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What Comes Next, Part 1: A Useful History Of The 20th Century

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Submitted by Jeffrey Snider via Alhambra Investment Partners,

Value as a foundation seems almost too literal to be an economic or financial concept, but it is perhaps the bedrock association that makes the economic system. We are used to aspects like profits and money, even inflation, but those are all symptoms of the ever-changing world surrounding value. Karl Marx understood very well how deeply embedded value was even by the 1850’s, unleashed in just a few centuries’ time as Adam Smith’s wonderful summation recounted how mercantile capitalism was more than just some “invisible hand.” For Marx, he knew that the very rise of modern economic orientation would spoil all his plans and conceits for instituting equality as he saw it; that is why his revolution had to be worldwide and comprehensive, to totally and completely destroy all notions of value in order to start over.

I wrote quite exhaustively (as I typically do) about the socialist strands in our economic history here, but it is, I think, useful to emphasize the role of value in theory that animates if not all of the historical progression of the elements that define our systemic operation than at least a majority portion. As early as the 1830’s, “reformers” of all kinds were beginning to examine how value might be “exploitable” as means to achieve desired results.

In the 1830’s, Robert Owen, a Welsh “reformer”, had tried repeatedly to convert currency to labor function. Time-based currency was an idea where you were “paid” in time for labor (notes actually denominated in hours), exchangeable for products “valued” under the same terms. The idea was simple, namely that all labor should be equal so that inequality of class would be abolished. Time currency, then, meant that there was no value to labor, only to goods, which presented inordinate problems in valuing goods as they were also intermediate to labor.

Owen, therefore, had very little luck in actually creating a workable system outside of that theory. He had close experience with a similar system, though wholly opposite his egalitarian intentions, in the “truck system” of early 19th century Britain. Owen was a part-owner of a mill and it was typical practice to pay mill workers in tokens (either in part or even in full) that were only exchangeable at the mill owner’s “truck shop.” Since the owner would often supply the worst kinds of inferior goods and charge the highest prices for them, Owen realized the relative exchange equation here was to devalue labor; he intended to accomplish the opposite thinking it would not only be more equitable to labor but far more efficient for everyone (instead of benefiting the mill owner almost exclusively, a far more fair labor “value” might benefit all of social society).

Socialists independent of Marx, including Owen who had influenced Marx with his time currency, shared many of his ideals if not his fervor for destroying everything in a clean and devastating break. For many, money could be the agent of change, whether in the course of redistribution (including government taxation and “spending”) or outright redefinition. If they would not go so far as to destroy value from the root, then they thought it, as Owen, potentially effective to manipulate money as a substitute or proxy for value. And a great deal of socialist contribution had little to do with equality other than utopian ideals of creating “optimal” outcomes. The shared methodology was simply to reduce individuals to cogs in order to more cohesively control the macro mess of them.

The development of economics as both a study and a political expression is certainly non-linear, but in the 20th century there is a clear progression; we started in gold and ended under much less certain terms, a process that seems chaotic, and often was, but with its own guiding if largely invisible hand. The battles in the various marginal directions seemed to take shape over money and currency, but in reality it is and has always been about value. The intent at times has been to separate money from value, but the grand mistake seems to have been where theorists simply assumed that all money and currency are eventually perfect substitutes. That may be true in at least one monetary function, payment terms, but has proven far more stubborn in practice across the whole spectrum of monetary discipline.

At the start of the 20th century, value was relatively easy to describe and its role was just as straightforward. The decade of the 1890’s proved that inordinately (as it was known up until the 1930’s as the Great Depression) where value was imposed on financial society through the act of convertibility. Numbers and quantitative descriptions did not apply, which is why so often the ire of “experts” is invoked against this type of expression, but it comes down to a simple and collective judgment (not aggregated) of the people to disassociate their property from financial components; the latter being judged un-valuable with respect to the former.

