The Lost Secrets of the Federal Reserve

I have a very esoteric mind....if I could just remember where I put it. A. Burns

The problem with esoteric institutions, from the Priests of Ancient Egypt to today's Federal Reserve is the difficulty in retaining the well-hidden secrets these institutions are built upon.  The more successfully esoteric the institution, the greater the risk "essential"- a claim deserving of vigorous debate, in my view- secrets will be lost.

The priests of Ancient Egypt, whose understanding of Nile flood cycles, inter alia, made them one of the first economic policy makers in the historical record, hid their knowledge of seasonality behind a dense a screen of esoteric theology.  The science, or exoteric understanding of the effects of the earth/sun relationship was left to younger cultures, uninhibited by Egyptian taboos on such studies, to "discover."

The Egyptians worshiped the Sun and made sacrifices and offerings thereto (thus enriching the priests).  The Greeks openly theorized about the sun and many other things and thus developed a more accurate world view.

In more modern times, the US Federal Reserve, the Creature from Jekyll Island, as some have called it, was formed in secret, around secrets.

I'd like the share some of those secrets (assuming I've actually divined them- an assumption the reader must determine for himself):

1) Industrial Capitalism is (and can continue to be in the future) so efficient that an ever increasing percentage of an ever increasing number of people can do nothing and yet receive the necessities of survival.

2) The social utility of money- i.e. the elastic variety of modern Central Banks- is (and has been for decades) decreasing as  an allocator of capital resources and increasing as an allocator of (ever increasing) labor resources.

In other words, the problems of economics once a nation industrializes (and more so when nations trade freely) are not on the production side (the already sufficient pie, if you will, can yet grow) but on the distribution side (how shall the pie be sliced). 

Consider, as an example, US agricultural production:

• 1900:  41 percent of workforce employed in agriculture
• 1930: 21.5 percent of workforce employed in agriculture;
• Agricultural GDP as a share of total GDP, 7.7 percent
• 1945: 16 percent of the total labor force employed in agriculture;
• Agricultural GDP as a share of total GDP, 6.8 percent
• 1970: 4 percent of employed labor force worked in agriculture;
• Agricultural GDP as a share of total GDP, 2.3 percent
• 2000/02: 1.9 percent of employed labor force worked in agriculture (2000); Agricultural GDP as a share of total GDP (2002),
• 0.7 percent

Source: Compiled by Economic Research Service, USDA. Share of workforce employed in agriculture, for 1900-1970, Historical Statistics of the United States; for 2000, calculated using data from Census of Population; agricultural GDP as part of total GDP, calculated using data from the Bureau of Economic Analysis.

We, in the US, can not only feed ourselves, we can generate an exportable surplus using less than 2% of labor resources.  Food is easy, which explains, in part, the obesity problems of the modern world.

Food, houses, clothes, transportation (most likely not of the automobile variety), education and health care, to name a few key "necessities" of life can be produced in excess of demand.  The problem, in my view, lies in how to distribute the goods. 

One solution, chosen by men steeped in the tradition of the Protestant work ethic, was the use of elastic money to keep idle hands from "the devil's work."  Rather than a massive expansion of welfare, which, I believe, would be more intellectually honest and restrict money's social utility to capital resource allocation- i.e. the hard money advocated by Ron Paul, inter alios- money would be (and still is, with decreasing efficiency) used to soak up excess labor resources and "explain" the vagaries of goods distribution within a society to modern sensibilities.

Paradoxically, Rep. Paul favors not only hard money, but also further decreases in transfer payments, i.e. welfare and "make work."  Hard money, in my view, generates increased efficiency- more goods for less labor- which, in turn, generates unneeded labor resources.  Hard money "end the Fed" advocates need to ponder the unnecessary, but existent population problem.  Swift's modest proposal of eating Irish babies, which we can expand, in the modern world, to eating unemployed people (Soylent Green!) strikes me as most unsavory.  (I couldn't resist)

State enforced population restriction, like China's "one child" policy could be used, at risk of imposing human for "natural" selection on humanity.  How would we know which humans are worth bringing to life?

The esoteric solution of the Federal Reserve, aided by the views of JM Keynes, worked, in my view, tolerably well so long as the secret of excess labor was understood by its leaders and national capital infrastructure wasn't in need of retooling.  Greenspan's statistical fumblings with productivity coupled with his anti-welfare/anti-inflation views suggest to me that the secret was not well transmitted as does the lack of import placed on previously believed key elements of the Fed's role in fomenting social stability embodied in Humphrey Hawkins legislation.  The financial sector, taking its cue from the confused Fed thinks its function is to make money rather than allocate capital resource.

The secret has been lost.

Thus, it seems to me, the current problem of long term unemployment.  The policies of the idle wealthy, or leisure class, desirous of maintaining and bequeathing to their progeny their position at the head of the pie cutting table via reductions in transfer payments implemented by the financial sector risk increased social tensions, and increasingly widespread populist uprisings, such as we are witnessing in Egypt and other nations. 

Solving this problem, in the context of the need to recapitalize our transportation system away from the automobile (and goods trucking) towards more efficient means, will be most difficult unless we are willing to slay a few sacred cows. The protestant work ethic inspired elastic monetary system insulates the real (production) sector from necessary conforming to new reality (decline in US and world oil production) pressures until a crisis is reached.  Hard money would make the necessary transportation (and other sector) changes easier, but would increase the social tensions noted above.  Increased transfer payments in the proposed hard money system should alleviate these tensions. 

Sadly, as noted, the hard money advocates are not fond of such transfer payments.  Perhaps they will be fonder of such socially calming methods when the turmoil in the Middle East rears its head closer to home.