Rambling thoughts from Spain

Freedom: The New and Future Experiment

2011-11-22T02:21:00.001-08:00

By Joel Bowman

This topic is particularly timely right now because, as you well know, a revolution of sorts is today under way in a place that used to be comfortable calling itself, proudly and with a straight face, “The Land of the Free, Home of the Brave.” Try asking any thinking individual who happened to be born within the United States borders today to claim that title without arousing a disquieting feeling of tragic irony. You might hear the words, but you’ll notice they are delivered with an empty conviction, with some embarrassment, a shame, almost, for remembering what was lost.

But before addressing the New and Future Experiment, let’s take a look at the Old and Moribund Experiment: Statism.

From the Pharaohs through to warlords, kings and queens, generalissimos, barbarians, emperors, chairmen, führers, shoguns, sheiks, tsars, presidents, prime ministers and the rest of the dirty rotten scoundrels, nobody could say we humans didn’t give “The State” a fair go.
Statism exists in many forms. All, I will argue, are inherently evil. All end in eventual and painful demise.

Why do I say that all forms of Statism are evil? Surely there is an argument for some kind of “minarchist” arrangement of governmental oversight, the Praetorian guard, the night watchman, some kind of political structure to protect us against the aggressions of our neighbors who are always and forever waiting at our front gates, ever at the ready for the law to change or turn its back so they can come and pilfer our grains, raid our gold stockpiles and defile our daughters?

It is sometimes said that religion makes men do noble things. And that’s true. But religion also makes men do heinous, hellish things. Why else would anybody strap a bomb to themselves and run into a kindergarten, for example, if they didn’t think God was on their side?

I’m reminded here of that great skit from Scottish comedian, Billy Connelly.

“I want to go to one of these suicide bomber schools,” he says. “You can just imagine the instructor.
“Alright lads… I’m only going to show you this once…”

Statism is the new religion.

Men used to march off to war for “God, King and Country.” Now he marches off to war to “spread democracy” — the credo of the new religion.

How many people, we wonder, would feel compelled to battle on foreign lands, the whereabouts of which were heretofore unknown to them, to slay “the enemy,” to lay waste to husbands, fathers and brothers they have never before met, to Napalm fields, Agent Orange crops, to litter terrain afar with landmines, if they didn’t believe the patriotic claptrap with which their State ceaselessly indoctrinates them?

No. Statism, in any form, is wicked because it attacks us at our most basic human level. It undermines our dignity. It presupposes that we are incapable of caring for each other and ourselves without its continued and ever increasing invigilation. It tells us that we are not born free individuals, but servants of the State.

In this way, the State is not the preserver and protector of freedom, but anathema to it.
But perhaps most cruelly, most insidiously, the State tells us that we need it more than it needs us. Untrue. It is important here to remember that the State is nothing more than a collection of men and women who initiate force against everybody else, the very same citizens they purport to serve, to represent…and who (are forced to) pay their salaries.

I’m reminded of Doug Casey’s observation that during the Viet Nam War, peace protestors used to carry placards reading, “What if there was a war and nobody showed up?” to which Doug adds, “What if they levied a tax and nobody paid?”

Here we can see immediately that, contrary to what they would have us believe, it is the State that depends on our complicit support to exist at all, not the reverse. It is a form of mass, political Stockholm Syndrome, where the captors gradually come to accept the commands of their master as a demented kind of benevolence, eventually even feeling compassion for and allegiance to him.
That, in a nutshell, is the definition of patriotism: allegiance to one’s own gatekeeper, affection for one’s oppressor.

There are, of course, those who argue that without the State, we would be without the means to build and maintain roads and other critical infrastructure — that we would be without hospitals and schools, without the “safety net” the State is forever crowing about having provided for us.
But to hold this point, one must first admit that there exists, within society, the resources, the productive capacity to build and provide these goods and services in the first place. Those arguing for State intervention are merely saying that the State is the preferred method for delivery, for redistributing a wealth of resources that already exists, through its superior mode of governance.
A dear friend of mine shared with me recently a fantastic quote that addresses just this point. It comes from Allen Thornton’s excellent essay, Laws of the Jungle…

“What do you think ‘govern’ means?” asks Thornton. “It doesn’t mean ‘suggest’ or ‘implore.’ It doesn’t mean two people sitting down, talking it over, and compromising. ‘Govern’ means ‘force’ and ‘force’ means ‘violence.’ When you advocate any government action, you must first believe that violence is the best answer to the question at hand.”

This is the Old Experiment.

Empires…their monies…their militaries and their promises. All these things eventually, invariably, die. You might even say it’s what they were born to do. Their death, in other words, is inevitable. Only the number of innocent individuals they take with them varies.

At this, we should not be surprised. But we should be prepared.

Ever since statists first cobbled together a collective of ruling people, the “rest” have been living under one form of tyranny or another. From tribal leadership structures to local council hierarchies, from Plato’s philosopher class to medieval monarchies through to the various “isms” of our modern times, there has existed one class of rulers — sometimes called guardians, other times tyrants — who have seen fit to exert their ways and rules on all others, usually, ultimately, on pain of death.
In the end, individual freedoms are surrendered to the precise degree that the State is permitted to exist at all.

Most people accept the State’s intrusions on their freedoms as minor grievances. They shrug and mutter something about the “best of a bad bunch” or the “lesser of two evils.” Nevertheless, for the vast majority of people, surrendering a little liberty (or a lot!) for a little safety or convenience is a pretty good deal. That, despite Benjamin Franklin’s famous call to caution that…
Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.

What if the "best of the States" is always on its way to becoming "the worst of States"?

It is true, of course, that certain forms of Statism are more overtly aggressive than others (though all seek to administer the ultimate punishment for political apostasy, one way or another). Some governments exercise control over their citizenry in subtle ways, like granting them the "privilege" of carrying an identifying document when said citizen chooses to exercise his natural right to travel freely.

Other regimes, however, are not so subtle in their use of coercion. They stone women to death for baring an inch of skin, force those of a certain race into internment camps, and/or execute political opponents at will...among many other atrocities.

This type of the State, according to most folks, constitutes the worst of all evils.
But what if the State, itself, is the "worst of all evils?" What if the State is genetically predisposed to malevolent mutations? What if even the "best State" -- the one that begins its life, nobly, as a constitutionally constrained republic, dedicated to protecting and promoting "life, liberty and justice for all" -- is really, at all times, on the road toward the most evil, militaristic expression possible?
What if force can only beget more force, in other words, coercion only more and greater coercion?
And, more importantly, where does that leave us, goose-stepping down the road to perdition?

Today, in the most powerful nation the planet has ever seen -- a mighty behemoth with military arsenal capable of exterminating the entire human population many, many times over -- more than 45 million of its own citizens live on food stamps, barely able to get by. That many again are supported directly by the State, that grand experiment we've devoted six thousand years to testing, but which we still don't quite understand.
And how is that experiment, however noble its genesis, working out? Well, take a look around.
I'd like to cite just a few troublesome data points that appeared as part of a much longer list in a recent Daily Reckoning.

According to the US Census Bureau, the percentage of "very poor" rose in 300 out of the 360 largest metropolitan areas during 2010.
Last year, 2.6 million more Americans descended into poverty. That was the largest increase yet seen since the US government began keeping such statistics on back in 1959.
Today, 15.1% of all Americans are living in poverty.
The poverty rate for children living in the United States increased to 22% in 2010.
There are 314 counties in the United States where at least 30% of the children are facing food insecurity.
In Washington DC, the "child food insecurity rate" is 32.3%.
It is being projected that approximately 50 percent of all US children will be on food stamps at some point in their lives before they reach the age of 18.

And the situation is worsening at the other end of the demographic chart, too. One out of every six elderly Americans now lives below the federal poverty line.

More than 50 million Americans are now on Medicaid. Back in 1965, only one out of every 50 Americans was on Medicaid. Today, approximately one out of every 6 Americans is on Medicaid.

One out of every six Americans is now enrolled in at least one government anti-poverty program.

The number of Americans that are going to food pantries and soup kitchens has increased by 46% since 2006.

The Old Experiment is faltering, even as we sit here today, surrounded by the picturesque landscape of "Doug's Gulch."
I suspect it is for this very reason many of you are here today. You see the writing on the wall.
So, where to from here? Can we discount the State entirely?

There are, of course, those who argue that the solution rests in going back to a gold standard, or back to the constitution.
What these people are really saying is that they want to start the Old Experiment over, an experiment that, demonstrably, has not only failed, but will end in absolute disaster for those who cling to its now baron promise of redemption.

We had a gold standard. Did that stop the government from abandoning it the moment it needed to inflate the currency to pay for its military misadventures abroad?

We had a Constitution. Did that stop the government from abandoning it, from circumventing the restrictions therein? Where is operation "Shock and Awe" in the Constitution? How about the authority to carry out programs like "universal medicine" or "cash for clunkers." Where is the amendment that empowers the Treasury Secretary to send billions of dollars to his former Wall Street employer?

Do presidents consult their worn, dog-eared copy of the Constitution when they decide to march off to war or to effectively nationalize this or that sector of the economy?

Of course not.
Murray Rothbard, the man who coined the phrase "anarcho-capitalist," perhaps summed it up best in his work, For a New Liberty, when he wrote:
"The idea of a strictly limited constitutional State was a noble experiment that failed, even under the most favorable and propitious circumstances." (And remember, this is from a book published back in 1973, almost forty years ago. Even then, the course of events was becoming obvious, if only to a few.)

"If it failed then," he continues, "why should a similar experiment fare any better now? No, it is the conservative laissez-fairist, the man who puts all the guns and all the decision-making power into the hands of the central government and then says, 'Limit yourself'; it is he who is truly the impractical utopian."

Meanwhile, back in impractical utopia...

Protesters are arrested by the hundreds in New York and elsewhere across the country.
Lemonade stands and bake sales across the nation are being shuttered and reams of rules and nosey-by-nature regulations are strangling small and medium businesses (and, along with them, any hope of genuine recovery).
You're subject to indecent searches -- "gate rapes" -- at the airports and even now, I hear, on State highways and train systems.
You are guilty until proven innocent. Due process be damned.
The question, then, is how do we escape or avoid the State, this most vicious and insidious enemy to freedom?
How do we begin the New Experiment?

Well, first we must recognize that, like the monster under our beds when we're children, the State only exists to the extent that we permit it to.

Without our continued support, both financially, through failing to protect our private property from expropriation at the hands of the State, the IRS, and politically, through our validating participation at the ballot box, the State ceases to exist.

It NEEDS us.

And it is up to us, therefore, to starve the monster, to take our own freedom back from the jaws of the beast.
How best to do this?
However tempting it might be to simply "lynch the bastards" (and, for the bloodthirsty among you, that might be coming anyway) we must realize that force and violence is not the answer, or at least not the best answer. You don't fight fire with fire, unless you want an inferno.
In the same way, there's little point in fighting violence with violence. For one thing, it's stupid. It's a no-win game. Violence is the State's specialty. They have the guns, the jails, the cops, the first responders, the TSA goons, the DEA, SEC, FDA, EPA, IRS and all the rest.
They have cornered the sociopath market, in other words.

Fortunately, we can do much better than that. We can do better than to play right into their clenched fists.
Revolution of the kind brewing amid the Occupy Wall Street camp and the Tea Party movement is probably not the answer either.
What kind of freedom are we seeking if it may be only be granted by those who appoint themselves our masters? Are we really going to prostrate ourselves on the steps of Capitol Hill or in the foyer of Goldman Sachs like some servile zombie and beg for freedom? That kind of subservience only serves to strengthen and validate the perverse, master slave notion they want to perpetuate.

Actually, revolution, in any form, is not the answer at all. We've tried that. We try it when any State begins to falter...then we go and erect another State to replace it.

By definition, revolution simply means returning to the beginning, to the point of origin. No wonder they say history repeats itself, or that it at least rhymes...We've been running and re-running the same experiment over and over again, always expecting a different result -- the very definition of insanity.
You'd think that, after 6,000 years -- and a body count in the hundreds of millions -- we'd give up on the State and try something different.
We don't need to revolve, in other words, we need to evolve.

But that takes courage. It's not easy to clap when everyone is booing. It's not easy to stand up when everyone around you seems content to live their lives on their knees.
The good news is that the State is already falling apart. The bad news is that it will likely try to take you with it. That has been, and continues to be, the glaring lesson of history.
In Europe and the United States, the people are beginning to see that their emperors -- and their empires -- have no clothes. The welfare/warfare State is broke, broken and fast running out of options.
But these people, these occupiers and tea partiers, by and large, are not going after the State...they are going after each other! They are demanding more State power, not less.
As such, you ought to expect higher taxes. Expect capital controls. Expect more and greater restrictions on the freedom of your movement.

And expect riots, as we are already seeing, of growing intensity.

It is not an exaggeration to say your window of opportunity is already closing. And one cannot stress that point enough.

But there is a silver lining to this dark, statist cloud. And it comes, in large part, with the power of communication. It comes with the spread of ideas -- ideas of freedom and of ways to achieve it.

In the same way that Gutenberg's printing press of the late 1400s acted as an "agent of change" in Europe, the Internet is today providing opportunities for the dissemination of ideas like we have never before seen.

Love them or hate them, Internet-based, decentralized organizations like WikiLeaks and Anonymous are operating more and more brazenly by the day, exposing the lies and corruption of the State for millions to see.

The idea, again, is not to overwhelm with force and violence, but to undermine with truth and ideas.
It is true that the State has the guns, but we have the information and, with the advent of the Internet, the means to distribute it.
We live in an age where a child in sub-Saharan Africa can access information published on the other side of the world almost instantaneously...where groups of likeminded individuals can coordinate and share ideas in real time across artificial borders erected by warring, small-minded politicians, where young entrepreneurs in South America can do business with start-up companies across the Pacific, trading cyber currencies well beyond the reach of their respective governments, thereby denying these criminal organizations the financial lifeblood they need to exist.

Now, like perhaps no other time in history, we have a chance to spread the word of freedom quicker and further than any time before.
And freedom, you'll notice by looking around the room, is a catchy tune. Once you've got that idea in your head, you can't shake it. And the world begins to look very different indeed.

On a personal level then, what can you do, now...today.

You should begin, immediately, diversifying yourself across borders. You should open a bank account in a foreign country. You should do that immediately. Uruguay, sometimes know as the "Switzerland of South America," is a reasonably good option that requires little paperwork. You can set up an account there in a few hours. Maybe that's not ideal for your own circumstances but, in any case, you should look into moving funds abroad quickly.
You should also consider working towards obtaining a second passport.
And obviously, you should be holding a significant portion of your portfolio in precious metals -- real money, in other words. They should be hard to get at. Not for you, but for anyone else, including, especially, anyone brandishing a government badge of some description.

How much? That depends on your individual circumstances, but I'm inclined to agree with Byron King, who writes Outstanding Investments, when he says between 15-20% of your portfolio in precious metals, more if your individual circumstances warrant it.
I'd also be looking at foreign real estate, mostly because it's difficult, if not impossible, for your government to get its hands on. Plus, it provides you with a "Plan B" if things really go awry...and I think there's a better-than-average chance they will, both in Europe and in the U.S.
Other than that, you want some of what my friend and colleague, Chris Mayer, calls "dry powder." That's cash on the sidelines -- hedged across multiple currencies -- that you can liquidate quickly to take advantage of deep value, crisis investments. And I do believe there will be many such opportunities for geographically nimble investors in the next 3-5 years.

And finally, a kind of quirky idea that I think is worth mentioning.

Get some mates.

I don't mean people you know from work or second cousins...I mean people who are similarly, independently minded, who are curious and who ask questions, who are not prone to imbibe the bread and circus sideshows they see on television.
Get these people together and begin an informal meeting group where you can share ideas. They might be start up businesses ideas, investment opportunities or just good book recommendations. Doesn't matter. Find some kindred spirits. You'll see they are an invaluable resource during times of crisis.
I'm part of such a group in Buenos Aires, founded, in large part, at Doug's suggestion and introductions.

We have doctors, engineers, software technicians, artists, writers, energy consultants, entrepreneurs and a whole host of talented people all sharing ideas and trying to figure ways to live freer, better lives.

You can do this at home, in your local communities, online, here in La Estancia, wherever...but I can't recommend the activity highly enough.

It's sad to have to say that...but...
In a world where violence is the norm, peaceful assembly and voluntarism have become extremist positions. I encourage you, in this respect, to become an extremist.
In a world ruled by guns and brute force, ideas of liberty and freedom are indeed our greatest tools. It's time we started sharing them.

Silly Life Lessons

2011-11-20T03:26:00.001-08:00

I love stuff like this:

1 .It hurts to love someone and not be loved in return.
But what is more painful is to love someone and never
find the courage to let that person know how you feel.

2. A sad thing in life is when you meet someone who
means a lot to you, only to find out in the end that it was
never meant to be and you just have to let go.

3. The best kind of friend is the kind you can sit on a
porch swing with, never say a word, and then walk away
feeling like it was the best conversation you've ever had.

4. It's true that we don't know what we've got until we lose
it, but it's also true that we don't know what we've been
missing until it arrives.

5. It takes only a minute to get a crush on someone, an
hour to like someone, and a day to love someone-but it
takes a lifetime to forget someone.

6. Don't go for looks, they can deceive. Don't go for wealth,
even that fades away. Go for someone who makes you
smile because it takes only a smile to make a dark day
seem bright.

7. Dream what you want to dream, go where you want to go,
be what you want to be. Because you have only one life and
one chance to do all the things you want to do.

8. Always put yourself in the other's shoes. If you feel that it
hurts you, it probably hurts the person too.

9. A careless word may kindle strife. A cruel word may wreck
a life. A timely word may level stress. But a loving word may
heal and bless.

10. The happiest of people don't necessarily have the best
of everything they just make the most of everything that comes
along their way.

11. Love begins with a smile, grows with a kiss, ends with
a tear. When you were born, you were crying and everyone
around you was smiling. Live your life so that when you die,
you're the one smiling and everyone around you is crying.

In the end, it's not going to matter how many breaths you took, but how many moments took your breath away

This Is How The Bankers Game Works

2011-11-18T02:09:00.001-08:00

1) Get the government to issue some currency (cash -- paper or reserves at the central bank -- reserves are government issued cash central bank deposits). Government issued cash is around 5% of the currency (money) supply. The government issued currency is put into circulation by the government simply spending it.

2) The rest (95%) of the currency is issued by the private banks. Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy. Note that this newly created money (currency) is put into circulation by the borrower spending it. Most currency (about 95% America's currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation. The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means fewer currency in circulation in the economy.

Accumulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans. Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).

3) The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.

4) The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid. Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.

5) Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable. The recession becomes a depression now.

6) The bankers then have to decide how to "reset" the system. One way to reset the system is to let the depression takes its course. But of course this path is very chaotic because people lose jobs and may become violent. Once most debts are cleared lending can start again and the currency supply is replenished. Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again. This is the great depression scenario.

7) Another way to "reset" the system is to get the government to print too much money and spend and destroy the currency and blame it on the government. This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again.

8) The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people. By the way this is a global game. This is the only system around no matter what country you are in. The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).

We need a currency system where money is spent into existence and does not need to be lent into existence so the economy is never starved of currency in circulation.

The US is Now a Corporate Monarchy

2011-11-18T01:31:00.001-08:00

By Barry Rithholtz

I did an interview with a print reporter yesterday about what has been going on with lack of prosecutions, the banks, and Wall Street in general. We discussed the corrupt exchanges and HFT.
I dropped lots of F-Bombs, called out cowards and crooks and held nothing back. (“That fucker belongs in prison; this son of a bitch should hang“)

Afterwards, she commented that I seemed angry.

I wrote back suggesting that I am a happy dude, and its not Anger — its closer to an ineffable sadness that comes once you realize you have lost something dear. I am old enough to have grown up when this nation was a Democracy, but that era has passed. We now live in a nation no longer run by the citizens — it is a Corporatocracy — and that makes me sadder than angry .
. .
She suggests perhaps a better word is outraged.

I wonder: Why have the Europeans figured out they are getting screwed, and we haven’t? Why are they taking to the streets en masse, while we seem to be watching our own control over our own futures slip from our hands almost as if from afar?

In America, we are too busy dropping the kids off at soccer, running around looking for sales and bargains, racing to keep our heads above water. We seem to forget to get outraged. Our control over our once Democracy — the one we had a revolution against a monarchy dictating decisions from afar — slips away from us. Not with a bang, not even with a whimper, but with a 1000s acts of gradual ceding of power to the new Monarch. We have given up hard won rights to a coordinated attack from all three branches of government; Our Congress has become the legislative branch of eBay — Congressmen are auctioned off to the highest bidder; they even have a Buy It Now button to get specific legislation passed. The executive branch has fallen under the sunk cost fallacy, afraid to prosecute banks because we spent so many billions bailing them out. It turns out that even our once venerable Supreme Court is just as corrupted, with lobbyists partying with Justices and backdooring ethics by hiring their wives.

In short, our new overlords are enormously well funded, well connected, relentless and perhaps most of all, patient. This new King was not appointed by primogeniture, or even Divine Right, but by acquiring enough profits in the free market that they can buy control over society, even as they thwart that free market ideal for their own ends.

We have become, in short, a Corporate Monarchy.

The right question isn’t why am I angry, sad and outraged. The proper question is, why aren’t you?

Goldman to the Rescue!

2011-11-16T00:50:00.001-08:00

By Bill Bonner

More pieces are coming together. Day by day, the puzzle takes shape. Not a pretty picture.

An epic battle is taking place. Between the forces of...

..inflation and deflation

..growth and depression

..credit expansion and credit destruction

..centralization and de-centralization

..politics and markets

..managed paper money and gold

..managed capitalism and the real thing

..control and wealth

..bull and bear

..greed and fear

..zombies and real working people.

Yes, dear reader, it’s quite a fight. Better than Frazier vs. Ali. And who’s gonna win?
Europe faces its “toughest hour since WWII,” says Angela Merkel. What does she propose? More centralization. Centralization got Europe into this mess — harmonizing interest rates so that the Greeks and Italians could borrow more. And now, more centralization, she believes, will get it out.

Europe is taking no chances. This debt problem is a slugger. What to do about it?

Who knows more about debt problems than anyone else? The people who cause them, of course. So, under great pressure from the centralized European authorities, Greece got rid of its Papandreou, after the man had the gall to suggest letting democracy work. He wanted the people to vote on further austerity measures. It replaced him with Papademos...a guy who won’t make the mistake of deferring to the masses. After all, he was vice-president of the European Central Bank for years. And he taught at the Kennedy School of Government at Harvard.

Meanwhile, Italy too has been forced to get rid of its popular, but difficult to control, elected leader — Silvio Berlusconi. It has put in a company man. Yes, a company man. What company? Goldman Sachs, of course. The new fellow, Mario Monti is an ex-Goldman guy. And so is the new fellow at the European Central Bank, Mario Draghi. Monti was also an EU commissioner. Draghi ran the Bank of Italy as the nation built up one of the world’s biggest piles of debt. Then, when Italy’s cost of borrowing shot over 7%, in came Monti and Draghi.

It is almost as if they planned it that way. Who’s the biggest seller of debt on the planet? We don’t know...but Goldman Sachs has to be up in the rankings somewhere. You’ll recall it was Goldman that helped Greece structure its debt so that it could abide by the letter of its treaty engagements with Europe but totally thumb its nose at the spirit of it.

And now the debt has blown up...and the Goldman boys are on the job, managing the mess they were so instrumental in creating.
What’s their solution? Oh come on...dear reader, you should know how this works by now. They propose more centralization, more management, more paper money, more debt, more inflation, more of everything you see on the right hand of our column above.

In other words, they believe that they know better than the people...or the market. They believe that their sanitized, homogenized, pasteurized Capitalism-in-a-Can works better than the real thing. Besides, they have a reason to believe it. This claptrap is the source of their power, status and money. Who knows, maybe their wives married them because of it.

Rather than renounce the program on which their reputations, careers and fortunes depend, they try to shore it up. They open up the can and see what they can use. They promise to reform the system, not reject it.

But every reform — unless it merely dismantles one of their previous reforms — is a manipulation...a price fix...and a scam. For example, they are proposing tax incentives to employers who hire youths and women. Good idea? Why not just drop some of the regulations and taxes that make it so expensive to hire youths and women in the first place? Nope. Then, they’d be giving up control. They’d be letting market forces decide who gets what.

Here’s another proposed reform, as reported in The Financial Times: “Wider social safety net to help those made redundant (laid off) and encourage labor mobility.” Typical rubbish. Spread a wider safety net and you discourage people from doing the hard work of finding new careers. But here’s one that will be popular with the managers: a “crackdown on tax evasion.” Are you kidding? Tax evasion is the only thing that keeps these economies going. People prevent their government from squandering their money. They spend it themselves. But the new Goldman guys won’t like it. They’ll want to get their hands on as much of that ‘black money’ as possible.
Meanwhile, what’s going on in the USA? Alas, the US economy is the hands of the same sort of people. The people who caused the mess...who did not see it coming...and who have not had a clue what to do about it. They’re still running US economic policy. These illustrious incompetents — such as Larry Summers of Obama’s National Economic Council and Tim Geithner, his Treasury Secretary — have proven that they wouldn’t know a Great Correction if it bit them on the behind...

So, they just keep adding more debt, more spending, more management, more ‘reform’ measures, and more centralization.

Ultimately, the elite managers of Europe and America all went to the same schools (Harvard, Yale, MIT...)...all read the same newspapers and magazines (The Financial Times and The Economist)...all worship the same gods (money and power)...all speak the same language (mid-Atlantic English)...and all want to control the world.

So far, they seem to be making great progress towards their objectives. They stuff the world with debt. It blows up. Then, they push out democratically-elected leaders...gain new power and authority...and take charge of the rescue.

Clinging to a Bankrupt Monetary System

2011-11-16T00:34:00.001-08:00

By Eric Fry

“Europe is in one of its toughest — perhaps the toughest — hours since World War II,” German Chancellor, Angela Merkel declared yesterday.

Who would argue with her?

The Second World War crippled the European economy. The victors suffered almost as much as the vanquished. Nearly ten years after the war ended, the British were still rationing sugar and meat.

Notwithstanding these hardships, however, the history of the post-WWII European economy is mostly a story of economic renaissance. From the rubble of war, the European Continent produced decades of economic growth.

Attempting to perpetuate and enhance that growth trajectory, the leading economies of Europe thought it best to pool their resources. So they formed the “European Union” and abandoned their national currencies in favor of the euro.

Nice idea. But the execution may have been flawed.

Just like a “group project” in junior high school, there’s usually an A-student in the mix...as well as an F-student. So what happens? The A-student does all the work to make sure he gets his habitual A. The F-student does nothing, but still receives the “A” he never could have earned on his own.

That’s the European Union.

Unfortunately, the F-student is on his own most of the time. He still has to get passing grades in his other courses...like “Tax-Collecting I” and “Remedial Budget-Balancing.” When the F-student fails to get a passing grade, there’s very little anyone can do to change the transcript...other than writing over the F’s to make them look like “B’s.”
That’s the European Union’s rescue plan. Every kid gets a passing grade, no matter how awful his homework may be.

But out in the school of hard knocks, an “F” is an “F.” Greece has failed already...and several of the other “students” are close to failing as well. The leaders of the euro zone are trying to change the transcripts. But that gambit will likely fail. A curriculum without absolute standards is a curriculum of no value.

The moment the EU began bailing out the Greeks, it abandoned the absolute standards that rendered the euro viable. If the EU had applied absolute standards and booted Greece out of the euro block, the euro’s credibility would have been validated. Without those standards, the euro’s value becomes as dubious as an online degree.

That’s why the Greek crisis has become a euro crisis. In fact, the entire system of currencies-backed-by-nothing may be lurching toward a crisis.

“If ideas could file for bankruptcy,” James Grant muses in the latest edition of Grant’s Interest Rate Observer, “the modern model of money and banking would have beaten MF Global Holdings to the courthouse. The concept of leveraged finance in a world of paper money and socialized risk deserves rehabilitation under an intellectual Chapter 11.”

The world’s monetary model is bankrupt — both intellectually and in fact. But if ever there were an institution that was too-big-to-fail, it is the institution of paper currencies. It is too-enormous-to-fail, which is why the world’s central bankers will stop at nothing to rescue it.
In general, the central banks are borrowing and/or printing money to buy “distressed assets.” By removing these distressed assets from the marketplace, the central banks hope to clear away some of the rot in order to “stabilize” the financial system and, by extension, the value of the currencies they print.

But since central banks are functionally outlawing bankruptcy for every large institution and government in the Western world — along with a few of those in the Eastern world, the rot remains...and it’s spreading. The rot is not only undermining economic activity, it is also undermining the entire global monetary system.

Throwing good money after bad — even newly printed, pretty good money — does not really clear away the rot; it merely smears it around...like a dry windshield-wiper smears bird-droppings.

Bankruptcy clears the rot away. Nothing else will do.

But since bankruptcy has become the ultimate non-option, the world’s largest central banks are all printing currency in the name of alleviating economic stresses. And they are swapping this currency for troubled assets.

For example, here in the States during the 2008-9 crisis, the Federal Reserve purchased hundreds of billions of dollars’ worth of mortgage-backed securities. It still owns them. Today, the European Central Bank is busy buying up the dodgy debts of Greece and Portugal.

Even the Chinese are in on the game. China’s sovereign wealth fund recently announced that it was “investing” in four of the largest state-owned banks in order to stabilize their share prices and support their operations.

The central banks dress their brutish market manipulations and backdoor bailouts in the elegant vernacular of ivory tower economics. Thus, “counterfeiting” becomes “quantitative easing,” while “using my influence at the Treasury Department to bail out my buddies at Goldman Sachs” becomes a “Troubled Asset Relief Program.”

But at the end of the day, the central bank manipulations are as clumsy, counter-productive and/or illegal as they appear at face value. And the worst of it is that these multi-trillion-dollar interventions do not remove the rot from the financial system; they merely relocate it from the private sector to the public sector.

The European Central Bank (ECB), for example, holds sub-AAA assets equal to 14 times its equity. Large portions of those sub-AAA assets are the very sub-AAA government bonds of Greece, Portugal, Italy and Ireland. If these assets, in the aggregate, were to lose 7% of their value, the ECB’s equity would be zero. (For perspective, the government bonds of Greece, Portugal, Italy and Ireland have already lost 30% to 60% of their values).

But don’t lose any sleep over the math; that’s what printing presses are for — to paper over the asset values the financial markets take away.

Observing these phenomena, Grant concludes: “There are better ports in a monetary storm than government securities denominated in paper money.”

Educated Guessing Game

2011-11-10T01:19:00.000-08:00

By Bill Bonner

Yesterday, Silvio Berlusconi said he will leave government...once the legislature has agreed on an austerity program.

Too bad. We’ll miss “The Cavalier.”

Once, in Rome, we heard him speak to a crowd. We didn’t understand a word of what he was saying. But he said it well. He was at ease...friendly...joking...enjoying himself.

And now what? The poor man will be out of politics. No more will he get to work with the great men of finance, trying to solve the historic problems of the day. He’ll have only his bunga-bunga parties with plenty of alcohol, music and beautiful young women. Poor fellow.

Our guess is that the great men of finance won’t be able to solve Europe’s debt problems. At least, not without a few blow-ups. And the European Union will probably end up less united than ever. (Gold is trading over $1,800 this morning...looks like investors are worried too.)

Until recently, both economics and politics argued in favor of a more centralized Europe. Now they are pulling it apart.

But we’ve made so many guesses over the past few months and years...we’ve lost track of them. Herewith a review:

First, back in the mid-’00s, we guessed that the housing market, stock market, and the financial industry would all blow up. They did.

Then, we guessed that this would not be followed by the typical recession/recovery pattern of the post-war period. It wasn’t.

Instead, we had a hunch that the economy had entered a Great Correction...from which it would not emerge for many years. So far, that appears to be what is happening.

As to what gets corrected, when and how...we admit ignorance. But ignorance never stops us here at The Daily Reckoning; it is like red meat to a hungry dog. We thrive on it.

We guessed that the main thing to be corrected was the credit bubble. Debt levels are too high. They need to be reduced. That’s why the feds have been unable to turn the situation around. In a recession, they can make credit cheaper and more abundant. That usually does the trick. At lower financing costs more projects make sense. People begin to invest and spend again. But it doesn’t work that way in a debt correction. It’s not a question of the price of credit...but of there being too much debt. Debt levels need to be reduced.

The price of credit has been reduced to zero (the fed funds rate)...and the US government is running trillion-dollar deficits. Neither monetary nor fiscal stimulus has worked. Both add debt; instead, debt needs to disappear.

We also guess that this correction will end with the end of the dollar-based monetary system that was set up in 1971. No paper money has ever survived a complete credit cycle. The dollar won’t be the first.

De-leveraging will keep prices low while cutting profits and sales. As it develops, stocks, real estate and other assets will eventually be marked down to real bottom-of-the-bust levels. You should be able to get a 5% yield on your stocks...about twice what is available today. That will mean prices at about half what they are today.

The slumpy economy...combined with periodic liquidity crises (such as is now happening in Europe)...along with falling asset prices will drive investors to the safety of US bonds. This will keep US government financing costs low — despite huge deficits. It will also convince the feds that they can pump large amounts of cash into the system without fear of inflation. This they will do...

The price of gold may fall in the early de-leveraging phase. Then, it will rise as the late de-leveraging stage begins. This is when the feds’ money-printing will move into high gear. Sophisticated investors — including foreign central banks — will be wary. They will buy gold.

The price of gold will rise. The Dow will fall. They will intersect at about $5,000.

But our guesses don’t stop there. We also guess that...

..the developed countries will find it very difficult to grow. First, because of the weight of debt. Second, because much of their capital is “invested” in unproductive, zombie industries. Third, because their populations are stagnant. Fourth, because they have already gotten most of the above-trend growth resulting from increased use of cheap fossil fuels.

..since the developed economies cannot grow...and since they are up to their chins in debt...they cannot fulfill the promises made to their citizens. The grand bargain of the modern, social welfare state will begin to look more and more like a bad deal. Young, unemployed men will become increasingly fed up. They will look for radical solutions...and more radical leaders with jingo answers.

..governments, which are inherently reactionary even in the best of circumstances, will respond with repression. They will not adapt peaceably. They will not throw their zombie clients under the bus. Instead, like the Ancien Regime, they will dig in their heels and protect them. The defense industry, for example, will try — probably successfully — to direct the citizens’ rage against imaginary foreign enemies...and thereby increase its own power and wealth...

..the real economy will weaken. Revolution will begin...probably coincident with hyperinflation. Finally, the middle class will be broke (the poor are already broke) and the country will be ruined.

There, that pretty much sums it up. Any more questions?

Where Are Your Papers?

2011-11-08T01:14:00.000-08:00

By Wendy McElroy

“Your papers!” In old movies, the demand is barked at trembling travelers by a Nazi with a guttural accent. If the demand is made in the opening scene, then the audience knows immediately that they watching a totalitarian state in which travelers are in danger.

“Your papers!” now rings out at every American airport and border crossing. The accent is different but travelers need to recognize with equal immediacy that a totalitarian state is playing out in front of their eyes, and they must be careful.

A passport is where the security theater begins. Indeed, without a passport those who wish to fly or cross a border are not “allowed” to be scanned, searched, interrogated, or undergo a plethora of other indignities imposed by uniformed thugs. The hoops through which passport carriers jump are all prelude to “permitting” them to exercise a right belonging to every freeborn person: the right to travel.

Things were not always this way. It is important to remember that there once was a world in which people traveled freely across borders without paperwork to visit families, pursue education, conduct business, and mingle. Freedom worked once. It enriched the world economically, culturally, and psychologically.

European nations pioneered many if not most aspects of the modern passport. The passport as an official permission or protection, and not merely as identification, arose because of armed conflicts. In the 17th century, sea voyaging was key to trade, travel, and the maintenance of empire. With some frequency, war interrupted that flow. Therefore, neutral vessels were granted passports or “sea letters” from a port of departure, which permitted them to journey in safety.

By the mid-19th century, mandatory passports had largely disappeared from Europe and Asia, with Czarist Russia and the Ottoman Empire being prominent exceptions. The change was largely due to three factors. First, governments were pressured to open up borders so that goods and services could flow across an increasingly industrialized Europe. Second, the period between the last Napoleonic War (1815) and World War I was unusually peaceful. Third, railroads now dominated travel. Their speed and the sheer number of travelers made traditional methods of checking documents impractical.

Thus, with trade and peace, mandatory passports declined.

War brought them back to life. With World War I, European nations once more imposed requirements not only to identify “enemies of the state” (e.g., spies or the citizens of belligerents) but also to control the outward flow of skilled labor in order to maintain their own workforces. In short, passports once again became social controls and, like the United States, many European nations maintained their requirements after the War.

World War II made passports mandatory on a virtually worldwide basis. Although passport requirements loosened once more after the WWII, the war on terror in the wake of 9/11 has raised those requirements to unprecedented levels. The ebb and flow of passports is that of war itself.

The American passport was also rooted in war, specifically the American Revolution (1775-1783). The first one was issued in 1783; based on the French “passport,” it was designed and printed by Benjamin Franklin. It was a single page with a description of the bearer(s) and his or their signature(s). For example, when John Adams, Benjamin Franklin, and John Jay acted as ministers plenipotentiary in traveling to Great Britain to seal the terms of peace, all three names were on one passport. It was addressed “TO ALL Captains or Commanders of ships of war, privateers, or armed Vessels...”

During the Articles of Confederation period (1783-1789), passports were issued but not required. When the US Constitution was ratified, creating a new government, passports continued to be issued but not required. Many American states and cities also issued their own “voluntary” passports until 1856 when the Department of State exerted a federal monopoly, ostensibly to eliminate confusion.

Nevertheless, passports were not mandatory except for a period during the American Civil War (1861-1865) and during World War I (1914-1918). The latter can be seen as the beginning of the current American passport. On December 15, 1915, President Woodrow Wilson issued Executive Order No. 2285, “[r]equiring American citizens traveling abroad to procure passports.”

