In economics, there are two kinds of problems:  real problems and nominal problems.

The deforestation on Easter Island destroyed most of the Rapa Nui.  When it was necessary to leave the island and start new lives in a new land with an environment able to support their people, there were not enough large trees left to build ocean-worthy vessels.  Their population declined to 15-20% of their peak population within a century.

This is an example of a real problem. A real problem is a lack of natural resources, capital goods, land or labour, or when any combination of these factors of production sum to an inadequate value to produce enough to maintain (or better) the general welfare of a people.

A nominal problem is one which is contained in the abstract.  They can result from frictions in capital structure, uneven distribution of income, or simply in the collective choices of participants in an economy.

The wealth contained in an economy is its capital stock:  our oil fields, forests, farms, houses, offices, cars, computers, factories, data centers, software and construction equipment.  Our potential is richly governed by the quantity of our workers, the durability of their work ethos coupled with their experience and education.  This is the real economy.

Capital consists of raw materials, instruments of labour, and means of subsistence of all kinds, which are employed in producing new raw materials, new instruments, and new means of subsistence. -Wage Labour & Capital (Marx, 1847)

II – Marginal Capital Allocation

An economy with inadequate capital has firm prices and high capital returns.  An economy with a glut of capital has soft prices and low capital returns.

Economic growth is the expansion of capital – and subsequent expansion of capital utilization. Investment creates capital. Capital is the accumulated labour directed by the formation of financial capital.  This capital, or accumulated labour, represents capacity to sustain consumption.

High (low) capital returns don’t necessarily equate to high (low) capital prices.  An outsized capital return likely indicates that additional investment will be induced, which could compete to drive the price of its output down.

Growth in employment hinges on investment.  The utilisation of existing capital maintains the stability of existing employment, but new employment requires new investment.  This is demonstrated with Figure 1, showing a very strong relationship between the health of the employment market and Investment net of Capital Consumption as a fraction of GDP.

Figure 1: Variations in Net Investment explain 92% of unemployment from 1990-on.

Unemployment is largely a result of rentierism, which we’ve defined as the behavior of collecting economic rent from existing assets instead of creating new ones. The act of collecting rent is a preference executed on marginal free cash flow dollars, principally by the corporate sector.  Corporate Management have three options, with increasingly expected yield requirements:

1. Hold it as cash:  this is a liquidity preference, which is pro-cyclical, and becomes decreasingly attractive as the embedded put option in cash becomes too expensive to hold while it decays, thus becoming less competitive with capital accumulation options that have a positive real expectancy
2. Purchase existing capital:  this can be either the purchase of used or previously existing fixed capital, such as machinery or real estate, or capital assets, including a firm’s own stock
3. Invest in new capital:  building a new factory or drilling a new oil well

III – The Marginal Rentier Opportunity Curve

J. M. Keynes (and Irving Fisher before him) furnish us with the Marginal Efficiency of Capital as the excess return of a piece of capital over its supply price.  The supply price can be one of two values:  the market price (buying used or existing capital) or replacement cost (new net investment).

I define the marginal efficiency of capital as being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital-asset during its life just equal to its supply price. This gives us the marginal efficiencies of particular types of capital-assets. The greatest of these marginal efficiencies can then be regarded as the marginal efficiency of capital in general. The reader should note that the marginal efficiency of capital is here defined in terms of the expectation of yield and of the current supply price of the capital-asset. It depends on the rate of return expected to be obtainable on money if it were invested in a newly produced asset; not on the historical result of what an investment has yielded on its original cost if we look back on its record after its life is over. -General Theory of Employment, Interest & Money (Keynes, 1933)

There in fact exist marginal efficiencies between all investment opportunities.

Figure 2: The Marginal Rentier Opportunity Curve outlines the yields on principal investment opportunities available for the marginal cash-flow dollar

I propose, approximately illustrated in Figure 2,  the Marginal Rentier Opportunity Curve, which offers a comparison between the principal investment opportunities available. The current yield is not the same as the Expected Return.  We can, however, tease out the relative expected returns by spreading spots on this curve.

The investment opportunity set has ascending and encapsulating risk premiums:  Attractiveness of new investment is measured against the sum of all premiums between it and the risk-free rate.

