“Ohhhoh!” Perry slapped his thigh. “I see! If anyone saves income that he receives from the cycle, it is thrown out of balance and over-production results.”
“Exactly. In the problem that we have just gone through I cast the banker as the thrifty villain simply because banks were the worst offenders. They charged as much interest as they could get, and spent very little on consumption, whereas the workers, by and large, had to spend all they got as they went along. But all were guilty of the economic crime of not spending all their purchasing power and thereby saving themselves into bankruptcy, even a father with his life insurance policy and baby with his penny bank.”
“Wait a minute, Master Davis. It seems to me that money saved eventually finds its way back into purchasing, even after several years. It all balances out in time. There should have been some consumers spending their savings in that first cycle to make up for those who managed to save.”
“There were, of course. If savings are actually tucked away in a sock, it doesn’t do much harm. It balances out with just a small carry over of inventories. But most money is not saved that way. Ordinary people invest in life insurance and savings accounts. Industrialists and financiers put it into capital expansion—use it to increase production. In each case it goes into new production.”
“But how can that be harmful? We have just shown that money used for production creates new purchasing power to buy the goods produced.”
“That’s true but you are looking at just one part of the picture. Listen to me carefully. This is the crucial point: Potential purchasing power not spent for consumption but saved and invested for production in a later cycle has appeared as cost in both cycles. When it reappears as purchasing power in the second cycle, it is needed there, and still leaves the first cycle out of balance. For example, if money saved out of your playing card cycle were saved to finance a jelly bean production cycle every shekel of it would appear as cost in the jelly beans and would be needed to purchase jelly beans. It’s not available to buy playing cards. To make this exposition rigorous I should mention the possibility that capital funds are occasionally spent on consumption and that money is sometimes taken out of production entirely, but this also produces unemployment and its attendant evils. The Panic of 1907 was of this nature, artificially created by the Morgan Bank and associated interests.
“But let’s get back to your playing card factory. It is in trouble. These cycles continue. Each time the bank owns a bigger piece of your business and more of your employees are out of work. Eventually they are in dire distress and private charity cannot carry the load. Congress provides relief. At first Congress tries to pay for relief with new taxes but you business men howl that you are losing money now, which is true. Taxes on everybody—such as the sales tax—rob Peter to pay Paul, and increases purchasing power not a whit. It helps a little to tax the higher bracket incomes but in the long run that inhibits production by striking at a source of capital expansion. Congress is forced to look elsewhere for money to subsidize purchasing power and provide relief, for the spread between production and purchasing power has grown enormous, more than thirty percent in your day, billions of dollars a year. Some congressman from the middle west who cut his teeth on the Bryan campaigns proposes that the government print greenbacks to provide relief for the unemployed, but the bankers condemn this as ‘unsound’, ‘inflationary’, ‘radical’, ‘striking at the roots of our institution’. They have great political power and carry their point. There is but one thing left to do and the government does it. It borrows for relief from the banks. True, the banks have very little cash money but the same law that permitted them to lend you money out of the inkwell enables them to lend to the government with the whole United States as security, the security being represented by interest-bearing tax-free bonds. The national debt climbs sky high but the system is held together a few more years, until the banks own practically everything, even the government.”