This was followed in 1918 by an act of Congress granting the president authority to require passports during time of war. Passports remained mandatory until early 1921.

Thereafter, the United States continued its “no-passport-required” travel policy until another war: World War II (1939-1945). In 1941, passports became mandatory for travel abroad and remain so to this day. (Travel to Canada used to be an exception; until recently, proof of citizenship was all that was required to cross the border.)

Passports clearly function as an essential and effective means through which a state can control the person and property of its residents. Consider the United States. No one can legally leave without one.

And yet passports can be denied for a myriad of reasons that have nothing to do with being “an enemy of the state” but rest strictly on statutory grounds. Common reasons for denial include owing money to the IRS, a federal arrest, a state-criminal court order existing, a drug arrest, being on parole or probation. Law-enforcement databases are routinely checked against both passports and applications to weed out those who have committed such offenses as being more than $2,500 behind on child-support payments. Passports can also be revoked for several reasons, although revocation is far less common.

Those who meet the legal requirements for a passport move on to the next stage of social control. After handing over documents, a traveler is questioned about the reasons for travel, how much money he carries, his occupation, and virtually any other question a border agent wishes to ask. The traveler’s person and property are “searched” in various ways, including a strip search at the agent’s discretion. If the traveler questions or evinces disapproval, then he could be denied the “right” to board a plane, thus wasting an expensive ticket. Or he may be pulled aside for special treatment, including fines or interrogation by the police.

Requiring a passport as the key to freedom of movement is akin to gagging someone while maintaining that he retains freedom of speech.

The passport has grown into what is arguably the single most powerful tool of totalitarian America, second only to law enforcement itself. It no longer pretends to protect individuals; not a single terrorist has been apprehended as a result of passport checks. But it does cement the totalitarian state. The mandatory passport should be reviled and rejected as an abuse of human rights and common decency. A nation that requires one cannot be free.

Wendy McElroy is a Canadian born individualist anarchist and individualist feminist. She was a co-founder along with Carl Watner and George H. Smith of The Voluntaryist in 1982. Her articles are widely published on libertarian websites. A version of this column originally appeared on mises.org on September 7, 2011

Printing Money to Combat a Global Depression

2011-11-08T01:06:00.000-08:00

By Bill Bonner

Last week produced nothing but more disappointment. At the center of it was the Europeans’ inability to make their debt disappear. They had hoped that they could just announce a plan to take care of it...and that would be enough.

But then, the Greeks said they wanted to vote on it...and then, they didn’t. ‘Papandenomium,’ the papers called it. If the voters were allowed to give their opinions everybody knew what would happen; the whole fix would be unfixed quix. So, they all got together and twisted Papandreou’s arms...and his arms gave way.

And then, investors started getting nosey. They wanted details. They wanted to know how the French and the Germans could cover so many potential losses — from Spain, Portugal, Ireland, Greece, and Italy.

Italy is in the worst position. It has scarcely any more debt than the US, but it has an immediate problem. It has to turn over its debt...it has to borrow heavily just to keep the wheels turning. And it lacks America’s key advantage...it doesn’t have a printing press. It gave up the power to print money when it joined the EU. Only the European Central Bank can print money...and it’s controlled by the Germans!

What’s the matter with the Germans, anyway? Why don’t they get on-board with the Fed? Why don’t they want to print money? If they would just give the signal — ‘don’t worry, we’ll print the money’ — the whole crisis would be over. In Europe, as in America, bond investors would be reassured. They would know that they’d get their money. The ECB would buy Italy’s bonds, and Greece’s bonds, and Spain’s bonds... Heck, it would buy everyone’s bonds. Bond investors would get their money. They would stop hiking interest rates. Italy could cover its losses.

Everyone would be better off, no? Just like they are in the USA. Right?

It all seems so simple. Why don’t the Germans get it?

While US policy makers, official economists and jackdaw kibitzers are terrified of another Great Depression, Germany’s officialdom is afraid of hyperinflation. Hardly any Germans are still alive who remember it, but the experience of hyperinflation of the early ’20s is painted on the German character like graffiti on a national monument. They can’t ignore it. They can’t forget it. It will take generations for it to wear off. After the bitter experience of WWI, hyperinflation wiped out the German’s residual faith in their institutions. Working hard, saving your money, being a good citizen — none of it seemed to pay off. The ex-soldiers were bitterly disappointed. The ruling classes had let them down. The banks had betrayed them. The politicians had stabbed them in the back.

Even their money was worthless!

“How could 2,000 years of accumulated civilization have led to this...” (Or words to that effect) says the hero of Remarque’s famous All Quiet on the Western Front. Having no good answer, the Germans turned away from accumulated civilization, towards armed, mechanized zombieism.

In just a few years, Germany’s factories were working again — producing tanks and planes. It was a solution to the post-WWI unemployment and depression. Unfortunately, the solution was worse than the problem. The trains ran on time. But they were headed for disaster!

But that’s a long story.

Meanwhile, in the US, we have our race memories too. Few people alive today recall the Great Depression. But it still haunts economists’ sleep and troubles their vacations.

“Not on my watch,” says Ben Bernanke, or words to that effect.

And so, the Americans fight depression. The Europeans fight hyperinflation.

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And what will they get? Depression AND hyperinflation!

Yes, dear reader, that was our forecast as few years ago. We stick with it. The world is entering a depression. Growth has stalled. Even the emerging markets are slowing down...suffering the consumer depression exported from Europe and America and trying to fight the inflation exported, by QE2, from the US.

This depression isn’t going away anytime soon. It will take years to work through, write off, default and foreclose on the mountain of household, business, and financial debt built up over the last 60 years. At first, we thought it would take 7-10 years. We’re in year 5 already...and, at the present rate, it looks like it might take another 15 years!

But the authorities aren’t going to take a depression sitting down. Even the Germans will probably decide that a little bit of printing press money is better than the defaults and bankruptcies that accompany a depression. They’ll all guarantee each other’s credits. The banks guarantee the debts of their big customers. The government guarantees the debt of its big banks. The central banks guarantee the debts of the governments...and all print money to cover them. What a great system.

Yes, that’s our prediction. Depression will lead to money-printing...which will eventually lead to hyperinflation.

But heck...the whole thing will take years to play out. By the time it finally comes to pass we’ll all probably have forgotten this forecast. We’ll be lucky if we can remember our names.

The Euro and You

2011-11-08T00:19:00.000-08:00

By Frederick Sheehan

The Euro and You described a fundamental problem of world finance. The quantity of debt grows as the quality recedes. The problem of bad loans is no longer just the pre-2008 mortgages, CDOs, and LBOs. Debt issued after the bust is defaulting, such as Greek sovereign bonds, issued in June 2010. Some securities are born to part investors from their money, but it’s remarkable the extent and variety of such instruments issued in 2011. The world choked on similar bonds and derivatives only three years ago, many of which are still held at false prices on financial institutions’ books.

Of all the past century’s downgrades, none has been greater than the borrower’s promise that stands behind a “security,” a word that once credibly described a paper contract backed by appropriate collateral. In Debt and Delusion, Peter Warburtin wrote: “It is easy to forget that, as recently as in the 1960s, the government budgets of the OECD countries were in approximate balance and that net issues of debt were comparatively rare. The outstanding stock of debt in public hands was a meager $800 billion at the end of 1970. At that time debt issue was typically reserved for the financing of large construction projects or investment by power generation companies by publicly owned companies.” Today, PIMCO’s Bill Gross manages $244 billion in a single bond fund.

The starting pistol was sounded on August 15, 1971, 40 years ago. On that date, the United States broke its long-standing promise to pay one ounce of gold to a foreign government that redeemed $35 for the same. (The ability of American citizens to redeem dollars for gold with the U.S. government was modified during World War I and ceased after the War.) As a prelude to the loosy-goosy financial contracts today, it is worth reviewing the wording of the contractual relationship between the United States government and the holder of its currency before and after. (A book should be written on the parallels between the century-long degradation of language, the American legal system, money, credit, debt, and the American people.)

The face of a $20 bill, a gold certificate, issued in 1882, stated: “This certifies that there have been deposited in the Treasury of the United States, twenty dollars in gold coin, repayable to the bearer on demand.” The bearer of $20.67 received one ounce of gold in exchange. This is a simple legal contract. It is easy to understand. There was no theory. No economists were employed to interpret what did not require interpretation.

A 2011 Federal Reserve Note states: “This note is legal tender for all debts, public and private.” As contracts go, this makes no sense. Nor does it make sense to a three-year-old. My extensive survey of three-year-olds did not uncover a single child, who, in exchange for a $20 bill, preferred another $20 bill rather than receive a one-ounce gold coin. (The current value of the one-ounce coin versus that of the $20 bill is not germane to this survey.)

The abstraction of money is related to the manner in which securities today are often backed by abstract or non-existent collateral. Contradictory theories employ at least 100,000 economists (probably multiples of this figure), among whom, there may not be a handful who ever write or think about money. Read (if you must) the theoretical papers or newspaper columns of these imposters. They retreated into a soothing bubble bath of differential calculus generations ago.

Many of the malignant securities issued in 2010 and 2011 have fallen into disfavor. Credit markets have suffered loss of liquidity, momentary or protracted. These issues, collateralized by hope and imagination, are on the books though, often at institutions that already hold wads of securities still valued at wishful prices (for purposes of accounting, capital requirements, and falsifying the institutions’ dubious solvency). We should expect that when Federal Reserve Chairman Ben Bernanke revs up his money machine, more will flow.

It is a safe bet that Ben is preparing to welcome more unmentionable securities on the Fed’s balance sheet. (“Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy….” – Wall Street Journal, October 21, 2011.)

Guessing at why the Fed will splurge is a chicken-or-egg game. Is the Fed preparing for a downdraft in the stock market with its tried-and-false response: by creating more money? Or, is it preparing to transmit (by electronic keystroke) more dollars to absorb securities held at banks, insurance companies, money-market funds, and mutual funds that should be carried at a much lower value?

The Fed washed its hands of credit analysis on January 6, 2011, when it issued its weekly H.4.1 “Factors Affecting Reserve Balances.” The federal agency that vaunts its “transparency” (i.e.: the Fed) implanted a note that transferred all capital losses to the taxpayer. The January 6, 2011, “Factors Affecting Reserve Balances” stated that beginning on January 1, 2011, all capital losses in the Federal Reserve’s mangy and non-transparent portfolio would henceforth be transferred to the Treasury Department. In a sense, this is only an accounting frivolity, since the taxpayer ultimately pays for the New York Fed’s reckless mismanagement of its highly leveraged portfolio (103:1); that could soon, absent the January 6 sleight-of-hand, mirror Enron’s jambalaya.

After the 2008 credit meltdown, the Fed, led by Simple Ben, fought for greater regulatory control of the banking system. The cranks who warned against Federal Reserve regulatory authority have been vindicated, on a comically inflated scale.

Wild-and-wooly securities that cratered after the credit cycle turned (circa 2007) are back, for instance: low doc, cov lite, payment-in-kind toggle notes, the proceeds of which pay private-equity firms up-front dividends. Century bonds (Mexico, the University of Southern California) sold swiftly, never a good sign. “Synthetic junk bonds” warned the Financial Times that “resemble transactions linked to U.S. mortgages, which proliferated before the crisis” and “staple deals” counseled the Wall Street Journal that “came under sharp criticism during the buyout boom for causing a number of conflicts of interest” have been structured by the banks that Ben Bernanke regulates. This highlights the greatest conflict of interest: the false claim that the Federal Reserve regulates the banks.

One security in the pipeline (possibly on hold during the current market mayhem) is a “synthetic deutsche mark,” that would “create shadow trading in legacy currencies in a synthetic market.” Paul Volcker said somewhere the only financial advancement of the past 30 years is the ATM card. Comparing the collateral behind Peter Warburtin’s bond market to the absence of such behind the synthetic deutsche mark (a currency that ceased to exist over a decade ago) outlines the enormous waste of capital, human ingenuity, and savings over the past 40 years. With nothing learned, this will continue, until uncollateralized paper spawns a New Era in post-fiat origami.

Defeat the Corporatocracy

2011-11-01T00:58:00.000-07:00

We Shall Over Come

The only way to overcome the power of money is regain our courage and solidarity. Here's how to do that.

Many Americans know that the United States is not a democracy but a "corporatocracy," in which we are ruled by a partnership of giant corporations, the extremely wealthy elite and corporate-collaborator government officials. However, the truth of such tyranny is not enough to set most of us free to take action. Too many of us have become pacified by corporatocracy-created institutions and culture.

Some activists insist that this political passivity problem is caused by Americans' ignorance due to corporate media propaganda, and others claim that political passivity is caused by the inability to organize due to a lack of money. However, polls show that on the important issues of our day - from senseless wars, to Wall Street bailouts, to corporate tax-dodging, to health insurance rip-offs - the majority of Americans are not ignorant to the reality that they are being screwed. And American history is replete with organizational examples - from the Underground Railroad, to the Great Populist Revolt, to the Flint sit-down strike, to large wildcat strikes a generation ago - of successful rebels who had little money but lots of guts and solidarity.

The elite spend their lives stockpiling money and have the financial clout to bribe, divide and conquer the rest of us. The only way to overcome the power of money is with the power of courage and solidarity. When we regain our guts and solidarity, we can then more wisely select from - and implement - time-honored strategies and tactics that oppressed peoples have long used to defeat the elite. So, how do we regain our guts and solidarity?

1. Create the Cultural and Psychological "Building Blocks" for Democratic Movements

Historian Lawrence Goodwyn has studied democratic movements such as Solidarity in Poland, and he has written extensively about the populist movement in the United States that occurred during the end of the 19th century (what he calls "the largest democratic mass movement in American history"). Goodwyn concludes that democratic movements are initiated by people who are neither resigned to the status quo nor intimidated by established powers. For Goodwyn, the cultural and psychological building blocks of democratic movements are individual self-respect and collective self-confidence. Without individual self-respect, we do not believe that we are worthy of power or capable of utilizing power wisely, and we accept as our role being a subject of power. Without collective self-confidence, we do not believe that we can succeed in wresting away power from our rulers.

Thus, it is the job of all of us - from parents, to students, to teachers, to journalists, to clergy, to psychologists, to artists and EVERYBODY who gives a damn about genuine democracy - to create individual self-respect and collective self-confidence.

2. Confront and Transform ALL Institutions that Have Destroyed Individual Self-Respect and Collective Self-Confidence

In "Get Up, Stand Up, " I detail 12 major institutional and cultural areas that have broken people's sprit of resistance, and all are "battlefields for democracy" in which we can fight to regain our individual self-respect and collective self confidence:

• Television
• Isolation and bureaucratization
• "Fundamentalist consumerism" and advertising/propaganda
• Student loan debt and indentured servitude
• Surveillance
• The decline of unions/solidarity among working people
• Greed and a "money-centric" culture
• Fear-based schools that teach obedience
• Psychopathologizing noncompliance
• Elitism via professional training
• The corporate media
• The US electoral system

As Ralph Waldo Emerson observed, "All our things are right and wrong together. The wave of evil washes all our institutions alike."

3. Side Each Day in Every Way With Anti-Authoritarians

We can recover our self-respect and strength by regaining our integrity. This process requires a personal transformation to overcome our sense of powerlessness and fight for what we believe in. Integrity includes acts of courage resisting all illegitimate authorities. We must recognize that in virtually every aspect of our life in every day, we can either be on the side of authoritarianism and the corporatocracy or on the side of anti-authoritarianism and democracy. Specifically, we can question the legitimacy of government, media, religious, educational and other authorities in our lives, and if we establish that an authority is not legitimate, we can resist it. And we can support others who are resisting illegitimate authorities. A huge part of solidarity comes from supporting others who are resisting the illegitimate authorities in their lives. Walt Whitman had it right: "Resist much, obey little. Once unquestioning obedience, once fully enslaved."

4. Regain Morale by Thinking More Critically About Our Critical Thinking

While we need critical thinking to effectively question and challenge illegitimate authority - and to wisely select the best strategies and tactics to defeat the elite - critical thinking can reveal some ugly truths about reality, which can result in defeatism. Thus, critical thinkers must also think critically about their defeatism, and realize that it can cripple the will and destroy motivation, thus perpetuating the status quo. William James (1842–1910), the psychologist, philosopher, and occasional political activist (member of the Anti-Imperialist League who, during the Spanish-American War, said, "God damn the US for its vile conduct in the Philippine Isles!") had a history of pessimism and severe depression, which helped fuel some of his greatest wisdom on how to overcome immobilization. James, a critical thinker, had little stomach for what we now call "positive thinking," but he also came to understand how losing belief in a possible outcome can guarantee its defeat. Antonio Gramsci (1891–1937), an Italian political theorist and Marxist activist who was imprisoned by Mussolini, came to the same conclusions. Gramsci's phrase "pessimism of the intellect, optimism of the will" has inspired many critical thinkers, including Noam Chomsky, to maintain their efforts in the face of difficult challenges.

5. Restore Courage in Young People

The corporatocracy has not only decimated America's labor union movement, it has almost totally broken the spirit of resistance among young Americans - an even more frightening achievement. Historically, young people without family responsibilities have felt most freed up to challenge illegitimate authority. But America's education system creates fear, shame and debt - all killers of the spirit of resistance. No Child Left Behind, Race to the Top and standardized testing tyranny results in the kind of fear that crushes curiosity, critical thinking and the capacity to constructively resist illegitimate authority. Rebel teachers, parents, and students - in a variety of overt and covert ways - have already stopped complying with corporatocracy schooling. We must also stop shaming intelligent young people who reject college, and we must instead recreate an economy that respects all kinds of intelligence and education. While the corporatocracy exploits student loan debt to both rake in easy money and break young people's spirit of resistance, the rest of us need to rebel against student loan debt and indentured servitude. And parents and mental health professionals need to stop behavior-modifying and medicating young people who are resisting illegitimate authority.

6. Focus on Democracy Battlefields Where the Corporate Elite Don't Have Such a Large Financial Advantage

The emphasis of many activists is on electoral politics, but the elite have a huge advantage in this battlefield, where money controls the US electoral process. By focusing exclusively on electoral politics at the expense of everything else, we: (1) give away power when we focus only on getting leaders elected and become dependent on them; (2) buy into the elite notion that democracy is all about elections; (3) lose sight of the fact that democracy means having influence over all aspects of our lives; and (4) forget that if we have no power in our workplace, in our education and in all our institutions, then there will never be democracy worthy of the name. Thus, we should focus our fight more on the daily institutions we experience. As Wendell Berry said, "If you can control a people's economy, you don't need to worry about its politics; its politics have become irrelevant."

7. Heal from "Corporatocracy Abuse" and "Battered People's Syndrome" to Gain Strength

Activists routinely become frustrated when truths about lies, victimization and oppression don't set people free to take action. But when we human beings eat crap for too long, we gradually lose our self-respect to the point that we become psychologically too weak to take action. Many Americans are embarrassed to accept that, after years of corporatocracy subjugation, we have developed "battered people's syndrome" and what Bob Marley called "mental slavery." To emancipate ourselves and others, we must:

• Move out of denial and accept that we are a subjugated people.
• Admit that we have bought into many lies. There is a dignity, humility, and strength in facing the fact that, while we may have once bought into some lies, we no longer do so.
• Forgive ourselves and others for accepting the abuser's lies. Remember the liars we face are often quite good at lying.
• Maintain a sense of humor. Victims of horrific abuse, including those in concentration camps and slave plantations, have discovered that pain can either immobilize us or be transformed by humor into energy.
• Stop beating ourselves up for having been in an abusive relationship. The energy we have is better spent on healing and then working to change the abusive system; this provides more energy, and when we use this energy to provide respect and confidence for others, everybody gets energized.

8. Unite Populists by Rejecting Corporate Media's Political Divisions

The corporate media routinely divides Americans as "liberals," "conservatives" and "moderates," a useful division for the corporatocracy, because no matter which of these groups is the current electoral winner, the corporatocracy retains power. In order to defeat the corporatocracy, it's more useful to divide people in terms of authoritarians versus anti-authoritarians, elitists versus populists and corporatists versus anticorporatists. Both left anti-authoritarians and libertarian anti-authoritarians passionately oppose current US wars in Afghanistan and Iraq, the Wall Street bailout, the PATRIOT Act, the North American Free Trade Agreement (NAFTA), the so-called "war on drugs" and several other corporatocracy policies. There are differences between anti-authoritarians but, as Ralph Nader and Ron Paul have together recently publicly discussed, we can form coalitions and alliances on these important power-money issues. One example of an anti-authoritarian democratic movement (which I am involved in) is the mental health treatment reform movement, comprised of left anti-authoritarians and libertarians. We all share distrust of Big Pharma and contempt for pseudoscience, and we believe that people deserve truly informed choice regarding treatment. We respect Erich Fromm, the democratic-socialist psychoanalyst, along with Thomas Szasz, the libertarian psychiatrist, both passionate anti-authoritarians who have confronted mental health professionals for using dogma to coerce people.

9. Unite "Comfortable Anti-Authoritarians" and "Afflicted Anti-Authoritarians

This "comfortable-afflicted" continuum is based on the magnitude of pain that one has simply getting through the day. The term comfortable anti-authoritarian is not a pejorative one, but refers to those anti-authoritarians lucky enough to have decent paying and maybe even meaningful jobs, or platforms through which their voices are heard or social supports in their lives. Many of these comfortable anti-authoritarians may know that there are millions of Americans working mindless jobs in order to hold on to their health insurance, or hustling two low-wage jobs to pay college loans, rent and a car payment, or who may be unable to find even a poorly paying, mindless job and are instead helplessly watching eviction or foreclosure and bankruptcy close in on them. However, unless these comfortable anti-authoritarians have once been part of that afflicted class - and remember what it feels like - they may not be able to fully respect the afflicted's emotional state. The afflicted need to recognize that human beings often become passive because they are overwhelmed by pain (not because they are ignorant, stupid, or lazy), and in order to function at all, they often shut down or distract themselves from this pain. Some comfortable anti-authoritarians assume that people's inactions are caused by ignorance. This not only sounds and smells like elitism, it creates resentment for many in the afflicted class who lack the energy to be engaged in any activism. Respect, resources and anything that concretely reduces their level of pain is likely to be far more energizing than a scolding lecture. That's the lesson of many democratic movements, including the Great Populist Revolt.

10. Do Not Let Debate Divide Anti-Authoritarians

Spirited debate is what democracy is all about, but when debate turns to mutual antipathy and divides anti-authoritarians, it plays into the hands of the elite. One such divide among anti-elitists is over the magnitude of change that should be worked for and celebrated. On one extreme are people who think that anything is better than nothing at all. At the other extreme are people who reject any incremental change and hold out for total transformation. We can better unite by asking these questions: Does the change increase individual self-respect and collective self-confidence, and increase one's energy level to pursue even greater democracy? Or does it feel like a sellout that decreases individual self-respect and collective self-confidence, and de-energizes us? Utilizing the criteria of increased self-respect and collective self-confidence, those of us who believe in genuine democracy can more constructively debate whether the change is going to increase strength to gain democracy or is going to take the steam out of a democratic movement. Respecting both sides of this debate makes for greater solidarity and better decisions.

To summarize, democracy will not be won without guts and solidarity. Risk-free green actions - such as shopping from independents, buying local, recycling, composting, consuming less, not watching television and so on - can certainly help counter a dehumanizing world. However, revolutions that truly transform fundamental power inequities and enable us to feel like men and women rather than children and slaves require risk, guts and solidarity.

No Place for Small Business Growth

2011-10-28T01:54:00.000-07:00

The Dow jumped 162 points yesterday. Up, down...up, down...when will it stop?

Never. That’s what prices do. They go up and they go down.

Discovering...discovering...the markets will never cease discovering...

And the end of all their discoveries will be, to return to the place where they began, and to know it for the first time...

Poetry! Yes, dear reader, poets are probably better able to tell you what is going on in the world than economists. Today’s economists are tied to their worn-out, crack-pot theories. They won’t give them up...even though they do not work.

Poets at least are on the right track...probing deep into the soft, easily corrupted tissue of the human heart.

We’ll come back to that in a moment. First, we would like to tell you why unemployment is so high. Yes, dear reader, the pieces of the puzzle are coming together.

Why is unemployment so high?

Well, who creates jobs? Small businesses.

Big businesses cut jobs. That is how they maintain profit margins so they can pay bonuses to their over-paid managers.

Small businesses...growing businesses...businesses that are adding value and building wealth...create new jobs.

Why so few new jobs now? Because more and more money — capital allocation decisions — are in the hands of the feds. The feds always favor existing businesses...big businesses that make campaign contributions and whose lobbyists take them to lunch. They never favor small start-ups. The start-ups don’t have any money...or any lobbyists. The start-ups have no political power.

The feds favor big businesses in direct, obvious ways — such as tax credits, bailouts and government contracts. They also favor big businesses by making it hard for the start-ups to compete with them.

Let’s just say, dear reader, that you wanted to start a new kind of bank. You saw that the big banks are ripping off their clients...losing money...and getting bailed out by the feds. So, you figure you’ll do to the banks what Napster did to the music business or Amazon did to the book business. After all, moving money around is just an electronic, digital process. It should be dirt cheap to run a bank. You could even create a much better way for customers to hold their money. You could allow them to choose whatever currency they would like...or they could hold their cash in gold...just with a few clicks on a computer keyboard. You could set it up so no customer would ever lose money...because his account would be backed by, say, 100% physical gold. And you could cut credit card transactions and banking fees down to a fraction of what they cost today.

And you know what else? You could end inflation. And end the worry about choosing currencies...or hedging against one currency or another. You could create your own gold-backed currency!

Heck, it’s all information. A few computers. A few programmers. You could revolutionize the banking business and send Bank of America into bankruptcy even faster than it is going on its own.

Do you think you could do that, dear reader? Well, the answer is no. You can’t. Because the regulators — put in place with the conniving cooperation of the banking industry — would stop you. Otherwise, some enterprising entrepreneur would have wreaked creative destruction on the banking industry years ago. And the dinosaur banks that remained would have been wiped out in the crisis of ’07- ’09.

Instead, the feds came to the rescue of the big banks. The start-ups were shut down by the regulators. And the new jobs never happened.

That’s just banking...an obvious example. But in every industry the story is about the same. Existing businesses colluded with the feds to set up barriers to entry and to absorb savings, which could otherwise be used to start small businesses. The US government runs a deficit that is greater than the total savings of the nation. It decides where these resources go. And one place they never go is to businesses that haven’t been created yet.

Government always favors the past. It is always reactionary. It is always backward looking...trying to protect industries that were developed a long time ago. It always tends toward “zombieism,” in other words...

Many dear readers probably thought our focus on ‘zombies’ was a joke. But we’re as serious as we are about anything. And the more we look at what is going on in the US economy, the more convinced we are that zombies are behind it.

Zombieism refers to a tendency of things to become paralyzed and parasitic. When anything ages it becomes less adaptable, less flexible, more ‘stuck in its ways.’

You know the expression: ‘You can’t teach an old dog new tricks.’
That’s partly because the old dog is tired and doesn’t want to learn any new tricks. And it’s partly because he doesn’t need to. Old dogs just lie around. They eat, but they don’t hunt. Their joints are stiff. Their ambitions are few. They’ve figured out how to get the bone without much effort.

Likewise, old people often distrust anything new. They’ve seen that most new things don’t work out very well.

And they often become parasitic. They eat. But they don’t produce. It’s just natural. Often, old people mimic the grave before crawling into it. They don’t move. They don’t think. They shuffle around...like zombies.

Now, magnify these natural tendencies onto a whole economy, a whole society, a whole nation. The US has been in business for nearly 250 years. Is it any wonder it is a little fusty?

But today, instead of explaining the General Theory of Zombieism in detail, we are going to begin by asking you some questions, dear reader.

How come university tuition rose more than 8% last year, when most prices rose only half as much?

How come so few new jobs are created...in a society where so many intelligent, well-educated people are looking for work?

How come health care costs go up year after year — like education expenses — at twice the rate of the CPI...and people are no healthier?

How come the government now consumes more than $41 out of every $100 of national output...making it by far the largest allocator of capital in the world — when it is supposed to be a free enterprise system?
How come the US government — which is supposed to be the best system that 300 million smart people can come up with — is actually a system that no sane person could possibly want?

All those questions have the same answer. The whole system has become zombified...taken over by unproductive, parasitic tendencies.

More to come...

Regards,

Bill Bonner,
for The Daily Reckoning

Truisms of a Financial Crisis

2011-10-28T01:40:00.000-07:00

By Bill Bonner

So much information and so many ideas come to us daily in the financial press. We’re able to fill up our trash basket in just minutes

In The Financial Times, for example, Larry Summers recently offered a solution to America’s housing debt problem. And in The Herald Tribune our favorite comedian, Thomas L. Friedman, tells us about the next Internet revolution and what a wonderful world it will create.

Meanwhile, stocks appear to be on the march again. The Dow is up over 4% for the week. And oil is back over $90 per barrel.

Once again, ‘recovery’ hopes are building. The Europeans just have to sort out their debt mess. And Americans too!

And that should be easy. There are so many smart people on the job!

In Europe, Monsieur Sarkozy and Frau Merkel — not to mention an army of technicians, bankers and delusional incompetents — are finding ways to solve Europe’s debt crisis. How? By adding more leverage...debt...and confusion. To simplify, today’s bad debt will be guaranteed by tomorrow’s bad debt. The authorities are just hoping that between today and tomorrow is sufficient time for them to get away. It may be a bigger problem, they say to themselves, but at least it will be someone else’s problem.

And who knows, maybe Mr. Friedman will be right. He’s wrong with such conviction and such regularity that there is bound to come the time when he is right by accident. Now he tells us he sees another ‘tech revolution’ coming, this one based on ‘the cloud’ and the social media. Surely this one is going to make us all rich...or make the world a better place...whichever comes first.

He hardly mentions the last tech revolution, which he also thought would make us all rich. It did nothing of the sort, of course. Against all odds, the last decade bucked the course of 300 years of history. With the help of the new technology — at their fingertips — Americans got poorer!

But that’s a long story.
So, let’s turn to Mr. Summers. He tells us that the problem with the US economy is that people have lost too much money on their houses. And if house prices sink further there is little chance that the economy can get out of its present low-growth slump.

Right so far. But what to do about it?

The man with all the answers steps boldly forward and proposes to make a bad situation worse. How would he address the problem of too much mortgage debt? By increasing the amount of mortgage debt!

“It is a central irony of financial crisis that while it is caused by too much confidence, too much borrowing and lending, and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.”

That may seem stupid to you and other sensible mortals, dear readers. But Mr. Summers sups with the gods, where the rules that cover the rest of us don’t apply. He says the problem with public policy is its “inability to appreciate this truism.”

The real truism is that Larry Summers has never understood what is going on. Nor will he. His whole career is based on not understanding. It’s served him well so far; he’ll stick with it.

The idea behind Mr. Summers’ solution is that you subsidize what doesn’t work; you reward failure. So, instead of abolishing Fannie and Freddie, for example, you give them more money...

Failed mortgage lending is a big drag on the economy. So, you lend more!

You could apply the same logic to other failed industries — such as education. Education spending has soared over the last 40 years. But test scores show there has been no payoff...no improvement at all.
One of the ways the feds shift resources to this zombie sector is with student loans. Bloomberg has the report:

William Prince, of Rosenberg, Texas, knows just how inescapable student loans can be. The 52-year-old father of two started paying off $51,000 in college debt 15 years ago and now owes $57,000. “I don’t expect to pay these loans off in my lifetime,” he says. Prince, a criminal justice major who works in private security, had to defer payments during three bouts of unemployment, and the accumulated interest left him deeper in debt.

Americans now owe about $950 billion in student loans — more than their total credit-card debt. The weight of those IOUs is a frequent refrain for Occupy Wall Street protestors and their online supporters. On the “We Are the 99 Percent” Tumblr blog, which features hundreds of pictures of people holding handwritten signs describing their desperate financial situations, student loan concerns exceed those about children, unemployment, and health care, according to an analysis by Mike Konczal, a fellow with the nonprofit Roosevelt Institute.

Desperation may have something to do with that outcry. Two out of five Americans with federal student debt can’t make monthly payments and either defer, default or are delinquent, according to Mark Kantrowitz, publisher of Fastweb.com, a free scholarship-matching service, and FinAid.org, a source of student financial aid information...

We’ll save Larry Summers some thinking. What to do about this trillion-dollar weight of student debt? Lend the students more money!

The Class War Has Begun

2011-10-25T02:23:00.001-07:00

By Frank Rich, NY Times Magazine

During the death throes of Herbert Hoover’s presidency in June 1932, desperate bands of men traveled to Washington and set up camp within view of the Capitol. The first contingent journeyed all the way from Portland, Oregon, but others soon converged from all over alone, in groups, with families until their main Hooverville on the Anacostia River’s fetid mudflats swelled to a population as high as 20,000. The men, World War I veterans who could not find jobs, became known as the Bonus Army for the modest government bonus they were owed for their service. Under a law passed in 1924, they had been awarded roughly $1,000 each, to be collected in 1945 or at death, whichever came first. But they didn’t want to wait any longer for their pre New Deal entitlement especially given that Congress had bailed out big business with the creation of a Reconstruction Finance Corporation earlier in its session. Father Charles Coughlin, the populist Radio Priest who became a phenomenon for railing against greedy bankers and financiers, framed Washington’s double standard this way: If the government can pay $2 billion to the bankers and the railroads, why cannot it pay the $2 billion to the soldiers?

The echoes of our own Great Recession do not end there. Both parties were alarmed by this motley assemblage and its political rallies; the Secret Service infiltrated its ranks to root out radicals. But a good Communist was hard to find. The men were mostly middle-class, patriotic Americans. They kept their improvised hovels clean and maintained small gardens. Even so, good behavior by the Bonus Army did not prevent the U.S. Army’s hotheaded chief of staff, General Douglas MacArthur, from summoning an overwhelming force to evict it from Pennsylvania Avenue late that July. After assaulting the veterans and thousands of onlookers with tear gas, MacArthur’s troops crossed the bridge and burned down the encampment. The general had acted against Hoover’s wishes, but the president expressed satisfaction afterward that the government had dispatched a mob albeit at the cost of killing two of the demonstrators. The public had another take. When graphic newsreels of the riotous mêlée fanned out to the nation’s movie theaters, audiences booed MacArthur and his troops, not the men down on their luck. Even the mining heiress Evalyn Walsh McLean, the owner of the Hope diamond and wife of the proprietor of the Washington Post, professed solidarity with the mob that had occupied the nation’s capital.

The Great Depression was then nearly three years old, with FDR still in the wings and some of the worst deprivation and unrest yet to come. Three years after our own crash, we do not have the benefit of historical omniscience to know where 2011 is on the time line of America’s deepest bout of economic distress since that era. (The White House, you may recall, rolled out recovery summer sixteen months ago.) We don’t know if our current president will end up being viewed more like Hoover or FDR. We don’t know whether Occupy Wall Street and its proliferating satellites will spiral into larger and more violent confrontations, disperse in cold weather, prove a footnote to our narrative, or be the seeds of something big.

What’s as intriguing as Occupy Wall Street itself is that once again our Establishment, left, right, and center, did not see the wave coming or understand what it meant as it broke. Maybe it’s just human nature and the power of denial, or maybe it’s a stubborn strain of all-American optimism, but at each aftershock since the fall of Lehman Brothers, those at the top have preferred not to see what they didn’t want to see. And so for the first three weeks, the protests were alternately ignored, patronized, dismissed, and insulted by politicians and the mainstream news media as a neo-Woodstock for wannabe collegiate rebels without a causeand not just in Fox-land. CNN’s new prime-time hopeful, Erin Burnett, ridiculed the protesters as bongo-playing know-nothings; a dispatch in The New Republic called them an unfocused rabble of ragtag discontents. Those who did express sympathy for Occupy Wall Street tended to pat it on the head before going on to fault it for being leaderless, disorganized, and inchoate in its agenda.

Despite such dismissals, the movement, abetted by made-for-YouTube confrontations with police, started to connect with the mass public much as the Bonus Army did with a newsreel audience. The week after a Wall Street Journal editorial claimed that no one seems to care very much about the collection of ne’er-do-wells congregating in Zuccotti Park, the paper released its own poll, in collaboration with NBC News, finding that 37 percent of Americans supported the protesters, 25 percent had no opinion, and just 18 percent opposed them. The approval numbers for Occupy Wall Street published in Time and Reuters were even higher—hitting 54 percent in Time. Apparently some of those dopey kids, staggering under student loans and bereft of job prospects, have lots of parents and friends of all ages who understand exactly what they’re talking about.

Coverage increased and politicians ran for cover. Mayor Bloomberg, who had initially (and preposterously) portrayed the occupiers as a threat to the financial industry’s lower-income service workers, gingerly observed that some unspecified people are very frustrated. Though the Treasury secretary, Timothy Geithner, waffled when asked if he had any sympathy for Occupy Wall Street, Barack Obama publicly acknowledged the demonstrators’ broad-based frustration about how our financial system works.* (If Bloomberg and Obama are both using frustration, you can be certain it is a focus-group-tested trope chosen not to frighten the presumed sensibilities of independents.) Mitt Romney, who had first called the protests dangerous,” executed another of his patented flip-flops to assert that he, too, identifies with America’s 99 percent, not the top one percent where he’s always dwelled. Boy, I understand how these people feel, he said. (Boy, do these people not believe him.) Even Eric Cantor, who’d described the protesters as mobs, started talking about what else? frustration.