Thus, I further propose:  The price of capital is the Net Present Value of Risk-adjusted Expected Return discounted from the Marginal Rentier Opportunity. 

 IV – Used Capital Competition

So far, I have postulated:

1. The wealth of an economy, and the capacity for its income, is contained in the accumulated labour, or the capital stock, of its people.
2. Economic growth, measured by real income, is the accumulation of labour and subsequent utilisation through net new investment.
3. The marginal investment dollar purchases either existing capital assets, or the creation of new capital assets through net new investment.
4. Marginal investment dollars that are not allocated into net new investment cause a reduction of income to the household sector, and increase unemployment.

Assuming the aforementioned postulates true, it can be observed that the rational business manager will, perhaps simultaneously:

1. Increase liabilities from portion of the Marginal Rentier Opportunity Curve with the lowest expected return.
2. Increase assets from the portion of the Marginal Rentier Opportunity Curve with the highest expected return.

This necessarily implies that, if the risk-adjusted expected return is not highest in net new investment, the business manager will instead invest the marginal dollar into existing capital. If the price of capital is the Net Present Value of Risk-adjusted Expected Return discounted from the Marginal Rentier Opportunity, and the business manager finds the most attractive investment opportunities in the purchase of existing capital, we can conclude:  the price of existing capital must be bid up high enough in order for new capital to be competitive.

V – Jobless Recoveries

Figure 3: The relationship between Net investment as % of GDP as 12-month payroll growth

The significance of existing capital available cheaply to allocators is that, until existing capital is expensive enough to make new capital competitive, net new investment will be muted, and so too will employment growth (figure 3).

The common understanding is stocks lead the economy at economic turning points.  This is not always true.  Coming out of the .com bust, the economy bottomed in 2001, more than a year before S&P 500 finally did.  The explanation is expectations lead the economy, but I find this argument runs counter my observations in expectations around cycle turns.  I offer an alternative: that which causes equities to (typically) bottom is also what causes the economy to recover.

The recovery after the .com bust recession was termed a jobless recovery, and for good reason:  jobs took even longer than the stock market to bottom!

Figure 4: The jobless recovery following the .com bust

Using our understanding of job-growth as net-investment driven, we can clearly see why there were no jobs:  there was no investment.  The next observation we can make from Figure 4 is the lack of investment, even years after the recovery, until after the S&P 500 had bottomed.  Finally, in later 2003, the Net Investment is elastic to the upward movement in the S&P 500.

For this argument, we approximate the S&P 500 as the aggregate price-level of existing capital.

The inference is that the jobless recovery of late 2001-2003 was the result of a net investment-less recovery, which was probably the result of existing capital being available more cheaply.

We can see the same pattern emerge, as demonstrated by Figure 4, in the present recovery.

Figure 5: The second jobless recovery

Perhaps most incredibly, Net Investment went negative for the first time in history of the series going back to 1947 during The Great Recession (figure 6).  Our capital stock was depreciating at a greater rate than we were replacing it.

Figure 6: The long-run relationship between Net Investment and growth in employment

The explanation that jobless recoveries result from a scarcity of net-investment because existing capital is too cheap for new capital creation to be competitive enjoys intuitive sense, as well some recent historical evidence.

VI – Contemporary Interpretation

If the price of existing capital has been rising, and Net Investment has been muted, we conclude that the price of creating new capital is not competitive with existing capital.

The great irony is that, the richer the country has become, there is less work to be done, which leaves workers with less income.  This is our great nominal problem.

Figure 7: Labour force and population growth projections through 2050

Figure 7: Labour force and Private Non-Residential Fixed Investment growth

The CBO and BLS forecast around 0.7% annual labour force growth this decade, and just 0.5% in the 2020s.  This means the growth of future requirements for fixed capital and accumulated labour that support workers — such as office buildings or automobiles — will be subdued, even more so than the production of goods consumed by all demographic groups.

Combined with productivity efficiencies in the Internet age that provide a declining Real Capital Intensity of Economic Output, we require less capital formation.  This potentially explains why the price of real capital had been below its previous peak for so long, and consequently why net investment (and employment growth by proxy) has been limited.