The result was banking panics and depression, negative outcomes which opened the door to anyone promising relief including through the growing collectivization of monetary affairs. Nobody likes a panic, and certainly not a depression, but to claim that they hold no role in systemic health is to ignore reality, to ignore value. But that is exactly what occurred at the start of the 20th century, given great vigor after the Panic of 1907 even though it produced only a minor (in historical terms) economic dislocation. The institutional intention toward “elasticity” in currency was not just a means to end bank panics (it worked out poorly anyway) but to disrupt the balance of power in the economic arrangements toward the socialist expression of the whole rather than individuals.

For some, that meant egalitarian ends, for others just the quest for economic utopia largely of mathematical origin in those optimal outcomes. In any case, the balance of the last century and the first parts of this one all trace in governing dynamics to that introduction. What we can piece together, quite seamlessly, is different tones of aspiration and methods in trying to attain these largely socialist ideals.

The American changes after the Panic of 1907 were just in many ways catching up to Europe, but at the start of World War I the gold standard would end and never truly return. All the theories, policies and programs put together thereafter were simply means to exercise greater control out of that momentous, cardinal shift – with gold gone, the opportunity to refashion was there. The problem was always value, in that it survives the deeper defenestrations of money and currency, even if only to interrupt, often terribly, these “best laid” plans for achieving either equality or optimal outcomes.

Three AGES

The first age, out of necessity of the Great War, was monetary in character; the first international experimentation with fiat currency. As with most things, it started out as just a means to a specific end but overgrew and lasted far longer. The 1920’s were not simply a Golden Age particularly of American economic prowess and remarkably consistent monetary programs (how could it be, with what came immediately thereafter?), but were marked by serious incursions of monetary experimentation. The gold standard that was reworked after the war was by no means a traditional gold standard, featuring more than enough clearance for central banks to begin exercising “flexibility” outside of the more rigid historical arrangements. The results were predictably disastrous and monetary in nature.

There is no mystery as to why the first socialist age ended in bubbles and depression (and then total war) and why they revisited again only so far in the third – those were both overriding of monetary character. The second was not, taking the form of fiscal dominance. The Federal Reserve today takes credit for the post-war period as if it were an island of perfect competence, but it was far from it as the Great Inflation (which marked the turn from the second age into the third) showed all too well.

In that respect, the British experience in the second age is quite emblematic of these marginal shifts. Churchill was a hero, a great man of all history, on May 8, 1945 (V-E Day) and out of office six weeks later; and not just barely, but in one of the most lopsided electoral shifts in democratic history. The Great Depression had shown the dangers of monetary overdrive, but not the relevant lessons taken from central command in instilling that impulse. Instead, economic thought roundly viewed the Great Depression as a systemic flaw of capitalism (socialists taking advantage of the opportunity), and if money wasn’t the answer then government and their treasuries was.

After 1945, Britain nationalized a huge proportion of their industrial base – there were 16 or so car manufacturers in the 1940’s but only one was left by the 1960’s. And so it was that the welfare statement and the ubiquitous if ephemeral drive for “full employment” became the objects of economic policy, not through central banking, but through government Keynesianism. It was mismatched from the start because value imposed restrictions, especially where the pound was supposed to act as a co-reserve to the dollar. The British government wanted heavy fiscal socialism as a means to full employment, but the pound meant that the people outside of that still had influence which they exercised intermittently to keep the utopian ideals restricted to at least less risible budget plans. This transition to fiscal dominance was thus highly irregular and often harrowing.

By the late 1960’s and especially the 1970’s, it was almost all over. The rise of Thatcherism meant the end of nationalizations, the return of private industry and the private economy if not a total repudiation of the welfare state. The fiscal turn in the second age had proved far too unwieldy, and by the end of the 1960’s was once again expecting far more monetary contributions. That was true even in the United States, with vestiges of the New Deal remaining in place but augmented by fiscal experimenting in the 1950’s and especially the 1960’s. The Great Society and the War on Poverty were perfectly consistent with the fiscal focus of the second age, and only by the end was it “necessary” to employ heavy monetarism again – not in restoring value and sense, but in a last ditch to save it all before it became once more unworkable. Value was the great upheaval in the Great Inflation, but instead of listening and seeing that money was never going to be a perfect substitute, at least enough, to allow overcoming the value constraint, theorists simply went still further just as they had in transitioning from the first age to the second.