These efforts to domesticate and contain the protests are unlikely to succeed. It is not frustration that’s roiling America but anger, the anger of a full-fledged class war. Try as polite company keeps trying to ignore it, that war has been building in this country and abroad for much of this decade and has been waged in earnest in America since the fall of 2008. But the crisp agenda demanded of Occupy Wall Street will not be forthcoming. The inchoateness of our particular class war is central to its meaning. America is not Tahrir Square or the riot-scarred precincts of North London, where everyone knows at birth who is in which class and why. We pride ourselves on being a classless” democracy. We abhor ideology. When Americans left and right, young and old, express anger at an overclass, they don’t necessarily agree about who’s on which side of that class divide. The often confusing fluidity of class definitions, especially in an America as polarized as ours is now, may make our home grown class war more volatile, not less.

The tea-party right finds the hippie-scented movement in lower Manhattan repellent, but it and Occupy Wall Street are two sides of the same coin. Take Back America, the initial tea-party battle cry, would work for those in Zuccotti Park as well. The disagreement is about which America needs to be taken back, and from whom.

Provoked by Obama’s ascent, the right was ahead of the class-war curve, with Sarah Palin sounding the charge when she stuck up for the real America against the elites during the 2008 campaign. The real America, as she defined it, was in small towns those who are running our factories and teaching our kids and growing our food. In other words: It is the middle class (or at least its white precincts) that fell behind while the rich got richer. The Über-class she and her angry followers would take to the guillotine, however, is not defined by its super-wealth. It is first and foremost exemplified by potentates in the federal government, especially the Ivy League cohort of Obama closely followed by the usual right-wing populist bogeymen, the pointy-headed experts in fancy universities and the mainstream-media royalty with their gotcha questions.

Palin may now have abdicated her position on the barricades, not least because she succumbed to the financial blandishments of the unreal America, but the zeal of her constituency has not faded a bit. The right’s angry class warriors constitute the vast majority of the GOP that roughly three- quarters of the party that seems determined to resist Romney no matter what. A Harvard-educated former Massachusetts governor, especially one who embraced the social engineering of health-care reform, inspires class anger from his own party to the same degree that his private-sector record as a leveraged-buyout tycoon provokes class anger from Democrats.

But while Romney is a class enemy liberals and conservatives can unite against, perhaps nothing has revealed how much the class warriors of the right and left of our time have in common than the national outpouring after Steve Jobs’s death. Indeed, the near-universal over-the-top emotional response more commensurate with a saintly religious or civic leader, not a sometimes bullying captain of industry brought Americans of all stripes together as few events have in recent memory.

Some on the right were baffled that the ostensible Marxists demonstrating in lower Manhattan would observe a moment of silence and assemble makeshift shrines for a top one-percenter like Jobs, whose expensive products were engineered for near-instant obsolescence and produced by Chinese laborers in factories with substandard health-and-safety records. For heaven’s sake, the guy didn’t even join Warren Buffett and Bill Gates in their Giving Pledge. There is perhaps no greater image of irony, wrote the conservative blogger Michelle Malkin, than that of anti-capitalist, anti-corporate, anti-materialist extremists of the Occupy Wall Street movement paying tribute to Steve Jobs.

Yet those demonstrators who celebrated Jobs were not necessarily hypocrites at all and no more anti-capitalist than the Bonus Army of 1932. If you love your Mac and iPod, you can still despise CDOs and credit-default swaps. Jobs’s genius in the words of Regis McKenna, a Silicon Valley marketing executive who worked with him early on was his ability to strip away the excess layers of business, design, and innovation until only the simple, elegant reality remained. The supposed genius of modern Wall Street is the exact reverse, piling on excess layers of business and innovation on ever thinner and more exotic creations until simple reality is distorted and obscured. Those in Palin’s real America may not be agitated about the economic 99-vs.-one percent inequality brought about by the rise of the financial sector in the past three decades, but, like class warriors of the left, they know that financial instruments wreaked havoc on their 401(k)s, homes, and jobs. The bottom line remains that Wall Street’s opaque inventions led directly to TARP, the taxpayers’ bank bailout that achieved the seemingly impossible feat of unifying the left and right in rage against government much as Jobs’s death achieved the equally surprising coup of unifying left and right in mourning a corporate god.

That bipartisan grief was arguably as much for the passing of a capitalist culture as for the man himself. Finance long ago supplanted visionary entrepreneurial careers like Jobs’s as the most desired calling among America’s top-tier university students, just as hedge-fund tycoons like John Paulson and Steve Cohen passed Jobs on the Forbes 400 list. Americans sense that something incalculable has been lost in this transformation that cannot be measured in dollars and cents.

There’s no handier way to track just how much American capitalism has changed since Apple’s divine, mid-�seventies birth in a garage than by following the corporate afterlife of the American icon most frequently invoked as Jobs’s antecedent in his obituaries, Thomas Alva Edison. Like Jobs, Edison wasn’t just a brilliant fount of technological breakthroughs but a businessman as well (albeit a less savvy one). He was the official founder of General Electric�known as Edison General Electric at its inception in 1890, before Edison was strong-armed into an early merger. G.E. was created to maximize the profits of his many inventions and businesses, Apple style. And like Apple, the company flourished as an exemplar of American capitalism at its most creative and productive, even in a downtime. During the Great Depression, it produced an astonishing array of Jobs-worthy �innovations�the first commercial fluorescent lamp, the first waste �Disposall,� the first night baseball game, and the first television network. This was the job-�creating, profit-making, America-�empowering corporate behemoth, spewing out refrigerators and jet engines, that would ultimately recruit Ronald Reagan as its television pitchman in the fifties.

But the G.E. born out of Edison’s genius and synergistic with Reagan’s brand of postwar jingoism is far from the G.E. of our time. Its once minor financial-services subsidiary, G.E. Capital, metastasized over the past 30 years in sync with the growth of the new Wall Street. In 1990, G.E. Capital accounted for just a quarter of G.E.’s overall profits, but by 2007, on the eve of the crash, it had gobbled up 55 percent of the bottom line. Its sophisticated gambling strategies, like those of the big banks it emulated, amounted to an ingenious get-rich-quick scheme for high-rollers until the bottom fell out, taking shareholders and employees, not to mention the country, down with it. G.E. Capital’s dependence on short-term credit was so grave that it forced G.E. to cut back its dividend for the first time since the thirties and to turn to Buffett for a $3 billion emergency cash infusion in the dark days of October 2008.

The cheerleader for ratcheting up that risk at G.E. was the CEO, Jeffrey Immelt. These days he heads the president’s ineffectual Council on Jobs and Competitiveness, despite his own corporation’s record of job-shedding in America and the revelation that G.E. paid no American taxes in 2010 (on more than $14 billion in profits, including $5.1 billion in the U.S.). Immelt is a Republican, but that didn’t prevent Palin this fall from calling G.E. �the poster child of corporate welfare and crony capitalism.� (Bill O’Reilly and Newt Gingrich joined this class-warfare chorus.) On this point, once again, there is no air between the right and Occupy Wall Street. And as both camps condemn Immelt, so they are also united in the conviction that the godfather of Obama’s economic team, Robert Rubin, is likewise a poster child for corporate welfare and crony capitalism. Rubin, whose useful cronies included his former protégés Geithner and Lawrence Summers, encouraged reckless greed and risk at Citigroup during the bubble much as Immelt did at G.E. Capital, ultimately requiring the taxpayers’ rescue of TARP.

Politicians in either party, of course, never use the term �class warfare� to describe what’s going on in America, unless it’s Republican leaders accusing Obama of waging it every time he even mildly asserts timeless liberal bromides about taxing the rich. Nor do most politicians want to talk about the depth of the crisis in present-day capitalism, since to acknowledge its scale would only dramatize how little they intend to do about it.

The whole system is screwed up, and it’s not all Wall Street’s fault�or remotely in the financial sector’s power alone to solve. As middle-class Americans have lost their jobs or watched their wages stagnate or decline while corporations pile up record profits, they’ve also seen CEOs far removed from Wall Street (at Hewlett-Packard and Yahoo most recently) walk away with rich settlements even after they’ve laid off workers en masse, mismanaged their companies, or wrecked them. But at least politicians pay lip service to the woes of the middle class. That America’s poverty rate has risen to its highest level since 1993 goes all but unmentioned by leaders in both parties. The poor, after all, don’t make campaign contributions and are unlikely to vote. And they have even less clout than usual now that Republican legislators and governors, fanning bogus fears of �voter fraud,� have mandated new, Jim Crow�style restrictions to scare away poor, elderly, and minority voters in fourteen states. In the Beltway bubble, even the local poor are out of sight and out of mind; with a 6.1 percent unemployment rate and a median income of $84,523 (versus $50,046 nationally), Washington is now the wealthiest metro area in the country and, according to Gallup, departs from all 50 states in believing by a majority that the economy is getting better.

Back in 1931, even Hoover worried that �timid people, black with despair� had �lost faith in the American system� and might be susceptible to the kind of revolutions that had become a spreading peril abroad. When Roosevelt took office, he had the confidence that his leadership could overcome that level of despair and head off radicals on the left or right. In 2011, the despair is again black, and faith in the system is shaky, but it would be hard to describe the atmosphere at Zuccotti Park or a tea-party rally as prerevolutionary. The anger of the class war across the spectrum seems fatalistic more than incendiary. No wonder. Everyone just assumes the fix is in for the highest bidder, no matter what. Take�please!�the latest bipartisan Beltway panacea: the congressional supercommittee charged by the president and GOP leaders to hammer out the deficit-reduction compromise they couldn’t do on their own. The Washington Post recently discovered that nearly 100 of the registered lobbyists no doubt charged with besieging the committee to protect the interests of the financial, defense, and health-care industries are former employees of its dozen members. Indeed, six of those members (three from each party) currently have former lobbyists on their staffs.

Elections are supposed to resolve conflicts in a great democracy, but our next one will not.

Just in time for election season, Obama has recovered his populist rhetoric (if not populism itself) and will say the right things about Wall Street, about that �frustration� out there, about the modest reforms of Dodd-Frank, and about millionaires who don’t pay their fair share of taxes. It’s not clear if anyone believes it, including him. Having been a bystander to history when the tea party harvested populist rage during the summer of 2009, he may have a tough time co-opting Occupy Wall Street now to plug the so-called enthusiasm gap in his base. There’s a serious danger that the anger could co-opt him instead. To pander to the swing state of North Carolina, the Democrats in their wisdom chose to hold their convention in a city best known as the headquarters of Bank of America, whose recent financial innovations include illegal robo-foreclosures and the $5 monthly fee on debit cards. Occupy Charlotte could be a far more telegenic show than the one happening inside the hall.

Despite all the chatter to the contrary, Obama is so far outdrawing all the GOP candidates combined in Wall Street contributions. His best hope is that that fact is blurred by either Romney, the plutocrat from central casting, or Rick Perry, a creature of lobbyists and pay-for-play government in Texas. Herman Cain’s as yet little-known corporate history would also prove problematic to Republicans: He’s not only an unabashed Alan Greenspan fan who was chairman of the Kansas City Fed but also served on the board of Aquila, an energy company that ended up paying a $10.5 million settlement for Enron-esque shenanigans. (Cain’s campaign manager hails from Americans for Prosperity, the Koch brothers’ political front.) Whatever else is to be said about Michele Bachmann, Rick Santorum, Tim Pawlenty, and Ron Paul, they actually spent most of their pre-political careers in the aggrieved middle class. But they are all history in the presidential race, and perhaps were destined to be, given how big money plays its hand. You don’t have to like their views to find their earnest but misplaced faith in the free-market efficiency of the political system a bit poignant.

Elections are supposed to resolve conflicts in a great democracy, but our next one will not. The elites will face off against the elites to a standoff, and the issues animating the class war in both parties won’t even be on the table. The structural crises in our economy, our government, and our culture defy any of the glib solutions proposed by current Democrats or Republicans; the quixotic third-party movements being hatched by well-heeled do-gooders are vanity productions. The two powerful forces that extricated America from the Great Depression�the courageous leadership and reformist zeal of Roosevelt, the mobilization for World War II�are not on offer this time. Our class war will rage on without winners indefinitely, with all sides stewing in their own juices, until�when? No one knows. The reckoning with capitalism’s failures over the past three decades, both in America and the globe beyond, may well be on hold until the top one percent becomes persuaded that its own economic fate is tied to the other 99 percent’s. Which is to say things may have to get worse before they get better.

Over the short term, meanwhile, the Democratic Establishment is no doubt wishing that Occupy Wall Street will melt away with the winter snows, much as its Republican counterpart hopes that the leaderless tea party will wither if Romney nails down the nomination. But even in the unlikely event that these wishes come true, it is not likely to be the end of the story. Though the Bonus Army was driven out of Washington in the similarly fraught election year of 1932, the newsreels they left behind turned out to be previews of coming attractions for the long decade still to come.

The 8% Solution

2011-10-19T01:05:00.000-07:00

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.

The terminal stage of Dr. Frankenstein-style central banking is disgorging ridiculous claims of authority motivated by reckless efforts to retain control. One such pincer attack is the Federal Reserve’s purported 2% inflation target. Behind our very eyes, this fictional mandate is being raised, all the more reason that savers need to speculate, not a welcome prospect with both inflationary and deflationary influences expanding and bound to burst.

A certainty of this age (post-Western-Civilization) is the ease with which libertine policies escalate to fantastic proportions even as they are failing. The Federal Reserve mumbles its 2% inflation target while the “economic literature” has sown the garden for an 8% inflation rate, in the name of “price stability.”

To be more precise, “inflation” to the Federal Reserve is conveniently defined as the consumer price index – without including food and energy. This 2% or 8% target should be understood as a negative interest rate. The Federal Reserve will (through its current policy, although this will boomerang at some point) hold Treasury yields at zero-percent. It will target inflation at 2% to 20%.

In The Beginning, at least in this short narrative, a Harvard economist told a Senate committee the United States must accept a 2% inflation rate as the cost of prosperity. That was in 1957, a very good year to wrap such a career-advancing declaration inside a Cold War mandate. “Growth” would defeat the Soviet Union.

Federal Reserve Chairman William McChesney Martin did not agree. On August 13, 1957, Martin warned that recent inflationary pressures had risen from a period of strong economic growth fostered by “‘imbalances in the economy’ in which ‘rising costs and prices mutually interact upon each other over time with a spiral effect.’ . . . The person most likely to be injured in the inflationary cycle was the ‘hardworking and thrifty…little man’ on fixed income who could protect neither his income nor the value of his savings.”

Martin was doomed to lose this battle and the media misunderstood hemorrhaging inflationary tendencies. Inflation was National Worry #1 when the business editor of the New York Times calmed his readers: “Luckily, the Government has the ability and the wisdom not to let inflation break into a gallop as it has happened recently in other countries.” That was in 1966.

President Richard Nixon held a farewell gala for Martin in 1970. The soon-to-be ex-Federal Reserve chairman sobered up the tipsy revelers when he removed the punch bowl during his valedictory speech: “I wish I could turn the bank over to Arthur Burns [the next Fed Chairman] as I would have liked. But we are in deep trouble. We are in the wildest inflation since the Civil War.”

Moving ahead, Professor Ben S. Bernanke wrote a book that was well received in the right circles: Inflation Targeting: Lessons from the International Experience (2001). One of his co-authors was Frederic Mishkin. Those in the know understand the implications of Mishkin’s cooperation. The book propagated the awful euphemisms (“the zero-bound” and “inflation targeting”) used to disguise their mandate to inflate. Rather, they could have simply stated: “Let’s ruin the dollar.”

Some economists took exception. Lee Hoskins, president of the Federal Reserve Bank of Cleveland from 1987 to 1991, wrote: “Pundits, economists, and some Fed officials often talk about the fight against inflation or the battle against it or the need to contain it as if it is some preternatural event. The Fed does not have to battle or contain inflation, it creates inflation…. So when a Fed official says the goal for inflation should be 2 percent, he is explicitly choosing to create that rate of inflation.” (“Zero Inflation: Goal and Target,” 2005) Hoskins is not a regular on CNBC’s short list. (See “The Education Gap.”)

Federal Reserve policy of 2% inflation is a product of failure and verbal repetition. Bernanke’s Fed needs room to maneuver (“infinite bound”), and a wide fairway to compound its broadening failure, while not losing credibility. Thus, this fictional authority is repeated over and over. Current Federal Reserve Governor Janet Yellen: “This increase in core inflation was below the 2 percent rate that I and most of my fellow Fed policymakers on the Federal Open Market Committee (FOMC) consider an appropriate long-term price stability objective.”

Note the structure of Yellen’s statement. She hides the arbitrary (“consider an appropriate”) under legal cover (“price stability”). The Fed and its accomplices in the professorate train the public mind through such repetition.

Even with 2% inflation touted as a mark of price stability, higher figures are working their way into the public conscience. N. Gregory Mankiw, a Harvard economics professor who consistently establishes new lows in personal integrity, wrote a column in the April 19, 2009, New York Times: “It May Be Time to go Negative.”

It should be remembered that Mankiw made his proposal because Federal Reserve Chairman Ben S. Bernanke’s grand theory was failing. In October 2011, we know it has failed. Bernanke’s foolish interpretation of the Great Depression has done nothing to halt the housing bust. It is far worse today than in 2009, and probably about to take another tumble. This was an inevitable consequence of the credit binge, of which Bernanke’s Fed has no understanding. We have paid a heavy price for this ignorance. Investment continues its drift towards short-term trading gains and not into industries that need long-term investment to prosper. The result: a country with an inflation-adjusted median income that is 6.7% below that of June 2009.

In his 2009 column, Mankiw wrote: “[T]here is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates – interest rates measured in purchasing power – could become negative. Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. Ben S. Bernanke, the Fed chairman, is the perfect person to make this commitment to higher inflation….” That’s enough. Mankiw consistently makes Eddie Haskell’s syrupy conversations with Ward Cleaver sound like General Patton’s misadventure with the hospitalized soldier.

Note that Mankiw was behind the times. He needed to justifying negative interest rates even though such a course is inconsistent with the Fed’s mandated goal of “price stability.” No insufferably pliant economist would make that mistake today – note Yellen, above.

It is obvious that Mankiw is vying to head the Fed, with such maneuvers as his recently announced post as Presidential candidate Mitt Romney’s economic adviser. Romney has stated he will jettison Bernanke. (Romney’s other adviser is Glenn Hubbard – See: Inside Job) The resourceful Bill Black, author (The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry) and currently professor of Economics and Law at the University of Missouri – Kansas City recently quoted from a paper written by Mankiw in 1993: “[I]t would be irrational for operators of the savings and loans not to loot.”

Harvard economics professor Kenneth Rogoff, author of This Time is Different: Eight Centuries of Financial Folly, told Bloomberg News on May 19, 2009: “I’m advocating 6 percent inflation for at least a couple of years.” Rogoff has not changed course, recently advocating 6% inflation in the Financial Times.

Mankiw was quoted in the same article as declining to “put a number on what inflation rate the Fed should shoot for, saying that the central bank has computer models that would be useful for determining that.” The “model” trick is the mental ghetto that permits fourth-rate economists to become Federal Reserve chairmen.

But Mankiw is on to something. Why pin yourself to a rate, when triple-digit inflation may be required to really ruin the country?

The following sequence is a lesson in how bureaucracies insinuate their failures into accepted policy.

Stanley Fischer, current Governor of the Bank of Israel, doctoral Ph.D. thesis adviser to Ben S. Bernanke and to Greg Mankiw (at MIT), with stops at every institution of impeccable prestige among the anointed (chief economist at the World Bank, vice chairman of Citigroup) professed in 1997 that: “The fundamental task of a central bank is to preserve the value of the currency.” That is the first sentence in “Maintaining Price Stability,” a paper published when Fischer was First Deputy Managing Director of the International Monetary Fund. Five paragraphs later (wasting no time) Fischer wrote: “Barro (1995) and Sarel (1996) do not find a clear negative relationship below 8 percent inflation…” That is, as long as it remains at 8 percent or below, inflation is not a burden to economic growth.

We can be sure the conclusion rested on the result of some computer model. Barro (1995) and Sarel (1996) cited as their authority Fischer (1993), which is noted later in Fischer (1997).

In 2001, IMF economic researchers Mohsin S. Khan and Abdelhak S. Senhadji wrote a staff paper “Threshold Effects in the Relationship between Inflation and Growth.” The authors declare “[F]irst identified by Fischer (1993)” [addressing inflation below an 8 percent rate], “inflation does not have a significant effect on growth, or it may even show a slightly positive effect.” Note the change from the (1997) model Fischer from whom they quote: from “do not find clear negative relationship below 8 percent inflation,” to “it [8% inflation] may even show a slightly positive effect.” This sequence was arranged by Sheehan (2011)

In 1978, Federal Reserve Governor Henry C. Wallich spoke before the graduating seniors at Fordham University. His topic was inflation. Wallich explained the loser is labor. “Inflation becomes a means of exploiting labor’s money illusion.”

His speech is interesting in a contemporary context. The Wall Street protestors, who are probably building igloos in front of the Nome, Alaska city hall by now, are on to something; or, it seems, some things; but they are diffusing their influence. One of the protestors’ tendencies leans towards a government solution. This is a barren tangent. A supersized government uses supersized banks to remain supersized.

Wallich told the Fordham students, that government is one of the winners in an inflation. From this Federal Reserve official: “It [inflation] allows the politician to make promises that cannot be met in real terms, because, as the government overspends trying to keep those promises, the value of those benefits shrinks.” This creates a “diminishing ability of households to provide privately for the future…. One may ask whether it is not an essential attribute of a civilized society to be able to make that kind of provision for the future.”

Wallich went on to emphasize “the increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government.” If alive today, he would not be surprised the protestors are looking to the government for help. Wallich (1914-1988) grew up in Berlin and lived through what he warned against (1978).

Wallich added that inflation “creates a vacuum in the private sector into which the government moves.” He worried that the consequences of the inflation would be “a shift into the third dimension, away from democracy and toward authoritarianism.”

In Wallich’s Germany, Joseph Goebbels (1897-1945) spoke at Nuremberg (1934):

“It is no sign of wise leadership to acquaint the nation with hard facts over night. Crises must be prepared for not only politically and economically, but also psychologically. Here propaganda has its place. It must prepare the way actively and educationally. Its task is to prepare the way for practical actions. It must follow these actions step by step, never losing sight of them. In a manner of speaking, it provides the background music. Such propaganda in the end miraculously makes the unpopular popular, enabling even a government’s most difficult decisions to secure the resolute support of the people. A government that uses it properly can do what is necessary without running the risk of losing the masses.”

Did QE2 Cause the (Present) Recession?

2011-10-19T00:43:00.000-07:00

Randall Forsyth of Barron’s asks this rather intriguing question:

While the Fed mulls more ambitious plans to tell the public how it will steer the economy in the future, perhaps the monetary authorities should reflect on the results of their recent efforts. As notes long-time Fed watcher Lacy Hunt of Hoisington Investment Management in Austin, Texas, the unintended consequences of its policies have all but superseded their professed aims. For instance, QE2—the Fed’s purchase of $600 billion of Treasury securities completed in June—caused the current slowdown instead of giving the economy a boost, he writes in Hoisington’s Quarterly Review and Outlook. Real disposable income was lower in August than in December, in part because of the jump in commodity costs. “While rising equity values helped a few consumers, inflation in necessities, such as food and fuel, decimated real incomes for the average family. Thus, the emergent cyclical weakness that lies ahead can be directly related to the unintended consequences of quantitative easing,” Hunt says.
The Fed’s current policy of attempting to flatten the yield curve by buying long-term Treasury securities and offsetting it with sales of shorter-dated paper—Operation Twist 2.0, after a similar gambit in the early 1960s—also could backfire. The FOMC minutes said the policy was expected “to help make broader financial conditions more accommodative.” Translated from Fed speak, lower long-term rates will make borrowers more willing to borrow while lenders will be more eager to lend.
But, Hunt points out, ultra-low interest rates could have the opposite effect. To earn a profit, banks have to cover their costs, from payroll, overhead, taxes and “elevated” fees to the Federal Deposit Insurance Corp. Then they have to earn a spread to compensate for the risk the borrower could default. At very low interest rates, there aren’t enough basis points left to lend profitably. The historical precedent is Japan, where banks would rather buy government bonds than make loans . . .”

Pretty ugly stuff, and I fear all too accurate.

Occupy Wall Street Must Occupy Congress, AG offices

2011-10-18T00:45:00.000-07:00

By Barry Ritholtz,

There is an unfocused financial rage in the United States.

It was born in the late 1990s on an unholy trinity of accounting swindles, the dotcom collapse and analyst scandals. It grew on a housing boom and bust that created 5 million (and counting) foreclosures, leaving more than a quarter of bank financed homes worth less than their mortgages. It matured on a growing wealth disparity that eviscerated the middle class, and brought back the plutocracy of the 1920s. It reached its peak with the bailout of reckless bankers, who were rewarded for their irresponsibility with the greatest wealth transfer in human history.

And now, it seems to be finding a new voice with the movement known as Occupy Wall Street (OWS).

Like the Tea Party, OWS began as a loose collection of people who knew they were getting a raw economic deal — but were unsure as to precisely why. They both started with a surge of grassroots politics. Both tapped into the national zeitgeist, feeding on an unfocused economic angst. When the Tea Party first burst onto the national stage, I had high hopes they might address some of the persistent economic problems our two-party political system was ignoring. But the Tea Party tilted to the right, shifting from the economic to the partisan. Obamacare and taxes – neither of which were responsible for a laundry list of economic woes facing the nation – became their focus.

That move created a vacuum. Since then, we have been waiting for a group of angry Americans to fill the void. It did not look like OWS was going to be the ones to do so. Especially with the way the Media was either ignoring them, or portraying them as a group of slacker hippies, fringe dwellers and kooks.

Credit the Daily Show with changing all that. Jon Stewart’s team surfaced a video of a senior NYPD officer pepper-spraying some young girls for no apparent reason. NYC may not be Libya, but that clip of abusive police behavior – and the young women collapsing in obvious agony – ramped up the mainstream coverage. What Rick Santelli’s infamous rant on CNBC did for the Tea Party, the NYPD pepper spray video did for the Wall Street protesters
.
Now, the founders of OWS must consider what to do next. They surely do not want to let the momentum and energy dissipate. They see the Tea Party as hugely influential, but highly partisan, and up until now the Tea Party has been far less willing to criticize corporate interests than OWS.

The founders of OWS are aware of how the Tea Party was Jiu Jitsued by the existing GOP political establishment. OWS want to avoid a similar fate. Such an end could occur of the leaders of MoveOn.org, a partisan Democratic group, gets their way. They have bulled their way into the media, pretending to speak for OWS. (The media are suckers for a simple narrative, and MoveOn.org provides that).

Hence, OWS needs to demonstrate a few things: A clear leadership. A consistent message. But most importantly of all, some specific policy objectives.

To become as focused and influential as the Tea Party, what Occupy Wall Street needs a simple set of goals. Not a top 10 list — that’s too unwieldy, and too unfocused. Instead, a simple 3 part agenda, that responds to some very basic problems regardless of political party. It must address the key issues, have a specific legislative agenda, and finally, effect lasting change. By keeping it focused on the foibles of Wall Street, and on issues that actually matter, it can become a rallying cry for an angry nation
.
I suggest the following three as achievable goals that will have a lasting impact:

1. No more bailouts: Bring back real capitalism
2. End TBTF banks
3. Get Wall Street Money out of legislative process

Let’s look at each of these in turn:

1. No more bailouts/Bring Back Real Capitalism!
The United States was once a capitalist system. Companies lived and died on their own successes. “Corporate Welfare” – the term coined by Wisconsin senator William Proxmire – came into being in 1971 with the bailout of Lockheed Aircraft. Thus began a run of corporatism and bailouts of connected companies, not capitalism. Some firms, less than successful in a competitive marketplace, chose instead to suckle at the teat of the public trough. Innovation, execution and hard work were replaced with lobbying, crony capitalism and bailouts of failure. Of course, all paid for by taxpayers.
“Socialism for bankers, wrenching capitalism for the working stiff” is not a slogan you are likely to see on a bumper sticker anytime soon. But that’s wht the US had morphed into.
America needs to end this system of spoils. There should be no more bailouts, no more crony capitalism, no more government determined winners and losers. We simply cannot live in a society of privatized gains and socialized losses.

2. End Too Big To Fail /Restore Competition
As George Shultz once said, “”If they’re too big to fail, make them smaller.”
The current economic approach of “Too Big to Fail” is itself a failure. It reduces economic competition, concentrates risk, and raises costs for consumers.
I agree with University of Missouri–Kansas City (UMKC) professor of Economics and Law William Black, who notes that the TBTF moniker is misleading. We should start calling these firms by the more accurate phrase “Systemically Dangerous Institutions” (SDIs). TBTF makes it sound like the size is the problem – in reality, the systemically, regardless of size, is what we should be focused on. SDI is an accurate phrase, and appropriately pejorative.
The TBTF size has brought a different set of problems: The bailouts have made the top 10 SDI an even bigger, less competitive oligarchy. We need to bring back competition by limiting the size of these firms. We can do that by capping their deposits, in terms of total percentage or a specific dollar amounts. There are many ways to accomplish this, including an FDIC caps on deposit insurance. And if the OWS people were smart, they would bring in former FDIC chair Sheila Bair (now private citizen) into the discussion.

3. Take Congress back from Wall Street
Whatever changes come, they will only be temporary if the current system of spoils is allowed to continue.
The Supreme Court has ruled repeatedly on campaign finance reform, finding against voters and in favor of corporate interests. The only way to take the government back is a Constitutional Amendment.
The United States has become a “corporatocracy.” Campaign finance and lobbying money has so utterly corrupted Congress that we might as well put elected officials up for bid on eBay – that is how corrupted the system has become. We have even seen the State Attorneys Generals become targets of aggressive lobbying, most recently in Florida. We must become a democracy again, where one man one vote matters. To do that, Wall Street money must be taken out of the process.
The only way to accomplish that goal and have it withstand Supreme Court review is a Constitutional Amendment, mandating public financing of Congressional elections and criminalizing the purchases of politicians. We need to marginalize lobbyists, and make voters the most important people in the nation (again).