With the S&P 500 (our approximate aggregate capital market value) closing once again near record highs, it seems likely that new investment will be more attractive.

Perhaps Conor Sen put it best:  Wringing the risk premia out of existing capital is a necessary precondition for new capital formation (and hiring!).

I hope and believe we are there, and maybe we’ve learnt something new about the nature of jobless recoveries.

There are principally three types of capital allocation transactions.

If you are expanding capital stock, or you are funding the expansion of capital stock, you are investing.  This includes net fixed investment, the purchase of newly issued marketable securities which fund new investment, or otherwise funding ventures which do. Purchases of existing shares on the secondary markets, such as the purchase of stocks and bonds outside of IPOs do not represent investment, but simply swapping the ownership between the cash and security holders.

If you are underwriting convexity risk to capture theta, you are providing liquidity. You needn’t be doing this with options.  Any portfolio instrument or stance that pays an expected time premium for adopting convexity risk will do, whether it be buying a stock which has a temporary disconnection from fundamentals or shorting volatility instruments.

If you are doing neither, you are simply trying to exploit a monopoly on existing capital.  This can be accomplished by owning existing fixed capital assets and selling the output, or by ownership of securities which stake a claim in ownership of existing fixed capital assets and income.  The value of existing capital is relative to the supply of existing real capital to meet present demand for output.  This is most profitable when there is an existing deficit of real capital from inadequate past investment relative to present demand.  The value is bolstered by the frictions to competition by new investment to expand capacity.

While investment is the only non-rentier transaction type, the provision of liquidity, particularly during times of market dislocation, generates value by raising the unrealised equity value of other holders, thereby freeing their capital to service something more productive.  However, if the liquidity provider previously had liquidity preference — that is, he developed his monopoly on capital by first hoarding it through non-reinvestment accumulation — this reverts to unproductive behaviour on balance.

The decision to allocate like a rentier is not entirely autonomous.  There is a realistic limit to the amount of fixed capital which can be profitable and manageable by the agency of a single individual or household.  The purchase of securities (or shares) to defer the management of fixed capital thus also defers the decision to be a capitalist or a rentier.

Both the capitalist and the rentier seek to exploit their monopoly on capital to acquire more capital.  Rentier behaviour is typically found in households and corporations, with the public sector tending to run deficits to support the former two.

The distinction between the rentier and capitalist is that the capitalist reinvests her cashflow into creating new capacity – or new real capital.  The rentier more simply exploits his existing monopoly on capital for cashflow.  The capitalist accumulates new real capital, which expands the nation’s capital stock while rentier accumulates economic rent.

All other things equal (including return on capital), it is preferable to be a rentier.  The capitalist creates new things, and is constant competition with other capitalists to provide the highest quality cost goods and services at the lowest cost.  Because capital reinvestment is risky, return on capital is generally lower for collecting economic rents.

The fulcrum upon which the capitalist and the rentier are defined is the marginal decision to re-invest cashflows.

Unchecked, a reduction of re-investment subtracts income from the rest of the economy. When this happens in aggregate, the labour which was used to create the production won’t be able to purchase all of their own output.  Rentiers thus reduce labour demand and demand for the output their assets produce.

Figure 1: Saving as a % of Investment = Unemployment Rate

To approximate the Aggregate Rentierism in the econonmy, we look at the fraction of savings that investment comprise of.  We observe in Figure 1 that Gross Private Savings as a % of Gross Private Investment explains 70% of the unemployment rate. Rentierism is unemployment.

Figure 2: 85-country study regressing age against saving and investment

Rentierism itself is not morally objectionable.  The gap between savings and investment is explainable through demographics.  The relationship between age and both income and investment is well understood.  The young have little income and large risk appetite.  As they approach middle-age, their income and investment peak.  At the onset of old age, the high-income dramatically reduce investment to save with less risk towards retirement.  Retirees then dis-save and liquidate investments for sustenance.  Figure 2, drawn from Saving and Demographic Change: The Global Dimension (Bosworth, Chodorow-Reich), demonstrates this effect empirically.

Figure 3: Savings Rate over Age

The agents which make these decisions, even if impacted by household demographics, aren’t always households themselves, but we’ll start there.