Part 2 coming soon...

 

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Sun, 06/14/2015 - 19:39 | 6196470 JustObserving
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Best estimates are that 200 million died in wars and oppression in the 20th century.  One would guess that it will be ten times more in the 21st century since we are so much better at killing and oppression today

http://necrometrics.com/all20c.htm

Sun, 06/14/2015 - 20:17 | 6196522 Tasty Sandwich
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About two percent of the US population died in the civil war.  (Approximately 620,000 / 31,000,000)

Two hundred million is less than three percent of current world population.

Sun, 06/14/2015 - 20:45 | 6196575 NoDebt
NoDebt's picture

Agreed.  War has proven to be an utterly inadequate method of population control the last century or two.  Perhaps that poor performance will be significantly improved next time around thanks to nuclear weapons.

Sun, 06/14/2015 - 20:53 | 6196592 New_Meat
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RAH made the point decades ago that the world population was invariably higher at the end of the war than it was at the beginning.

Also made the point that nuclear weapons were sledghammer against roaches.

- Ned

Sun, 06/14/2015 - 21:08 | 6196619 Manthong
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Not exactly correct on the name of that third age..

It should be called “Central Banks and Financial Fascism”

 

Sun, 06/14/2015 - 21:09 | 6196626 SWRichmond
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Where is LTCM?

Sun, 06/14/2015 - 21:07 | 6196620 Tasty Sandwich
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Yes, I'm not disagreeing with JustObserving on that front.  I just think percentages do a better job of putting things in perspective.

I expect most humans to be dead by 2030 and extinction by 2050.  War will be one of the many factors.

Sun, 06/14/2015 - 21:40 | 6196696 Sandmann
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5 million Germans died in WW2 or around 6% 1935 population

Sun, 06/14/2015 - 21:48 | 6196712 Sandmann
Sandmann's picture

US plans for nuclear strike on USSR in 1950s envisaged 50 million dead

Sun, 06/14/2015 - 19:44 | 6196478 lawyer4anarchists
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It has been over since before it "started".  We have been trapped without consent in this "free" country since the civil war. If not before. http://www.thetruthaboutthelaw.com/they-tell-big-lies-about-our-supposed...

Sun, 06/14/2015 - 19:52 | 6196489 TuPhat
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There will be more killing but the next world order will not be what the bankers want.

Sun, 06/14/2015 - 20:04 | 6196504 Rektors
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.

Sun, 06/14/2015 - 20:08 | 6196508 MonetaryApostate
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tldr;  Summaries save sooooo much work, we don't need history lessons we need people who understand clearly enough to explain who, what where, when, why, and how...

Sun, 06/14/2015 - 20:50 | 6196568 MATA HAIRY
MATA HAIRY's picture

this stuff about marxism and socialism etc is all just nonsense.

 

it is NOT the capitalism vs socialism spectrum that matters.

What matters is the size of the nation, how white (how homogeneous) the nation is, how small the electoral districts are, how much power is put in the hands of the smallest electoral districts, how responsive the governmental structure is to the will of the people, and how decentralized the nation is.

 

But no one has any idea what i am talking about. Why? Because your glorious Thought Leaders do not discuss these aspects, even though they are right in your f*cking face every time you think about the USA as compared to any other western nation.

 

But instead of talking about these important characteristics, it's just the same tired old socialist/marxism vs capitalism discussion.

Mon, 06/15/2015 - 01:19 | 6197010 trader1
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I see you've read Kohr, but Kohr never made a point about the racial aspects of a small nation.

