual of payment—sort of a financial Holyrollerism—in which everything is going smoothly on Beneficent Wednesday but on Black Thursday it is arbitrarily decided that the “tomorrow” in gold-tomorrow is knocking at the door like Banquo’s ghost. All the paper that can be called is called for clearing, and balances have to be settled in gold-today—right away. And nobody has the what-with to lend anymore. Well, there never was enough gold for that kind of religion (if there were, then gold would not be gold—it wouldn’t even be as good as gold) and the fact became clear even to the High Priests themselves in 1907, when everybody was frightened by the mass passion to be paid in yellow metal. Thus the Federal Reserve System. There have to be limits to religious frenzy in any well-ordered church—you have to keep the True Believers in line. (Financial panics were also encouraged by the fact that markets—i.e., the domination of the consumer—were imperfectly organized: some real competition here and there, and as a consequence prices could on occasion be forced down faster than costs, which brings the whole related paper structure tumbling down.)

We have not yet figured out a workable substitute for the ritual of bankruptcy and other forms of price reduction and deflation—for letting the air out of the balloon. Meanwhile the air is getting fairly stale inside, even though we keep blowing fresh air in through the price-hole.

How can we deflate without interfering too much with the non-paper area of employment and production? The answer is simply to try, as we have been trying, to manipulate the mass of paper (but not just bank deposits) with a comprehension of its basic unreality, and to keep our attention focused on important matters, like real wealth and its rational allocation. A real Old Religion type of credit liquidation is really out of the question. That couldn’t happen without production slowing down disastrously. We have had a steady government-underwritten (and business-benefited) inflation since 1933 (with a special and unnecessary spurt for 1946—48), with all the old and new paper protected, and we’re stuck with that system.

But the fact that we live in the Age of the Big Underwriter, that prices don’t go down, and that paper is never seriously deflated, is brand new, decisive, and changes the entire nature of our system.

The money-unit is not stable and it does not measure all things—it merely measures all paper. The value of the dollar has to shift in order for it to do its job. The fact that it no longer shifts upward is unfortunate, and of course makes the system of paper-value increasingly intramural. But the true historical purpose of the paper system was never to measure the value of things (that would have been an impossible task); its purpose was to value a future-with-more-things-in-it more highly, much more highly, than a present-deficient-in-things. It certainly achieved that purpose effectively, although not equitably. What has compromised the paper system is merely the superfluity of things in the present. The future has arrived—but the paper-chasers refuse to join the welcoming committee. The urgent point I want to make, is that somebody ought to get out there and welcome it anyway.

What is the difference between one hundred dollars “saved”—even out of salary, or go further and say hoarded in Federal Reserve Notes—and one hundred dollars “made” by a one-point rise in a hundred-share smidgeon of Snappy Garter Inc., which rise, lasting only one day, resulted from an unfounded rumor that the Company’s third-quarter earnings would snap back to 1961 levels? Freeze it in time, and you will notice upon dissection that all paper is created equal.

Nobody has to “save”—that is, wait and work a year to get an automobile—so that General Motors can build another factory. That would be true only under full production—and we haven’t experienced that phenomenon except in limited sectors and for limited periods since the war. Moreover, under full production—this is a very revealing fact—the paper system with its price airhole is utterly incapable by itself of rationally allocating materials and effort: to accomplish this, under full technological steam, reality as well as its conventional symbols must be consulted.

Paper is a useful and historically valid technique of accumulating capital, by means of a kind of privately distributed authoritarianism (relying on big banks and small governments), in those circumstances where the demand for goods is so great that all goods possible are actually produced, and new factories besides. That was some time ago. Probably the reason the Great Depression was so great (as W. W. Rostow suggests) is that we had by that time left those circumstances rather decisively behind.

The validity of paper in the absence of scarcity is unthinkable without conscious control of its quantity and/or value. When scarcity is in inadequate supply, so to speak, paper leads to a literal form of madness—a distortion or denial of reality in order to preserve the illusion of the absent condition. And when the power of great corporations is a part of the situation, reality itself gives way to the illusion—and a weird, glistening, new kind of scarcity appears, as an emanation from beyond the historical grave. It is Scarcity Regained—one of the ugliest of all human creations.

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