Based on the 2011 Bureau of Labour Statistics’s Consumer Expenditure Survey, we imputed household a savings rates across age-groups using the difference between Income Before Taxes and Average Annual Expenditures.  This is an approximation, and we just use the shape of the curve in our analysis.

The shape of this curve intones a marginal propensity to accumulate rent based on demographics.  Can we really blame our middle-aged for saving with less risk for retirement?

Not all savings are accumulated equally.  The Bureau of Labour Statistic’s Personal Savings Rate accounts for Fixed Investment as consumption, whilst the Federal Reserve’s Z.1 Flow of Funds report reports that as a form of saving.

Figure 4: Consumer Expenditure Survey data on age-groups

Both are valid in their own context.  The Z.1′s F.10 subsection details the breakdown, including comparison to the Bureau of Labour Statistics version.

The difference between the two provide the basis for rent-seeking savings and capitalist savings.  The capitalist household saves by creating new fixed capital, while the rentier household savings in cash and financial assets.  Thus, we find the household decisions that drive rentier behaviour are probably principally driven, at least over the long-run, but demographics.

Cyclical swings in the marginal propensity to save also invoke the paradox of thrift: when everyone saves, aggregate demand falls, and so too does income, and the value of assets frequently fall more than the cash balances increase.

Households aren’t the only agent which demonstrates rent-seeking behaviour.

Figure 5: The fraction of income which is reinvested into capex

Using historical data from the F.101 series of the Federal Reserve’s Z.1 Flow of Funds release, we form a ratio between Income before taxes and Capital Expenditures (figure 5).  We find something which looks strikingly like long-term government interest rates.

Business capex to income is proportionate to long-term government interest rates.

This draws us to our central conclusion: rentierism is a dependent derivative of capitalism.  A positive risk-free rate is the ultimate vehicle of the rent-seeker.

We can see that the cost of money is proportionate to the level of re-investment.  This infers that a high cost of money is dependent on a high level of re-investment.

Figure 1: Labour Force Participation Rate and Non-farm Payrolls

Has the United States of America reached, and perhaps passed, “peak capitalism” – the point where the maximum number of people participate in capitalist relationships?

The argument could be made, at least on a relative basis, that it has indeed crested, and we are on the slow, inevitable march away.

Let’s back pause a minute to define what this means:  Capitalism is the system of relationships between the labour class and the capital class.

Individual relationships are really bilateral.  There are two channels:  the wage channel, whereby the capitalist negotiates with the worker for the highest output at the lowest salary, and the price channel, whereby capitalists compete with one another to provide the highest quality products and services for the worker at the lowest prices.

The capitalist does not do this at a loss.  She endeavors to maintain an advantage between her expenditures and sales – her profit.

This system provides a unique suite of incentives to each class which is responsible for providing the West a previously unimaginably high standard of living, even for the lower classes.  The worker is incentivised to produce more and higher quality goods, thereby increasing his advantage in competing with other labour for higher wages.  The capitalist is incentivised to produce higher quality goods at lower prices, thereby increasing her advantage in competing with other companies for sales, and ultimately the capital she can accumulate.

The worker seeks to consume the highest quality of goods at the lowest prices, and the capitalist seeks to accumulate more capital.

Figure 2: Wages as fraction of nominal GDP

By looking at this (now well worn) chart of Wages as % of GDP (figure 2), it could be assumed that a net capital advantage has been accruing over time. There are other things that support this view.  I would prefer to use U.S. mean family net worth by percentile of net worth to really show how this capital accumulation has played out.

Figure 3: Mean family net worth by percentile of net worth

However, if you add Government Social Benefits to Wages as % of GDP to the former chart, the picture changes dramatically!  The present value, 58%, is dead from the 1959-present average.

Figure 4: Wages and Government Social Benefits as a fraction of nominal GDP

The character of change now represents a shift, not from labour to capital, but away from the classical capitalist bilateral relationship between the labour class and the capital class (through wages and prices) to a unilateral one (prices).

Thus we get to the fundamental reality:  capitalists have been compensated for serving the poor and the elderly.  The system has worked for everyone.  The government has brokered a deal whereby capitalists accumulate capital by providing the infirm and the retired working class sustenance.  Perhaps you would change the proportions of profit and transfer payments, but the basic system of transactions and incentives has been proved out.