A national campaign to get that amendment on every ballot in every state should be the objective.
~~~
You will note that these three goals are issues that both the Left and the Right — Libertarians and Liberals — should be able to agree upon. These are all doable measurable goals, that can have a real impact on legislation, the economy and taxes.

But amending the Constitution to eliminate dirty money from politics is an essential task. Failing to do that means backsliding from whatever gains are made. Whatever is accomplished will be temporary without campaign finance reform . . .

Occupy Wall Street

2011-10-12T00:44:00.000-07:00

(speach by Slavoj Zizek, NYC October 9)

Part One

…2008 financial crash more hard earned private property was destroyed than if all of us here were to be destroying it night and day for weeks. They tell you we are dreamers. The true dreamers are those who think things can go on indefinitely the way they are. We are not dreamers. We are awakening from a dream which is tuning into a nightmare. We are not destroying anything. We are only witnessing how the system is destroying itself. We all know the classic scenes from cartoons. The cart reaches a precipice. But it goes on walking. Ignoring the fact that there is nothing beneath. Only when it looks down and notices it, it falls down. This is what we are doing here. We are telling the guys there on Wall Street – Hey, look down! (cheering).

In April 2011, the Chinese government prohibited on TV and films and in novels all stories that contain alternate reality or time travel. This is a good sign for China. It means that people still dream about alternatives, so you have to prohibit this dream. Here we don’t think of prohibition. Because the ruling system has even suppressed our capacity to dream. Look at the movies that we see all the time. It’s easy to imagine the end of the world. An asteroid destroying all life and so on. But you cannot imagine the end of capitalism. So what are we doing here? Let me tell you a wonderful old joke from communist times.

A guy was sent from East Germany to work in Siberia. He knew his mail would be read by censors. So he told his friends: Let’s establish a code. If the letter you get from me is written in blue ink ,it is true what I said. If it is written in red ink, it is false. After a month his friends get a first letter. Everything is in blue. It says, this letter: everything is wonderful here. Stores are full of good food. Movie theaters show good films from the West. Apartments are large and luxurious. The only thing you cannot buy is red ink.

This is how we live. We have all the freedoms we want. But what we are missing is red ink. The language to articulate our non-freedom. The way we are taught to speak about freedom war and terrorism and so on falsifies freedom. And this is what you are doing here: You are giving all of us red ink.

There is a danger. Don’t fall in love with yourselves. We have a nice time here. But remember: carnivals come cheap. What matters is the day after. When we will have to return to normal life. Will there be any changes then. I don’t want you to remember these days, you know, like - oh, we were young, it was beautiful. Remember that our basic message is: We are allowed to think about alternatives. The rule is broken. We do not live in the best possible world. But there is a long road ahead. There are truly difficult questions that confront us. We know what we do not want. But what do we want? What social organization can replace capitalism? What type of new leaders do we want?
Remember: the problem is not corruption or greed. The problem is the system that pushes you to give up. Beware not only of the enemies. But also of false friends who are already working to dilute this process. In the same way you get coffee without caffeine, beer without alcohol, ice cream without fat. They will try to make this into a harmless moral protest. They think (??? unintelligible). But the reason we are here is that we have enough of the world where to recycle coke cans…

Part Two

….Starbucks cappuccino. Where 1% goes to the world’s starving children. It is enough to make us feel good. After outsourcing work and torture. After the marriage agencies are now outsourcing even our love life, daily.

Mic check

We can see that for a long time we allowed our political engagement also to be outsourced. We want it back. We are not communists. If communism means the system which collapsed in 1990, remember that today those communists are the most efficient ruthless capitalists. In China today we have capitalism which is even more dynamic than your American capitalism but doesn’t need democracy. Which means when you criticize capitalism, don’t allow yourselves to be blackmailed that you are against democracy. The marriage between democracy and capitalism is over.
The change is possible. So, what do we consider today possible? Just follow the media. On the one hand in technology and sexuality everything seems to be possible. You can travel to the moon. You can become immortal by biogenetics. You can have sex with animals or whatever. But look at the fields of society and economy. There almost everything is considered impossible. You want to raise taxes a little bit for the rich, they tell you it’s impossible, we lose competitivitiy. You want more money for healthcare: they tell you impossible, this means a totalitarian state. There is something wrong in the world where you are promised to be immortal but cannot spend a little bit more for health care. Maybe that ??? set our priorities straight here. We don’t want higher standards of living. We want better standards of living. The only sense in which we are communists is that we care for the commons. The commons of nature. The commons of what is privatized by intellectual property. The commons of biogenetics. For this and only for this we should fight.

Communism failed absolutely. But the problems of the commons are here. They are telling you we are not Americans here. But the conservative fundamentalists who claim they are really American have to be reminded of something. What is Christianity? It’s the Holy Spirit. What’s the Holy Spirit? It’s an egalitarian community of believers who are linked by love for each other. And who only have their own freedom and responsibility to do it. In this sense the Holy Spirit is here now. And down there on Wall Street there are pagans who are worshipping blasphemous idols. So all we need is patience. The only thing I’m afraid of is that we will someday just go home and then we will meet once a year, drinking beer, and nostalgically remembering what a nice time we had here. Promise ourselves that this will not be the case.

We know that people often desire something but do not really want it. Don’t be afraid to really want what you desire. Thank you very much!

The Eight Marks of Fascist Policy

2011-10-11T01:20:00.001-07:00

By Lew Rockwell
10/07/11 John T. Flynn, like other members of the Old Right, was disgusted by the irony that what he saw, almost everyone else chose to ignore. In the fight against authoritarian regimes abroad, he noted, the United States had adopted those forms of government at home, complete with price controls, rationing, censorship, executive dictatorship, and even concentration camps for whole groups considered to be unreliable in their loyalties to the state.

After reviewing this long history, John T. Flynn proceeds to sum up with a list of eight points he considers to be the main marks of the fascist state.

As I present them, I will also offer comments on the modern American central state.

Point 1. The government is totalitarian because it acknowledges no restraint on its powers.

This is a very telling mark. It suggests that the US political system can be described as totalitarian. This is a shocking remark that most people would reject. But they can reject this characterization only so long as they happen not to be directly ensnared in the state’s web. If they become so, they will quickly discover that there are indeed no limits to what the state can do. This can happen boarding a flight, driving around in your hometown, or having your business run afoul of some government agency. In the end, you must obey or be caged like an animal or killed. In this way, no matter how much you may believe that you are free, all of us today are but one step away from Guantanamo.

As recently as the 1990s, I can recall that there were moments when Clinton seemed to suggest that there were some things that his administration could not do. Today I’m not so sure that I can recall any government official pleading the constraints of law or the constraints of reality to what can and cannot be done. No aspect of life is untouched by government intervention, and often it takes forms we do not readily see. All of healthcare is regulated, but so is every bit of our food, transportation, clothing, household products, and even private relationships.

Mussolini himself put his principle this way: “All within the State, nothing outside the State, nothing against the State.” He also said: “The keystone of the Fascist doctrine is its conception of the State, of its essence, its functions, and its aims. For Fascism the State is absolute, individuals and groups relative.”

I submit to you that this is the prevailing ideology in the United States today. This nation, conceived in liberty, has been kidnapped by the fascist state.

Point 2. Government is a de facto dictatorship based on the leadership principle.

I wouldn’t say that we truly have a dictatorship of one man in this country, but we do have a form of dictatorship of one sector of government over the entire country. The executive branch has spread so dramatically over the last century that it has become a joke to speak of checks and balances. What the kids learn in civics class has nothing to do with reality.

The executive state is the state as we know it, all flowing from the White House down. The role of the courts is to enforce the will of the executive. The role of the legislature is to ratify the policy of the executive.

Further, this executive is not really about the person who seems to be in charge. The president is only the veneer, and the elections are only the tribal rituals we undergo to confer some legitimacy on the institution. In reality, the nation-state lives and thrives outside any “democratic mandate.” Here we find the power to regulate all aspects of life and the wicked power to create the money necessary to fund this executive rule.

As for the leadership principle, there is no greater lie in American public life than the propaganda we hear every four years about how the new president/messiah is going to usher in the great dispensation of peace, equality, liberty, and global human happiness. The idea here is that the whole of society is really shaped and controlled by a single will — a point that requires a leap of faith so vast that you have to disregard everything you know about reality to believe it.

And yet people do. The hope for a messiah reached a fevered pitch with Obama’s election. The civic religion was in full-scale worship mode — of the greatest human who ever lived or ever shall live. It was a despicable display.

Another lie that the American people believe is that presidential elections bring about regime change. This is sheer nonsense. The Obama state is the Bush state; the Bush state was the Clinton state; the Clinton state was the Bush state; the Bush state was the Reagan state. We can trace this back and back in time and see overlapping appointments, bureaucrats, technicians, diplomats, Fed officials, financial elites, and so on. Rotation in office occurs not because of elections but because of mortality.

Point 3. Government administers a capitalist system with an immense bureaucracy.

The reality of bureaucratic administration has been with us at least since the New Deal, which was modeled on the planning bureaucracy that lived in World War I. The planned economy — whether in Mussolini’s time or ours — requires bureaucracy. Bureaucracy is the heart, lungs, and veins of the planning state. And yet to regulate an economy as thoroughly as this one is today is to kill prosperity with a billion tiny cuts.

This doesn’t necessarily mean economic contraction, at least not right away. But it definitely means killing off growth that would have otherwise occurred in a free market.

So where is our growth? Where is the peace dividend that was supposed to come after the end of the Cold War? Where are the fruits of the amazing gains in efficiency that technology has afforded? It has been eaten by the bureaucracy that manages our every move on this earth. The voracious and insatiable monster here is called the Federal Code that calls on thousands of agencies to exercise the police power to prevent us from living free lives.

It is as Bastiat said: the real cost of the state is the prosperity we do not see, the jobs that don’t exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The state has looted us just as surely as a robber who enters our home at night and steals all that we love.

Point 4. Producers are organized into cartels in the way of syndicalism.
Syndicalist is not usually how we think of our current economic structure. But remember that syndicalism means economic control by the producers. Capitalism is different. It places by virtue of market structures all control in the hands of the consumers. The only question for syndicalists, then, is which producers are going to enjoy political privilege. It might be the workers, but it can also be the largest corporations.

In the case of the United States, in the last three years, we’ve seen giant banks, pharmaceutical firms, insurers, car companies, Wall Street banks and brokerage houses, and quasi-private mortgage companies enjoying vast privileges at our expense. They have all joined with the state in living a parasitical existence at our expense.

This is also an expression of the syndicalist idea, and it has cost the US economy untold trillions and sustained an economic depression by preventing the postboom adjustment that markets would otherwise dictate. The government has tightened its syndicalist grip in the name of stimulus.

Point 5. Economic planning is based on the principle of autarky.

Autarky is the name given to the idea of economic self-sufficiency. Mostly this refers to the economic self-determination of the nation- state. The nation-state must be geographically huge in order to support rapid economic growth for a large and growing population.

This was and is the basis for fascist expansionism. Without expansion, the state dies. This is also the idea behind the strange combination of protectionist pressure today combined with militarism. It is driven in part by the need to control resources.

Look at the wars in Iraq, Afghanistan, and Libya. We would be supremely naive to believe that these wars were not motivated in part by the producer interests of the oil industry. It is true of the American empire generally, which supports dollar hegemony.

It is the reason for the planned North American Union.

The goal is national self-sufficiency rather than a world of peaceful trade. Consider, too, the protectionist impulses of the Republican ticket. There is not one single Republican, apart from Ron Paul, who authentically supports free trade in the classical definition.

From ancient Rome to modern-day America, imperialism is a form of statism that the bourgeoisie love. It is for this reason that Bush’s post-9/11 push for the global empire has been sold as patriotism and love of country rather than for what it is: a looting of liberty and property to benefit the political elites.

6. Government sustains economic life through spending and borrowing.

This point requires no elaboration because it is no longer hidden. There was stimulus 1 and stimulus 2, both of which are so discredited that stimulus 3 will have to adopt a new name. Let’s call it the American Jobs Act.

With a prime-time speech, Obama argued in favor of this program with some of the most asinine economic analysis I’ve ever heard. He mused about how is it that people are unemployed at a time when schools, bridges, and infrastructure need repairing. He ordered that supply and demand come together to match up needed work with jobs.

Hello? The schools, bridges, and infrastructure that Obama refers to are all built and maintained by the state. That’s why they are falling apart. And the reason that people don’t have jobs is because the state has made it too expensive to hire them. It’s not complicated. To sit around and dream of other scenarios is no different from wishing that water flowed uphill or that rocks would float in the air. It amounts to a denial of reality.

Still, Obama went on, invoking the old fascistic longing for national greatness. “Building a world-class transportation system,” he said, “is part of what made us an economic superpower.” Then he asked, “We’re going to sit back and watch China build newer airports and faster railroads?”

Well, the answer to that question is yes. And you know what? It doesn’t hurt a single American for a person in China to travel on a faster railroad than we do. To claim otherwise is an incitement to nationalist hysteria.

As for the rest of this program, Obama promised yet another long list of spending projects. Let’s just mention the reality: No government in the history of the world has spent as much, borrowed as much, and created as much fake money as the United States. If the United States doesn’t qualify as a fascist state in this sense, no government ever has.

None of this would be possible but for the role of the Federal Reserve, the great lender to the world. This institution is absolutely critical to US fiscal policy. There is no way that the national debt could increase at a rate of $4 billion per day without this institution.

Under a gold standard, all of this maniacal spending would come to an end. And if US debt were priced on the market with a default premium, we would be looking at a rating far less than A+.

Point 7. Militarism is a mainstay of government spending.

Have you ever noticed that the military budget is never seriously discussed in policy debates? The United States spends more than most of the rest of the world combined.

And yet to hear our leaders talk, the United States is just a tiny commercial republic that wants peace but is constantly under threat from the world. They would have us believe that we all stand naked and vulnerable. The whole thing is a ghastly lie. The United States is a global military empire and the main threat to peace around the world today.

To visualize US military spending as compared with other countries is truly shocking. One bar chart you can easily look up shows the US trillion-dollar-plus military budget as a skyscraper surrounded by tiny huts. As for the next highest spender, China spends 1/10th as much as the United States.

Where is the debate about this policy? Where is the discussion? It is not going on. It is just assumed by both parties that it is essential for the US way of life that the United States be the most deadly country on the planet, threatening everyone with nuclear extinction unless they obey. This should be considered a fiscal and moral outrage by every civilized person.

This isn’t only about the armed services, the military contractors, the CIA death squads. It is also about how police at all levels have taken on military-like postures. This goes for the local police, state police, and even the crossing guards in our communities. The commissar mentality, the trigger-happy thuggishness, has become the norm throughout the whole of society.

If you want to witness outrages, it is not hard. Try coming into this country from Canada or Mexico. See the bullet-proof-vest- wearing, heavily armed, jackbooted thugs running dogs up and down car lanes, searching people randomly, harassing innocents, asking rude and intrusive questions.

You get the strong impression that you are entering a police state. That impression would be correct.

Yet for the man on the street, the answer to all social problems seems to be more jails, longer terms, more enforcement, more arbitrary power, more crackdowns, more capital punishments, more authority. Where does all of this end? And will the end come before we realize what has happened to our once-free country?

Point 8. Military spending has imperialist aims.

Ronald Reagan used to claim that his military buildup was essential to keeping the peace. The history of US foreign policy just since the 1980s has shown that this is wrong. We’ve had one war after another, wars waged by the United States against noncompliant countries, and the creation of even more client states and colonies.

US military strength has led not to peace but the opposite. It has caused most people in the world to regard the United States as a threat, and it has led to unconscionable wars on many countries. Wars of aggression were defined at Nuremberg as crimes against humanity.

Obama was supposed to end this. He never promised to do so, but his supporters all believed that he would. Instead, he has done the opposite. He has increased troop levels, entrenched wars, and started new ones. In reality, he has presided over a warfare state just as vicious as any in history. The difference this time is that the Left is no longer criticizing the US role in the world. In that sense, Obama is the best thing ever to happen to the warmongers and the military-industrial complex.

As for the Right in this country, it once opposed this kind of military fascism. But all that changed after the beginning of the Cold War. The Right was led into a terrible ideological shift, well documented in Murray Rothbard’s neglected masterpiece The Betrayal of the American Right. In the name of stopping communism, the right came to follow ex-CIA agent Bill Buckley’s endorsement of a totalitarian bureaucracy at home to fight wars all over the world.

At the end of the Cold War, there was a brief reprise when the Right in this country remembered its roots in noninterventionism. But this did not last long. George Bush the First rekindled the militarist spirit with the first war on Iraq, and there has been no fundamental questioning of the American empire ever since. Even today, Republicans elicit their biggest applause by whipping up audiences about foreign threats, while never mentioning that the real threat to American well-being exists in the Beltway.

What Happened to the Jobs?

2011-10-11T01:20:00.000-07:00

By John Mauldin
July 7, 2011
So How’s That Stimulus Thing Working Out?

The US jobs report came out this morning, and it was simply dismal. This week we look at not only the jobs report but also “what-if” proffers for the US and global economies. There’s a lot to cover, so let’s jump in.

First, there were only 18,000 jobs created in June, the lowest since September 2010. While private employment rose by 57,000, government workers dropped by 39,000, continuing a trend as governments at all levels work to cut their budgets. Long-time readers know I think it is important to look at the direction of the revisions, and we got no help. May was revised down by 29,000 jobs and April a further down 15,000.

I saw some headlines and talking heads in the mainstream media saying the poor number was due to “seasonals,” and I just shook my head. If you are that reflexively bullish when presented with what was clearly a bad report, how can you be taken seriously? You know who you are. And then Philippa Dunne of the Liscio Report sent the following note. She is one of the best data mavens there is on jobs and employment.

“After the release, some bulls turned to that old reliable excuse – bad seasonals. According to one analysis making the rounds, had the BLS used last year’s factor – computed, of course, using exactly the same concurrent technique as this year’s factor – the gain would have been 221,000! (Whoever did this made a mistake by comparing the NSA and SA levels for the two months – you have to compare the over-the-month changes.) Still, if you’re going to play this game, you should be consistent, and apply last year’s seasonals to several months, not just one. If you do that, May’s gain of 25,000 would turn into a loss of 19,000, and June’s gain would be a mere 73,000, all total payrolls. In any case, why should you do that? The seasonals are recomputed every month based on recent experience and calendar quirks, and should be more aggressive in a recovery. (Hope we won’t be using the trend set in the depth of the recession as the bar going forward.) Also, there is no adjustment to the headline number – the sectors are adjusted separately (96 different industries at the 3-digit NAICS level, to be precise) and the total is the sum of those components. The whole argument is bogus.”

The household survey was even worse. Total employment fell by 445,000. Full-time employment is down by 0.5% in the last year, while part-time is up 3%. David Rosenberg calls this the just-in-time labor market. The total number of unemployed rose to over 14 million. If you count the discouraged workers not in the official unemployed, the total number rises to 20.6 million, up 483,000 last month. This put the unemployment rate back up to 9.2%.

We were told that the stimulus would have us down to 6.5% unemployment by now. The team at e21 has the real story:

“Back in January 2009, Christina Romer and Jared Bernstein of the Obama adminstration produced a report estimating future unemployment rates with and without a stimulus plan. Their estimates, which were widely circulated, projected that unemployment would approach 9% without a stimulus, but would never exceed 8% with the plan. The estimates, along

If you update the graph for today’s report, you find that there is another red dot higher than the last one. The last three months have seen the unemployment rate rise (chart from e21). They further note:

“For example, there is new research that suggests that the stimulus may actually have resulted in a net loss of jobs. Regardless of the exact number of jobs lost or created, however, the fact that some economists are even arguing that it had a negative impact tells you that the stimulus may very well have been a wash overall.

“Larry Lindsey offered his own review of the stimulus this week, arguing that it failed what’s colloquially known as the Sharp Pencil Test. As he explains, ‘if you sit down and do a back of the envelope calculation of the [stimulus] program’s costs and benefits, there is no way to conjure up numbers that allow it to make sense.’ Here is more on how Lindsey applies this test to the stimulus:

“ ‘[E]ven if you buy the White House’s argument that the $800 billion package created 3 million jobs, that works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide.’

“At minimum, the public now deserves a response from policymakers about what they have learned from 2009 and 2010 – about what actually does and does not help get the economy growing and producing more jobs.”

The small businesses that are the real drivers of employment are not participating the way they do in a normal recovery. Bill Dunkelberg, fishing buddy and the chief economist for the National Federation of Independent Business, writes me this afternoon:

“Writing about our current weak economy (Philadelphia Inquirer Currents, June 26), Mark Zandi argued that employment will improve because ‘…U.S. companies are in great financial shape’. Dr. Zandi must be referring to companies like GE which just posted profits of $17 billion (and paid no income taxes) and whose CEO is the head of President Obama’s job creation committee. This is the view in Washington and Wall Street that only thinks in terms of the “biggies” (that make large donations to re-election committees). For perspective, GE employs about 150,000 people in the U.S. Last week, over 400,000 people filed initial claims for unemployment (e.g. lost their jobs). There are 6 million firms in the U.S. that employ 1 or more workers. This includes GE, but 90% of them have fewer than 20 employees. These firms are not ‘in great financial shape’ as Dr. Zandi asserts. In a recent survey of a sample of 350,000 of them, 46% reported that profits were still falling two years into the ‘recovery’ compared to 18% reporting that earnings were improving. Firms like GE might hire more due to their good fortune, but there aren’t many of them and they don’t employ many workers anyway. It’s the small businesses that Treasury Secretary Geithner said must be taxed more to support government that provide the needed jobs, not ‘tax-free’ GE. Regulations such as the new mandatory sick leave passed by City Council are detrimental to the job creation needed by making labor more expensive to hire, a bad idea.

“Dr. Zandi also suggests that state and local governments be given more funding to prevent the predicted loss of 250,000 public sector jobs over the next 12 months, funded I guess by more debt, since the Federal government is a bit short of cash (like $1.5 trillion in deficit). ‘Ending this job loss would go a long way to lifting the job market,’ he asserts. My math says that would reduce job loss by about 5,000 per week. With monthly job loss over 400,000, this hardly makes a difference. Government employment has become bloated because governments don’t have to worry about profitability. When faced with budget problems, politicians tend to make cuts in services like libraries or police protection that hurt voters to show taxpayers why the government can’t live with less instead of cutting patronage jobs and the like whose efforts would not be missed. Government can’t create jobs, but it can create a lot of policies and taxes that prevent jobs from being created.”

I wrote last year about the studies that show that on a net job-creation basis, large businesses reduced their employment over the last two decades. Of course, there are exceptions; but on average, large businesses are not where you get new jobs.

And many of the jobs we got this last month, as few as they were, were not of the high-paying variety. Leisure and hospitality were up 34,000. The average work week was down, and earnings dropped a penny an hour. After inflation, workers are behind, year over year.

By the way, I get the unemployment thing. Today we found out that my daughter Amanda has lost her job. Sales at the place she worked were down a lot. Another two of my kids can’t get enough hours. At 17, Trey is looking for a job, but so far no luck. It’s tough out there. Let’s look at a few charts from David Rosenberg. First is the average duration of unemployment, which has risen to an all-time high.

This Time Is Different
I have quoted at length in past letters from Ken Rogoff and Carmen Reinhart’s masterful work, This Time is Different. While the market may have been surprised by such a low jobs number, it is PRECISELY what is typical following a credit crisis, as they demonstrate in their book.

And now the Fed is done with QE2 (except that they will take the mortgage roll-off from their portfolio and use it to buy treasuries), and the fiscal authorities are going to put the brakes on government spending, or at least slow things down.

Everything is very fluid, but the headlines in today’s Wall Street Journal suggest a deal on the order of $4 trillion in on the table. I assume it will be back-loaded, but it is a start. But assume that the first year sees real spending cuts of $200 billion. That is a reduction of 1.5% in GDP. It’s that pesky old equation I keep using:

GDP = C (total consumption) + I (Investments) + G (government Spending) + net exports

Now, the literature suggests that the effect on the economy from a reduction in G should be over within about 4 quarters, on average. But then we reduce “G” again the next year. Maybe not by as much overall, but at least by another $50-100 billion. This is going to put a real headwind in the face of economic growth for years, but we simply have to do it or we become Greece.

The economy will already be slowing down. A recession in 2012 is a real possibility if there is any type of shock coming from Europe, and what will happen there is anyone’s guess. I think most European leaders are basing their thinking more on hope than on reality. When Greece defaults there will be a domino effect; you can count on it. And you could actually see a banking crisis before we get actual sovereign defaults.

Gentle reader, you need to understand that the market does not get it. Neither in Europe nor in the US. When someone says the market has already priced in a default, go back and ask them how well the market priced in a crisis in the spring of 2008. The market doesn’t know jack.

I got a lot of internet buzz from a throwaway line in an interview on CNBC in London. I said that if the market knew what Bernanke and the leadership of the central banks talked about after their third glass of wine, the market would wet its pants. That is not to suggest I don’t think Bernanke or Trichet can hold their liquor. It means that they get the problem more than they let on in public and are simply trying to stem as much damage as they can.

Banking crises are followed by credit crises by 2-3 years. It is getting close to that time. We need 3-3.5% GDP growth in the US to really make a dent in jobs. We are not going to get it. There is nothing we can do other than Muddle Through as best we can. Prepare accordingly.

Spend It Like You Stole It

2011-04-30T02:51:00.000-07:00

The Illusion of Growth

Why the Feds are Powerless Against an Economic Downturn

by Bill Bonner

Okay, President Obama is a real, native-born citizen.

Whew! That's cleared up.

But we never could figure out what the fuss was about. It didn't make any difference to us where he was born. After all, you don't have to be born in the USA to mess up an economy. Plenty of foreigners have done it. Plenty of Americans too.

Yes, dear reader, Mr. Market is an equal-opportunity disaster-maker. Men, women, Black, White...Jew or Gentile...it doesn't matter. As you sow, so shall ye reap - no matter who you are.

Here's the AP report on the latest US "growth" figures:

WASHINGTON (AP) - The economy slowed sharply in the first three months of the year. High gas prices cut into consumer spending, bad weather delayed construction projects and the federal government slashed defense spending by the most in six years.

The 1.8 percent annual growth rate in the January-March quarter was weaker than the 3.1 percent growth in the previous quarter, the Commerce Department reported. And it was the worst showing since last spring when the European debt crisis slowed growth to a 1.7 percent pace.

Federal Reserve Chairman Ben Bernanke and other economists say the slowdown is a temporary setback. They generally agree that gas prices will stabilize and the economy will grow at a 3 percent pace in each of the next three quarters.

But gas prices are still going up. The housing market has shown little signs of recovering. And lawmakers are proposing some of the steepest cuts in federal spending in a generation. Those cuts would filter down to state and local governments, which are already wrestling with their own budget crises.

"The economy has lost its modest upward momentum, and headwinds such as rising gasoline prices and further budget cuts suggest the recovery will continue at only a moderate pace going forward," said Sal Guatieri, senior economist at BMO Capital Markets.
The stock market went up anyway. The Dow rose 72 points. Gold rose too - up $16. The dollar is still going down.

At this rate, gold will hit $1,600 in just a few weeks.

And stocks? They're above the high set on January 14, 2000, when the Dow hit 11,723. But adjust for inflation...and they're still way down.

The big downturn began in January 2000, not in 2007.

Since January 2001, neither America's real GDP, nor its stock market, has registered any real gains. Oh...and neither has its workforce; there are no more people working today than there were 10 years ago; and they take home no more disposable income.

You already know about the stock market. As for the lack of growth in GDP, our old friend Jim Davidson points out that while the total GDP has grown...the portion that is attributable to private sector activity has not; it was almost stagnant. And this was while the population grew by nearly 10%. In other words, per capita private sector output has gone down almost 10% since the stock market cracked in January, 2000.

Which is a damned shame. Because it shows that the feds are powerless. Their "stimulus" tricks don't work. The Bush administration responded to the little downturn of 2001 with the greatest counter-cyclical stimulus program since the Japanese bombed Pearl Harbor. If we recall the figures right, it went from a federal surplus of $200 billion to a deficit of $300 billion in one year's time. Little good it did. The real economy did not grow. It just added debt; US federal government debt more than tripled over the 10 years.

The private sector was adding debt at a ferocious pace too. Together with public sector debt, total debt crested at over 4 times GDP.

Then, to meet the challenge of debt liquidation in '07-'09, the feds added more cash, more credit, and more funny money. Even today, 11 years after the beginning of the downturn...and 4 years after the beginning of the insolvency crisis, they're still pumping $36 billion per week in fiscal (deficits) stimulus and $25 billion per week in QE money-printing. And this doesn't include their zero interest rate lending.

And what did all that accomplish?

QE2 is ending in June. But globally, QE3 has already begun. As usual, Japan is the pacesetter. As temperatures rose at its Fukushima reactor so did Japan's monetary base - at the rate of 100% per week! What happens to all this new, hot money? No one knows, exactly. But today, at The Daily Reckoning, we have advice for everyone - central planners, politicians, and householders, too: if you have money, pretend you robbed a bank.

From the point of view of a modern economist, nothing stimulates better than a bank robbery. The money leaves the cold embrace of a bank vault; soon every pimp and bartender has his pockets full. Hot money gets around.

An article in Rolling Stone Magazine provides an illustration. It explains how one Wall Street wife, and one Wall Street widow, formed a company specifically to take advantage of the US government's spending spree known as TALF. You'd think the feds had already done enough for the Mack family. John Mack runs Morgan Stanley. Had it not been for the generous support of the US government and the Federal Reserve, he might be parking cars. Instead, the feds bailed out the entire financial sector. First, it bought up Wall Street's bad bets at inflated prices and then lent banks money at artificially low interest rates; they were invited to lend the money back to the federal government for a sure profit.

Business was so good at Morgan Stanley that the distaff side of the Mack household apparently couldn't resist. In June, 2009, with her friend Susan Christy, Mack set up an investment company and put in $15 million. Then, they borrowed $220 million from the government. A brave move on their part? If you think so, you are as naïve as a turnip. The fix was in; the two used the money to buy non-recourse loans at deep discount. If the loans increased in value, they would make a profit. If they fell, the government would take the losses. Much safer and more profitable than robbing banks. Two months later, Mr. Mack, perhaps with a little assistance from his blond helpmate, bought a limestone carriage house in Manhattan, with a 12-space garage for the getaway cars.

If you don't have your own little stimulus scam going, you may want to listen up. Your dollars, pounds, euros and pesos are going to lose value. Don't trust the government's inflation figures. An honest measure of the "inflation rate" is available thanks to a pair of professors at MIT. Their "Billion Prices Project" (BPP) doesn't pussyfoot around. It trolls the Internet, records prices and reveals the most accurate measure of inflation ever. This new index shows the rate of consumer price increases for the last 12 months at 3.2%. This is more than half again as much as the Labor Department's own tally - 2.1%.

Something is dreadfully wrong. Either a billion prices are in error. Or, people who buy US treasury bonds are. They accept a real yield (based on the BPP numbers) of barely 1.2% on a 30-year dollar- denominated, inflation-sensitive Treasury bond, while the dollar sinks and its custodians actively try to drown it. And, over the last six months, according to BPP, prices have been rising nearly twice as fast - at a 6.1% annualized rate. If these figures hold, bond investors already have a built-in negative yield. The inflation figure for the last 3 months is even higher, 7.4%, about 300 basis points more than the yield on the long bond.

Treasury prices have trended higher for nearly 30 years. Could they be ready to fall now? Maybe. Inflation is not like holding up a liquor store; it's more like a major bank heist, the product of long planning by trained professionals. Whenever the nominal amount of available money increases faster than the real goods and services that money buys, you can expect rising prices.

In America, real private-sector output reached a plateau at the end of the 20th century. In the last 10 years, it has scarcely increased at all. Total private sector GDP was $9.31 trillion in 2001. Now it is $9.72 trillion. But while real output has been flat, the output of hot "money" has not. When they are not stealing it from the taxpayers, or borrowing it with no intention to pay it back, the feds are counterfeiting it. The Fed will have "printed up" about $1.8 trillion from the end of 2008 to the end of June, 2011 - partly to finance staggering federal government deficits of nearly $4.5 trillion over the three years. This led to an increase in the GDP, almost entirely from government spending, with 79% of household income growth from government transfer payments.

Meanwhile, the US monetary base has tripled in the last 3 years. These increases are not all immediately available to households as "money;" they are mostly still in bank vaults, waiting to be liberated. Then, watch out. Dollars will be too hot to hold.

The last time the Fed reported, it said growth in the US economy was on a "firmer footing." Now, according to Ben Bernanke's press conference talk-up, it's just "moderate."

What is he talking about? The economy is going nowhere. After 10 years of slipping backward at a slow rate, it's now beginning to slide faster. The latest figures show the economy in the first quarter "growing" at barely half the rate of the previous quarter. And you have to adjust this growth - 1.8%, according to the official estimates - to population growth and to a real measure of inflation. The population is growing at about a 1% rate...leaving about 0.8% "growth." But over the last 3 months, the same quarter we're talking about, according to the Billion Prices Project real-time Internet tracking, prices rose at a 7.4% annualized pace. That means the Labor Department's inflation adjustment - 2.1% - is only a third of what it should be. And it means the real economy is actually shrinking, per capita, at about 5.3% per year.

And keep in mind. It would be much worse were it not for mind-blowing inputs from the feds.

"That's a confusing point," Elizabeth noted yesterday. "You say the feds are doing the wrong thing. But you also say that it would be a lot worse if they didn't do it."

"Yes...it's a paradox. But it's true," we explained. "If they're willing to pump trillions more dollars into the economy, as Paul Krugman wants them to do, they can make it look like the economy is recovering. More people will have more money in their pockets. More people will have jobs. In the very short run, it will look better. Like a wartime economy. Or the Soviet economy.

"But the growth will be phony - built on government spending and unsustainable credit. Eventually, inflation rates will go up - making everyone poorer. Or the whole system will collapse into a much worse depression."

The feds were able to create a huge bubble in '03-'07. Now, they're causing prices to bubble up again. But there is very little real growth. People are not earning more money. They are only barely increasing real output, not enough to keep up with population growth or with inflation. There is no recovery. Instead, the Great Correction continues.

History Is A Weapon

2011-04-30T01:34:00.000-07:00

Propaganda (1928)

by Edward Bernays

[The] American business community was also very impressed with the propaganda effort. They had a problem at that time. The country was becoming formally more democratic. A lot more people were able to vote and that sort of thing. The country was becoming wealthier and more people could participate and a lot of new immigrants were coming in, and so on.
So what do you do? It's going to be harder to run things as a private club. Therefore, obviously, you have to control what people think. There had been public relation specialists but there was never a public relations industry. There was a guy hired to make Rockefeller's image look prettier and that sort of thing. But this huge public relations industry, which is a U.S. invention and a monstrous industry, came out of the first World War. The leading figures were people in the Creel Commission. In fact, the main one, Edward Bernays, comes right out of the Creel Commission. He has a book that came out right afterwards called Propaganda. The term "propaganda," incidentally, did not have negative connotations in those days. It was during the second World War that the term became taboo because it was connected with Germany, and all those bad things. But in this period, the term propaganda just meant information or something like that. So he wrote a book called Propaganda around 1925, and it starts off by saying he is applying the lessons of the first World War. The propaganda system of the first World War and this commission that he was part of showed, he says, it is possible to "regiment the public mind every bit as much as an army regiments their bodies." These new techniques of regimentation of minds, he said, had to be used by the intelligent minorities in order to make sure that the slobs stay on the right course. We can do it now because we have these new techniques.
This is the main manual of the public relations industry. Bernays is kind of the guru. He was an authentic Roosevelt/Kennedy liberal. He also engineered the public relations effort behind the U.S.-backed coup which overthrew the democratic government of Guatemala.
His major coup, the one that really propelled him into fame in the late 1920s, was getting women to smoke. Women didn't smoke in those days and he ran huge campaigns for Chesterfield. You know all the techniques—models and movie stars with cigarettes coming out of their mouths and that kind of thing. He got enormous praise for that. So he became a leading figure of the industry, and his book was the real manual.

—Noam Chomsky

(From Chomsky's "What Makes Mainstream Media
Mainstream": a talk at Z Media Institute, June 1997)

Contents
I. ORGANIZING CHAOS
II. THE NEW PROPAGANDA
III. THE NEW PROPAGANDISTS
IV. THE PSYCHOLOGY OF PUBLIC RELATIONS
V. BUSINESS AND THE PUBLIC
VI. PROPAGANDA AND POLITICAL LEADERSHIP
VII. WOMEN'S ACTIVITIES AND PROPAGANDA
VIII. PROPAGANDA FOR EDUCATION
IX. PROPAGANDA IN SOCIAL SERVICE
X. ART AND SCIENCE
XI. THE MECHANICS OF PROPAGANDA

CHAPTER I
ORGANIZING CHAOS

THE conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.
We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society.
Our invisible governors are, in many cases, unaware of the identity of their fellow members in the inner cabinet.
They govern us by their qualities of natural leadership, their ability to supply needed ideas and by their key position in the social structure. Whatever attitude one chooses to take toward this condition, it remains a fact that in almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons—a trifling fraction of our hundred and twenty million—who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind, who harness old social forces and contrive new ways to bind and guide the world.
It is not usually realized how necessary these invisible governors are to the orderly functioning of our group life. In theory, every citizen may vote for whom he pleases. Our Constitution does not envisage political parties as part of the mechanism of government, and its framers seem not to have pictured to themselves the existence in our national politics of anything like the modern political machine. But the American voters soon found that without organization and direction their individual votes, cast, perhaps, for dozens or hundreds of candidates, would produce nothing but confusion. Invisible government, in the shape of rudimentary political parties, arose almost overnight. Ever since then we have agreed, for the sake of simplicity and practicality, that party machines should narrow down the field of choice to two candidates, or at most three or four.
In theory, every citizen makes up his mind on public questions and matters of private conduct. In practice, if all men had to study for themselves the abstruse economic, political, and ethical data involved in every question, they would find it impossible to come to a conclusion about anything. We have voluntarily agreed to let an invisible government sift the data and high-spot the outstanding issues so that our field of choice shall be narrowed to practical proportions. From our leaders and the media they use to reach the public, we accept the evidence and the demarcation of issues bearing upon public questions; from some ethical teacher, be it a minister, a favorite essayist, or merely prevailing opinion, we accept a standardized code of social conduct to which we conform most of the time.
In theory, everybody buys the best and cheapest commodities offered him on the market. In practice, if every one went around pricing, and chemically testing before purchasing, the dozens of soaps or fabrics or brands of bread which are for sale, economic life would become hopelessly jammed. To avoid such confusion, society consents to have its choice narrowed to ideas and objects brought to its attention through propaganda of all kinds. There is consequently a vast and continuous effort going on to capture our minds in the interest of some policy or commodity or idea.
It might be better to have, instead of propaganda and special pleading, committees of wise men who would choose our rulers, dictate our conduct, private and public, and decide upon the best types of clothes for us to wear and the best kinds of food for us to eat. But we have chosen the opposite method, that of open competition. We must find a way to make free competition function with reasonable smoothness. To achieve this society has consented to permit free competition to be organized by leadership and propaganda.
Some of the phenomena of this process are criticized—the manipulation of news, the inflation of personality, and the general ballyhoo by which politicians and commercial products and social ideas are brought to the consciousness of the masses. The instruments by which public opinion is organized and focused may be misused. But such organization and focusing are necessary to orderly life.
As civilization has become more complex, and as the need for invisible government has been increas ingly demonstrated, the technical means have been invented and developed by which opinion may be regimented.
With the printing press and the newspaper, the railroad, the telephone, telegraph, radio and airplanes, ideas can be spread rapidly and even instantaneously over the whole of America.
H. G. Wells senses the vast potentialities of these inventions when he writes in the New York Times:
"Modern means of communication—the power afforded by print, telephone, wireless and so forth, of rapidly putting through directive strategic or technical conceptions to a great number of cooperating centers, of getting quick replies and effective discussion—have opened up a new world of political processes. Ideas and phrases can now be given an effectiveness greater than the effectiveness of any personality and stronger than any sectional interest. The common design can be documented and sustained against perversion and betrayal. It can be elaborated and developed steadily and widely without personal, local and sectional misunderstanding."
What Mr. Wells says of political processes is equally true of commercial and social processes and all manifestations of mass activity. The groupings and affiliations of society to-day are no longer subject to "local and sectional" limitations. When the Constitution was adopted, the unit of organization was the village community, which produced the greater part of its own necessary commodities and generated its group ideas and opinions by personal contact and discussion directly among its citizens. But to-day, because ideas can be instantaneously transmitted to any distance and to any number of people, this geographical integration has been supplemented by many other kinds of grouping, so that persons having the same ideas and interests may be associated and regimented for common action even though they live thousands of miles apart.
It is extremely difficult to realize how many and diverse are these cleavages in our society. They may be social, political, economic, racial, religious or ethical, with hundreds of subdivisions of each. In the World Almanac, for example, the following groups are listed under the A's:
