PART 1: CREDIT AND THE RENT-INTEREST INDEX

The Georgist analysis of depressions is frequently countered with the concept that depressions are caused by the over-extension of credit. The wide-spread acceptance in today's idea market of this point of view demands an interpretation of credit in terms of rent and interest.

The usual starting point of most new or expanded production in the present American economy is the obtaining of credit -- a sum of money representing calls on wealth that the lender expects to he converted to a larger sum at a later date. The borrower (labor) uses these funds to obtain or maintain the tools (capital) and production sites (land) for carrying out production at an increased rate.

The term credit is used to include all transactions in which transfer of physical entities of value or claims to value are made from one (economic person to another for disposal, without immediate payment for the value received. The characterizing criterion of credit lies in a time lapse between value received and payment therefor. Examples of credit situations are charge accounts, commercial bank loans, government bonds, railroad bonds, installment purchases, etc.

During good times only casual thought is given to problems of political economy and the relations of rent, wages and interest to the servicing of credit commitments. However only when the increased yield gained by a lender from a particular producer-borrower is derived from expanded production that also gives the borrower an increased yield, can the particular enterprise be considered successful enough to endure.

The period in the business cycle called "boom" is characterized by an upward movement in total production that generally provides both lenders and borrowers with increased yields. Since bad times can only originate in natural processes occurring in good times, credit-extenders, business men and politicians would do well to examine prevailing economic thinking which is still rooted in concepts that have not been distinguished by any ability to solve the problem of recurring depressions. If they wait until hard times begin, then the urgency to do something, will, as it did in 1933-39, compel economic practices which serve to postpone, re-arrange and compound the distress rather than relieve it permanently.

During any "boom," the natural action of the tools and the commodities comprising active capital is to increase per capita production. The natural action of land as production proceeds to inferior sites is to decrease per capita production. Interest, i.e., wealth accruing to the use of capital, is a measure therefore of the increased productivity induced by the use of current capital. Rent, i.e., wealth accruing to the use of better land, is a measure of the decreased productivity induced by the use of poorer sites.

When the effect on the total labor force of the productivity of capital compensates for the decreased productivity of inferior lands called into use, production must be expanding. Those who labor are provided with increased real wages. At the same time, there is available a Rent and interest may be spoken of as existing in a favorable ratio towards each other.

As the increased productive state proceeds into "boom" times, land speculation increases rent faster than production and so prevents capital from compensating for the inferior land called into use. An adverse "rent-interest index" comes into being and production must shrink. Not enough surplus funds are available to service all credit commitments.

Many producers can meet all their commitments only by depriving labor of some of its wages through wage cuts or layoffs, by liquidating some of their capital, or by cutting production schedules. Trade being the exchange of production for production, any shrinkage thereof means further reduction in wages and, of course, demand. New opportunities for the profitable employment of labor and capital are kept low by the rent line remaining very high. Some disemployed workers stay idle causing further reduction in demand and production.

The reduced production, employment, demand and consumption are conspicuously reflected at the entrepreneurial level by commercial loan and bond defaults, foreclosure of mortgages, assignee and bankruptcy sales. If all of these cross-aggravating retardations of production remain unchecked, the inevitable result is the period called "bust" or depression.

The increased number of failures to pay credit liens accumulating and occurring at the same time gives a situation superficially describable as originating in the "over-extension of credit." It is impossible to believe that these defections are derived from the epidemic appearance among most credit lenders of a peculiar virus that prompts them, after years of successful lending practices, to concurrently make the same technical blunder of lending to inefficient producer-borrowers.

The phrase "over-extension of credit" is actually descriptive only in character and devoid of the attribute of causality. The necessary causality can be supplied only by the concept of insufficiency of the credit-servicing surplus owing to the speculative rise in rents beyond the ability of capital to compensate. In terms of price equilibria, this means an inability of the active producers of wealth (labor and capital) to buy back what they produce. When inventories over-accumulate in stores and warehouses, other superficial thinkers are led to loudly proclaim that depressions are caused by "overproduction." The "rent-interest index" reasoning can easily be applied to demonstrate the speciousness of this concept much in the same manner as can the idea of "over-extension of credit" be refuted. If one wishes to oversimplify and to indulge in a generality that glitters as much as "overproduction" and "overextension," the only plausible one to use is "underproduction as being the cause of depression.

There is a considerable uncertainty prevailing in theoretical and practical circles about the immediate economic future. This uncertainty might be relieved by a statistical investigation of the suggested "rent-interest index." Perhaps it can give us a barometer capable of presaging swings in the business cycle. Such a barometer would fill the acute need of the Georgist economic perspective for a statistical corroboration of the concept that rising land values acting to diminish wages and interfere with the appropriate use of capital causes depressions and that falling land values accompanied by capital innovations initiate recovery.

PART 2: THE EFFECT OF EMPLOYMENT AND INFLATION ON THE RENT-INTEREST INDEX

There are two forces which may temporarily counteract the effect of a rise in the rent line and the presence of an adverse "rent-interest index." Their success in so doing provides illusory solutions to the problems of the cyclical production pattern.

