Thou Shalt Not Crucify Labor
on the Cross of Paper Money
A Message to American Labor
Antal E. Fekete
Nov 27, 2008
The "crime of 1873"
My title is a paraphrase of
the 1896 battle-cry of William Jennings Bryan during his presidential
bid. He was talking about 'crucifying mankind on a cross of gold'.
Bryan was protesting against the unconstitutional closing of
the U.S. Mint to silver. Congress inadvertently suspended the
unlimited coinage of the standard silver dollar, which it had
no authority to do under the Constitution. Bryan called it "the
crime of 1873".
No battle-cry was issued during
this year's presidential campaign by the finalists in protest
against our present unconstitutional paper money system, even
though it has started a wave of unprecedented unemployment that
would sweep through the land in the wake of the current financial
crisis and the official response to it: further serial cuttings
of the rate of interest.
Politicians have long ago vacated
the field of warning people about the danger caused by violations
of the monetary provisions of the Constitution. It is now incumbent
on the leadership of American labor to call the workers to rise
in protest against the job-destroying policies of the government.
Please take a few moments and bear with me as I go through a
simple monetary explanation of the job-destruction process that
has been going on in America for the past thirty years through
serial cuttings of the rate of interest, that will reach fever-pitch
Serial rate-cuts destroy the wage
Suppose you are a worker taking
home $50,000 a year in wages. When your income-flow is capitalized
at the current rate of interest of, say, 5 percent, you arrive
at the figure of $1,000,000. The sum of one million dollars or
its equivalent in physical capital must exist somewhere, in some
form, the yield of which will continue paying your wages. Capital
has been accumulated and turned into plant and equipment to support
you at work. Part of your employer's capital is the wage fund
that backs your employment. Assuming, of course, that no one
is allowed to tamper with the rate of interest.
Suppose for the sake of argument
that the rate of interest is cut in half to 2-1/2 percent. Nothing
could be clearer than the fact that the $1,000,000 wage fund
is no longer adequate to support your payroll, as its annual
yield has been reduced to $25,000. This can be described by saying
that every time the rate of interest is cut by half, capital
is being destroyed, wiping out half of the wage fund. Unless
compensation is made by adding more capital, your employment
is no longer supported by a full slate of capital as before.
Since productivity is nothing but the result of combining labor
and capital, the productivity of your job has been impaired.
You are in danger of being laid off - or forced to take a wage
cut of $25,000.
Lemming-like rush into certain disaster
I have news for you. Employers
are not in the habit of compensating for the destruction of capital
caused by falling interest rates. Rather, they welcome the cut
as manna sent from heaven. They are kissing the hand that is
strangling them. They are as badly misinformed about the lethal
effects of a falling interest rate structure as the rest of society.
They confuse a low interest rate structure with a falling
one. No less than employees, employers are hurt by the destruction
of capital caused by serial rate cuts. After all, it is their
capital, too, that is being destroyed. Nevertheless, they accept
at face value the official propaganda line that "falling
interest rates are good for you". Employers are like lemmings
running to their own certain disaster.
The "crime of 1971"
In the euphoria of celebrating
the advent of the irredeemable dollar in 1971, politicians and
economists have 'forgotten' to look at the untoward consequences
of the New Brave World of synthetic credit. Not only was the
dollar destabilized by the 'crime of 1971'; interest rates were
cut adrift as well. The U.S. Treasury was soon forced to print
16 percent coupons on its 30 year bonds which would not otherwise
This did not present much of
a problem to the Treasury, since interest on bonds was now payable
in irredeemable dollars. The same paper, the same amount of ink,
and the same printing press would produce the coupon at the same
cost, whether it carried the figure 4 or 16, with which the
obligation would be discharged.
However, bringing down the
rate of interest from 16 percent to its normal level of 4 percent
was a different story altogether. It meant that the rate had
to be halved twice from 16 to 8 and from 8 to 4 percent, destroying
three quarters of the wage fund. Is there any wonder why so many
well-paid American industrial jobs were driven offshore in the
intervening years, as production was being outsourced?
Academia and media were silent
on the real cause of the de-industrialization of America: the
destruction of capital through serial rate-cutting. They are
still silent as they expect that the Federal Reserve will do
more money magic and pump still more money into the economy,
causing rates to fall still more. They are oblivious to the fact
that this will destroy still more capital in the process, pulling
more rug from underneath employment.
The problem is vanishing capital.
During the past thirty years capital was destroyed across the
board as the long-term rate was pushed down from 16 to 4 percent,
and the short-term rate from 22 to 1 percent. The process is
insidious: only one in a million can identify the causal relation
between vanishing interest and vanishing capital. As a result
the captains of industry are not aware of what is happening to
the capital of their enterprise until it is too late and they
are forced to fold tent. Even then, they have no idea what has
hit them. It would never cross their mind to blame irredeemable
currency and the serial cutting of interest rates for the disaster.
Hat in hand, they go to Washington to beg for bailout money with
which they can shore up their capital structure. They don't realize
that Washington will claw it all back just as soon as the next
round of rate cuts are announced.
Make no mistake about it: vanishing
capital does not disappear without a trace. It is being siphoned
away clandestinely from the capital account of businesses, to
benefit the issuers of irredeemable dollars and their cohorts.
These honorable gentlemen cut rates with their right hand and
grab the obscene profits thus generated on their bond portfolio
with their left hand. It is legalized embezzlement. Keynesians
say that the government can turn the stone into bread through
driving down the rate of interest to zero. It would be more accurate
to say that the government, in a vampire-like fashion, sucks
the blood of labor through the bleeding of their wage fund.