The League to Abolish Capital Punishment; Association to Abolish War; American Institute of Accountants; Actors' Equity Association; Actuarial Association of America; International Advertising Association; National Aeronautic Association; Albany Institute of History and Art; Amen Corner; American Academy in Rome; American Antiquarian Society; League for American Citizenship; American Federation of Labor; Amorc (Rosicrucian Order); Andiron Club; American-Irish Historical Association; Anti-Cigarette League; Anti-Profanity League; Archeological Association of America; National Archery Association; Arion Singing Society; American Astronomical Association; Ayrshire Breeders' Association; Aztec Club of 1847. There are many more under the "A" section of this very limited list.
The American Newspaper Annual and Directory for 1928 lists 22,128 periodical publications in America. I have selected at random the N's published in Chicago. They are:
Narod (Bohemian daily newspaper); Narod-Polski (Polish monthly); N.A.R.D. (pharmaceutical); National Corporation Reporter; National Culinary Progress (for hotel chefs); National Dog Journal; National Drug Clerk; National Engineer; National Grocer; National Hotel Reporter; National Income Tax Magazine; National Jeweler; National Journal of Chiropractic; National Live Stock Producer; National Miller; National Nut News; National Poultry, Butter and Egg Bulletin; National Provisioner (for meat packers); National Real Estate Journal; National Retail Clothier; National Retail Lumber Dealer; National Safety News; National Spiritualist; National Underwriter; The Nation's Health; Naujienos (Lithuanian daily newspaper); New Comer (Republican weekly for Italians); Daily News; The New World (Catholic weekly); North American Banker; North American Veterinarian.
The circulation of some of these publications is astonishing. The National Live Stock Producer has a sworn circulation of 155,978; The National Engineer, of 20,328; The New World, an estimated circulation of 67,000. The greater number of the periodicals listed—chosen at random from among 22,128—have a circulation in excess of 10,000.
The diversity of these publications is evident at a glance. Yet they can only faintly suggest the multitude of cleavages which exist in our society, and along which flow information and opinion carrying authority to the individual groups.
Here are the conventions scheduled for Cleveland, Ohio, recorded in a single recent issue of "World Convention Dates"—a fraction of the 5,500 conventions and rallies scheduled.
The Employing Photo-Engravers' Association of America; The Outdoor Writers' Association; the Knights of St. John; the Walther League; The National Knitted Outerwear Association; The Knights of St. Joseph; The Royal Order of Sphinx; The Mortgage Bankers' Association; The International Association of Public Employment Officials; The Kiwanis Clubs of Ohio; The American Photo-Engravers' Association; The Cleveland Auto Manufacturers Show; The American Society of Heating and Ventilating Engineers.
Other conventions to be held in 1928 were those of:
The Association of Limb Manufacturers' Associations; The National Circus Fans' Association of America; The American Naturopathic Association; The American Trap Shooting Association; The Texas Folklore Association; The Hotel Greeters; The Fox Breeders' Association; The Insecticide and Disinfectant Association; The National Association of Egg Case and Egg Case Filler Manufacturers; The American Bottlers of Carbonated Beverages; and The National Pickle Packers' Association, not to mention the Terrapin Derby—most of them with banquets and orations attached.
If all these thousands of formal organizations and institutions could be listed (and no complete list has ever been made), they would still represent but a part of those existing less formally but leading vigorous lives. Ideas are sifted and opinions stereotyped in the neighborhood bridge club. Leaders assert their authority through community drives and amateur theatricals. Thousands of women may unconsciously belong to a sorority which follows the fashions set by a single society leader.
"Life" satirically expresses this idea in the reply which it represents an American as giving to the Britisher who praises this country for having no upper and lower classes or castes:
"Yeah, all we have is the Four Hundred, the White-Collar Men, Bootleggers, Wall Street Barons, Criminals, the D.A.R., the K.K.K., the Colonial Dames, the Masons, Kiwanis and Rotarians, the K. of C, the Elks, the Censors, the Cognoscenti, the Morons, Heroes like Lindy, the W.C.T.U., Politicians, Menckenites, the Booboisie, Immigrants, Broadcasters, and—the Rich and Poor."
Yet it must be remembered that these thousands of groups interlace. John Jones, besides being a Rotarian, is member of a church, of a fraternal order, of a political party, of a charitable organization, of a professional association, of a local chamber of commerce, of a league for or against prohibition or of a society for or against lowering the tariff, and of a golf club. The opinions which he receives as a Rotarian, he will tend to disseminate in the other groups in which he may have influence.
This invisible, intertwining structure of groupings and associations is the mechanism by which democracy has organized its group mind and simplified its mass thinking. To deplore the existence of such a mechanism is to ask for a society such as never was and never will be. To admit that it easts, but expect that it shall not be used, is unreasonable.
Emil Ludwig represents Napoleon as "ever on the watch for indications of public opinion; always listening to the voice of the people, a voice which defies calculation. 'Do you know,' he said in those days, 'what amazes me more than all else? The impotence of force to organize anything.'"
It is the purpose of this book to explain the structure of the mechanism which controls the public mind, and to tell how it is manipulated by the special pleader who seeks to create public acceptance for a particular idea or commodity. It will attempt at the same time to find the due place in the modern democratic scheme for this new propaganda and to suggest its gradually evolving code of ethics and practice.

CHAPTER II
THE NEW PROPAGANDA

IN the days when kings were kings, Louis XIV made his modest remark, "L'Etat c'est moi." He was nearly right.
But times have changed. The steam engine, the multiple press, and the public school, that trio of the industrial revolution, have taken the power away from kings and given it to the people. The people actually gained power which the king lost For economic power tends to draw after it political power; and the history of the industrial revolution shows how that power passed from the king and the aristocracy to the bourgeoisie. Universal suffrage and universal schooling reinforced this tendency, and at last even the bourgeoisie stood in fear of the common people. For the masses promised to become king.
To-day, however, a reaction has set in. The minority has discovered a powerful help in influencing majorities. It has been found possible so to mold the mind of the masses that they will throw their newly gained strength in the desired direction. In the present structure of society, this practice is inevitable. Whatever of social importance is done to-day, whether in politics, finance, manufacture, agriculture, charity, education, or other fields, must be done with the help of propaganda. Propaganda is the executive arm of the invisible government
Universal literacy was supposed to educate the common man to control his environment. Once he could read and write he would have a mind fit to rule. So ran the democratic doctrine. But instead of a mind, universal literacy has given him rubber stamps, rubber stamps inked with advertising slogans, with editorials, with published scientific data, with the trivialities of the tabloids and the platitudes of history, but quite innocent of original thought. Each man's rubber stamps are the duplicates of millions of others, so that when those millions are exposed to the same stimuli, all receive identical imprints. It may seem an exaggeration to say that the American public gets most of its ideas in this wholesale fashion. The mechanism by which ideas are disseminated on a large scale is propaganda, in the broad sense of an organized effort to spread a particular belief or doctrine.
I am aware that the word "propaganda" carries to many minds an unpleasant connotation. Yet whether, in any instance, propaganda is good or bad depends upon the merit of the cause urged, and the correctness of the information published.
In itself, the word "propaganda" has certain technical meanings which, like most things in this world, are "neither good nor bad but custom makes them so." I find the word defined in Funk and Wagnalls' Dictionary in four ways:

1 "A society of cardinals, the overseers of foreign missions; also the College of the Propaganda at Rome founded by Pope Urban VIII in 1627 for the education of missionary priests; Sacred College de Propaganda Fide.

2 "Hence, any institution or scheme for propagating a doctrine or system.

3"Effort directed systematically toward the gaining of public support for an opinion or a course of action.

4"The principles advanced by a propaganda."

The Scientific American, in a recent issue, pleads for the restoration to respectable usage of that "fine old word 'propaganda.'"
"There is no word in the English language," it says, "whose meaning has been so sadly distorted as the word 'propaganda.' The change took place mainly during the late war when the term took on a decidedly sinister complexion.
"If you turn to the Standard Dictionary, you will find that the word was applied to a congregation or society of cardinals for the care and oversight of foreign missions which was instituted at Rome in the year 1627. It was applied also to the College of the Propaganda at Rome that was founded by Pope Urban VIII, for the education of the missionary priests. Hence, in later years the word came to be applied to any institution or scheme for propagating a doctrine or system.
"Judged by this definition, we can see that in its true sense propaganda is a perfectly legitimate form of human activity. Any society, whether it be social, religious or political, which is possessed of certain beliefs, and sets out to make them known, either by the spoken or written words, is practicing propaganda.
"Truth is mighty and must prevail, and if any body of men believe that they have discovered a valuable truth, it is not merely their privilege but their duty to disseminate that truth. If they realize, as they quickly must, that this spreading of the truth can be done upon a large scale and effectively only by organized effort, they will make use of the press and the platform as the best means to give it wide circulation. Propaganda becomes vicious and reprehensive only when its authors consciously and deliberately disseminate what they know to be lies, or when they aim at effects which they know to be prejudicial to the common good.
" 'Propaganda' in its proper meaning is a perfectly wholesome word, of honest parentage, and with an honorable history. The fact that it should to-day be carrying a sinister meaning merely shows how much of the child remains in the average adult. A group of citizens writes and talks in favor of a certain course of action in some debatable question, believing that it is promoting the best interest of the community. Propaganda? Not a bit of it. Just a plain forceful statement of truth. But let another group of citizens express opposing views, and they are promptly labeled with the sinister name of propaganda. . . .
" 'What is sauce for the goose is sauce for the gander,' says a wise old proverb. Let us make haste to put this fine old word back where it belongs, and restore its dignified significance for the use of our children and our children's children."
The extent to which propaganda shapes the progress of affairs about us may surprise even well informed persons. Nevertheless, it is only necessary to look under the surface of the newspaper for a hint as to propaganda's authority over public opinion. Page one of the New York Times on the day these paragraphs are written contains eight important news stories. Four of them, or one-half, are propaganda. The casual reader accepts them as accounts of spontaneous happenings. But are they? Here are the headlines which announce them: "TWELVE NATIONS WARN CHINA REAL REFORM MUST COME BEFORE THEY GIVE RELIEF," "PRITCHETT REPORTS ZIONISM WILL FAIL," "REALTY MEN DEMAND A TRANSIT INQUIRY," and "OUR LIVING STANDARD HIGHEST IN HISTORY, SAYS HOOVER REPORT."
Take them in order: the article on China explains the joint report of the Commission on Extraterritoriality in China, presenting an exposition of the Powers' stand in the Chinese muddle. What it says is less important than what it is. It was "made public by the State Department to-day" with the purpose of presenting to the American public a picture of the State Department's position. Its source gives it authority, and the American public tends to accept and support the State Department view.
The report of Dr. Pritchett, a trustee of the Carnegie Foundation for International Peace, is an attempt to find the facts about this Jewish colony in the midst of a restless Arab world. When Dr. Pritchett's survey convinced him that in the long run Zionism would "bring more bitterness and more unhappiness both for the Jew and for the Arab," this point of view was broadcast with all the authority of the Carnegie Foundation, so that the public would hear and believe. The statement by the president of the Real Estate Board of New York, and Secretary Hoover's report, are similar attempts to influence the public toward an opinion.
These examples are not given to create the impression that there is anything sinister about propaganda. They are set down rather to illustrate how conscious direction is given to events, and how the men behind these events influence public opinion. As such they are examples of modern propaganda. At this point we may attempt to define propaganda.
Modern propaganda is a consistent, enduring effort to create or shape events to influence the relations of the public to an enterprise, idea or group.
This practice of creating circumstances and of creating pictures in the minds of millions of persons is very common. Virtually no important undertaking is now carried on without it, whether that enterprise be building a cathedral, endowing a university, marketing a moving picture, floating a large bond issue, or electing a president. Sometimes the effect on the public is created by a professional propagandist, sometimes by an amateur deputed for the job. The important thing is that it is universal and continuous; and in its sum total it is regimenting the public mind every bit as much as an army regiments the bodies of its soldiers.
So vast are the numbers of minds which can be regimented, and so tenacious are they when regimented, that a group at times offers an irresistible pressure before which legislators, editors, and teachers are helpless. The group will cling to its stereotype, as Walter Lippmann calls it, making of those supposedly powerful beings, the leaders of public opinion, mere bits of driftwood in the surf. When an Imperial Wizard, sensing what is perhaps hunger for an ideal, offers a picture of a nation all Nordic and nationalistic, the common man of the older American stock, feeling himself elbowed out of his rightful position and prosperity by the newer immigrant stocks, grasps the picture which fits in so neatly with his prejudices, and makes it his own. He buys the sheet and pillow-case costume, and bands with his fellows by the thousand into a huge group powerful enough to swing state elections and to throw a ponderous monkey wrench into a national convention.
In our present social organization approval of the public is essential to any large undertaking. Hence a laudable movement may be lost unless it impresses itself on the public mind. Charity, as well as business, and politics and literature, for that matter, have had to adopt propaganda, for the public must be regimented into giving money just as it must be regimented into tuberculosis prophylaxis. The Near East Relief, the Association for the Improvement of the Condition of the Poor of New York, and all the rest, have to work on public opinion just as though they had tubes of tooth paste to sell. We are proud of our diminishing infant death rate—and that too is the work of propaganda.
Propaganda does exist on all sides of us, and it does change our mental pictures of the world. Even if this be unduly pessimistic—and that remains to be proved—the opinion reflects a tendency that is undoubtedly real. In fact, its use is growing as its efficiency in gaining public support is recognized. This then, evidently indicates the fact that any one with sufficient influence can lead sections of the public at least for a time and for a given purpose. Formerly the rulers were the leaders. They laid out the course of history, by the simple process of doing what they wanted. And if nowadays the successors of the rulers, those whose position or ability gives them power, can no longer do what they want without the approval of the masses, they find in propaganda a tool which is increasingly powerful in gaining that approval. Therefore, propaganda is here to stay.
It was, of course, the astounding success of propaganda during the war that opened the eyes of the intelligent few in all departments of life to the possibilities of regimenting the public mind. The American government and numerous patriotic agencies developed a technique which, to most persons accustomed to bidding for public acceptance, was new. They not only appealed to the individual by means of every approach—visual, graphic, and auditory—to support the national endeavor, but they also secured the cooperation of the key men in every group —persons whose mere word carried authority to hundreds or thousands or hundreds of thousands of followers. They thus automatically gained the support of fraternal, religious, commercial, patriotic, social and local groups whose members took their opinions from their accustomed leaders and spokesmen, or from the periodical publications which they were accustomed to read and believe. At the same time, the manipulators of patriotic opinion made use of the mental cliches and the emotional habits of the public to produce mass reactions against the alleged atrocities, the terror and the tyranny of the enemy. It was only natural, after the war ended, that intelligent persons should ask themselves whether it was not possible to apply a similar technique to the problems of peace.
As a matter of fact, the practice of propaganda since the war has assumed very different forms from those prevalent twenty years ago. This new technique may fairly be called the new propaganda.
It takes account not merely of the individual, nor even of the mass mind alone, but also and especially of the anatomy of society, with its interlocking group formations and loyalties. It sees the individual not only as a cell in the social organism but as a cell organized into the social unit. Touch a nerve at a sensitive spot and you get an automatic response from certain specific members of the organism.
Business offers graphic examples of the effect that may be produced upon the public by interested groups, such as textile manufacturers losing their markets. This problem arose, not long ago, when the velvet manufacturers were facing ruin because their product had long been out of fashion. Analysis showed that it was impossible to revive a velvet fashion within America. Anatomical hunt for the vital spot! Paris! Obviously! But yes and no. Paris is the home of fashion. Lyons is the home of silk. The attack had to be made at the source. It was determined to substitute purpose for chance and to utilize the regular sources for fashion distribution and to influence the public from these sources. A velvet fashion service, openly supported by the manufacturers, was organized. Its first function was to establish contact with the Lyons manufactories and the Paris couturiers to discover what they were doing, to encourage them to act on behalf of velvet, and to help in the proper exploitation of their wares. An intelligent Parisian was enlisted in the work. He visited Lanvin and Worth, Agnes and Patou, and others and induced them to use velvet in their gowns and hats. It was he who arranged for the distinguished Countess This or Duchess That to wear the hat or the gown. And as for the presentation of the idea to the public, the American buyer or the American woman of fashion was simply shown the velvet creations in the atelier of the dressmaker or the milliner. She bought the velvet because she liked it and because it was in fashion.
The editors of the American magazines and fashion reporters of the American newspapers, likewise subjected to the actual (although created) circumstance, reflected it in their news, which, in turn, subjected the buyer and the consumer here to the same influences. The result was that what was at first a trickle of velvet became a flood. A demand was slowly, but deliberately, created in Paris and America. A big department store, aiming to be a style leader, advertised velvet gowns and hats on the authority of the French couturiers, and quoted original cables received from them. The echo of the new style note was heard from hundreds of department stores throughout the country which wanted to be style leaders too. Bulletins followed despatches. The mail followed the cables. And the American woman traveler appeared before the ship news photographers in velvet gown and hat.
The created circumstances had their effect. "Fickle fashion has veered to velvet," was one newspaper comment. And the industry in the United States again kept thousands busy.
The new propaganda, having regard to the constitution of society as a whole, not infrequently serves to focus and realize the desires of the masses. A desire for a specific reform, however widespread, cannot be translated into action until it is made articulate, and until it has exerted sufficient pressure upon the proper law-making bodies. Millions of housewives may feel that manufactured foods deleterious to health should be prohibited. But there is little chance that their individual desires will be translated into effective legal form unless their halfexpressed demand can be organized, made vocal, and concentrated upon the state legislature or upon the Federal Congress in some mode which will produce the results they desire. Whether they realize it or not, they call upon propaganda to organize and effectuate their demand.
But clearly it is the intelligent minorities which need to make use of propaganda continuously and systematically. In the active proselytizing minorities in whom selfish interests and public interests coincide lie the progress and development of America. Only through the active energy of the intelligent few can the public at large become aware of and act upon new ideas.
Small groups of persons can, and do, make the rest of us think what they please about a given subject. But there are usually proponents and opponents of every propaganda, both of whom are equally eager to convince the majority.

CHAPTER III
THE NEW PROPAGANDISTS

WHO are the men who, without our realizing it, give us our ideas, tell us whom to admire and whom to despise, what to believe about the ownership of public utilities, about the tariff, about the price of rubber, about the Dawes Plan, about immigration; who tell us how our houses should be designed, what furniture we should put into them, what menus we should serve on our table, what kind of shirts we must wear, what sports we should indulge in, what plays we should see, what charities we should support, what pictures we should admire, what slang we should affect, what jokes we should laugh at?
If we set out to make a list of the men and women who, because of their position in public life, might fairly be called the molders of public opinion, we could quickly arrive at an extended list of persons mentioned in "Who's Who." It would obviously include, the President of the United States and the members of his Cabinet; the Senators and Representatives in Congress; the Governors of our fortyeight states; the presidents of the chambers of commerce in our hundred largest cities, the chairmen of the boards of directors of our hundred or more largest industrial corporations, the president of many of the labor unions affiliated in the American Federation of Labor, the national president of each of the national professional and fraternal organizations, the president of each of the racial or language societies in the country, the hundred leading newspaper and magazine editors, the fifty most popular authors, the presidents of the fifty leading charitable organizations, the twenty leading theatrical or cinema producers, the hundred recognized leaders of fashion, the most popular and influential clergymen in the hundred leading cities, the presidents of our colleges and universities and the foremost members of their faculties, the most powerful financiers in Wall Street, the most noted amateurs of sport, and so on. Such a list would comprise several thousand persons. But it is well known that many of these leaders are themselves led, sometimes by persons whose names are known to few. Many a congressman, in framing his platform, follows the suggestions of a district boss whom few persons outside the political machine have ever heard of. Eloquent divines may have great influence in their communities, but often take their doctrines from a higher ecclesiastical authority. The presidents of chambers of commerce mold the thought of local business men concerning public issues, but the opinions which they promulgate are usually derived from some national authority. A presidential candidate may be "drafted" in response to "overwhelming popular demand," but it is well known that his name may be decided upon by half a dozen men sitting around a table in a hotel room.
In some instances the power of invisible wirepullers is flagrant. The power of the invisible cabinet which deliberated at the poker table in a certain little green house in Washington has become a national legend. There was a period in which the major policies of the national government were dictated by a single man, Mark Hanna. A Simmons may, for a few years, succeed in marshaling millions of men on a platform of intolerance and violence.
Such persons typify in the public mind the type of ruler associated with the phrase invisible government. But we do not often stop to think that there are dictators in other fields whose influence is just as decisive as that of the politicians I have mentioned. An Irene Castle can establish the fashion of short hair which dominates nine-tenths of the women who make any pretense to being fashionable. Paris fashion leaders set the mode of the short skirt, for wearing which, twenty years ago, any woman would simply have been arrested and thrown into jail by the New York police, and the entire women's clothing industry, capitalized at hundreds of millions of dollars, must be reorganized to conform to their dictum.
There are invisible rulers who control the destinies of millions. It is not generally realized to what extent the words and actions of our most influential public men are dictated by shrewd persons operating behind the scenes.
Nor, what is still more important, the extent to which our thoughts and habits are modified by authorities.
In some departments of our daily life, in which we imagine ourselves free agents, we are ruled by dictators exercising great power. A man buying a suit of clothes imagines that he is choosing, according to his taste and his personality, the kind of garment which he prefers. In reality, he may be obeying the orders of an anonymous gentleman tailor in London. This personage is the silent partner in a modest tailoring establishment, which is patronized by gentlemen of fashion and princes of the blood. He suggests to British noblemen and others a blue cloth instead of gray, two buttons instead of three, or sleeves a quarter of an inch narrower than last season. The distinguished customer approves of the idea.
But how does this fact affect John Smith of Topeka?
The gentleman tailor is under contract with a certain large American firm, which manufactures men's suits, to send them instantly the designs of the suits chosen by the leaders of London fashion. Upon receiving the designs, with specifications as to color, weight and texture, the firm immediately places an order with the cloth makers for several hundred thousand dollars' worth of cloth. The suits made up according to the specifications are then advertised as the latest fashion. The fashionable men in New York, Chicago, Boston and Philadelphia wear them. And the Topeka man, recognizing this leadership, does the same.
Women are just as subject to the commands of invisible government as are men. A silk manufacturer, seeking a new market for its product, suggested to a large manufacturer of shoes that women's shoes should be covered with silk to match their dresses. The idea was adopted and systematically propagandized. A popular actress was persuaded to wear the shoes. The fashion spread. The shoe firm was ready with the supply to meet the created demand. And the silk company was ready with the silk for more shoes.
The man who injected this idea into the shoe industry was ruling women in one department of their social lives. Different men rule us in the various departments of our lives. There may be one power behind the throne in politics, another in the manipulation of the Federal discount rate, and still another in the dictation of next season's dances. If there were a national invisible cabinet ruling our destinies (a thing which is not impossible to conceive of) it would work through certain group leaders on Tuesday for one purpose, and through an entirely different set on Wednesday for another. The idea of invisible government is relative. There may be a handful of men who control the educational methods of the great majority of our schools. Yet from another standpoint, every parent is a group leader with authority over his or her children.
The invisible government tends to be concentrated in the hands of the few because of the expense of manipulating the social machinery which controls the opinions and habits of the masses. To advertise on a scale which will reach fifty million persons is expensive. To reach and persuade the group leaders who dictate the public's thoughts and actions is likewise expensive.
For this reason there is an increasing tendency to concentrate the functions of propaganda in the hands of the propaganda specialist. This specialist is more and more assuming a distinct place and function in our national life.
New activities call for new nomenclature. The propagandist who specializes in interpreting enterprises and ideas to the public, and in interpreting the public to promulgators of new enterprises and ideas, has come to be known by the name of "public relations counsel."
The new profession of public relations has grown up because of the increasing complexity of modern life and the consequent necessity for making the actions of one part of the public understandable to other sectors of the public. It is due, too, to the increasing dependence of organized power of all sorts upon public opinion. Governments, whether they are monarchical, constitutional, democratic or communist, depend upon acquiescent public opinion for the success of their efforts and, in fact, government is only government by virtue of public acquiescence. Industries, public utilities, educational movements, indeed all groups representing any concept or product, whether they are majority or minority ideas, succeed only because of approving public opinion. Public opinion is the unacknowledged partner in all broad efforts.
The public relations counsel, then, is the agent who, working with modern media of communication and the group formations of society, brings an idea to the consciousness of the public. But he is a great deal more than that. He is concerned with courses of action, doctrines, systems and opinions, and the securing of public support for them. He is also concerned with tangible things such as manufactured and raw products. He is concerned with public utilities, with large trade groups and associations representing entire industries.
He functions primarily as an adviser to his client, very much as a lawyer does. A lawyer concentrates on the legal aspects of his client's business. A counsel on public relations concentrates on the public contacts of his client's business. Every phase of his client's ideas, products or activities which may affect the public or in which the public may have an interest is part of his function.
For instance, in the specific problems of the manufacturer he examines the product, the markets, the way in which the public reacts to the product, the attitude of the employees to the public and towards the product, and the cooperation of the distribution agencies.
The counsel on public relations, after he has examined all these and other factors, endeavors to shape the actions of his client so that they will gain the interest, the approval and the acceptance of the public.
The means by which the public is apprised of the actions of his client are as varied as the means of communication themselves, such as conversation, letters, the stage, the motion picture, the radio, the lecture platform, the magazine, the daily newspaper. The counsel on public relations is not an advertising man but he advocates advertising where that is indicated. Very often he is called in by an advertising agency to supplement its work on behalf of a client. His work and that of the advertising agency do not conflict with or duplicate each other.
His first efforts are, naturally, devoted to analyzing his client's problems and making sure that what he has to offer the public is something which the public accepts or can be brought to accept. It is futile to attempt to sell an idea or to prepare the ground for a product that is basically unsound.
For example, an orphan asylum is worried by a falling off in contributions and a puzzling attitude of indifference or hostility on the part of the public. The counsel on public relations may discover upon analysis that the public, alive to modern sociological trends, subconsciously criticizes the institution because it is not organized on the new "cottage plan." He will advise modification of the client in this respect. Or a railroad may be urged to put on a fast train for the sake of the prestige which it will lend to the road's name, and hence to its stocks and bonds.
If the corset makers, for instance, wished to bring their product into fashion again, he would unquestionably advise that the plan was impossible, since women have definitely emancipated themselves from the old-style corset. Yet his fashion advisers might report that women might be persuaded to adopt a certain type of girdle which eliminated the unhealthful features of the corset.
His next effort is to analyze his public. He studies the groups which must be reached, and the leaders through whom he may approach these groups. Social groups, economic groups, geographical groups, age groups, doctrinal groups, language groups, cultural groups, all these represent the divisions through which, on behalf of his client, he may talk to the public.
Only after this double analysis has been made and the results collated, has the time come for the next step, the formulation of policies governing the general practice, procedure and habits of the client in all those aspects in which he comes in contact with the public. And only when these policies have been agreed upon is it time for the fourth step.
The first recognition of the distinct functions of the public relations counsel arose, perhaps, in the early years of the present century as a result of the insurance scandals coincident with the muck-raking of corporate finance in the popular magazines. The interests thus attacked suddenly realized that they were completely out of touch with the public they were professing to serve, and required expert advice to show them how they could understand the public and interpret themselves to it.
The Metropolitan Life Insurance Company, prompted by the most fundamental self-interest, initiated a conscious, directed effort to change the attitude of the public toward insurance companies in general, and toward itself in particular, to its profit and the public's benefit.
It tried to make a majority movement of itself by getting the public to buy its policies. It reached the public at every point of its corporate and separate existences. To communities it gave health surveys and expert counsel. To individuals it gave health creeds and advice. Even the building in which the corporation was located was made a picturesque landmark to see and remember, in other words to carry on the associative process. And so this company came to have a broad general acceptance. The number and amount of its policies grew constantly, as its broad contacts with society increased.
Within a decade, many large corporations were employing public relations counsel under one title or another, for they had come to recognize that they depended upon public good will for their continued prosperity. It was no longer true that it was "none of the public's business" how the affairs of a corporation were managed. They were obliged to convince the public that they were conforming to its demands as to honesty and fairness. Thus a corporation might discover that its labor policy was causing public resentment, and might introduce a more enlightened policy solely for the sake of general good will. Or a department store, hunting for the cause of diminishing sales, might discover that its clerks had a reputation for bad manners, and initiate formal instruction in courtesy and tact.
The public relations expert may be known as public relations director or counsel. Often he is called secretary or vice-president or director. Sometimes he is known as cabinet officer or commissioner. By whatever title he may be called, his function is well defined and his advice has definite bearing on the conduct of the group or individual with whom he is working.
Many persons still believe that the public relations counsel is a propagandist and nothing else. But, on the contrary, the stage at which many suppose he starts his activities may actually be the stage at which he ends them. After the public and the client are thoroughly analyzed and policies have been formulated, his work may be finished. In other cases the work of the public relations counsel must be continuous to be effective. For in many instances only by a careful system of constant, thorough and frank information will the public understand and appreciate the value of what a merchant, educator or statesman is doing. The counsel on public relations must maintain constant vigilance, because inadequate information, or false information from unknown sources, may have results of enormous importance. A single false rumor at a critical moment may drive down the price of a corporation's stock, causing a loss of millions to stockholders. An air of secrecy or mystery about a corporation's financial dealings may breed a general suspicion capable of acting as an invisible drag on the company's whole dealings with the public. The counsel on public relations must be in a position to deal effectively with rumors and suspicions, attempting to stop them at their source, counteracting them promptly with correct or more complete information through channels which will be most effective, or best of all establishing such relations of confidence in the concern's integrity that rumors and suspicions will have no opportunity to take root.
His function may include the discovery of new markets, the existence of which had been unsuspected.
If we accept public relations as a profession, we must also expect it to have both ideals and ethics. The ideal of the profession is a pragmatic one. It is to make the producer, whether that producer be a legislature making laws or a manufacturer making a commercial product, understand what the public wants and to make the public understand the objectives of the producer. In relation to industry, the ideal of the profession is to eliminate the waste and the friction that result when industry does things or makes things which its public does not want, or when the public does not understand what is being offered it. For example, the telephone companies maintain extensive public relations departments to explain what they are doing, so that energy may not be burned up in the friction of misunderstanding. A detailed description, for example, of the immense and scientific care which the company takes to choose clearly understandable and distinguishable exchange names, helps the public to appreciate the effort that is being made to give good service, and stimulates it to cooperate by enunciating clearly. It aims to bring about an understanding between educators and educated, between government and people, between charitable institutions and contributors, between nation and nation.
The profession of public relations counsel is developing for itself an ethical code which compares favorably with that governing the legal and medical professions. In part, this code is forced upon the public relations counsel by the very conditions of his work. While recognizing, just as the lawyer does, that every one has the right to present his case in its best light, he nevertheless refuses a client whom he believes to be dishonest, a product which he believes to be fraudulent, or a cause which he believes to be antisocial. One reason for this is that, even though a special pleader, he is not dissociated from the client in the public's mind. Another reason is that while he is pleading before the court—the court of public opinion—he is at the same time trying to affect that court's judgments and actions. In law, the judge and jury hold the deciding balance of power. In public opinion, the public relations counsel is judge and jury, because through his pleading of a case the public may accede to his opinion and judgment.
He does not accept a client whose interests conflict with those of another client. He does not accept a client whose case he believes to be hopeless or whose product he believes to be unmarketable.
He should be candid in his dealings. It must be repeated that his business is not to fool or hoodwink the public. If he were to get such a reputation, his usefulness in his profession would be at an end. When he is sending out propaganda material, it is clearly labeled as to source. The editor knows from whom it comes and what its purpose is, and accepts or rejects it on its merits as news.

CHAPTER IV
THE PSYCHOLOGY OF PUBLIC RELATIONS

The systematic study of mass psychology revealed to students the potentialities of invisible government of society by manipulation of the motives which actuate man in the group. Trotter and Le Bon, who approached the subject in a scientific manner, and Graham Wallas, Walter Lippmann and others who continued with searching studies of the group mind, established that the group has mental characteristics distinct from those of the individual, and is motivated by impulses and emotions which cannot be explained on the basis of what we know of individual psychology. So the question naturally arose: If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing it?
The recent practice of propaganda has proved that it is possible, at least up to a certain point and within certain limits. Mass psychology is as yet far from being an exact science and the mysteries of human motivation are by no means all revealed. But at least theory and practice have combined with sufficient success to permit us to know that in certain cases we can effect some change in public opinion with a fair degree of accuracy by operating a certain mechanism, just as the motorist can regulate the speed of his car by manipulating the flow of gasoline. Propaganda is not a science in the laboratory sense, but it is no longer entirely the empirical affair that it was before the advent of the study of mass psychology. It is now scientific in the sense that it seeks to base its operations upon definite knowledge drawn from direct observation of the group mind, and upon the application of principles which have been demonstrated to be consistent and relatively constant
The modern propagandist studies systematically and objectively the material with which he is working in the spirit of the laboratory. If the matter in hand is a nation-wide sales campaign, he studies the field by means of a clipping service, or of a corps of scouts, or by personal study at a crucial spot He determines, for example, which features of a product are losing their public appeal, and in what new direction the public taste is veering. He will not fail to investigate to what extent it is the wife who has the final word in the choice of her husband's car, or of his suits and shirts.
Scientific accuracy of results is not to be expected, because many of the elements of the situation must always be beyond his control. He may know with a fair degree of certainty that under favorable circumstances an international flight will produce a spirit of good will, making possible even the consummation of political programs. But he cannot be sure that some unexpected event will not overshadow this flight in the public interest, or that some other aviator may not do something more spectacular the day before. Even in his restricted field of public psychology there must always be a wide margin of error. Propaganda, like economics and sociology, can never be an exact science for the reason that its subject-matter, like theirs, deals with human beings.
If you can influence the leaders, either with or without their conscious cooperation, you automatically influence the group which they sway. But men do not need to be actually gathered together in a public meeting or in a street riot, to be subject to the influences of mass psychology. Because man is by nature gregarious he feels himself to be member of a herd, even when he is alone in his room with the curtains drawn. His mind retains the patterns which have been stamped on it by the group influences. A man sits in his office deciding what stocks to buy. He imagines, no doubt, that he is planning his purchases according to his own judgment. In actual fact his judgment is a melange of impressions stamped on his mind by outside influences which unconsciously control his thought. He buys a certain railroad stock because it was in the headlines yesterday and hence is the one which comes most prominently to his mind; because he has a pleasant recollection of a good dinner on one of its fast trains; because it has a liberal labor policy, a reputation for honesty; because he has been told that J. P. Morgan owns some of its shares.
Trotter and Le Bon concluded that the group mind does not think in the strict sense of the word. In place of thoughts it has impulses, habits and emotions. In making up its mind its first impulse is usually to follow the example of a trusted leader. This is one of the most firmly established principles of mass psychology. It operates in establishing the rising or diminishing prestige of a summer resort, in causing a run on a bank, or a panic on the stock exchange, in creating a best seller, or a box-office success.
But when the example of the leader is not at hand and the herd must think for itself, it does so by means of cliches, pat words or images which stand for a whole group of ideas or experiences. Not many years ago, it was only necessary to tag a political candidate with the word interests to stampede millions of people into voting against him, because anything associated with "the interests" seemed necessarily corrupt. Recently the word Bolshevik has performed a similar service for persons who wished to frighten the public away from a line of action.
By playing upon an old cliche, or manipulating a new one, the propagandist can sometimes swing a whole mass of group emotions. In Great Britain, during the war, the evacuation hospitals came in for a considerable amount of criticism because of the summary way in which they handled their wounded. It was assumed by the public that a hospital gives prolonged and conscientious attention to its patients. When the name was changed to evacuation posts the critical reaction vanished. No one expected more than an adequate emergency treatment from an institution so named. The cliche hospital was indelibly associated in the public mind with a certain picture. To persuade the public to discriminate between one type of hospital and another, to dissociate the cliche from the picture it evoked, would have been an impossible task. Instead, a new cliche automatically conditioned the public emotion toward these hospitals.
Men are rarely aware of the real reasons which motivate their actions. A man may believe that he buys a motor car because, after careful study of the technical features of all makes on the market, he has concluded that this is the best. He is almost certainly fooling himself. He bought it, perhaps, because a friend whose financial acumen he respects bought one last week; or because his neighbors believed he was not able to afford a car of that class; or because its colors are those of his college fraternity.
It is chiefly the psychologists of the school of Freud who have pointed out that many of man's thoughts and actions are compensatory substitutes for desires which he has been obliged to suppress. A thing may be desired not for its intrinsic worth or usefulness, but because he has unconsciously come to see in it a symbol of something else, the desire for which he is ashamed to admit to himself. A man buying a car may think he wants it for purposes of locomotion, whereas the fact may be that he would really prefer not to be burdened with it, and would rather walk for the sake of his health. He may really want it because it is a symbol of social position, an evidence of his success in business, or a means of pleasing his wife.
This general principle, that men are very largely actuated bv motives which they conceal from themselves, is as true of mass as of individual psychology. It is evident that the successful propagandist must understand the true motives and not be content to accept the reasons which men give for what they do.
It is not sufficient to understand only the mechanical structure of society, the groupings and cleavages and loyalties. An engineer may know all about the cylinders and pistons of a locomotive, but unless he knows how steam behaves under pressure he cannot make his engine run. Human desires are the steam which makes the social machine work. Only by understanding them can the propagandist control that vast, loose-jointed mechanism which is modern society.
The old propagandist based his work on the mechanistic reaction psychology then in vogue in our colleges. This assumed that the human mind was merely an individual machine, a system of nerves and nerve centers, reacting with mechanical regularity to stimuli, like a helpless, will-less automaton. It was the special pleader's function to provide the stimulus which would cause the desired reaction in the individual purchaser.
It was one of the doctrines of the reaction psychology that a certain stimulus often repeated would create a habit, or that the mere reiteration of an idea would create a conviction. Suppose the old type of salesmanship, acting for a meat packer, was seeking to increase the sale of bacon. It would reiterate innumerable times in full-page advertisements: "Eat more bacon. Eat bacon because it is cheap, because it is good, because it gives you reserve energy."
The newer salesmanship, understanding the group structure of society and the principles of mass psychology, would first ask: "Who is it that influences the eating habits of the public?" The answer, obviously, is: "The physicians." The new salesman will then suggest to physicians to say publicly that it is wholesome to eat bacon. He knows as a mathematical certainty, that large numbers of persons will follow the advice of their doctors, because he understands the psychological relation of dependence of men upon their physicians.
The old-fashioned propagandist, using almost exclusively the appeal of the printed word, tried to persuade the individual reader to buy a definite article, immediately. This approach is exemplified in a type of advertisement which used to be considered ideal from the point of view of directness and effectiveness:
"YOU (perhaps with a finger pointing at the reader) buy O'Leary's rubber heels—NOW."
The advertiser sought by means of reiteration and emphasis directed upon the individual, to break down or penetrate sales resistance. Although the appeal was aimed at fifty million persons, it was aimed at each as an individual.
The new salesmanship has found it possible, by dealing with men in the mass through their group formations, to set up psychological and emotional currents which will work for him. Instead of assaulting sales resistance by direct attack, he is interested in removing sales resistance. He creates circumstances which will swing emotional currents so as to make for purchaser demand.
If, for instance, I want to sell pianos, it is not sufficient to blanket the country with a direct appeal, such as:
"YOU buy a Mozart piano now. It is cheap. The best artists use it. It will last for years."
The claims may all be true, but they are in direct conflict with the claims of other piano manufacturers, and in indirect competition with the claims of a radio or a motor car, each competing for the consumer's dollar.
What are the true reasons why the purchaser is planning to spend his money on a new car instead of on a new piano? Because he has decided that he wants the commodity called locomotion more than he wants the commodity called music? Not altogether. He buys a car, because it is at the moment the group custom to buy cars.