 

 

 

 

Mon, 06/15/2015 - 03:23 | 6197118 MATA HAIRY
MATA HAIRY's picture

never heard of Kohr, but has Kohr read ME?

 

Have you read fresia and Holton?

Mon, 06/15/2015 - 15:15 | 6199019 trader1
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1957:

“Wherever something is wrong, something is too big. If the stars in the sky or the atoms of uranium disintegrate in spontaneous explosion, it is not because their substance has lost its balance. It is because matter has attempted to expand beyond the impassable barriers set to every accumulation. Their mass has become too big. If the human body becomes diseased, it is, as in cancer, because a cell, or a group of cells, has begun to outgrow its allotted narrow limits. And if the body of a people becomes diseased with the fever of aggression, brutzdity, collectivism, or massive idiocy, it is not because it has fallen victim to bad leadership or mental derangement. It is because huma beings, so charming as individuals or in small aggregations, have been welded into overconcentrated social units such as mobs, unions, cartels, or great powers.” 
Leopold Kohr

http://www.amazon.com/The-Breakdown-Nations-Leopold-Kohr/dp/0710208898

Sun, 06/14/2015 - 20:50 | 6196585 lasvegaspersona
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I'm not sue there is a point to this essay.

Each idea tumbles over the next without really telling us what to think of it all.

Marx was wrong...but I knew that...      http://fofoa.blogspot.com/2010/07/debtors-and-savers.html

The real changes we are likely to see are not even mentioned....


Sun, 06/14/2015 - 21:11 | 6196632 Wilcox1
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Very nice piece. Love the historical context. Part II is at David Stockman's ContraCorner and of course the Alhambrapartners website. This is a puzzle solving key--Value. Socialism is not going to work. Any Value provider knows it. 

Sun, 06/14/2015 - 21:38 | 6196689 Sandmann
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Poor article revealing shallow knowledge. 1920s US boomed because of gold imports and Fed policy; 1920s UK was in Depression because of Bank Rate hike in 1921 and Debt repayment to US consuming 40% Govt spending plus return to Gold Standard at $4.8786 causing General Strike 1926 and wage cuts.

Spencer-Churchill was kicked out in 1945 - he had never been elected to head a government. Last election 1935.......he came to power 1951 and set off postwar inflation.

Labour 1945 did not nationalise any car firms - railways, coal, steel, transport, electricity, gas - largely to supply capital since these sectors had lived on subsidy anyway - railways had been subsidised for years as private companies; coal needed huge investment.

Car firms nationalised 1970s to reorganise. BP nationalised as oil company 1913 at Spencer-Churchill's instigation to guarantee Iranian oil to Royal Navy.

UK insolvent 1940 with 6 weeks Forex left. UK 1947 - 50% GDP was Marshall Aid. Rationing bread 1948 to divert food to Berlin. Wartime rationing food, furniture, clothing lasted into 1950s.

This article is glib and US-centric as the only victor of both world wars it did very well and boomed. War has been so good for US business.

Sun, 06/14/2015 - 22:47 | 6196835 Faeriedust
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Frankly, I think the author assumes that the audience not only knows his particular definition of "value", but shares it.  That means he's preaching to a choir somewhere over in right field, but I don't even have the hymn book to read along, so I'm rather in the dark. I've seen numerous interpretations of these financial events, and none of them looked at all like this.  Most of the others were also a good deal clearer.  Except for the other recent article that tackled "value" from a Marxist perspective.  It makes me wonder if the concept is even meaningful, since two different LONG articles from diametrically opposed perspectives have been utter gobbledegook. 

Mon, 06/15/2015 - 00:27 | 6196950 Lordflin
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Separating money from value wasn't an experiment it was a con...

Mon, 06/15/2015 - 04:43 | 6197153 DontGive
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https://en.wikipedia.org/wiki/Conflagration

 

Broken window theory at its best.

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