Every so often we "open up" this space, and use it to provide a forum from which to present the views of various economic writers and thinkers. In the past few years we've so featured the work of Walter Prescott Webb, C. Vernon Myers, and others. Well, the following essay—reprinted with permission from Mr. R.E. McMaster's economic newsletter, The Reaper—struck us as just the sort of common sense analysis that MOTHER EARTH NEWS' readers would appreciate and profit from. R.E. has, in relatively few words, cut through much of the mumbo-jumbo that characterizes the public statements of the economic "establishment," and revealed the simple, beautiful truth that any nation's real wealth is based solely upon the richness of its natural resources and the productivity of its people.
Bread Is Basic
When we talk about economics these days, the words and phrases which quickly fill the air are: "supply side economics," "marginal utility," "Chicago vs Keynesian economics," "monetary and fiscal policy," "inflation," "petrodollar recycling," and so forth. All these buzz words are evidence of the frame of reference from which they spring, that of urban intellectuals. They are products of a culturally sophisticated age, marked by mathematical complexity and computer technology. Collectively, economists focus on money as an absolute in the financial/economic system. Money is king, and calls all the shots. Money is the measure of wealth and worth, both net and personal. We are dealing here with a mind set that saturates our society.
In a few moments of fleeting fantasy, let's assume that we are the remnant of a boatload of people. We are shipwrecked and marooned upon an island in the Pacific. All we have are the clothes on our backs and the resources of the island, in terms of economic goods. With no hope of rescue, we start to build an economy. We begin with the basis of economic production:. land and labor. These two must work in harmony for there to be economic progress and production. (Notice that there has to be production before there can be consumption. Our economic order today often gets the cart before the horse.)
Assuming that our island is located in a moderate climate, receives ample rainfall and sunshine, is blessed with lush vegetation, trees, fertile valleys, streams, and an abundance of animals, we have the foundation necessary for producing economic wealth. Certainly, we should be thankful that we aren't marooned on a desert island. The resources available on an arid island wasteland make the production of economic wealth far more difficult, if not impossible.
Next, let us assume that the men and women who were shipwrecked with us are of strong, hard-working stock. So, our labor resource is the best possible, too. If we were marooned with a group of elderly people, or young children, or sick or lazy individuals, we would quickly learn that our labor force was marginally productive. So, it becomes readily apparent that high quality land and labor are the raw materials of maximum economic productivity, and that both somewhat depend upon the "luck of the draw." Climate, natural flora and fauna, water, and minerals are real environmental assets. Good physical condition, moderate age, and a positive mental attitude toward work are also the "luck of the draw" in the case of our shipwrecked passengers: (This is also true when a new government comes to power in a nation.)
With favorable land and labor, we begin to produce capital ... houses, fishing gear, canoes, bows and arrows, cooking and eating utensils, etc. Notice that land and labor are the raw materials for the production of capital, and subsequently, goods and services. What goods will be produced? The goods most desired. Only if a good or service is desired, will it have value. It is questionable, particularly initially, on the island, if gold will be viewed as being very valuable. Fish, fruits, a horse, a milk cow, shelter, boats, and bows and arrows will probably be in the greatest demand initially. These items have value. Only after our new culture is established will we then view gold as having value. Then, and only then, will gold serve, as it has always served, as a medium of exchange, which holds its value as a store of wealth and is easily divisible, recognized, and nondestructible. Gold only becomes valuable after the basic biological needs of our group are met.
We are lucky enough to establish a gold mine on our island after the first three years of civilization. Some members of our work force mine the yellow metal and produce gold coins. The gold coins have value, because they represent actual productivity... toil and sweat. Our rice farmer is willing to trade "x" number of bushels of rice for "x" number of gold coins, because he recognizes that he is receiving value for value. Both rice and gold are the result of productivity. All productivity on our island, all good and services, stem from the earth. They are made possible by labor. THIS IS ALSO TRUE TODAY IN OUR SOCIETY. WE JUST FAIL TO RECOGNIZE IT!
All goods and services, as well as real money, gold and silver, are the result of work, the expenditure of energy. Recall the first and second laws of thermodynamics. Energy is neither created nor destroyed. It is only transferred, and something is always lost in the transfer. Economics operates in harmony with these laws. This is just plain, good old country economics. It is a far cry from city-centered, fictional, debt-created wealth.
On our island (in the rural country, too) goods, services, and money are produced into being. The Federal Reserve, on the other hand, simply creates money out of thin air. The Fed spend money into circulation. This is what inflation is all about, the creation of something (money) out of nothing.
Why did we go to all the trouble of creating this fantasy? Primarily, to reprogram our thinking. We no longer think in terms of who and what creates true economic prosperity. The land is the ultimate source of all wealth. The labor of men produces the wealth which is latent in the land. From this observation, we should see that when the land is unfruitful, such as during times of drought, the net result for the economy at large will be decreasing economic prosperity, less wealth. This is why drought and depressions go hand in hand. The land is less productive, so less wealth is produced, and hard times hit.