The fate of the auto industry
As a result of vanishing capital
the American auto industry, not so long ago the envy of the world,
is tottering at the brink. The statistical likelihood of the
three giant auto-makers running out of capital at the same time
is nil. The fact that they do is the evidence of outside interference.
The capital of the auto industry has been eroded and ultimately
destroyed by the serial rate cuts of the Federal Reserve. It
is true that the industry has been adding new capital in the
form of state-of-the-art technology. But it could not keep up
with the relentless serial rate-cutting. The Fed can cut rates
faster than the auto industry can build and equip new factories.
The blame for the suffering
should be put squarely on the criminal check-kiting conspiracy
between the Treasury and the Federal Reserve. They issue and
swap liabilities which they are neither willing nor able to meet.
It is a charade, pretending to serve the interest of the national
economy when, in fact, they are destroying the nation's capital.
The destruction is not visible
to the naked eye. The details are in the book-keeping. That's
why the sabotage is so hard to detect. As the rate of interest
is being pushed down, it makes inroads on the wage fund. Employers
are unable to meet their payroll because the falling interest-rate
structure calls for ever larger capital to fund it. Unemployment
is the result, which is becoming widespread and chronic.
Under a stable interest rate
structure none of this would happen. The auto industry and its
workers would have a bright future, as they did before the 'crime
of 1971' hit them. Every worker who is being laid off should
be reminded of that fact. They should know that they are being
sacrificed on the altar of Mammon. They should understand that
they are being crucified on the cross of paper money.
Capital destruction at an ever faster
Please also note that the rate
of capital destruction is accelerating as we are getting closer
to the black hole of zero interest. In principle halving the
rate can continue indefinitely. In reality, ever smaller absolute
cuts will have ever greater destructive effect on the wage fund.
While in the 1980's it took an 8 percent decline to wipe out
half of the wage fund, right now a 2 percent, and thereafter
a mere 1 percent cut will do the trick, causing the same amount
of damage to employment. This means that the level of economic
pain increases ever faster, soon reaching the point where it
will become unbearable.
The situation is more than
desperate. The political process has failed. The president-elect
has committed himself to the status-quo. He will not challenge
the unlimited power usurped by the Fed, as his nomination
of the president of the Federal Reserve Bank of New York to the
post of Treasury Secretary indicates. This nomination evoked
the comment, echoed in the New York Times on November 25, that
"Geithner deserves retirement, not promotion". (He
is 47.) Obama's utterances during the election campaign seem
to suggest that he believes in Keynesian prestidigitation, turning
the stone into bread through serial cuts in the rate of interest,
and in Friedmanite money magic of the printing press.
Labor's finest hour
The only remaining hope the
country has is that labor will not tolerate the ongoing destruction
of capital. It will not take it lying down any more. It will
take to the streets and confront the small reactionary elite
running our monetary regime, including Geithner. This is the
most destructive system ever devised: the regime of irredeemable
currency. Every time it has been tried in history it failed miserably.
As the current crisis clearly shows, this time is no different.
What is different is that this time the entire world is on irredeemable
paper money. That has never happened before. Accordingly, the
stakes are immeasurably higher as irredeemable currency is getting
ready to self-destruct.
Labor must take the initiative
and demand that Congress put an immediate end to the mindless
destruction of capital. Congress should stop the Federal Reserve
from pursuing a monetary policy of open-ended deliberate interest-rate
cuts. The economy is now like a runaway train with brakes disabled,
entering a downhill section of tracks. Crash is certain. At the
end of the run the country could be completely denuded of capital,
with a large part of its labor force idled.
Labor could be the savior of
the country in forcing a return to constitutional money at the
eleventh hour, by demanding that the Obama administration open
the U.S. Mint to gold and silver. That measure would enable the
brakes on the money-train. It would stabilize foreign exchange
and interest rates and stop the shredding machine, now spinning
out of control, from destroying capital. This would be labor's
finest hour: saving the United States from financial ruin and
This country has an intelligent,
dedicated, and industrious labor force. The best in the world.
It should step into the breach. Time for street action has come,
if we want to prevent blood from flowing in the streets later.
By the same author:
Revisionist View of the Great Depression, May 11, 2002
The Central Banker, Quartermaster
General of Deflation, January 1, 2003
Gold Is the Cure for the Job-Drain,
September 23, 2003
Real Bills and Unemployment,
September 26, 2005
Unemployment: Human Sacrifice
on the Altar of Mammon, September 30, 2005
Is Our Accounting System Flawed?
June 16, 2008
Revisionist Theories of Depressions:
Can It Happen Again? November 4, 2008
These and other articles
of the author can be accessed at the website
Calendar of events
Szombathely, Martineum Academy, Hungary, last weekend of March, 2009
Encore Session of Gold Standard University Live.
When Will the Gold Standard Be Released from Quarantine?
The Vaporization of the Derivatives Tower
Labor and the Unfolding Great Depression
Francisco School of Economics,
Money and Banking, a ten-week course based on the work of Professor
announcements will be made on the website:
Nov 26, 2008
Antal E. Fekete
Memorial University of Newfoundland
Professor Antal E. Fekete was born and educated
in Hungary. He immigrated to Canada in 1956. In addition to teaching
in Canada, he worked in the Washington DC office of Congressman
W. E. Dannemeyer for five years on monetary and fiscal reform
till 1990. He taught as visiting professor of economics at the
Francisco Marroquin University in Guatemala City in 1996. Since
2001 he has been consulting professor at Sapientia University,
Cluj-Napoca, Romania. In 1996 Professor Fekete won the first prize
in the International Currency Essay contest sponsored by Bank
Lips Ltd. of Switzerland. He also runs the Gold Standard
Copyright ©2005-2010 by A. E. Fekete<