The modern propagandist therefore sets to work to create circumstances which will modify that custom. He appeals perhaps to the home instinct which is fundamental. He will endeavor to develop public acceptance of the idea of a music room in the home. This he may do, for example, by organizing an exhibition of period music rooms designed by well known decorators who themselves exert an influence on the buying groups. He enhances the effectiveness and prestige of these rooms by putting in them rare and valuable tapestries. Then, in order to create dramatic interest in the exhibit, he stages an event or ceremony. To this ceremony key people, persons known to influence the buying habits of the public, such as a famous violinist, a popular artist, and a society leader, are invited. These key persons affect other groups, lifting the idea of the music room to a place in the public consciousness which it did not have before. The juxtaposition of these leaders, and the idea which they are dramatizing, are then projected to the wider public through various publicity channels. Meanwhile, influential architects have been persuaded to make the music room an integral architectural part of their plans with perhaps a specially charming niche in one corner for the piano. Less influential architects will as a matter of course imitate what is done by the men whom they consider masters of their profession. They in turn will implant the idea of the music room in the mind of the general public.
The music room will be accepted because it has been made the thing. And the man or woman who has a music room, or has arranged a corner of the parlor as a musical corner, will naturally think of buying a piano. It will come to him as his own idea.
Under the old salesmanship the manufacturer said to the prospective purchaser, "Please buy a piano." The new salesmanship has reversed the process and caused the prospective purchaser to say to the manufacturer, "Please sell me a piano."
The value of the associative processes in propaganda is shown in connection with a large real estate development. To emphasize that Jackson Heights was socially desirable every attempt was made to produce this associative process. A benefit performance of the Jitney Players was staged for the benefit of earthquake victims of Japan, under the auspices of Mrs. Astor and others. The social advantages of the place were projected—a golf course was laid out and a clubhouse planned. When the post office was opened, the public relations counsel attempted to use it as a focus for national interest and discovered that its opening fell coincident with a date important in the annals of the American Postal Service. This was then made the basis of the opening.
When an attempt was made to show the public the beauty of the apartments, a competition was held among interior decorators for the best furnished apartment in Jackson Heights. An important committee of judges decided. This competition drew the approval of well known authorities, as well as the interest of millions, who were made cognizant of it through newspaper and magazine and other publicity, with the effect of building up definitely the prestige of the development.
One of the most effective methods is the utilization of the group formation of modern society in order to spread ideas. An example of this is the nationwide competitions for sculpture in Ivory soap, open to school children in certain age groups as well as professional sculptors. A sculptor of national reputation found Ivory soap an excellent medium for sculpture.
The Procter and Gamble Company offered a series of prizes for the best sculpture in white soap. The contest was held under the auspices of the Art Center in New York City, an organization of high standing in the art world.
School superintendents and teachers throughout the country were glad to encourage the movement as an educational aid for schools. Practice among school children as part of their art courses was stimulated. Contests were held between schools, between school districts and between cities.
Ivory soap was adaptable for sculpturing in the homes because mothers saved the shavings and the imperfect efforts for laundry purposes. The work itself was clean.
The best pieces are selected from the local competitions for entry in the national contest. This is held annually at an important art gallery in New York, whose prestige with that of the distinguished judges, establishes the contest as a serious art event.
In the first of these national competitions about 500 pieces of sculpture were entered. In the third, 2,500. And in the fourth, more than 4,000. If the carefully selected pieces were so numerous, it is evident that a vast number were sculptured during the year, and that a much greater number must have been made for practice purposes. The good will was greatly enhanced by the fact that this soap had become not merely the concern of the housewife but also a matter of personal and intimate interest to her children.
A number of familiar psychological motives were set in motion in the carrying out of this campaign. The esthetic, the competitive, the gregarious (much of the sculpturing was done in school groups), the snobbish (the impulse to follow the example of a recognized leader), the exhibitionist, and—last but by no means least—the maternal.
All these motives and group habits were put in concerted motion by the simple machinery of group leadership and authority. As if actuated by the pressure of a button, people began working for the client for the sake of the gratification obtained in the sculpture work itself.
This point is most important in successful propaganda work. The leaders who lend their authority to any propaganda campaign will do so only if it can be made to touch their own interests. There must be a disinterested aspect of the propagandist's activities. In other words, it is one of the functions of the public relations counsel to discover at what points his client's interests coincide with those of other individuals or groups.
In the case of the soap sculpture competition, the distinguished artists and educators who sponsored the idea were glad to lend their services and their names because the competitions really promoted an interest which they had at heart—the cultivation of the esthetic impulse among the younger generation.
Such coincidence and overlapping of interests is as infinite as the interlacing of group formations themselves. For example, a railway wishes to develop its business. The counsel on public relations makes a survey to discover at what points its interests coincide with those of its prospective customers. The company then establishes relations with chambers of commerce along its right of way and assists them in developing their communities. It helps them to secure new plants and industries for the town. It facilitates business through the dissemination of technical information. It is not merely a case of bestowing favors in the hope of receiving favors; these activities of the railroad, besides creating good will, actually promote growth on its right of way. The interests of the railroad and the communities through which it passes mutually interact and feed one another.
In the same way, a bank institutes an investment service for the benefit of its customers in order that the latter may have more money to deposit with the bank. Or a jewelry concern develops an insurance department to insure the jewels it sells, in order to make the purchaser feel greater security in buying jewels. Or a baking company establishes an information service suggesting recipes for bread to encourage new uses for bread in the home. The ideas of the new propaganda are predicated on sound psychology based on enlightened selfinterest.

I have tried, in these chapters, to explain the place of propaganda in modern American life and something of the methods by which it operates—to tell the why, the what, the who and the how of the invisible government which dictates our thoughts, directs our feelings and controls our actions. In the following chapters I shall try to show how propaganda functions in specific departments of group activity, to suggest some of the further ways in which it may operate.

CHAPTER V
BUSINESS AND THE PUBLIC

THE relationship between business and the public has become closer in the past few decades. Business to-day is taking the public into partnership. A number of causes, some economic, others due to the growing public understanding of business and the public interest in business, have produced this situation. Business realizes that its relationship to the public is not confined to the manufacture and sale of a given product, but includes at the same time the selling of itself and of all those things for which it stands in the public mind.
Twenty or twenty-five years ago, business sought to run its own affairs regardless of the public. The reaction was the muck-raking period, in which a multitude of sins were, justly and unjustly, laid to the charge of the interests. In the face of an aroused public conscience the large corporations were obliged to renounce their contention that their affairs were nobody's business. If to-day big business were to seek to throttle the public, a new reaction similar to that of twenty years ago would take place and the public would rise and try to throttle big business with restrictive laws. Business is conscious of the public's conscience. This consciousness has led to a healthy cooperation.
Another cause for the increasing relationship is undoubtedly to be found in the various phenomena growing out of mass production. Mass production is only profitable if its rhythm can be maintained— that is, if it can continue to sell its product in steady or increasing quantity. The result is that while, under the handicraft or small-unit system of production that was typical a century ago, demand created the supply, to-day supply must actively seek to create its corresponding demand. A single factory, potentially capable of supplying a whole continent with its particular product, cannot afford to wait until the public asks for its product; it must maintain constant touch, through advertising and propaganda, with the vast public in order to assure itself the continuous demand which alone will make its costly plant profitable. This entails a vastly more complex system of distribution than formerly. To make customers is the new problem. One must understand not only his own business—the manufacture of a particular product—but also the structure, the personality, the prejudices, of a potentially universal public.
Still another reason is to be found in the improvements in the technique of advertising—as regards both the size of the public which can be reached by the printed word, and the methods of appeal. The growth of newspapers and magazines having a circulation of millions of copies, and the art of the modern advertising expert in making the printed message attractive and persuasive, have placed the business man in a personal relation with a vast and diversified public.
Another modern phenomenon, which' influences the general policy of big business, is the new competition between certain firms and the remainder of the industry, to which they belong. Another kind of competition is between whole industries, in their struggle for a share of the consumer's dollar. When, for example, a soap manufacturer claims that his product will preserve youth, he is obviously attempting to change the public's mode of thinking about soap in general—a thing of grave importance to the whole industry. Or when the metal furniture industry seeks to convince the public that it is more desirable to spend its money for metal furniture than for wood furniture, it is clearly seeking to alter the taste and standards of a whole generation. In either case, business is seeking to inject itself into the lives and customs of millions of persons.
Even in a basic sense, business is becoming dependent on public opinion. With the increasing volume and wider diffusion of wealth in America, thousands of persons now invest in industrial stocks. New stock or bond flotations, upon which an expanding business must depend for its success, can be effected only if the concern has understood how to gain the confidence and good will of the general public. Business must express itself and its entire corporate existence so that the public will understand and accept it. It must dramatize its personality and interpret its objectives in every particular in which it comes into contact with the community (or the nation) of which it is a part.
An oil corporation which truly understands its many-sided relation to the public, will offer that public not only good oil but a sound labor policy. A bank will seek to show not only that its management is sound and conservative, but also that its officers are honorable both in their public and in their private life. A store specializing in fashionable men's clothing will express in its architecture the authenticity of the goods it offers. A bakery will seek to impress the public with the hygienic care observed in its manufacturing process, not only by wrapping its loaves in dust-proof paper and throwing its factory open to public inspection, but also by the cleanliness and attractiveness of its delivery wagons. A construction firm will take care that the public knows not only that its buildings are durable and safe, but also that its employees, when injured at work, are compensated. At whatever point a business enterprise impinges on the public consciousness, it must seek to give its public relations the particular character which will conform to the objectives which it is pursuing.
Just as the production manager must be familiar with every element and detail concerning the materials with which he is working, so the man in charge of a firm's public relations must be familiar with the structure, the prejudices, and the whims of the general public, and must handle his problems with the utmost care. The public has its own standards and demands and habits. You may modify them, but you dare not run counter to them. You cannot persuade a whole generation of women to wear long skirts, but you may, by working through leaders of fashion, persuade them to wear evening dresses which are long in back. The public is not an amorphous mass which can be molded at will, or dictated to. Both business and the public have their own personalities which must somehow be brought into friendly agreement. Conflict and suspicion are injurious to both. Modern business must study on what terms the partnership can be made amicable and mutually beneficial. It must explain itself, its aims, its objectives, to the public in terms which the public can understand and is willing to accept.
Business does not willingly accept dictation from the public. It should not expect that it can dictate to the public. While the public should appreciate the great economic benefits which business offers, thanks to mass production and scientific marketing, business should also appreciate that the public is becoming increasingly discriminative in its standards and should seek to understand its demands and meet them. The relationship between business and the public can be healthy only if it is the relationship of give and take.
It is this condition and necessity which has created the need for a specialized field of public relations. Business now calls in the public relations counsel to advise it, to interpret its purpose to the public, and to suggest those modifications which may make it conform to the public demand.
The modifications then recommended to make the business conform to its objectives and to the public demand, may concern the broadest matters of policy or the apparently most trivial details of execution. It might in one case be necessary to transform entirely the lines of goods sold to conform to changing public demands. In another case the trouble may be found to lie in such small matters as the dress of the clerks. A jewelry store may complain that its patronage is shrinking upwards because of its reputation for carrying high-priced goods; in this case the public relations counsel might suggest the featuring of medium-priced goods, even at a loss, not because the firm desires a large medium-price trade as such, but because out of a hundred medium-price customers acquired to-day a certain percentage will be well-todo ten years from now. A department store which is seeking to gather in the high-class trade may be urged to employ college graduates as clerks or to engage well known modern artists to design show-windows or special exhibits. A bank may be urged to open a Fifth Avenue branch, not because the actual business done on Fifth Avenue warrants the expense, but because a beautiful Fifth Avenue office correctly expresses the kind of appeal which it wishes to make to future depositors; and, viewed in this way, it may be as important that the doorman be polite, or that the floors be kept clean, as that the branch manager be an able financier. Yet the beneficial effect of this branch may be canceled, if the wife of the president is involved in a scandal.
Big business studies every move which may express its true personality. It seeks to tell the public, in all appropriate ways,—by the direct advertising message and by the subtlest esthetic suggestion—the quality of the goods or services which it has to offer. A store which seeks a large sales volume in cheap goods will preach prices day in and day out, concentrating its whole appeal on the ways in which it can save money for its clients. But a store seeking a high margin of profit on individual sales would try to associate itself with the distinguished and the elegant, whether by an exhibition of old masters or through the social activities of the owner's wife.
The public relations activities of a business cannot be a protective coloring to hide its real aims. It is bad business as well as bad morals to feature exclusively a few high-class articles, when the main stock is of medium grade or cheap, for the general impression given is a false one. A sound public relations policy will not attempt to stampede the public with exaggerated claims and false pretenses, but to interpret the individual business vividly and truly through every avenue that leads to public opinion. The New York Central Railroad has for decades sought to appeal to the public not only on the basis of the speed and safety of its trains, but also on the basis of their elegance and comfort. It is appropriate that the corporation should have been personified to the general public in the person of so suave and ingratiating a gentleman as Chauncey M. Depew—an ideal window dressing for such an enterprise.
While the concrete recommendations of the public relations counsel may vary infinitely according to individual circumstances, his general plan of work may be reduced to two types, which I might term continuous interpretation and dramatization by highspotting. The two may be alternative or may be pursued concurrently.
Continuous interpretation is achieved by trying to control every approach to the public mind in such a manner that the public receives the desired impression, often without being conscious of it. High-spotting, on the other hand, vividly seizes the attention of the public and fixes it upon some detail or aspect which is typical of the entire enterprise. When a real estate corporation which is erecting a tall office building makes it ten feet taller than the highest sky-scraper in existence, that is dramatization.
Which method is indicated, or whether both be indicated concurrently, can be determined only after a full study of objectives and specific possibilities.
Another interesting case of focusing public attention on the virtues of a product was shown in the case of gelatine. Its advantages in increasing the digestibility and nutritional value of milk were proven in the Mellon Institute of Industrial Research. The suggestion was made and carried out that to further this knowledge, gelatine be used by certain hospitals and school systems, to be tested out there. The favorable results of such tests were then projected to other leaders in the field with the result that they followed that group leadership and utilized gelatine for the scientific purposes which had been proven to be sound at the research institution. The idea carried momentum.
The tendency of big business is to get bigger. Through mergers and monopolies it is constantly increasing the number of persons with whom it is in direct contact. All this has intensified and multiplied the public relationships of business.
The responsibilities are of many kinds. There is a responsibility to the stockholders—numbering perhaps five persons or five hundred thousand—who have entrusted their money to the concern and have the right to know how the money is being used. A concern which is fully aware of its responsibility toward its stockholders, will furnish them with frequent letters urging them to use the product in which their money is invested, and use their influence to promote its sale. It has a responsibility toward the dealer which it may express by inviting him, at its expense, to visit the home factory. It has a responsibility toward the industry as a whole which should restrain it from making exaggerated and unfair selling claims. It has a responsibility toward the retailer, and will see to it that its salesmen express the quality of the product which they have to sell. There is a responsibility toward the consumer, who is impressed by a clean and well managed factory, open to his inspection. And the general public, apart from its function as potential consumer, is influenced in its attitude toward the concern by what it knows of that concern's financial dealings, its labor policy, even by the livableness of the houses in which its employees dwell. There is no detail too trivial to influence the public in a favorable or unfavorable sense. The personality of the president may be a matter of importance, for he perhaps dramatizes the whole concern to the public mind. It may be very important to what charities he contributes, in what civic societies he holds office. If he is a leader in his industry, the public may demand that he be a leader in his community. The business man has become a responsible member of the social group. It is not a question of ballyhoo, of creating a picturesque fiction for public consumption. It is merely a question of finding the appropriate modes of expressing the personality that is to be dramatized. Some business men can be their own best public relations counsel. But in the majority of cases knowledge of the public mind and of the ways in which it will react to an appeal, is a specialized function which must be undertaken by the professional expert.
Big business, I believe, is realizing this more and more. It is increasingly availing itself of the services of the specialist in public relations (whatever may be the title accorded him). And it is my conviction that as big business becomes bigger the need for expert manipulation of its innumerable contacts with the public will become greater.
One reason why the public relations of a business are frequently placed in the hands of an outside expert, instead of being confided to an officer of the company, is the fact that the correct approach to a problem may be indirect. For example, when the luggage industry attempted to solve some of its problems by a public relations policy, it was realized that the attitude of railroads, of steamship companies, and of foreign government-owned railroads was an important factor in the handling of luggage.
If a railroad and a baggage man, for their own interest, can be educated to handle baggage with more facility and promptness, with less damage to the baggage, and less inconvenience to the passenger; if the steamship company lets down, in its own interests, its restrictions on luggage; if the foreign government eases up on its baggage costs and transportation in order to further tourist travel; then the luggage manufacturers will profit.
The problem then, to increase the sale of their luggage, was to have these and other forces come over to their point of view. Hence the public relations campaign was directed not to the public, who were the ultimate consumers, but to these other elements.
Also, if the luggage manufacturer can educate the general public on what to wear on trips and when to wear it, he may be increasing the sale of men's and women's clothing, but he will, at the same time, be increasing the sale of his luggage.
Propaganda, since it goes to basic causes, can very often be most effective through the manner of its introduction. A campaign against unhealthy cosmetics might be waged by fighting for a return to the wash-cloth and soap—a fight that very logically might be taken up by health officials all over the country, who would urge the return to the salutary and helpful wash-cloth and soap, instead of cosmetics.
The development of public opinion for a cause or line of socially constructive action may very often be the result of a desire on the part of the propagandist to meet successfully his own problem which the socially constructive cause would further. And by doing so he is actually fulfilling a social purpose in the broadest sense.
The soundness of a public relations policy was likewise shown in the case of a shoe manufacturer who made service shoes for patrolmen, firemen, letter carriers, and men in similar occupations. He realized that if he could make acceptable the idea that men in such work ought to be well-shod, he would sell more shoes and at the same time further the efficiency of the men.
He organized, as part of his business, a foot protection bureau. This bureau disseminated scientifically accurate information on the proper care of the feet, principles which the manufacturer had incorporated in the construction of the shoes. The result was that civic bodies, police chiefs, fire chiefs, and others interested in the welfare and comfort of their men, furthered the ideas his product stood for and the product itself, with the consequent effect that more of his shoes were sold more easily.
The application of this principle of a common denominator of interest between the object that is sold and the public good will can be carried to infinite degrees.
"It matters not how much capital you may have, how fair the rates may be, how favorable the conditions of service, if you haven't behind you a sympathetic public opinion, you are bound to fail." This is the opinion of Samuel Insull, one the foremost traction magnates of the country. And the late Judge Gary, of the United States Steel Corporation, expressed the same idea when he said: "Once you have the good will of the general public, you can go ahead in the work of constructive expansion. Too often many try to discount this vague and intangible element. That way lies destruction."
Public opinion is no longer inclined to be unfavorable to the large business merger. It resents the censorship of business by the Federal Trade Commission. It has broken down the anti-trust laws where it thinks they hinder economic development. It backs great trusts and mergers which it excoriated a decade ago. The government now permits large aggregations of producing and distributing units, as evidenced by mergers among railroads and other public utilities, because representative government reflects public opinion. Public opinion itself fosters the growth of mammoth industrial enterprises. In the opinion of millions of small investors, mergers and trusts are friendly giants and not ogres, because of the economies, mainly due to quantity production, which they have effected, and can pass on to the consumer.
This result has been, to a great extent, obtained by a deliberate use of propaganda in its broadest sense. It was obtained not only by modifying the opinion of the public, as the governments modified and marshaled the opinion of their publics during the war, but often by modifying the business concern itself. A cement company may work with road commissions gratuitously to maintain testing laboratories in order to insure the best-quality roads to the public. A gas company maintains a free school of cookery.
But it would be rash and unreasonable to take it for granted that because public opinion has come over to the side of big business, it will always remain there. Only recently, Prof. W. Z. Ripley of Harvard University, one of the foremost national authorities on business organization and practice, exposed certain aspects of big business which tended to undermine public confidence in large corporations. He pointed out that the stockholders' supposed voting power is often illusory; that annual financial statements are sometimes so brief and summary that to the man in the street they are downright misleading; that the extension of the system of non-voting shares often places the effective control of corporations and their finances in the hands of a small clique of stockholders; and that some corporations refuse to give out sufficient information to permit the public to know the true condition of the concern.
Furthermore, no matter how favorably disposed the public may be toward big business in general, the utilities are always fair game for public discontent and need to maintain good will with the greatest care and watchfulness. These and other corporations of a semi-public character will always have to face a demand for government or municipal ownership if such attacks as those of Professor Ripley are continued and are, in the public's opinion, justified, unless conditions are changed and care is taken to maintain the contact with the public at all points of their corporate existence.
The public relations counsel should anticipate such trends of public opinion and advise on how to avert them, either by convincing the public that its fears or prejudices are unjustified, or in certain cases by modifying the action of the client to the extent necessary to remove the cause of complaint. In such a case public opinion might be surveyed and the points of irreducible opposition discovered. The aspects of the situation which are susceptible of logical explanation; to what extent the criticism or prejudice is a habitual emotional reaction and what factors are dominated by accepted cliches, might be disclosed. In each instance he would advise some action or modification of policy calculated to make the readjustment.
While government ownership is in most instances only varyingly a remote possibility, public ownership of big business through the increasing popular investment in stocks and bonds, is becoming more and more a fact. The importance of public relations from this standpoint is to be judged by the fact that practically all prosperous corporations expect at some time to enlarge operations, and will need to float new stock or bond issues. The success of such issues depends upon the general record of the concern in the business world, and also upon the good will which it has been able to create in the general public. When the Victor Talking Machine Company was recently offered to the public, millions of dollars' worth of stock were sold overnight. On the other hand, there are certain companies which, although they are financially sound and commercially prosperous, would be unable to float a large stock issue, because public opinion is not conscious of them, or has some unanalyzed prejudice against them.
To such an extent is the successful floating of stocks and bonds dependent upon the public favor that the success of a new merger may stand or fall upon the public acceptance which is created for it. A merger may bring into existence huge new resources, and these resources, perhaps amounting to millions of dollars in a single operation, can often fairly be said to have been created by the expert manipulation of public opinion. It must be repeated that I am not speaking of artificial value given to a stock by dishonest propaganda or stock manipulation, but of the real economic values which are created when genuine public acceptance is gained for an industrial enterprise and becomes a real partner in it.
The growth of big business is so rapid that in some lines ownership is more international than national. It is necessary to reach ever larger groups of people if modern industry and commerce are to be financed. Americans have purchased billions of dollars of foreign industrial securities since the war, and Europeans own, it is estimated, between one and two billion dollars' worth of ours. In each case public acceptance must be obtained for the issue and the enterprise behind it.
Public loans, state or municipal, to foreign countries depend upon the good will which those countries have been able to create for themselves here. An attempted issue by an east European country is now faring badly largely because of unfavorable public reaction to the behavior of members of its ruling family. But other countries have no difficulty in placing any issue because the public is already convinced of the prosperity of these nations and the stability of their governments.
The new technique of public relations counsel is serving a very useful purpose in business by acting as a complement to legitimate advertisers and advertising in helping to break down unfair competitive exaggerated and overemphatic advertising by reaching the public with the truth through other channels than advertising. Where two competitors in a field are fighting each other with this type of advertising, they are undermining that particular industry to a point where the public may lose confidence in the whole industry. The only way to combat such unethical methods, is for ethical members of the industry to use the weapon of propaganda in order to bring out the basic truths of the situation.
Take the case of tooth paste, for instance. Here is a highly competitive field in which the preponderance of public acceptance of one product over another can very legitimately rest in inherent values. However, what has happened in this field?
One or two of the large manufacturers have asserted advantages for their tooth pastes which no single tooth paste discovered up to the present time can possibly have. The competing manufacturer is put in the position either of overemphasizing an already exaggerated emphasis or of letting the overemphasis of his competitor take away his markets. He turns to the weapon of propaganda which can effectively, through various channels of approach to the public—the dental clinics, the schools, the women's clubs, the medical colleges, the dental press and even the daily press—bring to the public the truth of what a tooth paste can do. This will, of course, have its effect in making the honestly advertised tooth paste get to its real public.
Propaganda is potent in meeting unethical or unfair advertising. Effective advertising has become more costly than ever before. Years ago, when the country was smaller and there was no tremendous advertising machinery, it was comparatively easy to get country-wide recognition for a product. A corps of traveling salesmen might persuade the retailers, with a few cigars and a repertory of funny stories, to display and recommend their article on a nationwide scale. To-day, a small industry is swamped unless it can find appropriate and relatively inexpensive means of making known the special virtues of its product, while larger industries have sought to overcome the difficulty by cooperative advertising, in which associations of industries compete with other associations.
Mass advertising has produced new kinds of competition. Competition between rival products in the same line is, of course, as old as economic life itself. In recent years much has been said of the new competition, we have discussed it in a previous chapter, between one group of products and another. Stone competes against wood for building; linoleum against carpets; oranges against apples; tin against asbestos for roofing.
This type of competition has been humorously illustrated by Mr. O. H. Cheney, Vice-President of the American Exchange and Irving Trust Company of New York, in a speech before the Chicago Business Secretaries Forum.
"Do you represent the millinery trades?" said Mr. Cheney. "The man at your side may serve the fur industry, and by promoting the style of big fur collars on women's coats he is ruining the hat business by forcing women to wear small and inexpensive hats. You may be interested in the ankles of the fair sex—I mean, you may represent the silk hosiery industry. You have two brave rivals who are ready to fight to the death—to spend millions in the fight —for the glory of those ankles—the leather industry, which has suffered from the low-shoe vogue, and the fabrics manufacturers, who yearn for the good old days when skirts were skirts.
"If you represent the plumbing and heating business, you are the mortal enemy of the textile industry, because warmer homes mean lighter clothes. If you represent the printers, how can you shake hands with the radio equipment man? . . .
"These are really only obvious forms of what I have called the new competition. The old competition was that between the members of each trade organization. One phase of the new competition is that between the trade associations themselves—between you gentlemen who represent those industries. Inter-commodity competition is the new competition between products used alternatively for the same purpose. Inter-industrial competition is the new competition between apparently unrelated industries which affect each other or between such industries as compete for the consumer's dollar—and that means practically all industries. . . .
"Inter-commodity competition is, of course, the most spectacular of all. It is the one which seems most of all to have caught the business imagination of the country. More and more business men are beginning to appreciate what inter-commodity competition means to them. More and more they are calling upon their trade associations to help them— because inter-commodity competition cannot be fought single-handed.
"Take the great war on the dining-room table, for instance. Three times a day practically every diningroom table in the country is the scene of a fierce battle in the new competition. Shall we have prunes for breakfast? No, cry the embattled orange-growers and the massed legions of pineapple canners. Shall we eat sauerkraut? Why not eat green olives? is the answer of the Spaniards. Eat macaroni as a change from potatoes, says one advertiser—and will the potato growers take this challenge lying down?
"The doctors and dietitians tell us that a normal hard-working man needs only about two or three thousand calories of food a day. A banker, I suppose, needs a little less. But what am I to do? The fruit growers, the wheat raisers, the meat packers, the milk producers, the fishermen—all want me to eat more of their products—and are spending millions of dollars a year to convince me. Am I to eat to the point of exhaustion, or am I to obey the doctor and let the farmer and the food packer and the retailer go broke! Am I to balance my diet in proportion to the advertising appropriations of the various producers? Or am I to balance my diet scientifically and let those who overproduce go bankrupt? The new competition is probably keenest in the food industries because there we have a very real limitation on what we can consume—in spite of higher incomes and higher living standards, we cannot eat more than we can eat."
I believe that competition in the future will not be only an advertising competition between individual products or between big associations, but that it will in addition be a competition of propaganda. The business man and advertising man is realizing that he must not discard entirely the methods of Barnum in reaching the public. An example in the annals of George Harrison Phelps, of the successful utilization of this type of appeal was the nation-wide hook-up which announced the launching of the Dodge Victory Six car.
Millions of people, it is estimated, listened in to this program broadcast over 47 stations. The expense was more than $60,000. The arrangements involved an additional telephonic hook-up of 20,000 miles of wire, and included transmission from Los Angeles, Chicago, Detroit, New Orleans, and New York. Al Jolson did his bit from New Orleans, Will Rogers from Beverly Hills, Fred and Dorothy Stone from Chicago, and Paul Whiteman from New York, at an aggregate artists' fee of $25,000. And there was included a four-minute address by the president of Dodge Brothers announcing the new car, which gave him access in four minutes to an estimated audience of thirty million Americans, the largest number, unquestionably, ever to concentrate their attention on a given commercial product at a given moment. It was a sugar-coated sales message.
Modern sales technicians will object: "What you say of this method of appeal is true. But it increases the cost of getting the manufacturer's message across. The modern tendency has been to reduce this cost (for example, the elimination of premiums) and concentrate on getting full efficiency from the advertising expenditure. If you hire a Galli-Curci to sing for bacon you increase the cost of the bacon by the amount of her very large fee. Her voice adds nothing to the product but it adds to its cost."
Undoubtedly. But all modes of sales appeal require the spending of money to make the appeal attractive. The advertiser in print adds to the cost of his message by the use of pictures or by the cost of getting distinguished endorsements.
There is another kind of difficulty, created in the process of big business getting bigger, which calls for new modes of establishing contact with the public. Quantity production offers a standardized product the cost of which tends to diminish with the quantity sold. If low price is the only basis of competition with rival products, similarly produced, there ensues a cut-throat competition which can end only by taking all the profit and incentive out of the industry.
The logical way out of this dilemma is for the manufacturer to develop some sales appeal other than mere cheapness, to give the product, in the public mind, some other attraction, some idea that will modify the product slightly, some element of originality that will distinguish it from products in the same line. Thus, a manufacturer of typewriters paints his machines in cheerful hues. These special types of appeal can be popularized by the manipulation of the principles familiar to the propagandist— the principles of gregariousness, obedience to authority, emulation, and the like. A minor element can be made to assume economic importance by being established in the public mind as a matter of style. Mass production can be split up. Big business will still leave room for small business. Next to a huge department store there may be located a tiny specialty shop which makes a very good living.
The problem of bringing large hats back into fashion was undertaken by a propagandist. The millinery industry two years ago was menaced by the prevalence of the simple felt hat which was crowding out the manufacture of all other kinds of hats and hat ornaments. It was found that hats could roughly be classified in six types. It was found too that four groups might help to change hat fashions: the society leader, the style expert, the fashion editor and writer, the artist who might give artistic approval to the styles, and beautiful mannequins. The problem, then, was to bring these groups together before an audience of hat buyers.
A committee of prominent artists was organized to choose the most beautiful girls in New York to wear, in a series of tableaux, the most beautiful hats in the style classifications, at a fashion fete at a leading hotel.
A committee was formed of distinguished American women who, on the basis of their interest in the development of an American industry, were willing to add the authority of their names to the idea. A style committee was formed of editors of fashion magazines and other prominent fashion authorities who were willing to support the idea. The girls in their lovely hats and costumes paraded on the running-board before an audience of the entire trade.
The news of the event affected the buying habits not only of the onlookers, but also of the women throughout the country. The story of the event was flashed to the consumer by her newspaper as well as by the advertisements of her favorite store. Broadsides went to the millinery buyer from the manufacturer. One manufacturer stated that whereas before the show he had not sold any large trimmed hats, after it he had sold thousands.
Often the public relations counsel is called in to handle an emergency situation. A false rumor, for instance, may occasion an enormous loss in prestige and money if not handled promptly and effectively. An incident such as the one described in the New York American of Friday, May 21, 1926, shows what the lack of proper technical handling of public relations might result in.
$1,000,000 LOST BY FALSE RUMOR ON
HUDSON STOCK
Hudson Motor Company stock fluctuated widely around noon yesterday and losses estimated at $500,000 to $1,000,000 were suffered as a result of the widespread flotation of false news regarding dividend action.
The directors met in Detroit at 12:30, New York time, to act on a dividend. Almost immediately a false report that only the regular dividend had been declared was circulated.
At 12:46 the Dow, Jones & Co. ticker service received the report from the Stock Exchange firm and its publication resulted in further drop in the stock.
Shortly after 1 o'clock the ticker services received official news that the dividend had been increased and a 20 per cent stock distribution authorized. They rushed the correct news out on their tickers and Hudson stock immediately jumped more than 6 points.
A clipping from the Journal of Commerce of April 4, 1925, is reproduced here as an interesting example of a method to counteract a false rumor:
BEECH-NUT HEAD HOME TOWN GUEST
Bartlett Arkell Signally Honored by
Communities of Mohawk Valley
{Special to The Journal of Commerce)
CANAJOHARIE, N. Y., April 3.—To-day was 'Beech-Nut Day' in this town; in fact, for the whole Mohawk Valley. Business men and practically the whole community of this region joined in a personal testimonial to Bartlett Arkell of New York City, president of the Beech-Nut Packing Company of this city, in honor of his firm refusal to consider selling his company to other financial interests to move elsewhere.
When Mr. Arkell publicly denied recent rumors that he was to sell his company to the Postum Cereal Company for $17,000,000, which would have resulted in taking the industry from its birthplace, he did so in terms conspicuously loyal to his boyhood home, which he has built up into a prosperous industrial community through thirty years' management of his Beech-Nut Company.
He absolutely controls the business and flatly, stated that he would never sell it during his lifetime 'to any one at any price,' since it would be disloyal to his friends and fellow workers. And the whole Mohawk Valley spontaneously decided that such spirit deserved public recognition. Hence, to-day's festivities.
More than 3,000 people participated, headed by a committee comprising W. J. Roser, chairman; B. F. Spraker, H. V. Bush, B. F. Diefendorf and J. H. Cook. They were backed by the Canajoharie and the Mohawk Valley Chambers of Business Men's Associations.
Of course, every one realized after this that there was no truth in the rumor that the Beech-Nut Company was in the market. A denial would not have carried as much conviction.
Amusement, too, is a business—one of the largest in America. It was the amusement business—first the circus and the medicine show, then the theater— which taught the rudiments of advertising to industry and commerce. The latter adopted the ballyhoo of the show business. But under the stress of practical experience it adapted and refined these crude advertising methods to the precise ends it sought to obtain. The theater has, in its turn, learned from business, and has refined its publicity methods to the point where the old stentorian methods are in the discard.
The modern publicity director of a theater syndicate or a motion picture trust is a business man, responsible for the security of tens or hundreds of millions of dollars of invested capital. He cannot afford to be a stunt artist or a free-lance adventurer in publicity. He must know his public accurately and modify its thoughts and actions by means of the methods which the amusement world has learned from its old pupil, big business. As public knowledge increases and public taste improves, business must be ready to meet them halfway.
Modern business must have its finger continuously on the public pulse. It must understand the changes in the public mind and be prepared to interpret itself fairly and eloquently to changing opinion.

CHAPTER VI
PROPAGANDA AND POLITICAL LEADERSHIP

THE great political problem in our modern democracy is how to induce our leaders to lead. The dogma that the voice of the people is the voice of God tends to make elected persons the will-less servants of their constituents. This is undoubtedly part cause of the political sterility of which certain American critics constantly complain.
No serious sociologist any longer believes that the voice of the people expresses any divine or specially wise and lofty idea. The voice of the people expresses the mind of the people, and that mind is made up for it by the group leaders in whom it believes and by those persons who understand the manipulation of public opinion. It is composed of inherited prejudices and symbols and cliches and verbal formulas supplied to them by the leaders.
Fortunately, the sincere and gifted politician is able, by the instrument of propaganda, to mold and form the will of the people.
Disraeli cynically expressed the dilemma, when he said: "I must follow the people. Am I not their leader?" He might have added: "I must lead the people. Am I not their servant?"
Unfortunately, the methods of our contemporary politicians, in dealing with the public, are as archaic and ineffective as the advertising methods of business in 1900 would be to-day. While politics was the first important department of American life to use propaganda on a large scale, it has been the slowest in modifying its propaganda methods to meet the changed conditions of the public mind. American business first learned from politics the methods of appealing to the broad public. But it continually improved those methods in the course of its competitive struggle, while politics clung to the old formulas.
The political apathy of the average voter, of which we hear so much, is undoubtedly due to the fact that the politician does not know how to meet the conditions of the public mind. He cannot dramatize himself and his platform in terms which have real meaning to the public. Acting on the fallacy that the leader must slavishly follow, he deprives his campaign of all dramatic interest. An automaton cannot arouse the public interest. A leader, a fighter, a dictator, can. But, given our present political conditions under which every office seeker must cater to the vote of the masses, the only means by which the born leader can lead is the expert use of propaganda.
Whether in the problem of getting elected to office or in the problem of interpreting and popularizing new issues, or in the problem of making the day-to-day administration of public affairs a vital part of the community life, the use of propaganda, carefully adjusted to the mentality of the masses, is an essential adjunct of political life.
The successful business man to-day apes the politician. He has adopted the glitter and the ballyhoo of the campaign. He has set up all the side shows. He has annual dinners that are a compendium of speeches, flags, bombast, stateliness, pseudo-democracy slightly tinged with paternalism. On occasion he doles out honors to employees, much as the republic of classic times rewarded its worthy citizens.
But these are merely the side shows, the drums, of big business, by which it builds up an image of public service, and of honorary service. This is but one of the methods by which business stimulates loyal enthusiasms on the part of directors, the workers, the stockholders and the consumer public. It is one of the methods by which big business performs its function of making and selling products to the public. The real work and campaign of business consists of intensive study of the public, the manufacture of products based on this study, and exhaustive use of every means of reaching the public.
Political campaigns to-day are all side shows, all honors, all bombast, glitter, and speeches. These are for the most part unrelated to the main business of studying the public scientifically, of supplying the public with party, candidate, platform, and performance, and selling the public these ideas and products.
Politics was the first big business in America. Therefore there is a good deal of irony in the fact that business has learned everything that politics has had to teach, but that politics has failed to learn very much from business methods of mass distribution of ideas and products.
Emily Newell Blair has recounted in the Independent a typical instance of the waste of effort and money in a political campaign, a week's speaking tour in which she herself took part. She estimates that on a five-day trip covering nearly a thousand miles she and the United States Senator with whom she was making political speeches addressed no more than 1,105 persons whose votes might conceivably have been changed as a result of their efforts. The cost of this appeal to these voters she estimates (calculating the value of the time spent on a very moderate basis) as $15.27 for each vote which might have been changed as a result of the campaign.
