02 March 2021

Hitler, FDR, Keynes and The Shift in the Limit to Progress from Capital to Labor

The new Republican Party created a new national currency and national banking system. Before they took power, thousands of banknotes circulated around the country – each discounted a little differently based on the risks to that particular bank. It wasn’t possible to verify each one and counterfeiting abounded. Imagine what an obstacle that would be to simple transactions. With 90% of the country in farming though – as it was in 1800 – money wasn’t a big part of too many folks’ lives. As specialization and the early move into automation lowered that percentage of self-sufficient farmers, though, more people needed money even for something as simple as buying groceries. Money became more important and having a stable, government-backed currency made it easier to buy, sell and invest. What would have been nice in 1800 - a national currency - had become vital by 1861.

But there was something the world didn’t quite understand about money and financial markets: capital markets could reach equilibrium before labor markets did.

In 1922, Russia became the Soviet Union and Mussolini took power in Italy. Communists and fascists had seized power. These new ideologies that were easy to dismiss in the roaring 20s became a threat in the early 1930s when the global economy collapsed. Communists and fascists began proliferating in the US in the 1930s.

When Hitler and FDR took office in March of 1933, capitalism was in crisis. More specifically, labor was in crisis. In the US, unemployment was about 25%. In Germany it was 30%.

The full name of the Nazi Party was National Socialists German Workers’ Party. There had always been a tension between the interests of labor and capital. The Great Depression seemed to prove that capitalism had failed labor.

It had, but not in a way that communists or fascists could address. For that we needed Keynes.

John Maynard Keynes’s General Theory of Employment, Interest and Money created macroeconomics. One way to think about his theory is simply this: capital markets could be at equilibrium before you got to full employment. When you talk about market equilibrium, you have to be more specific. As it turns out, labor and capital markets don’t necessarily hit equilibrium at the same time. The industrial economy that Republicans had helped to create was wonderful in so many ways but it had made labor dependent on capital. Even farmers had tractors. The economy was built atop a layer of financial and industrial capital and if that collapsed, the floor for labor dropped. The labor markets could not treat capital markets as a sideshow; it was the foundation.

What did Keynes suggest? Simply put, anything you could to get people back to work. Fiscal policy like spending and tax cuts. Monetary policy like lowering interest rates so that businesses would be more likely to borrow to hire and expand and households would be more likely to borrow to buy. Move the levers in the capital market to bring the labor market back to full employment. Get aggregate demand up and get people back in jobs. Don’t assume that capital markets will automatically move to fully employ labor.

As it turns out, FDR’s imagination was not wild enough to imagine just how much government spending it would take to again reach full employment. Weirdly, it took a massive war with the fascists to fully employ people. The battle of ideologies turned out to be a literal war. Weirdly, the massive spending needed to defeat Hitler and Mussolini brought the economy to full employment.

One other odd thing. Conceptually, everyone knew that things like GDP or GNP and unemployment mattered. There was no systematic way to measure those things, though. The unemployment numbers we use to track jobs created and unemployment rate? They only go back to 1939. We didn’t invent the measures until after we had the theory. And those measures have become essential to modern policy.

Not only have Keynes’ ideas made ours a less turbulent economy. From 1900 to 1933, the economy was in recession 48% of the time; since 1933, it has been in recession less than 14% of the time. Keynes’ ideas have been good for capital as well. In 1945, the wealth of households and nonprofits was $800 billion; last year it hit $124 trillion. When capital markets were subordinated to labor – the limit of the information economy – even capitalists prospered. People in communities that treat the limit as a limit always do, even if it takes global depressions and world wars to signal the shift in the limit. We can only hope that we make this next shift more smoothly, with less pain, unemployment and carnage.

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