The facilitating mechanism is the Federal government’s ability to add new financial assets (money and Treasuries) into the system.

Let’s apply the shift in bilateral capitalist relationships with a simple example: The legacy of the labourer’s work is not just the modest sum which he was able to accumulate, but also in the accumulated labour his employer captured as surplus value.  This accumulated labour is the combination of technology utilisation and process improvement which enabled his employer to produce more goods at the same cost – an improvement known as productivity.

When the worker retires, the government subsidises his means of sustenance by crediting new deposits to his bank account.  He uses these credits to purchase sustenance from the capitalist class.  The retired worker has already pre-paid for these newly government-created deposits with the massive productivity gains throughout his career.  As long as the retired worker, and the present labour force, are able to increase productivity at a rate faster than the retiree’s new deposits are created by the government, the capitalist gets paid, her worker is employed, and the retired worker is provided sustenance.

At the most basic level, the worker does not pre-pay his retirement through social security and pension fund contributions, but even more so by productivity.  He has pre-paid in through continually improving his employer’s capital and use of capital to expand output at the same cost throughout his career so the government can print money to deposit in his account after retirement without causing inflation.

The inevitable decline in per-capita working-aged people mean that the nature of capitalism fundamentally shifts away from the bilateral capital-labour transactions to a more complex set of transactions, introducing a third party – the public sector – to broker the deal.

The enemy of both capital and labour in the system of capitalism is running out of new markets.  Wages are not paid out of the current production of employees, but from past production by capitalists with the expectation that they will produce a surplus of value over what they are paid (for why else would the capitalist make this transaction?).

Figure 5: Change in savings rate with more wealth and income

Were it to stop here, the amount of money and income circulating through the economy would contract.  Capitalist income has long since maximised consumption, and is now focused on maximising capital accumulation.

At this point, this capitalist has free cashflow.  There are two actions she can do with it:  she can keep the cash, or re-invest it into more production.

Since capitalist’s goal is to accumulate more capital, she is going to re-invest when she sees opportunity, and this free cash-flow is exchanged with new labour for more future production.

But what happens when the capitalist sees her opportunity set decline?  Her expectation that the payment she makes to the new workers she’d hire would materialise into higher revenue later diminishes, and she decides to book her profit as cash.

Figure 6: Investment/Savings Ratio bears a strong relationship to the unemployment rate

Who could blame her?  She isn’t going to operate at an anticipated loss.

Let’s analyse why our capitalist would view her re-investment returns pessimistically: The first is the shift in near-term investment expectations.  Assuming new markets will always become available, the only reason to withhold investment is the worry that the market value of your capital will decline in the short-term.  The investment time horizon moves from “what is the total return on this piece of capital until it is consumed?” to “will I be able to get the same price for this piece of capital tomorrow that I can get today?“.

We have previously observed that these variations in investment horizon — and consequently rate of investment — are responsible for most of the economic cyclical variations.

The second is a glut of capital relative to the population.  There appear to be two chief reasons for this:  a rapid expansion in technology-driven productivity and demographically-driven declining final sales growth.

Let’s analyse what the capitalist does when there is a glut of capital:  Returns on capital are too low to create new real capital, so the capitalist’s objective turns from accumulating more capital to collecting and retaining economic rent by exploiting the monopoly she has on existing capital.  Our capitalist has now turned into a rentier.

Collecting economic rents siphons income from the rest of the economy, reducing the amount of income available to labour to purchase its own output.  As is, the rentier now has lower final sales, thereby reducing her perception of future returns on invested capital.  Her marginal proclivity shifts further into fiscal retrenchment. Unchecked, this scenario is not good for any of our three classes:  the labourer is out of work or has less income, the capitalist sees her sales (and utilisation of her existing capital) decline, and the retiree still requires sustenance.

Rentierism does have a derogative connotation.  Capitalists get paid to take investment risk while expanding capital stock, and labours get paid for their time.  Rentiers profit simply by having a monopoly on existing capital.  But if we examine their incentives, can we blame the capitalist for shifting to a rentier?  She certainly has the right to try to avoid losses.