One force is the drawing into the active labor pool, during times of compulsive production or steeply rising costs of living, of individuals who under optimum conditions of plenty should not be working at all. A conspicuous example is currently found in the necessity of young mothers to go back to work in order to live at a happy level of consumption. The use of more workers intensifies the use of land and capital so as to increase total production and temporarily permit continued debt servicing. The upward effect of this extra exertion is self-limited by the consequent lowering of the margin. In addition land holders are quick to exploit the association of more people with particular productive sites by speculatively increasing rents where and when possible.

With rents still rising, a continuous fear of falling behind the concomitant rising cost of graceful living pervades the population. This economic anxiety, combined with disruption in proper family relations due to the need for mothers to work, can act only to aggravate the mental illness, juvenile delinquency, marital tension and other social evils so widespread in the current scene. This is a state of affairs that can hardly be described as progress.

The "Full Employment" Hoax

The phrase "60,000,000 jobs" was a bit of word magic supposed to banish the threat of depression forever. Despite our now having more than this number employed, the menace of economic distress in the near future is disturbing the thinking of all.

The success of inflation in causing temporary bursts of increased production undoubtedly depends on increasing the labor force. The decreased capacity of capital funds to supply the tools and commodities for production due to the rising price level leads to a lower productivity that can be compensated only by extra exertion. When a pool of new workers is available, this compensation takes place.

When the labor pool is exhausted, the momentum of the increased production level must run down. Further inflation can only lead to the economic woes of runaway inflation, in which the economy is featured by full employment and a retarded standard of living.

The policy of making jobs through controlled inflation is the wages-fund theory in modern dress. The vigor of revival can be seen in the recent request of the head of one of the labor federations for the government to provide one and a half to two millions new jobs.

That the funds to supply tools to these workers comes from the organized state robbery called taxation, and deficit financing seems of no moment to this person. But this is to be expected in these days when double standards of morality are so commonplace in American civilization.

The Balloon Ascends

The other and more important force which serves to mask an adverse "rent-interest index" is inflation, i.e., increasing the quantity of money in circulation without increasing directly the supply of civilian goods. Widespread subsidies and war expenditures via deficit financing are favored techniques for so doing.

With the expansion of the money supply it becomes easier to obtain credit for production or consumption and easier to make credit repayments. Because of price rises which accompany all money expansions, the repayments are made in currency of lower commodity value. Holders of surplus funds are thus induced to invest further in production in order to protect the commodity value of the principal. Any lag in the rise of the rent line owing to prior contracts permits the "easy-money" production and the "surplus-investment production to rise fairly rapidly. This persuades many people that a little bit of inflation is a good thing.

In time, however, the rent line catches up. Land holders acting intelligently, quickly learn to include the factor of inflated currency in their speculative anticipations. This increased rent line combined with the decreased capacity through price rises of surplus funds to provide tools for production must ultimately give a "rent-interest index" that leads to a depressed rate of production.

This new period of retarded production is called variously deflation, recession and readjustment. These generalities are useful to politicians, professors and economists for they obscure mountains of confusion and ignorance.

Governments, true to centuries-old form, then try to counteract the detrimental effects of the inflation-deflation pattern with more inflation. Here in the United States the presence of vast land resources combined with an expanding population and accumulated capital operating in a free trade area have prevented the arrival of runaway inflation such as that now being experienced in Greece, Argentina and France, but we may be approaching it.

A tight money situation is now prevailing in the investment and credit market despite production being at an all-time high for conditions not marked by all-out war. In a healthy private-enterprise economy, the greater the production, the greater should be the surplus held by individuals and available for investment. The scarcity of investment funds is a symptom on the financial level of the inability of capital and labor to reach production sites at rent costs profitable to all participants. Surpluses can or will not he invested in risky times without risk insurance in the form of higher yields. These extra credit costs can only deter production.

What's "Normal"

Pronouncements by various politicoes, professors and economic writers have already been articulated to the effect that any recession that may appear shortly is merely a downward adjustment of the economy to normal production levels. The dominant economic philosophy of today seems to have the curious concept that normal economic times exist when less than the full labor force seeking work, is at work, and less than the full associated productive capacity is in operation. They regard as normal for any particular period an average somewhere between crest and trough of the contemporaneous section of their graphs of production activity.

The word "normal" has a connotation of healthful and optimum functioning; The only plausible meaning to the phrase "normal economic times" is a period of expanding production when there are enough dignified employment opportunities for all who seek employment. Associated therewith is a frequent turn-over of capital actuated by rapid advances in technology, and the presence of large quantities of surplus funds seeking investment. In short, normal times are "boom" times.

The present administration in attacking inflation does not seem to be taking any cognizance of the speculative rent line. A down-trend may appear if the indicated inability of capital to circumvent or compensate for the combined effects of the rent line and inflation continues. This would put the administration in the embarrassing position of being accused of having caused the slowdown.

The Pressure for Control

If the level of production goes fairly low it will win many people to the belief that only controlled inflation can maintain prosperity. Washington will then feel compelled to continue in some measure the easy money policies of the five previous administrations, while praying that any respite so achieved does not precipitate a severer downturn.

Exhortative pep talks and hyperbole about the need for confidence, salesmanship, enterprise, liberty and initiative cannot stop the inexorable working of the laws of rent, wages and interest nor counterbalance the pernicious effects of land speculation on production. When are businessmen, politicians, college professors and ordinary citizens who ask the silly question, "what state agency enforces natural laws," going to realize that the terrible crises of war, depression and runaway inflation are the natural enforcement agencies of natural laws? It better be soon!