Since all new wealth comes from the land, it is critical that we note that farm income is approximately 70% of ail new raw material income—new wealth. In a very real sense, then, agricultural production is a governing factor in our economy. The $20 billion agricultural loss in 1980, due to drought, will be devastating for the economy, long-term.
Carl H. Wilken, an American farm economist, proved that a definite link exists between the value of farm products and national income. Wilken's evidence suggested that the new wealth created in the economy multiplied itself seven times, as it worked its way through the economy. Put simply, $1.00 of farm income generates $7.00 of other income. Also, a 1% increase in unemployment results from a 1% drop in farm income, according to Wilken's studies. Wilken stated that the only factor that remains consistent with the earned profits and savings of a nation as a whole is the total price paid for all our raw material production Agriculture, while the largest source of new wealth, is joined by oil production, ore recovery, timber harvested, etc. These resources, most of which are renewable, produce new wealth.
It's also important to note that what we are dealing with here is the multiplier effect. When the price of raw materials drops, there is an exact ratio decline in terms of national income. And an increase in debt expansion and unemployment, according to Wilken. Economic good times are, by contrast, multiplied by abundant production of new wealth. Economic bad times are magnified by declining raw material production. Again, Wilken purported that the total national income is five to seven times the annual price paid for all raw material production. This "parity," if you will, ties real money in directly with the production of other goods and services.
Tractors have to be produced. Gold has to be produced. Wheat has to be produced. Thus, equipment, money, and food are all produced by the sweat of men's brows. Wheat and tractors can not be created out of nothing. Neither should money. When money is earned into circulation rather than created out of thin air and spent into circulation, not only does inflation not exist, but, with the concomitant elimination of the fractional reserve banking system, the boom/bust cycle is eliminated, too. Remember that a cycle is, by its very nature, unstable. Men desire stability, for with it comes a sense of security, well-being, and a long-term view. Eliminating the interest earned by the banks which own the Federal Reserve on money which is created out of thin air, plus outlawing the fractional reserve banking system, would go a long way toward providing us with a sound, stable, and secure economy. True, our economy would not grow as fast, but growth would come in real terms, not in terms of illusionary, debt-created wealth that is liquidated in the bust which follows the inflationary boom.
With all this in mind, let's look at a study entitled, "The Implications of an International Gold Based Economic System to Raw Materials Prices," prepared by Peter L. Brandt and Daniel Markey at the Chicago Board of Trade (9/7/79). They looked at the relationship between gold and other raw materials (commodities). (By the way, what we have been discussing above in terms of real economic exchange is nothing more or less than "barter.")
Brandt and Markey stated, "While all raw material prices will continue to be traded in currency terms, the currency expression of that raw material's value will be in relationship to gold and silver over the long term." Brandt and Markey were relating to economic reality (barter) in a society that thinks in terms of computerized banking illusion.
Based upon $350 gold, it was these gentlemen's conclusion that the price of corn should be $4.65 a bushel, wheat $7.00, soybeans $11.65, oats $2.48, cotton $1.03 per pound, hogs $0.65, pork bellies $0.81, cattle $1.13, broilers $0.67, cocoa $1.94, sugar $.16, and copper $1.52, production shortfalls aside.
Let's assume, just for the sake of argument, that Brandt and Markey's analysis is roughly accurate. What conclusions can we draw with relative confidence? First of all, with gold having doubled their $350 price, other commodities should be much higher priced, too. Yet, with gold now at roughly twice the price discussed in this study, we still find that these basic commodities, taken collectively, have not moved up substantially, at all. In fact, these basic commodities are, for the most part, still selling for less than they should have when gold was at $350 an ounce!
What's wrong? There is a political/fear/anxiety factor built into the price of gold, which distorts its relationship to other commodities. Gold is real money, and the stampede to gold and the distortion of the ratios is, in fact, evidence of an invisible depression. During a depression, people seek money, real money, which is, historically, gold. Commodities are cheap in a depression, and we have been through an inflationary depression in terms of gold versus commodities.
This warped gold/commodity relationship also suggests that eventually the price of commodities may have, long-term, a lot higher to go, particularly if the price of gold maintains its present lofty levels.
But, there is yet another more insidious conclusion that we can draw. In terms of real money, gold, the prices of raw materials have deflated drastically. If they stay low in terms of gold, or if the price of gold declines and these raw material prices hold steady or decline further, the implications should be obvious for the economy at large. We will have a tremendous shakeout. Recall Wilken's conclusions.
The wide difference now between the annual price paid for raw material production and national income is due to the use of credit/debt: $1.00 of farm income generates $7.00 of national income. In terms of economic expansion and contraction, this means that the economy at large has some massive adjusting to do on the downside if commodity prices stay put, or fall.
If commodity prices rise sharply, and realign with gold, the cost of basics for the American consumer will send the Misery Index through the roof. As we discussed in the earlier paragraphs of this article, commodities are the real anchor, the reality to which all economic activity ultimately returns. Bread is basic.