The way to mitigate the transition pain from capitalism to rentierism is to have the government pay retired workers for years of uncompensated productivity gains.

We can see a prior example of of a rapidly increasing dependency ratio and glut of capital in the past 20 years of Japanese economic history.  Germany is not far behind.

Consider life in these two high dependency ratio countries:  They have very low unemployment rates and low inflation rates.

Figure 7: Old-aged dependency ratios for the United States, Japan and Germany

The principal political driving force away from bilateral capitalism to trilateral government-brokered rentierism will, perhaps ironically, be the same force that is trying desperately (and likely with futility) to hang on to more capitalist relationships:  baby boomers.  But even the conservative baby boomers will move to ensure their entitlements are maintained, for they will need more than they anticipated as a result of the 2008 crisis.

We have been shifting at the margins away from bilateral capitalist relationships for decades.  What replaced it has successfully navigated the needs and demands of each class – accumulation to capital for enterprise value, sustenance to workers for labour and sustenance to the retiree for decades of productivity growth.

The key will be formalising how this already works so we can adjust policy within the framework for the betterment of every American.

Investment: Driver of Cyclicality

GDP, the measure of the nation’s income, is the sum of 4 components:

Y (GDP) = C (Consumption) + I (Investment) + G (Government Spending) + (X [Exports] – M [Imports])

The most volatile component is investment.  The cyclical variation of the economy could be said to largely be driven by investment.

We put Gross Private Domestic Investment in a vector autoregression framework with Real GDP, and ran an Impulse Response Function analysis on it to measure the impact of of the marginal change in investment on the real economy.

The answer was interesting: for every 1% y/y increase in nominal investment, real growth increased by 1% y/y by for several quarters after, the effect falling to 0 (and, roughly equilibrium) after 6 quarters.

Given GDP averages 6.39x the size of investment, investment wields substantial leverage over the economy.  The equilibrium is achieved when the investment is simply rolled into future real GDP.  The real capital has been created, and the means to utilise it have been pre-spent into the economy.

We should probably pause and define investment.  Deploying capital to stocks or bonds isn’t investment – rather, it is simply allocation of savings.  Investment activity either creates un-sold consumables (inventory stock), or increases the real capital stock (houses, machines, factories).

What incentivises investment?

Impulse response function of Real Retail Sales %-y/y on Gross Private Domestic Investment %-y/y

The answer is simple:  the expectation that there will be demand for the output resulting from the investment.  That expectation is established from realised demand.  That is:  demand begets investment, which begets more demand.

Investment in the business cycle

A recession could potentially be characterised by the preference for liquidity (saving) over investment or consumption.  What is rational for individual actors is not necessarily rational for the aggregate.

Counter-cyclical spending stablises aggregate demand, the anchor to which marginal investment decisions are made from.

At the same time, gross capital formation provides support in activity with consumption of fixed capital.  Despite a downturn in economic activity, as long as the expectation isn’t for a prolonged depression and permanent output impairment, capital goods are replaced when worn out.

Thus are the evident levers of power over the economy.

The contents of which surprised me a great deal.  Ben Franklin champions ideas that are attributed to Marx, Keynes and others 150-250 years later.  Not only was his command of economics impressive, but Franklin’s writing was an order of magnitude better than Marx, and quite a bit more accessible than Keynes.

Because it’s a great deal longer than a typical Macrofugue post, I’ve emboldened the paragraphs which I think are particularly compelling.  If you don’t have the time to read the whole thing, at least skim those.

Benjamin Franklin:

THERE is no Science, the Study of which is more useful and commendable than the Knowledge of the true Interest of one’s Country; and perhaps there is no Kind of Learning more abstruse and intricate, more difficult to acquire in any Degree of Perfection than This, and therefore none more generally neglected. Hence it is, that we every Day find Men in Conversation contending warmly on some Point in Politicks, which, altho’ it may nearly concern them both, neither of them understand any more than they do each other.

   Thus much by way of Apology for this present Enquiry into the Nature and Necessity of a Paper Currency. And if any Thing I shall say, may be a Means of fixing a Subject that is now the chief Concern of my Countrymen, in a clearer Light, I shall have the Satisfaction of thinking my Time and Pains well employed.