This, she says, was a "drive for votes, just as an Ivory Soap advertising campaign is a drive for sales." But, she asks, "what would a company executive say to a sales manager who sent a high-priced speaker to describe his product to less than 1,200 people at a cost of $15.27 for each possible buyer?" She finds it "amazing that the very men who make their millions out of cleverly devised drives for soap and bonds and cars will turn around and give large contributions to be expended for vote-getting in an utterly inefficient and antiquated fashion."
It is, indeed, incomprehensible that politicians do not make use of the elaborate business methods that industry has built up. Because a politician knows political strategy, can develop campaign issues, can devise strong planks for platforms and envisage broad policies, it does not follow that he can be given the responsibility of selling ideas to a public as large as that of the United States.
The politician understands the public. He knows what the public wants and what the public will accept. But the politician is not necessarily a general sales manager, a public relations counsel, or a man who knows how to secure mass distribution of ideas.
Obviously, an occasional political leader may be capable of combining every feature of leadership, just as in business there are certain brilliant industrial leaders who are financiers, factory directors, engineers, sales managers and public relations counsel all rolled into one.
Big business is conducted on the principle that it must prepare its policies carefully, and that in selling an idea to the large buying public of America, it must proceed according to broad plans. The political strategist must do likewise. The entire campaign should be worked out according to broad basic plans. Platforms, planks, pledges, budgets, activities, personalities, must be as carefully studied, apportioned and used as they are when big business desires to get what it wants from the public.
The first step in a political campaign is to determine on the objectives, and to express them exceedingly well in the current form—that is, as a platform. In devising the platform the leader should be sure that it is an honest platform. Campaign pledges and promises should not be lightly considered by the public, and they ought to carry something of the guarantee principle and money-back policy that an honorable business institution carries with the sale of its goods. The public has lost faith in campaign promotion work. It does not say that politicians are dishonorable, but it does say that campaign pledges are written on the sand. Here then is one fact of public opinion of which the party that wishes to be successful might well take cognizance.
To aid in the preparation of the platform there should be made as nearly scientific an analysis as possible of the public and of the needs of the public. A survey of public desires and demands would come to the aid of the political strategist whose business it is to make a proposed plan of the activities of the parties and its elected officials during the coming terms of office.
A big business that wants to sell a product to the public surveys and analyzes its market before it takes a single step either to make or to sell the product. If one section of the community is absolutely sold to the idea of this product, no money is wasted in reselling it to it. If, on the other hand, another section of the public is irrevocably committed to another product, no money is wasted on a lost cause. Very often the analysis is the cause of basic changes and improvements in the product itself, as well as an index of how it is to be presented. So carefully is this analysis of markets and sales made that when a company makes out its sales budget for the year, it subdivides the circulations of the various magazines and newspapers it uses in advertising and calculates with a fair degree of accuracy how many times a section of that population is subjected to the appeal of the company. It knows approximately to what extent a national campaign duplicates and repeats the emphasis of a local campaign of selling.
As in the business field, the expenses of the political campaign should be budgeted. A large business to-day knows exactly how much money it is going to spend on propaganda during the next year or years. It knows that a certain percentage of its gross receipts will be given over to advertising—newspaper, magazine, outdoor and poster; a certain percentage to circularization and sales promotion—such as house organs and dealer aids; and a certain percentage must go to the supervising salesmen who travel around the country to infuse extra stimulus in the local sales campaign.
A political campaign should be similarly budgeted. The first question which should be decided is the amount of money that should be raised for the campaign. This decision can be reached by a careful analysis of campaign costs. There is enough precedent in business procedure to enable experts to work this out accurately. Then the second question of importance is the manner in which money should be raised.
It is obvious that politics would gain much in prestige if the money-raising campaign were conducted candidly and publicly, like the campaigns for the war funds. Charity drives might be made excellent models for political funds drives. The elimination of the little black bag element in politics would raise the entire prestige of politics in America, and the public interest would be infinitely greater if the actual participation occurred earlier and more constructively in the campaign.
Again, as in the business field, there should be a clear decision as to how the money is to be spent. This should be done according to the most careful and exact budgeting, wherein every step in the campaign is given its proportionate importance, and the funds allotted accordingly. Advertising in newspapers and periodicals, posters and street banners, the exploitation of personalities in motion pictures, in speeches and lectures and meetings, spectacular events and all forms of propaganda should be considered proportionately according to the budget, and should always be coordinated with the whole plan. Certain expenditures may be warranted if they represent a small proportion of the budget and may be totally unwarranted if they make up a large proportion of the budget.
In the same way the emotions by which the public is appealed to may be made part of the broad plan of the campaign. Unrelated emotions become maudlin and sentimental too easily, are often costly, and too often waste effort because the idea is not part of the conscious and coherent whole.
Big business has realized that it must use as many of the basic emotions as possible. The politician, however, has used the emotions aroused by words almost exclusively.
To appeal to the emotions of the public in a political campaign is sound—in fact it is an indispensable part of the campaign. But the emotional content must— (a) coincide in every way with the broad basic plans of the campaign and all its minor details;
(b) be adapted to the many groups of the public at which it is to be aimed; and
(c) conform to the media of the distribution of ideas.
The emotions of oratory have been worn down through long years of overuse. Parades, mass meetings, and the like are successful when the public has a frenzied emotional interest in the event. The candidate who takes babies on his lap, and has his photograph taken, is doing a wise thing emotionally, if this act epitomizes a definite plank in his platform. Kissing babies, if it is worth anything, must be used as a symbol for a baby policy and it must be synchronized with a plank in the platform. But the haphazard staging of emotional events without regard to their value as part of the whole campaign, is a waste of effort, just as it would be a waste of effort for the manufacturer of hockey skates to advertise a picture of a church surrounded by spring foliage. It is true that the church appeals to our religious impulses and that everybody loves the spring, but these impulses do not help to sell the idea that hockey skates are amusing, helpful, or increase the general enjoyment of life for the buyer.
Present-day politics places emphasis on personality. An entire party, a platform, an international policy is sold to the public, or is not sold, on the basis of the intangible element of personality. A charming candidate is the alchemist's secret that can transmute a prosaic platform into the gold of votes. Helpful as is a candidate who for some reason has caught the imagination of the country, the party and its aims are certainly more important than the personality of the candidate. Not personality, but the ability of the candidate to carry out the party's program adequately, and the program itself should be emphasized in a sound campaign plan. Even Henry Ford, the most picturesque personality in business in America to-day, has become known through his product, and not his product through him.
It is essential for the campaign manager to educate the emotions in terms of groups. The public is not made up merely of Democrats and Republicans. People to-day are largely uninterested in politics and their interest in the issues of the campaign must be secured by coordinating it with their personal interests. The public is made up of interlocking groups —economic, social, religious, educational, cultural, racial, collegiate, local, sports, and hundreds of others.
When President Coolidge invited actors for breakfast, he did so because he realized not only that actors were a group, but that audiences, the large group of people who like amusements, who like people who amuse them, and who like people who can be amused, ought to be aligned with him.
The Shepard-Towner Maternity Bill was passed because the people who fought to secure its passage realized that mothers made up a group, that educators made up a group, that physicians made up a group, that all these groups in turn influence other groups, and that taken all together these groups were sufficiently strong and numerous to impress Congress with the fact that the people at large wanted this bill to be made part of the national law.
The political campaign having defined its broad objects and its basic plans, having defined the group appeal which it must use, must carefully allocate to each of the media at hand the work which it can do with maximum efficiency.
The media through which a political campaign may be brought home to the public are numerous and fairly well defined. Events and activities must be created in order to put ideas into circulation, in these channels, which are as varied as the means of human communication. Every object which presents pictures or words that the public can see, everything that presents intelligible sounds, can be utilized in one way or another.
At present, the political campaigner uses for the greatest part the radio, the press, the banquet hall, the mass meeting, the lecture platform, and the stump generally as a means for furthering his ideas. But this is only a small part of what may be done. Actually there are infinitely more varied events that can be created to dramatize the campaign, and to make people talk of it. Exhibitions, contests, institutes of politics, the cooperation of educational institutions, the dramatic cooperation of groups which hitherto have not been drawn into active politics, and many others may be made the vehicle for the presentation of ideas to the public.
But whatever is done must be synchronized accurately with all other forms of appeal to the public. News reaches the public through the printed word— books, magazines, letters, posters, circulars and banners, newspapers; through pictures—photographs and motion pictures; through the ear—lectures, speeches, band music, radio, campaign songs. All these must be employed by the political party if it is to succeed. One method of appeal is merely one method of appeal and in this age wherein a thousand movements and ideas are competing for public attention, one dare not put all one's eggs into one basket.
It is understood that the methods of propaganda can be effective only with the voter who makes up his own mind on the basis of his group prejudices and desires. Where specific allegiances and loyalties exist, as in the case of boss leadership, these loyalties will operate to nullify the free will of the voter. In this close relation between the boss and his constituents lies, of course, the strength of his position in politics.
It is not necessary for the politician to be the slave of the public's group prejudices, if he can learn how to mold the mind of the voters in conformity with his own ideas of public welfare and public service. The important thing for the statesman of our age is not so much to know how to please the public, but to know how to sway the public. In theory, this education might be done by means of learned pamphlets explaining the intricacies of public questions. In actual fact, it can be done only by meeting the conditions of the public mind, by creating circumstances which set up trains of thought, by dramatizing personalities, by establishing contact with the group leaders who control the opinions of their publics.
But campaigning is only an incident in political life. The process of government is continuous. And the expert use of propaganda is more useful and fundamental, although less striking, as an aid to democratic administration, than as an aid to vote getting.
Good government can be sold to a community just as any other commodity can be sold. I often wonder whether the politicians of the future, who are responsible for maintaining the prestige and effectiveness of their party, will not endeavor to train politicians who are at the same time propagandists. I talked recently with George Olvany. He said that a certain number of Princeton men were joining Tammany Hall. If I were in his place I should have taken some of my brightest young men and set them to work for Broadway theatrical productions or apprenticed them as assistants to professional propagandists before recruiting them to the service of the party.
One reason, perhaps, why the politician to-day is slow to take up methods which are a commonplace in business life is that he has such ready entry to the media of communication on which his power depends.
The newspaper man looks to him for news. And by his power of giving or withholding information the politician can often effectively censor political news. But being dependent, every day of the year and for year after year, upon certain politicians for news, the newspaper reporters are obliged to work in harmony with their news sources.
The political leader must be a creator of circumstances, not only a creature of mechanical processes of stereotyping and rubber stamping.
Let us suppose that he is campaigning on a lowtariff platform. He may use the modern mechanism of the radio to spread his views, but he will almost certainly use the psychological method of approach which was old in Andrew Jackson's day, and which business has largely discarded. He will say over the radio: "Vote for me and low tariff, because the high tariff increases the cost of the things you buy." He may, it is true, have the great advantage of being able to speak by radio directly to fifty million listeners. But he is making an old-fashioned approach. He is arguing with them. He is assaulting, single-handed, the resistance of inertia.
If he were a propagandist, on the other hand, although he would still use the radio, he would use it as one instrument of a well-planned strategy. Since he is campaigning on the issue of a low tariff, he not merely would tell people that the high tariff increases the cost of the things they buy, but would create circumstances which would make his contention dramatic and self-evident. He would perhaps stage a low-tariff exhibition simultaneously in twenty cities, with exhibits illustrating the additional cost due to the tariff in force. He would see that these exhibitions were ceremoniously inaugurated by prominent men and women who were interested in a low tariff apart from any interest in his personal political fortunes. He would have groups, whose interests were especially affected by the high cost of living, institute an agitation for lower schedules. He would dramatize the issue, perhaps by having prominent men boycott woolen clothes, and go to important functions in cotton suits, until the wool schedule was reduced. He might get the opinion of social workers as to whether the high cost of wool endangers the health of the poor in winter.
In whatever ways he dramatized the issue, the attention of the public would be attracted to the question before he addressed them personally. Then, when he spoke to his millions of listeners on the radio, he would not be seeking to force an argument down the throats of a public thinking of other things and annoyed by another demand on its attention; on the contrary, he would be answering the spontaneous questions and expressing the emotional demands of a public already keyed to a certain pitch of interest in the subject.
The importance of taking the entire world public into consideration before planning an important event is shown by the wise action of Thomas Masaryk, then Provisional President, now President of the Republic of Czecho-Slovakia.
Czecho-Slovakia officially became a free state on Monday, October 28, 1918, instead of Sunday, October 27, 1918, because Professor Masaryk realized that the people of the world would receive more information and would be more receptive to, the announcement of the republic's freedom on a Monday morning than on a Sunday, because the press would have more space to devote to it on Monday morning.
Discussing the matter with me before he made the announcement, Professor Masaryk said, "I would be making history for the cables if I changed the date of Czecho-Slovakia's birth as a free nation." Cables make history and so the date was changed.
This incident illustrates the importance of technique in the new propaganda.
It will be objected, of course, that propaganda will tend to defeat itself as its mechanism becomes obvious to the public. My opinion is that it will not. The only propaganda which will ever tend to weaken itself as the world becomes more sophisticated and intelligent, is propaganda that is untrue or unsocial.
Again, the objection is raised that propaganda is utilized to manufacture our leading political personalities. It is asked whether, in fact, the leader makes propaganda, or whether propaganda makes the leader. There is a widespread impression that a good press agent can puff up a nobody into a great man.
The answer is the same as that made to the old query as to whether the newspaper makes public opinion or whether public opinion makes the newspaper. There has to be fertile ground for the leader and the idea to fall on. But the leader also has to have some vital seed to sow. To use another figure, a mutual need has to exist before either can become positively effective. Propaganda is of no use to the politician unless he has something to say which the public, consciously or unconsciously, wants to hear.
But even supposing that a certain propaganda is untrue or dishonest, we cannot on that account reject the methods of propaganda as such. For propaganda in some form will always be used where leaders need to appeal to their constituencies.
The criticism is often made that propaganda tends to make the President of the United States so important that he becomes not the President but the embodiment of the idea of hero worship, not to say deity worship. I quite agree that this is so, but how are you going to stop a condition which very accurately reflects the desires of a certain part of the public? The American people rightly senses the enormous importance of the executive's office. If the public tends to make of the President a heroic symbol of that power, that is not the fault of propaganda but lies in the very nature of the office and its relation to the people.
This condition, despite its somewhat irrational puffing up of the man to fit the office, is perhaps still more sound than a condition in which the man utilizes no propaganda, or a propaganda not adapted to its proper end. Note the example of the Prince of Wales. This young man reaped bales of clippings and little additional glory from his American visit, merely because he was poorly advised. To the American public he became a well dressed, charming, sportloving, dancing, perhaps frivolous youth. Nothing was done to add dignity and prestige to this impression until towards the end of his stay he made a trip in the subway of New York. This sole venture into democracy and the serious business of living as evidenced in the daily habits of workers, aroused new interest in the Prince. Had he been properly advised he would have augmented this somewhat by such serious studies of American life as were made by another prince, Gustave of Sweden. As a result of the lack of well directed propaganda, the Prince of Wales became in the eyes of the American people, not the thing which he constitutionally is, a symbol of the unity of the British Empire, but part and parcel of sporting Long Island and dancing beauties of the ballroom. Great Britain lost an invaluable opportunity to increase the good will and understanding between the two countries when it failed to understand the importance of correct public relations counsel for His Royal Highness.
The public actions of America's chief executive are, if one chooses to put it that way, stage-managed. But they are chosen to represent and dramatize the man in his function as representative of the people. A political practice which has its roots in the tendency of the popular leader to follow oftener than he leads is the technique of the trial balloon which he uses in order to maintain, as he believes, his contact with the public. The politician, of course, has his ear to the ground. It might be called the clinical ear. It touches the ground and hears the disturbances of the political universe.
But he often does not know what the disturbances mean, whether they are superficial, or fundamental. So he sends up his balloon. He may send out an anonymous interview through the press. He then waits for reverberations to come from the public—a public which expresses itself in mass meetings, or resolutions, or telegrams, or even such obvious manifestations as editorials in the partisan or nonpartisan press. On the basis of these repercussions he then publicly adopts his original tentative policy, or rejects it, or modifies it to conform to the sum of public opinion which has reached him. This method is modeled on the peace feelers which were used during the war to sound out the disposition of the enemy to make peace or to test any one of a dozen other popular tendencies. It is the method commonly used by a politician before committing himself to legislation of any kind, and by a government before committing itself on foreign or domestic policies.
It is a method which has little justification. If a politician is a real leader he will be able, by the skillful use of propaganda, to lead the people, instead of following the people by means of the clumsy instrument of trial and error.
The propagandist's approach is the exact opposite of that of the politician just described. The whole basis of successful propaganda is to have an objective and then to endeavor to arrive at it through an exact knowledge of the public and modifying circumstances to manipulate and sway that public.
"The function of a statesman," says George Bernard Shaw, "is to express the will of the people in the way of a scientist."
The political leader of to-day should be a leader as finely versed in the technique of propaganda as in political economy and civics. If he remains merely the reflection of the average intelligence of his community, he might as well go out of politics. If one is dealing with a democracy in which the herd and the group follow those whom they recognize as leaders, why should not the young men training for leadership be trained in its technique as well as in its idealism?
"When the interval between the intellectual classes and the practical classes is too great," says the historian Buckle, "the former will possess no influence, the latter will reap no benefits."
Propaganda bridges this interval in our modern complex civilization.
Only through the wise use of propaganda will our government, considered as the continuous administrative organ of the people, be able to maintain that intimate relationship with the public which is necessary in a democracy.
As David Lawrence pointed out in a recent speech, there is need for an intelligent interpretative bureau for our government in Washington. There is, it is true, a Division of Current Information in the Department of State, which at first was headed by a trained newspaper man. But later this position began to be filled by men from the diplomatic service, men who had very little knowledge of the public. While some of these diplomats have done very well, Mr. Lawrence asserted that in the long run the country would be benefited if the functions of this office were in the hands of a different type of person.
There should, I believe, be an Assistant Secretary of State who is familiar with the problem of dispensing information to the press—some one upon whom the Secretary of State can call for consultation and who has sufficient authority to persuade the Secretary of State to make public that which, for insufficient reason, is suppressed.
The function of the propagandist is much broader in scope than that of a mere dispenser of information to the press. The United States Government should create a Secretary of Public Relations as member of the President's Cabinet. The function of this official should be correctly to interpret America's aims and ideals throughout the world, and to keep the citizens of this country in touch with governmental activities and the reasons which prompt them. He would, in short, interpret the people to the government and the government to the people.
Such an official would be neither a propagandist nor a press agent, in the ordinary understanding of those terms. He would be, rather, a trained technician who would be helpful in analyzing public thought and public trends, in order to keep the government informed about the public, and the people informed about the government. America's relations with South America and with Europe would be greatly improved under such circumstances. Ours must be a leadership democracy administered by the intelligent minority who know how to regiment and guide the masses.
Is this government by propaganda? Call it, if you prefer, government by education. But education, in the academic sense of the word, is not sufficient. It must be enlightened expert propaganda through the creation of circumstances, through the high-spotting of significant events, and the dramatization of important issues. The statesman of the future will thus be enabled to focus the public mind on crucial points of policy, and regiment a vast, heterogeneous mass of voters to clear understanding and intelligent action.

CHAPTER VII
WOMEN'S ACTIVITIES AND PROPAGANDA

WOMEN in contemporary America have achieved a legal equality with men. This does not mean that their activities are identical with those of men. Women in the mass still have special interests and activities in addition to their economic pursuits and vocational interests.
Women's most obvious influence is exerted when they are organized and armed with the weapon of propaganda. So organized and armed they have made their influence felt on city councils, state legislatures, and national congresses, upon executives, upon political campaigns and upon public opinion generally, both local and national.
In politics, the American women to-day occupy a much more important position, from the standpoint of their influence, in their organized groups than from the standpoint of the leadership they have acquired in actual political positions or in actual office holding. The professional woman politician has had, up to the present, not much influence, nor do women generally regard her as being the most important element in question. Ma Ferguson, after all, was simply a woman in the home, a catspaw for a deposed husband; Nellie Ross, the former Governor of Wyoming, is from all accounts hardly a leader of statesmanship or public opinion.
If the suffrage campaign did nothing more, it showed the possibilities of propaganda to achieve certain ends. This propaganda to-day is being utilized by women to achieve their programs in Washington and in the states. In Washington they are organized as the Legislative Committee of Fourteen Women's Organizations, including the League of Women Voters, the Young Women's Christian Association, the Woman's Christian Temperance Union, the Federation of Women's Clubs, etc. These organizations map out a legislative program and then use the modern technique of propaganda to make this legislative program actually pass into the law of the land. Their accomplishments in the field are various. They can justifiably take the credit for much welfare legislation. The eight-hour day for women is theirs. Undoubtedly prohibition and its enforcement are theirs, if they can be considered an accomplishment. So is the Shepard-Towner Bill which stipulates support by the central government of maternity welfare in the state governments. This bill would not have passed had it not been for the political prescience and sagacity of women like Mrs. Vanderlip and Mrs. Mitchell.
The Federal measures endorsed at the first convention of the National League of Women Voters typify social welfare activities of women's organizations. These covered such broad interests as child welfare, education, the home and high prices, women in gainful occupations, public health and morals, independent citizenship for married women, and others.
To propagandize these principles, the National League of Women Voters has published all types of literature, such as bulletins, calendars, election information, has held a correspondence course on government and conducted demonstration classes and citizenship schools.
Possibly the effectiveness of women's organizations in American politics to-day is due to two things: first, the training of a professional class of executive secretaries or legislative secretaries during the suffrage campaigns, where every device known to the propagandist had to be used to regiment a recalcitrant majority; secondly, the routing over into peacetime activities of the many prominent women who were in the suffrage campaigns and who also devoted themselves to the important drives and mass influence movements during the war. Such women as Mrs. Frank Vanderlip, Alice Ames Winter, Mrs. Henry Moskowitz, Mrs. Florence Kelley, Mrs. John Blair, Mrs. O. H. P. Belmont, Doris Stevens, Alice Paul come to mind.
If I have seemed to concentrate on the accomplishments of women in politics, it is because they afford a particularly striking example of intelligent use of the new propaganda to secure attention and acceptance of minority ideas. It is perhaps curiously appropriate that the latest recruits to the political arena should recognize and make use of the newest weapons of persuasion to offset any lack of experience with what is somewhat euphemistically termed practical politics. As an example of this new technique: Some years ago, the Consumers' Committee of Women, fighting the "American valuation" tariff, rented an empty store on Fifty-seventh Street in New York and set up an exhibit of merchandise tagging each item with the current price and the price it would cost if the tariff went through. Hundreds of visitors to this shop rallied to the cause of the committee.
But there are also non-political fields in which women can make and have made their influence felt for social ends, and in which they have utilized the principle of group leadership in attaining the desired objectives.
In the General Federation of Women's Clubs, there are 13,000 clubs. Broadly classified, they include civic and city clubs, mothers' and homemakers' clubs, cultural clubs devoted to art, music or literature, business and professional women's clubs, and general women's clubs, which may embrace either civic or community phases, or combine some of the other activities listed.
The woman's club is generally effective on behalf of health education; in furthering appreciation of the fine arts; in sponsoring legislation that affects the welfare of women and children; in playground development and park improvement; in raising standards of social or political morality; in homemaking. and home economics, education and the like. In these fields, the woman's club concerns itself with efforts that are not ordinarily covered by existing agencies, and often both initiates and helps to further movements for the good of the community.
A club interested principally in homemaking and the practical arts can sponsor a cooking school for young brides and others. An example of the keen interest of women in this field of education is the cooking school recently conducted by the New York Herald Tribune, which held its classes in Carnegie Hall, seating almost 3,000 persons. For the several days of the cooking school, the hall was filled to capacity, rivaling the drawing power of a McCormack or a Paderewski, and refuting most dramatically the idea that women in large cities are not interested in housewifery.
A movement for the serving of milk in public schools, or the establishment of a baby health station at the department of health will be an effort close to the heart of a club devoted to the interest of mothers and child welfare.
A music club can broaden its sphere and be of service to the community by cooperating with the local radio station in arranging better musical programs. Fighting bad music can be as militant a campaign and marshal as varied resources as any political battle.
An art club can be active in securing loan exhibitions for its city. It can also arrange travelling exhibits of the art work of its members or show the art work of schools or universities.
A literary club may step out of its charmed circle of lectures and literary lions and take a definite part in the educational life of the community. It can sponsor, for instance, a competition in the public schools for the best essay on the history of the city, or on the life of its most famous son.
Over and above the particular object for which the woman's club may have been constituted, it commonly stands ready to initiate or help any movement which has for its object a distinct public good in the community. More important, it constitutes an organized channel through which women can make themselves felt as a definite part of public opinion.
Just as women supplement men in private life, so they will supplement men in public life by concentrating their organized efforts on those objects which men are likely to ignore. There is a tremendous field for women as active protagonists of new ideas and new methods of political and social housekeeping. When organized and conscious of their power to influence their surroundings, women can use their newly acquired freedom in a great many ways to mold the world into a better place to live in.

CHAPTER VIII
PROPAGANDA FOR EDUCATION

EDUCATION is not securing its proper share of public interest. The public school system, materially and financially, is being adequately supported. There is marked eagerness for a college education, and a vague aspiration for culture, expressed in innumerable courses and lectures. The public is not cognizant of the real value of education, and does not realize that education as a social force is not receiving the kind of attention it has the right to expect in a democracy.
It is felt, for example, that education is entitled to more space in the newspapers; that well informed discussion of education hardly exists; that unless such an issue as the Gary School system is created, or outside of an occasional discussion, such as that aroused over Harvard's decision to establish a school of business, education does not attract the active interest of the public.
There are a number of reasons for this condition. First of all, there is the fact that the educator has been trained to stimulate to thought the individual students in his classroom, but has not been trained as an educator at large of the public.
In a democracy an educator should, in addition to his academic duties, bear a definite and wholesome relation to the general public. This public does not come within the immediate scope of his academic duties. But in a sense he depends upon it for his living, for the moral support, and the general cultural tone upon which his work must be based. In the field of education, we find what we have found in politics and other fields—that the evolution of the practitioner of the profession has not kept pace with the social evolution around him, and is out of gear with the instruments for the dissemination of ideas which modern society has developed. If this be true, then the training of the educators in this respect should begin in the normal schools, with the addition to their curricula of whatever is necessary to broaden their viewpoint. The public cannot understand unless the teacher understands the relationship between the general public and the academic idea.
The normal school should provide for the training of the educator to make him realize that his is a twofold job: education as a teacher and education as a propagandist.
A second reason for the present remoteness of education from the thoughts and interests of the public is to be found in the mental attitude of the pedagogue —whether primary school teacher or college professor—toward the world outside the school. This is a difficult psychological problem. The teacher finds himself in a world in which the emphasis is put on those objective goals and those objective attainments which are prized by our American society. He himself is but moderately or poorly paid. Judging himself by the standards in common acceptance, he cannot but feel a sense of inferiority because he finds himself continually being compared, in the minds of his own pupils, with the successful business man and the successful leader in the outside world. Thus the educator becomes repressed and suppressed in our civilization. As things stand, this condition cannot be changed from the outside unless the general public alters its standards of achievement, which it is not likely to do soon.
Yet it can be changed by the teaching profession itself, if it becomes conscious not only of its individualistic relation to the pupil, but also of its social relation to the general public. The teaching profession, as such, has the right to carry on a very definite propaganda with a view to enlightening the public and asserting its intimate relation to the society which it serves. In addition to conducting a propaganda on behalf of its individual members, education must also raise the general appreciation of the teaching profession. Unless the profession can raise itself by its own bootstraps, it will fast lose the power of recruiting outstanding talent for itself.
Propaganda cannot change all that is at present unsatisfactory in the educational situation. There are factors, such as low pay and the lack of adequate provision for superannuated teachers, which definitely affect the status of the profession. It is possible, by means of an intelligent appeal predicated upon the actual present composition of the public mind, to modify the general attitude toward the teaching profession. Such a changed attitude will begin by expressing itself in an insistence on the idea of more adequate salaries for the profession.
There are various ways in which academic organizations in America handle their financial problems. One type of college or university depends, for its monetary support, upon grants from the state legislatures. Another depends upon private endowment. There are other types of educational institutions, such as the sectarian, but the two chief types include by far the greater number of our institutions of higher learning.
The state university is supported by grants from the people of the state, voted by the state legislature. In theory, the degree of support which the university receives is dependent upon the degree of acceptance accorded it by the voters. The state university prospers according to the extent to which it can sell itself to the people of the state.
The state university is therefore in an unfortunate position unless its president happens to be a man of outstanding merit as a propagandist and a dramatizer of educational issues. Yet if this is the case—if the university shapes its whole policy toward gaining the support of the state legislature—its educational function may suffer. It may be tempted to base its whole appeal to the public on its public service, real or supposed, and permit the education of its individual students to take care of itself. It may attempt to educate the people of the state at the expense of its own pupils. This may generate a number of evils, to the extent of making the university a political instrument, a mere tool of the political group in power. If the president dominates both the public and the professional politician, this may lead to a situation in which the personality of the president outweighs the true function of the institution.
The endowed college or university has a problem quite as perplexing. The endowed college is dependent upon the support, usually, of key men in industry whose social and economic objectives are concrete and limited, and therefore often at variance with the pursuit of abstract knowledge. The successful business man criticizes the great universities for being too academic, but seldom for being too practical. One might imagine that the key men who support our universities would like them to specialize in schools of applied science, of practical salesmanship or of industrial efficiency. And it may well be, in many instances, that the demands which the potential endowers of our universities make upon these institutions are flatly in contradiction to the interests of scholarship and general culture.
We have, therefore, the anomalous situation of the college seeking to carry on a propaganda in favor of scholarship among people who are quite out of sympathy with the aims to which they are asked to subscribe their money. Men who, by the commonly accepted standards, are failures or very moderate successes in our American world (the pedagogues) seek to convince the outstanding successes (the business men) that they should give their money to ideals which they do not pursue. Men who, through a sense of inferiority, despise money, seek to win the good will of men who love money.
It seems possible that the future status of the endowed college will depend upon a balancing of these forces, both the academic and the endowed elements obtaining in effect due consideration.
The college must win public support. If the potential donor is apathetic, enthusiastic public approval must be obtained to convince him. If he seeks unduly to influence the educational policy of the institution, public opinion must support the college in the continuance of its proper functions. If either factor dominates unduly, we are likely to find a demagoguery or a snobbishness aiming to please one group or the other.
There is still another potential solution of the problem. It is possible that through an educational propaganda aiming to develop greater social consciousness on the part of the people of the country, there may be awakened in the minds of men of affairs, as a class, social consciousness which will produce more minds of the type of Julius Rosenwald, V. Everitt Macy, John D. Rockefeller, Jr., the late Willard Straight.
Many colleges have already developed intelligent propaganda in order to bring them into active and continuous relation with the general public. A definite technique has been developed in their relation to the community in the form of college news bureaus. These bureaus have formed an intercollegiate association whose members meet once a year to discuss their problems. These problems include the education of the alumnus and his effect upon the general public and upon specific groups, the education of the future student to the choice of the particular college, the maintenance of an esprit de corps so that the athletic prowess of the college will not be placed first, the development of some familiarity with the research work done in the college in order to attract the attention of those who may be able to lend aid, the development of an understanding of the aims and the work of the institution in order to attract special endowments for specified purposes.
Some seventy-five of these bureaus are now affiliated with the American Association of College News Bureaus, including those of Yale, Wellesley, Illinois, Indiana, Wisconsin, Western Reserve, Tufts and California. A bi-monthly news letter is published, bringing to members the news of their profession. The Association endeavors to uphold the ethical standards of the profession and aims to work in harmony with the press.
The National Education Association and other societies are carrying on a definite propaganda to promote the larger purposes of educational endeavor. One of the aims of such propaganda is of course improvement in the prestige and material position of the teachers themselves. An occasional McAndrew case calls the attention of the public to the fact that in some schools the teacher is far from enjoying full academic freedom, while in certain communities the choice of teachers is based upon political or sectarian considerations rather than upon real ability. If such issues were made, by means of propaganda, to become a matter of public concern on a truly national scale, there would doubtless be a general tendency to improvement.
The concrete problems of colleges are more varied and puzzling than one might suppose. The pharmaceutical college of a university is concerned because the drug store is no longer merely a drug store, but primarily a soda fountain, a lunch counter, a bookshop, a retailer of all sorts of general merchandise from society stationery to spare radio parts. The college realizes the economic utility of the lunch counter feature to the practicing druggist, yet it feels that the ancient and honorable art of compounding specifics is being degraded.
Cornell University discovers that endowments are rare. Why? Because the people think that the University is a state institution and therefore publicly supported.
Many of our leading universities rightly feel that the results of their scholarly researches should not only be presented to libraries and learned publications, but should also, where practicable and useful, be given to the public in the dramatic form which the public can understand. Harvard is but one example.
"Not long ago," says Charles A. Merrill in Personality, "a certain Harvard professor vaulted into the newspaper headlines. There were several days when one could hardly pick up a paper in any of the larger cities without finding his name bracketed with his achievement.
"The professor, who was back from a trip to Yucatan in the interests of science, had solved the mystery of the Venus calendar of the ancient Mayas. He had discovered the key to the puzzle of how the Mayas kept tab on the flight of time. Checking the Mayan record of celestial events against the known astronomical facts, he had found a perfect correlation between the time count of these Central American Indians and the true positions of the planet Venus in the sixth century B.C. A civilization which flour129 Propaganda ished in the Western Hemisphere twenty-five centuries ago was demonstrated to have attained heights hitherto unappreciated by the modern world.
"How the professor's discovery happened to be chronicled in the popular press is, also, in retrospect, a matter of interest. ... If left to his own devices, he might never have appeared in print, except perhaps in some technical publication, and his remarks there would have been no more intelligible to the average man or woman than if they had been inscribed in Mayan hieroglyphics.
"Popularization of this message from antiquity was due to the initiative of a young man named James W. D. Seymour. . . .
"It may surprise and shock some people," Mr. Merrill adds, "to be told that the oldest and most dignified seats of learning in America now hire press agents, just as railroad companies, fraternal organizations, moving picture producers and political parties retain them. It is nevertheless a fact. . . .
". . . there is hardly a college or university in the country which does not, with the approval of the governing body and the faculty, maintain a publicity office, with a director and a staff of assistants, for the purpose of establishing friendly relations with the newspapers, and through the newspapers, with the public. . . .
"This enterprise breaks sharply with tradition. In the older seats of learning it is a recent innovation. It violates the fundamental article in the creed of the old academic societies. Cloistered seclusion used to be considered the first essential of scholarship. The college was anxious to preserve its aloofness from the world. ...
"The colleges used to resent outside interest in their affairs. They might, somewhat reluctantly and contemptuously, admit reporters to their Commencement Day exercises, but no further would they go. . . .
"To-day, if a newspaper reporter wants to interview a Harvard professor, he has merely to telephone the Secretary for Information to the University. Officially, Harvard still shies away from the title 'Director of Publicity.' Informally, however, the secretary with the long title is the publicity man. He is an important official to-day at Harvard."
It may be a new idea that the president of a university will concern himself with the kind of mental picture his institution produces on the public mind. Yet it is part of the president's work to see that his university takes its proper place in the community and therefore also in the community mind, and produces the results desired, both in a cultural and in a financial sense.
If his institution does not produce the mental picture which it should, one of two things may be wrong: Either the media of communication with the public may be wrong or unbalanced; or his institution may be at fault. The public is getting an oblique impression of the university, in which case the impression should be modified; or it may be that the public is getting a correct impression, in which case, very possibly, the work of the university itself should be modified. For both possibilities lie within the province of the public relations counsel.
Columbia University recently instituted a Casa Italiana, which was solemnly inaugurated in the presence of representatives of the Italian government, to emphasize its high standing in Latin studies and the Romance languages. Years ago Harvard founded the Germanic Museum, which was ceremoniously opened by Prince Henry of Prussia.
Many colleges maintain extension courses which bring their work to the knowledge of a broad public. It is of course proper that such courses should be made known to the general public. But, to take another example, if they have been badly planned, from the point of view of public relations, if they are unduly scholastic and detached, their effect may be the opposite of favorable. In such a case, it is not the work of the public relations counsel to urge that the courses be made better known, but to urge that they first be modified to conform to the impression which the college wishes to create, where that is compatible with the university's scholastic ideals.
Again, it may be the general opinion that the work of a certain institution is 80 per cent postgraduate research, an opinion which may tend to alienate public interest. This opinion may be true or it may be false. If it is false, it should be corrected by high-spotting undergraduate activities.
If, on the other hand, it is true that 80 per cent of the work is postgraduate research, the most should be made of that fact. It should be the concern of the president to make known the discoveries which are of possible public interest. A university expedition into Biblical lands may be uninteresting as a purely scholastic undertaking, but if it contributes light on some Biblical assertion it will immediately arouse the interest of large masses of the population. The zoological department may be hunting for some strange bacillus which has no known relation to any human disease, but the fact that it is chasing bacilli is in itself capable of dramatic presentation to the public.
Many universities now gladly lend members of their faculties to assist in investigations of public interest. Thus Cornell lent Professor Wilcox to aid the government in the preparation of the national census. Professor Irving Fisher of Yale has been called in to advise on currency matters.
In the ethical sense, propaganda bears the same relation to education as to business or politics. It may be abused. It may be used to overadvertise an institution and to create in the public mind artificial values. There can be no absolute guarantee against its misuse.

CHAPTER IX
PROPAGANDA IN SOCIAL SERVICE

THE public relations counsel is necessary to social work. And since social service, by its very nature, can continue only by means of the voluntary support of the wealthy, it is obliged to use propaganda continually. The leaders in social service were among the first consciously to utilize propaganda in its modern sense.
The great enemy of any attempt to change men's habits is inertia. Civilization is limited by inertia.
Our attitude toward social relations, toward economics, toward national and international politics, continues past attitudes and strengthens them under the force of tradition. Comstock drops his mantle of proselytizing morality on the willing shoulders of a Sumner; Penrose drops his mantle on Butler; Carnegie his on Schwab, and so ad infinitum. Opposing this traditional acceptance of existing ideas is an active public opinion that has been directed consciously into movements against inertia. Public opinion was made or changed formerly by tribal chiefs, by kings, by religious leaders. To-day the privilege of attempting to sway public opinion is every one's. It is one of the manifestations of democracy that any one may try to convince others and to assume leadership on behalf of his own thesis.
New ideas, new precedents, are continually striving for a place in the scheme of things.
The social settlement, the organized campaigns against tuberculosis and cancer, the various research activities aiming directly at the elimination of social diseases and maladjustments—a multitude of altruistic activities which could be catalogued only in a book of many pages—have need of knowledge of the public mind and mass psychology if they are to achieve their aims. The literature on social service publicity is so extensive, and the underlying principles so fundamental, that only one example is necessary here to illustrate the technique of social service propaganda.
A social service organization undertook to fight lynching, Jim Crowism and the civil discriminations against the Negro below the Mason and Dixon line.
The National Association for the Advancement of the Colored People had the fight in hand. As a matter of technique they decided to dramatize the year's campaign in an annual convention which would concentrate attention on the problem.
Should it be held in the North, South, West or East? Since the purpose was to affect the entire country, the association was advised to hold it in the South. For, said the propagandist, a point of view on a southern question, emanating from a southern center, would have greater authority than the same point of view issuing from any other locality, particularly when that point of view was at odds with the traditional southern point of view. Atlanta was chosen.
The third step was to surround the conference with people who were stereotypes for ideas that carried weight all over the country. The support of leaders of diversified groups was sought. Telegrams and letters were dispatched to leaders of religious, political, social and educational groups, asking for their point of view on the purpose of the conference. But in addition to these group leaders of national standing it was particularly important from the technical standpoint to secure the opinions of group leaders of the South, even from Atlanta itself, to emphasize the purposes of the conference to the entire public. There was one group in Atlanta which could be approached. A group of ministers had been bold enough to come out for a greater interracial amity. This group was approached and agreed to cooperate in the conference.
The event ran off as scheduled. The program itself followed the general scheme. Negroes and white men from the South, on the same platform, expressed the same point of view.
A dramatic element was spot-lighted here and there. A national leader from Massachusetts agreed in principle and in practice with a Baptist preacher from the South.
If the radio had been in effect, the whole country might have heard and been moved by the speeches and the principles expressed.
But the public read the words and the ideas in the press of the country. For the event had been created of such important component parts as to awaken interest throughout the country and to gain support for its ideas even in the South.
The editorials in the southern press, reflecting the public opinion of their communities, showed that the subject had become one of interest to the editors because of the participation by southern leaders.
The event naturally gave the Association itself substantial weapons with which to appeal to an increasingly wider circle. Further publicity was attained by mailing reports, letters, and other propaganda to selected groups of the public.
As for the practical results, the immediate one was a change in the minds of many southern editors who realized that the question at issue was not only an emotional one, but also a discussable one; and this point of view was immediately reflected to their readers. Further results are hard to measure with a slide-rule. The conference had its definite effect in building up the racial consciousness and solidarity of the Negroes. The decline in lynching is very probably a result of this and other efforts of the Association.
Many churches have made paid advertising and organized propaganda part of their regular activities. They have developed church advertising committees, which make use of the newspaper and the billboard, as well as of the pamphlet. Many denominations maintain their own periodicals. The Methodist Board of Publication and Information systematically gives announcements and releases to the press and the magazines.
But in a broader sense the very activities of social service are propaganda activities. A campaign for the preservation of the teeth seeks to alter people's habits in the direction of more frequent brushing of teeth. A campaign for better parks seeks to alter people's opinion in regard to the desirability of taxing themselves for the purchase of park facilities. A campaign against tuberculosis is an attempt to convince everybody that tuberculosis can be cured, that persons with certain symptoms should immediately go to the doctor, and the like. A campaign to lower the infant mortality rate is an effort to alter the habits of mothers in regard to feeding, bathing and caring for their babies. Social service, in fact, is identical with propaganda in many cases.
Even those aspects of social service which are governmental and administrative, rather than charitable and spontaneous, depend on wise propaganda for their effectiveness. Professor Harry Elmer Barnes, in his book, "The Evolution of Modern Penology in Pennsylvania," states that improvements in penological administration in that state are hampered by political influences. The legislature must be persuaded to permit the utilization of the best methods of scientific penology, and for this there is necessary the development of an enlightened public opinion. "Until such a situation has been brought about," Mr. Barnes states, "progress in penology is doomed to be sporadic, local, and generally ineffective. The solution of prison problems, then, seems to be fundamentally a problem of conscientious and scientific publicity."
Social progress is simply the progressive education and enlightenment of the public mind in regard to its immediate and distant social problems.

CHAPTER X
ART AND SCIENCE

IN the education of the American public toward greater art appreciation, propaganda plays an important part. When art galleries seek to launch the canvases of an artist they should create public acceptance for his works. To increase public appreciation a deliberate propagandizing effort must be made.
In art as in politics the minority rules, but it can rule only by going out to meet the public on its own ground, by understanding the anatomy of public opinion and utilizing it.
In applied and commercial art, propaganda makes greater opportunities for the artist than ever before. This arises from the fact that mass production reaches an impasse when it competes on a price basis only. It must, therefore, in a large number of fields create a field of competition based on esthetic values. Business of many types capitalizes the esthetic sense to increase markets and profits. Which is only another way of saying that the artist has the opportunity of collaborating with industry in such a way as to improve the public taste, injecting beautiful instead of ugly motifs into the articles of common use, and, furthermore, securing recognition and money for himself.
Propaganda can play a part in pointing out what is and what is not beautiful, and business can definitely help in this way to raise the level of American culture. In this process propaganda will naturally make use of the authority of group leaders whose taste and opinion are recognized.
The public must be interested by means of associational values and dramatic incidents. New inspiration, which to the artist may be a very technical and abstract kind of beauty, must be made vital to the public by association with values which it recognizes and responds to.
For instance, in the manufacture of American silk, markets are developed by going to Paris for inspiration. Paris can give American silk a stamp of authority which will aid it to achieve definite position in the United States.
The following clipping from the New York Times of February 16, 1925, tells the story from an actual incident of this sort:
"Copyright, 1925, by THE NEW YORK TIMES COMPANY—Special Cable to THE NEW YORK TIMES.
"PARIS, Feb. 15.—For the first time in history, American art materials are to be exhibited in the Decorative Arts Section of the Louvre Museum.
"The exposition opening on May 26th with the Minister of Fine Arts, Paul Leon, acting as patron, will include silks from Cheney Brothers, South Manchester and New York, the designs of which were based on the inspiration of Edgar Brandt, famous French iron worker, the modern Bellini, who makes wonderful art works from iron.
"M. Brandt designed and made the monumental iron doors of the Verdun war memorial. He has been asked to assist and participate in this exposition, which will show France the accomplishments of American industrial art.
"Thirty designs inspired by Edgar Brandt's work are embodied in 2,500 yards of printed silks, tinsels and cut velvets in a hundred colors. . . .
"These 'prints ferronnieres' are the first textiles to show the influence of the modern master, M. Brandt. The silken fabrics possess a striking composition, showing characteristic Brandt motifs which were embodied in the tracery of large designs by the Cheney artists who succeeded in translating the iron into silk, a task which might appear almost impossible. The strength and brilliancy of the original design is enhanced by the beauty and warmth of color."
The result of this ceremony was that prominent department stores in New York, Chicago and other cities asked to have this exhibition. They tried to mold the public taste in conformity with the idea which had the approval of Paris. The silks of Cheney Brothers—a commercial product produced in quantity—gained a place in public esteem by being associated with the work of a recognized artist and with a great art museum.
The same can be said of almost any commercial product susceptible of beautiful design. There are few products in daily use, whether furniture, clothes, lamps, posters, commercial labels, book jackets, pocketbooks or bathtubs which are not subject to the laws of good taste.
In America, whole departments of production are being changed through propaganda to fill an economic as well as an esthetic need. Manufacture is being modified to conform to the economic need to satisfy the public demand for more beauty. A piano manufacturer recently engaged artists to design modernist pianos. This was not done because there existed a widespread demand for modernist pianos. Indeed, the manufacturer probably expected to sell few. But in order to draw attention to pianos one must have something more than a piano. People at tea parties will not talk about pianos; but they may talk about the new modernist piano.
When Secretary Hoover, three years ago, was asked to appoint a commission to the Paris Exposition of Decorative Arts, he did so. As Associate Commissioner I assisted in the organizing of the group of important business leaders in the industrial art field who went to Paris as delegates to visit and report on the Exposition. The propaganda carried on for the aims and purposes of the Commission undoubtedly had a widespread effect on the attitude of Americans towards art in industry; it was only a few years later that the modern art movement penetrated all fields of industry.
Department stores took it up. R. H. Macy & Company held an Art-in-Trades Exposition, in which the Metropolitan Museum of Art collaborated as adviser. Lord & Taylor sponsored a Modern Arts Exposition, with foreign exhibitors. These stores, coming closely in touch with the life of the people, performed a propagandizing function in bringing to the people the best in art as it related to these industries. The Museum at the same time was alive to the importance of making contact with the public mind, by utilizing the department store to increase art appreciation.
Of all art institutions the museum suffers most from the lack of effective propaganda. Most present-day museums have the reputation of being morgues or sanctuaries, whereas they should be leaders and teachers in the esthetic life of the community. They have little vital relation to life.
The treasures of beauty in a museum need to be interpreted to the public, and this requires a propagandist. The housewife in a Bronx apartment doubtless feels little interest in an ancient Greek vase in the Metropolitan Museum. Yet an artist working with a pottery firm may adapt the design of this vase to a set of china and this china, priced low through quantity production, may find its way to that Bronx apartment, developing unconsciously, through its fine line and color, an appreciation of beauty.
Some American museums feel this responsibility. The Metropolitan Museum of Art of New York rightly prides itself on its million and a quarter of visitors in the year 1926; on its efforts to dramatize and make visual the civilizations which its various departments reveal; on its special lectures, its story hours, its loan collections of prints and photographs and lantern slides, its facilities offered to commercial firms in the field of applied art, on the outside lecturers who are invited to lecture in its auditorium and on the lectures given by its staff to outside organizations} and on the free chamber concerts given in the museum under the direction of David Mannes, which tend to dramatize the museum as a home of beauty. Yet that is not the whole of the problem.
It is not merely a question of making people come to the museum. It is also a question of making the museum, and the beauty which it houses, go to the people.
The museum's accomplishments should not be evaluated merely in terms of the number of visitors. Its function is not merely to receive visitors, but to project iself and what it stands for in the community which it serves.
The museum can stand in its community for a definite esthetic standard which can, by the help of intelligent propaganda, permeate the daily lives of all its neighbors. Why should not a museum establish a museum council of art, to establish standards in home decoration, in architecture, and in commercial production? or a research board for applied arts? Why should not the museum, instead of merely preserving the art treasures which it possesses, quicken their meaning in terms which the general public understands?
A recent annual report of an art museum in one of the large cities of the United States, says:
"An underlying characteristic of an Art Museum like ours must be its attitude of conservatism, for after all its first duty is to treasure the great achievements of men in the arts and sciences."
Is that true? Is not another important duty to interpret the models of beauty which it possesses?
If the duty of the museum is to be active it must study how best to make its message intelligible to the community which it serves. It must boldly assume esthetic leadership.
As in art, so in science, both pure and applied. Pure science was once guarded and fostered by learned societies and scientific associations. Now pure science finds support and encouragement also in industry. Many of the laboratories in which abstract research is being pursued are now connected with some large corporation, which is quite willing to devote hundreds of thousands of dollars to scientific study, for the sake of one golden invention or discovery which may emerge from it.
Big business of course gains heavily when the invention emerges. But at that very moment it assumes the responsibility of placing the new invention at the service of the public. It assumes also the responsibility of interpreting its meaning to the public.
The industrial interests can furnish to the schools, the colleges and the postgraduate university courses the exact truth concerning the scientific progress of our age. They not only can do so; they are under obligation to do so. Propaganda as an instrument of commercial competition has opened opportunities to the inventor and given great stimulus to the research scientist. In the last five or ten years, the successes of some of the larger corporations have been so outstanding that the whole field of science has received a tremendous impetus. The American Telephone and Telegraph Company, the Western Electric Company, the General Electric Company, the Westinghouse Electric Company and others have realized the importance of scientific research. They have also understood that their ideas must be made intelligible to the public to be fully successful. Television, broadcasting, loud speakers are utilized as propaganda aids.
Propaganda assists in marketing new inventions. Propaganda, by repeatedly interpreting new scientific ideas and inventions to the public, has made the public more receptive. Propaganda is accustoming the public to change and progress.

CHAPTER XI
THE MECHANICS OF PROPAGANDA

THE media by which special pleaders transmit their messages to the public through propaganda include all the means by which people to-day transmit their ideas to one another. There is no means of human communication which may not also be a means of deliberate propaganda, because propaganda is simply the establishing of reciprocal understanding between an individual and a group.
The important point to the propagandist is that the relative value of the various instruments of propaganda, and their relation to the masses, are constantly changing. If he is to get full reach for his message he must take advantage of these shifts of value the instant they occur. Fifty years ago, the public meeting was a propaganda instrument par excellence. To-day it is difficult to get more than a handful of people to attend a public meeting unless extraordinary attractions are part of the program. The automobile takes them away from home, the radio keeps them in the home, the successive daily editions of the newspaper bring information to them in office or subway, and also they are sick of the ballyhoo of the rally.
Instead there are numerous other media of communication, some new, others old but so transformed that they have become virtually new. The newspaper, of course, remains always a primary medium for the transmission of opinions and ideas—in other words, for propaganda.
It was not many years ago that newspaper editors resented what they called "the use of the news columns for propaganda purposes." Some editors would even kill a good story if they imagined its publication might benefit any one. This point of view is now largely abandoned. To-day the leading editorial offices take the view that the real criterion governing the publication or non-publication of matter which comes to the desk is its news value. The newspaper cannot assume, nor is it its function to assume, the responsibility of guaranteeing that what it publishes will not work out to somebody's interest. There is hardly a single item in any daily paper, the publication of which does not, or might not, profit or injure somebody. That is the nature of news. What the newspaper does strive for is that the news which it publishes shall be accurate, and (since it must select from the mass of news material available) that it shall be of interest and importance to large groups of its readers.
In its editorial columns the newspaper is a personality, commenting upon things and events from its individual point of view. But in its news columns the typical modern American newspaper attempts to reproduce, with due regard to news interest, the outstanding events and opinions of the day.
It does not ask whether a given item is propaganda or not. What is important is that it be news. And in the selection of news the editor is usually entirely independent. In the New York Times—to take an outstanding example—news is printed because of its news value and for no other reason. The Times editors determine with complete independence what is and what is not news. They brook no censorship. They are not influenced by any external pressure nor swayed by any values of expediency or opportunism. The conscientious editor on every newspaper realizes that his obligation to the public is news. The fact of its accomplishment makes it news.
If the public relations counsel can breathe the breath of life into an idea and make it take its place among other ideas and events, it will receive the public attention it merits. There can be no question of his "contaminating news at its source." He creates some of the day's events, which must compete in the editorial office with other events. Often the events which he creates may be specially acceptable to a newspaper's public and he may create them with that public in mind.
If important things of life to-day consist of transatlantic radiophone talks arranged by commercial telephone companies; if they consist of inventions that will be commercially advantageous to the men who market them; if they consist of Henry Fords with epoch-making cars—then all this is news. The so-called flow of propaganda into the newspaper offices of the country may, simply at the editor's discretion, find its way to the waste basket.
The source of the news offered to the editor should always be clearly stated and the facts accurately presented.
The situation of the magazines at the present moment, from the propagandist's point of view, is different from that of the daily newspapers. The average magazine assumes no obligation, as the newspaper does, to reflect the current news. It selects its material deliberately, in accordance with a continuous policy. It is not, like the newspaper, an organ of public opinion, but tends rather to become a propagandist organ, propagandizing for a particular idea, whether it be good housekeeping, or smart apparel, or beauty in home decoration, or debunking public opinion, or general enlightenment or liberalism or amusement. One magazine may aim to sell health; another, English gardens; another, fashionable men's wear; another, Nietzschean philosophy.
In all departments in which the various magazines specialize, the public relations counsel may play an important part. For he may, because of his client's interest, assist them to create the events which further their propaganda. A bank, in order to emphasize the importance of its women's department, may arrange to supply a leading women's magazine with a series of articles and advice on investments written by the woman expert in charge of this department. The women's magazine in turn will utilize this new feature as a means of building additional prestige and circulation.
The lecture, once a powerful means of influencing public opinion, has changed its value. The lecture itself may be only a symbol, a ceremony; its importance, for propaganda purposes, lies in the fact that it was delivered. Professor So-and-So, expounding an epoch-making invention, may speak to five hundred persons, or only fifty. His lecture, if it is important, will be broadcast; reports of it will appear in the newspapers; discussion will be stimulated. The real value of the lecture, from the propaganda point of view, is in its repercussion to the general public.
The radio is at present one of the most important tools of the propagandist. Its future development is uncertain.
It may compete with the newspaper as an advertising medium. Its ability to reach millions of persons simultaneously naturally appeals to the advertiser. And since the average advertiser has a limited appropriation for advertising, money spent on the radio will tend to be withdrawn from the newspaper.
To what extent is the publisher alive to this new phenomenon? It is bound to come close to American journalism and publishing. Newspapers have recognized the advertising potentialities of the companies that manufacture radio apparatus, and of radio stores, large and small; and newspapers have accorded to the radio in their news and feature columns an importance relative to the increasing attention given by the public to radio. At the same time, certain newspapers have bought radio stations and linked them up with their news and entertainment distribution facilities, supplying these two features over the air to the public.
It is possible that newspaper chains will sell schedules of advertising space on the air and on paper. Newspaper chains will possibly contract with advertisers for circulation on paper and over the air. There are, at present, publishers who sell space in the air and in their columns, but they regard the two as separate ventures.
Large groups, political, racial, sectarian, economic or professional, are tending to control stations to propagandize their points of view. Or is it conceivable that America may adopt the English licensing system under which the listener, instead of the advertiser, pays?
Whether the present system is changed, the advertiser—and propagandist—must necessarily adapt himself to it. Whether, in the future, air space will be sold openly as such, or whether the message will reach the public in the form of straight entertainment and news, or as special programs for particular groups, the propagandist must be prepared to meet the conditions and utilize them.
The American motion picture is the greatest unconscious carrier of propaganda in the world to-day. It is a great distributor for ideas and opinions.
The motion picture can standardize the ideas and habits of a nation. Because pictures are made to meet market demands, they reflect, emphasize and even exaggerate broad popular tendencies, rather than stimulate new ideas and opinions. The motion picture avails itself only of ideas and facts which are in vogue. As the newspaper seeks to purvey news, it seeks to purvey entertainment.
Another instrument of propaganda is the personality. Has the device of the exploited personality been pushed too far? President Coolidge photographed on his vacation in full Indian regalia in company with full-blooded chiefs, was the climax of a greatly over-reported vacation. Obviously a public personality can be made absurd by misuse of the very mechanism which helped create it.
Yet the vivid dramatization of personality will always remain one of the functions of the public relations counsel. The public instinctively demands a personality to typify a conspicuous corporation or enterprise.
There is a story that a great financier discharged a partner because he had divorced his wife.
"But what," asked the partner, "have my private affairs to do with the banking business?"
"If you are not capable of managing your own wife," was the reply, "the people will certainly believe that you are not capable of managing their money."
The propagandist must treat personality as he would treat any other objective fact within his province.
A personality may create circumstances, as Lindbergh created good will between the United States and Mexico. Events may create a personality, as the Cuban War created the political figure of Roosevelt. It is often difficult to say which creates the other. Once a public figure has decided what ends he wishes to achieve, he must regard himself objectively and present an outward picture of himself which is consistent with his real character and his aims.
There are a multitude of other avenues of approach to the public mind, some old, some new as television. No attempt will be made to discuss each one separately. The school may disseminate information concerning scientific facts. The fact that a commercial concern may eventually profit from a widespread understanding of its activities because of this does not condemn the dissemination of such information, provided that the subject merits study on the part of the students. If a baking corporation contributes pictures and charts to a school, to show how bread is made, these propaganda activities, if they are accurate and candid, are in no way reprehensible, provided the school authorities accept or reject such offers carefully on their educational merits.
It may be that a new product will be announced to the public by means of a motion picture of a parade taking place a thousand miles away. Or the manufacturer of a new jitney airplane may personally appear and speak in a million homes through radio and television. The man who would most effectively transmit his message to the public must be alert to make use of all the means of propaganda.
Undoubtedly the public is becoming aware of the methods which are being used to mold its opinions and habits. If the public is better informed about the processes of its own life, it will be so much the more receptive to reasonable appeals to its own interests. No matter how sophisticated, how cynical the public may become about publicity methods, it must respond to the basic appeals, because it will always need food, crave amusement, long for beauty, respond to leadership.
If the public becomes more intelligent in its commercial demands, commercial firms will meet the new standards. If it becomes weary of the old methods used to persuade it to accept a given idea or commodity, its leaders will present their appeals more intelligently.
Propaganda will never die out. Intelligent men must realize that propaganda is the modern instrument by which they can fight for productive ends and help to bring order out of chaos.

Bernanke spoke!

2011-04-28T23:57:00.000-07:00

How to Be a Central Bank Celebrity

By Bill Bonner

Yes, he held a press conference. Why would the world want a press conference from a central banker? Ah...good question. Because he's a celebrity... He's powerful. He moves and he shakes. He's as popular as William and Kate put together.

In the past, a central banker was meant to be anonymous...quiet...hidden away somewhere so far in the background that the ordinary man wouldn't know his name or recognize his face.

A good central banker was one you never heard of. He did his job. He made sure that the country had enough gold to cover its foreign debts and domestic currency issuance. He did not worry about full employment. Nor did he concern himself with "growth." His job was to make sure the money was good. That's all. If he did it well, he was practically a nobody.

If he did it badly, on the other hand, he might be castrated. Or, at least he would be disgraced.

Times have changed. Alan Greenspan turned central bankers into celebrities. He stood with Hillary Clinton at her husband's State of the Union address...thus signifying the union of money and power, much like the Pope and the Holy Roman Emperor standing together on the balcony of the Vatican.

And now, who wouldn't recognize Ben Bernanke's mug?

In fact, he is widely thought to be responsible for saving Christendom, Jewry and all of western civilization. Yes, he stepped in where fools feared to tread - and rescued the whole shebang.

And now what?

Well, the rescue effort has proven to be a big failure. TARP, TALF, QE1, QE2... The US feds put at risk more than $10 trillion to turn the situation around. Federal deficits alone add up to $4.5 trillion over the last 3 years.

And for what? Housing is still falling. The unemployment rate is still over 10%...unless you stop counting people who haven't been able to find work. More than 40 million people are on food stamps. And every increase in gasoline or food pinches household budgets like a tax increase.

But now, not only does the central banker play a much bigger role in the life of a modern economy, so does the government. A report earlier this week told us that more than half of "income growth" in the last 10 years comes from the feds!

Wait a minute. Where does government get any money? How can the feds give more than half US households more than half their income gains? Who pays for it?

Doesn't that money really belong to someone else? Aren't they just robbing Peter to pay Paul?

Yes, Of course they are. But Peter isn't old enough to vote. So who cares?

And now The Fiscal Times reports that US voters - as a whole - receive more in payments from the government than they pay in taxes.

The feds have turned half the population into incipient zombies...feeding off the other half of the population...and their children...and their children's children.

But let's get back to Bernanke. What did he have to say yesterday? Well...nothing!

Here's the AP report:

WASHINGTON (AP) - The US economy and job creation have strengthened enough for the Federal Reserve to end on schedule a program of buying Treasury bonds to help the economy, the Fed said Wednesday.

Fed Chairman Ben Bernanke spoke at a news conference after the meeting. It was the first time in the Fed's 98-year history that a chairman has begun holding regular sessions with reporters.

Bernanke said that as long as the Fed continues to say rates will remain at historic lows for "an extended period," rates won't rise until the Fed has met at least twice more. The Fed board meets about every six weeks.

Bernanke said he expects the economy to continue growing through next year and 2013.

He acknowledged that higher gasoline prices are creating a financial hardship for many Americans. But he said the Fed doesn't think gas prices will continue to rise at their recent pace.
And more thoughts...

With Bernanke's dulcet assurances still echoing in their ears, investors went back to their errors. They bought more stocks - pushing the Dow up 93 points. They bought more gold too. The yellow metal rose $13.

One thing they didn't buy was the dollar. The greenback is at an all- time low against the Swiss franc. Against the euro, it seems to be returning to its all-time low. And against gold, of course, it passed its all time low many months ago.

And now that the economy is slowly but surely recovering - Bernanke said so! - many investors are beginning to wonder if gold may have passed its all time high too.

Let's hope people believe it.

The more who think so, the better. Yes...sell gold...please! Sell it in a panic. Sell it cheap. Sell it to the rag and bone man! Sell it to the pawnshop! Sell it at parties organized by newspaper ads! Sell it to people who put notices on eBay! Sell...sell...sell...

And then, you know what to do, don't you, dear reader?

Buy!

*** An old friend has written a delightful book. Alex Green is an investment analyst. We have never completely shared his investment philosophy; he is optimistic, capable and earnest, with little appreciation for our end-of-the-world-as-we-have-known-it perspective.

But we share an interest. His new book Beyond Wealth is about what interests us both - that is, what money can't buy.

The burden of the book is obvious, but not inconsequential. It reminds us of who we are and what we are. Making and spending money is part of what we do and much of what we care about. But it is not everything.

Getting rich is a competitive activity. We can't all be rich. Only a few can. There's no secret to it. Those who become rich tend to work harder at it than most people. Getting rich requires you to stay focused, to exclude from your life many of the distractions, idleness, chitchat and casual entertainments that make life interesting, lively, and agreeable. Rich people are often highly competitive, single-minded, and self-disciplined. That is, they are dull workaholics and terrible dinner companions.

Enjoying a rich life is an entirely different matter. You have to let your mind wander a bit. You have to be willing to "waste time" with friends, to spend time reading, thinking and amusing yourself with no apparent or immediate prospect of a reward. You have to travel, with no particular destination in mind...and be prepared for the serendipitous encounter along the way.

Where's the pay off? Well, it comes later...unbidden...unmeasured...and untaxed. It shows up on no balance sheet and no portfolio review. You will not be able to put a number on it...nor brag about how much it exceeds the benchmark. And yet, it is what you need to live a "rich life."

Alex's new book covers values, not prices. He describes the value in all manner of things - friends, long walks...hobbies...travel...philosophy...poetry...music - all the things the hard-charging wealth maximizer eschews.

The book itself is a distraction from the world of money...a delightful one. Click here to find out for yourself.

Regards,

Bill Bonner,
for The Daily Reckoning

Go Long Material,

2011-04-26T04:03:00.000-07:00

Go Short Certified Idiots

By Frederick Sheehan

Some other relationships:

Federal Reserve Chairman, Ben Bernanke, knows that his stock-market support operations are coming to an end, or a pause - time will tell. Propping up the stock market was an explicit objective of QE2. Quantitative Easing 2 (QE2), a process by which the New York Federal Reserve is buying $600 billion of US Treasury securities, is due to end in June. Classified as Permanent Open Market Operations (POMOs), the New York Fed dispatches about $6.5 to $8.5 billion into the banking system every day, as payment for 5- to 7-year Treasury notes. Chairman Bernanke wants the POMOs to continue, forever.

A few Federal Reserve Bank presidents have recently stated their reservations, in public. They warn that it is time to stop POMO-ing, QE-ing, or otherwise bankrupting America. ("Bankrupting" was not their description.) But Christina Romer, former chairperson of the "Council of Economic Advisors," is "all in." During a recent interview on Yahoo's Daily Ticker, Romer gushed, "I think the evidence is that QE2 was very effective and certainly QE1 was very effective. I don't understand why we'd be dialing back that tool."

Central to her argument is that a lower dollar helps Americans. Since she worked so hard to emphasize this view on the Daily Ticker, we can be sure that: (1) Ben Bernanke is doing all that he can to lower the value of the dollar against other currencies, (2) jobs, wages, working hours, and production industries will continue to shrivel, and (3) tried-and-true asset relationships of the past decade (i.e. gold up, dollar down) will accelerate.

The Bureau of Labor Statistics (BLS) calculated the civilian population available to work was 216 million in January 2002. It was 239 million in December 2010, an increase of 23 million. Within this group, the BLS calculated 132 million were working in January 2002. In December 2010: 138 million, an increase of 6 million. Thus, the percentage of those with jobs among those who can work has dropped significantly. Those who do have jobs are worse off, in general, than they were in 2002.

The BLS calculated the weekly earnings of the average worker at $341 in January 2002. In December 2010, it was $342. This calculation is adjusted for inflation - but given the corruption of government inflation numbers, the latter figure ($342) should be reduced by at least 20%.

However, despite the overwhelming evidence that QE I and II have been dismal failures, Romer continues to applaud them as successes, just like Chairman Bernanke. The striking similarity between Romer's perspective and Bernanke's seems odd...until you examine their resumes.

We have, first, Christiana Romer, Class of 1957, Garff B. Wilson Professor of Economics at the University of California, Berkeley, former Chair of the President's Council of Economic Advisers, former economics professor at Princeton University, current co-director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER),former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received her Ph.D in economics from the Massachusetts Institute of Technology in 1985.

We have, second, Ben S. Bernanke, current chairman of the Federal Reserve Board, former Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, former chair of the President's Council of Economics Advisers, former Director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER), former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received his Ph.D in economics from the Massachusetts Institute of Technology in 1979.

Perhaps there's a bit too much "in-breeding" in the gene pool of professional economists. Now some "highlights" from the Romer interview:

The Daily Ticker's, Aaron Task: A lot of people say the Fed's been very successful helping financial markets and helping people at the upper end of the income scale. There hasn't been a translation into wage growth for the average worker or substantial hiring, so [how] would the Fed be doing more to help [if it continued to QE]?

ROMER: Noooooooo! If you look in fact at what quantitative easing does, it tends to lower the price of the dollar, both of those things that are good for ordinary families and lower long-term interest rates means firms can do investment. It means it's easier for consumers to afford borrowing, so that tends to encourage spending and when people spend that puts the people back to work. A lower price of the dollar helps to make goods more competitive in foreign markets. If we're exporting more, we need more workers to produce it.

TASK: Isn't it true that long-term rates have risen since the Fed announced QE2 in August? And also, a lot of people think a "weaker dollar" means the dollar doesn't go as far, when I go to the grocery store and when I put gas in my tank, or things of that nature. So, I think a lot of people think the weaker dollar is hurting them, not helping them

ROMER: So, you need to be very careful. It's hard to evaluate what QE has done to long-term interest rates, because there were a lot of announcement effects. What I can tell you is that the academic studies that have looked at this absolutely say that QE does what we thought it was going to do.

And, of course, on the price of the dollar we're not talking about what's happening to your purchasing power here; we're talking about what the price of the dollar is in the foreign exchange markets. I think that everyone agrees that a lower price of the dollar tends to make us export more, which ultimately causes unemployment to come down... There's no evidence that what's holding back business spending or consumer economy is government activism.

[Editor's note: In 2010, David Farr, President, Chairman and CEO of Emerson Electric Corporation, in Chicago, told investors: "Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game."]

Many brand-name professors and economists from the Romer/Bernanke gene pool also continue to cheer the "successes" of quantitative easing. Average Americans, not so much...

"Comments" by Yahoo! viewers responding to the Romer interview, featured widespread contempt for QE, and therefore for Romer's perspective.

Comment #1 was from "Ross," who asked, "Is this chick retarded or what?" Of viewers who expressed an opinion about Ross' analysis, 227 liked his comment; 16 disliked it.

Comment #2 was from "Brian," who queried: "Who knew it was so easy? Someone should go tell those poor nations in Africa that we've learned the secret: just produce more of your currency." (Score: 182 to 11.)

Comment #3 was from "Kimmie Taylor" who observed: "QE1 has failed on jobs. QE2 has failed on jobs. The only success with these QEs are increased bank profits." (253-18)

Comment #4 was from "Jack," who stated one obvious problem and a fair conclusion: "The woman has never held a real job and knows nothing about the real world. She is a complete failure."

There was not a single Romer defender as far as the eye could see. (The eye saw the first 20 reviews.)

We will finish with "PhilippeB" (#6), a fast learner: "No idea who she is, but it is now official: Christina Romer is a certified idiot." (62- 3)

What to do about it? Please refer to the very top: "Some relationships."

Flash Crash To The Upside In Gold

2011-04-21T00:40:00.000-07:00

By Adventures In Capitalism

Traders like to talk about panics or crashes--“The Panic of 1907” or “The Crash of 1929.” Usually crashes involve something dropping in price. I have this funny feeling that the panic of 2011 will be upwards. There has been a slow move into hard assets for years now. One by one, investors are beginning to understand the meaning of what the Federal Reserve intends to do to our currency. Even more importantly, investors are beginning to understand that most Western governments are effectively bankrupt. None of this should be news to anyone. What is shocking is our government’s blasé attitude to the mess it has created.

We are now wrapping up a very contentious period of debate about the budget. After threatening to shut down our government, both sides agreed to cut a few dollars and go on with the status quo. It reminded me of an insolvent company deciding to save money by eliminating free coffee. If I were a creditor to the US, I’d be in a blind panic. I think many people are suddenly realizing that the system is broken and no one has any desire to fix it.

For the past few months, gold has gone up, even while Fed officials have threatened to stop QE2 before it was scheduled to end. I think that’s telling. Gold knows what’s going on. People are slowly waking up to its charms.

Fear is a strange emotion. Normally, when people are scared, they sell assets for dollars. What does a crash look like where people sell dollars to buy gold? “Get me something to own that the government will not destroy!!” If you think your currency will be worthless, there’s almost no price that’s too high to pay for gold. In the past, there was always another currency that you could buy. Argentines had dozens of options each time their currency collapsed. What if there are no other options? All the currencies are now bad.

I realize that the concept of an upwards crash is strange to people. Look at what happened to the CBOE volatility index (VIX) from late 2007 until 2009. I think gold is about to do something very much like that. The days of slow and contained gold moves are over. We are about to see some real volatile action. What will people do if gold has a $100 one day move higher? Will they panic out of other asset classes to buy more?

Everywhere I look, gold is one of the most hated asset classes—even though it is at multi-year highs. Gold futures open interest is down from highs a few months ago. Open interest in the Market Vectors Gold Miners ETF (GDX: NYSE) is near 2 year lows. These are products that traders use to get exposure. No one cares about gold yet. I think that the doubters are about to suddenly become believers.

A smart friend once told me that if you want to write about the market, you should never predict an event and a date simultaneously. I have always said that this bull market in gold will not end until there are $200 dollar up days in gold. You need something so shocking that it scares the politicians to stop acting stupid. I’m not saying that I know what gold will do next week, but I think we’re on the cusp of a real paradigm shift. Some time very soon, people will have no choice but to panic. We are getting very close to the first flash crash higher in gold. There will be plenty more flash crashes to follow.

Japan's Economy Takes a Hit

2011-04-19T00:58:00.000-07:00

This Time Might Be Different

It’s not just Tokyo hotels that are finding it tough. Blackouts, aftershocks, nuclear fears and a general mood of restraint are conspiring to create an economic impact that's likely considerably greater than originally believed.

On Wednesday, the Cabinet downgraded its outlook for the economy, the first such move in six months. Its regular survey of industry, conducted in late March, showed a record drop in confidence, to the lowest point since early 2009. A regular Reuters survey has shown similar results. Comments by government ministers suggest that the government is forecasting—hoping for—a short shock to the economy, followed by a strong rebound later in the year. That's generally what happens following a major natural disaster, and it's the path that Japan followed after the Kobe earthquake in 1995.

There are grounds, however, to argue that this time might be different. First, the crisis isn't over. How quickly can the situation at the nuclear power plant in Fukushima be brought under control? TEPCO remains unable to provide any kind of timeline. How bad will the blackouts be during summer? Keidanren, Japan’s leading business association, is trying to get the government to accept voluntary power cuts, rather than the mandatory outages planned. Will there be more damaging aftershocks? That's the forecast.

Second, Japan faces a much more constrained fiscal situation than it did in 1995. Under the circumstances, efforts to reduce the public debt—usually stated as more than 200 percent of GDP—will be put aside for the time being. There's a strong argument that Japan’s debt crisis is overrated, and certainly the ultimate risk is of inflation, not default, but at some point political pressure will return for both the government and the Bank of Japan (BOJ) to rein in the debt.

BOJ officials have pointed out that Japan has an ample surplus of savings to pay for reconstruction. This is certainly true, but those savings are in the private sector. To be mobilized for rebuilding and fiscal stimulus it needs to made available to the government, which can be done through either higher tax or higher debt. Neither option is appealing. Tokyo may be able to pass a special tax to pay for reconstruction—a draft bill prepared by the ruling Democratic Party of Japan has this and other options on the table—but raising income or consumption (sales) taxes would be fatal to efforts to stimulate a battered economy and may ultimately result in lower tax revenues. That’s what happened when the consumption tax was last raised, in 1997.

The main worry with the use of additional debt is that even with an average interest rate on its outstanding debt of just 1.5 percent, interest payments already account for 25 percent of the Japanese government’s tax revenues. This is one reason why the BOJ is so reluctant to directly monetize the debt—the fear that this could trigger inflation expectations, a rise in bond yields, and a crushing interest payment burden for the government.

Reining in debt while trying to kick-start the economy is the central economic dilemma for the Japanese government, and I’ll have more to say about a possible solution in a piece on Monday.

Third, the Japanese economy was already very fragile even before the earthquake, with the endemic problem of falling population and weakening demand. The natural momentum in Japan is now towards contraction, not growth.

In normal times, the Japanese business year moves in fairly predictable cycles. For the vast majority of Japanese companies, the fiscal year ends on March 31, and March is generally a flurry of last-minute orders and activity. Early April often brings a brief lull, with many companies inducting new recruits, executing reshuffles, or digesting acquisitions, which are often timed for April 1.

For workers, thoughts often begin to turn to the upcoming Golden Week holidays, a set of consecutive public holidays that start at the end of April and run through the first week of May. In Tokyo, where everybody is from somewhere else, Golden Week often means a return to hometowns. That idea will be particularly appealing this year, with Tokyoite nerves somewhat frayed by the constant aftershocks.

Given the circumstances this year, it's very likely that companies will hunker down in April and wait until after Golden Week before making spending decisions. In my own (admittedly very unscientific) survey of clients and associates, that is the strong impression they are getting. The retail and hospitality sectors will be suffering badly, and trying to survive. Manufacturers will be focused on fixing disrupted supply chains. Many other companies will be poised, with a wait-and-see attitude. In short, April is going to be dismal.

What happens after that first week in May very much depends on the tenor of the news reports. For the government to get its wish of a short shock followed by a sharp recovery, a best-case scenario is required: progress in Fukushima, with no more alarming contamination reports; a workable arrangement for the power cuts; convincing government announcements on economic stimulus with a credible plan for eventual fiscal reform; and significant progress in fixing supply chains.

That’s a lot of ifs, but it may not be as difficult to achieve as it sounds. Radiation levels outside Fukushima are trending downwards, and in Tokyo they have returned to normal range. There have been no further contamination alerts. Power outages during summer, when demand peaks, could perhaps be alleviated through means such as extending and staggering summer holidays. The government apparently has a comprehensive bill to be tabled in early May. And early reports suggest that many companies are making good progress in restoring their capabilities.

So Japan may exit summer with its economy bruised but still standing. Of course, the risks are very much on the downside, such as a damaging aftershock, a setback at Fukushima, a slowdown overseas, or delays in getting supply chains restored.

Longer term, the two central economic debates in Japan will resume: how to pay down the public debt without strangling growth, and whether to open the economy or continue to protect the primary and tertiary sectors. But even in the very best-case scenario, the disaster and its aftermath will lend additional urgency to these questions.

James Pach is the publisher of The Diplomat and the founder of Trans-Asia Inc., a Tokyo-based translation and investor relations company.