To proceed, then,

   There is a certain proportionate Quantity of Money requisite to carry on the Trade of a Country freely and currently; More than which would be of no Advantage in Trade, and Less, if much less, exceedingly detrimental to it.

This leads us to the following general Considerations.

 First, A great Want of Money in any Trading Country, occasions Interest
to be at a very high Rate. And here it may be observed, that it is impossible by any Laws to restrain Men from giving and receiving exhorbitant Interest, where Money is suitably scarce: For he that wants Money will find out Ways to give 10 per Cent. when he cannot have it for less, altho’ the Law forbids to take more than 6 per Cent. Now the Interest of Money being high is prejudicial to a Country several Ways: It makes Land bear a low Price, because few Men will lay out their Money in Land, when they can make a much greater Profit by lending it out upon Interest: And much less will Men be inclined to venture their Money at Sea, when they can, without Risque or Hazard, have a great and certain Profit by keeping it at home; thus Trade is discouraged. And if in two Neighbouring Countries the Traders of one, by Reason of a greater Plenty of Money, can borrow it to trade with at a lower Rate than the Traders of the other, they will infallibly have the Advantage, and get the greatest Part of that Trade into their own Hands; For he that trades with Money he hath borrowed at 8 or 10 per Cent. cannot hold Market with him that borrows his Money at 6 or 4. — – -On the contrary, A plentiful Currency will occasion Interest to be low: And this will be an Inducement to many to lay out their Money in Lands, rather than put it out to Use, by which means Land will begin to rise in Value and bear a better Price: And at the same Time it will tend to enliven Trade exceedingly, because People will find more Profit in employing their Money that Way than in Usury; and many that understand Business very well, but have not a Stock sufficient of their own, will be encouraged to borrow Money; to trade with, when they can have it at a moderate Interest.

Secondly, Want of Money in a Country reduces the Price of that Part of its Produce which is used in Trade: Because Trade being discouraged by it as above, there is a much less Demand for that Produce. And this is another Reason why Land in such a Case will be low, especially where the Staple Commodity of the Country is the immediate Produce of the Land, because that Produce being low, fewer People find an Advantage in Husbandry, or the Improvement of Land. — – -On the contrary, A Plentiful Currency will occasion the Trading Produce to bear a good Price: Because Trade being encouraged and advanced by it, there will be a much greater Demand for that Produce; which will be a great Encouragement of Husbandry, who probably might otherwise have Sought some more profitable Employment.

As we have already experienced how much the Increase of our Currency by what Paper Money has been made, has encouraged our Trade; particularly to instance only in one Article, Ship-Building; it may not be amiss to observe under this Head, what a great Advantage it must be to us as a Trading Country, that has Workmen and all the Materials proper for that Business within itself, to have Ship-Building as much as possible advanced: For every Ship that is built here for the English Merchants, gains the Province her clear Value in Gold and Silver, which must otherwise have been sent Home for Returns in her Stead; and likewise, every Ship built in and belonging to the Province, not only saves the Province her first Cost, but all the Freight, Wages and Provisions she ever makes or requires as long as she lasts; provided Care is taken to make This her Pay Port, and that she always takes Provisions with her for the whole Voyage, which may easily be done. And how considerable an Article this is yearly in our Favour, every one, the least acquainted with mercantile Affairs, must needs be sensible; for if we could not Build our selves, we must either purchase so many Vessels as we want from other Countries, or else Hire them to carry our Produce to Market, which would be more expensive than Purchasing, and on may other Accounts exceedingly to our Loss. Now as Trade in general will decline where there is not a plentiful Currency, so Ship-Building must certainly of Consequence decline where Trade is declining.

Thirdly, Want of Money in a Country discourages Labouring and Handicrafts Men (which are the chief Strength and Support of a People) from coming to settle in it, and induces many that were settled to leave the Country, and seek Entertainment and Employment in other Places, where they can be better paid. For what can be more disheartning to an industrious labouring Man, than this, that after he hath earned his Bread with the Sweat of his Brows, he must spend as much Time, and have near as much Fatigue in getting it, as he had to earn it. And nothing makes more bad Paymasters than a general Scarcity of Money. And here again is a Third Reason for Land’s bearing a low Price in such a Country, because Land always increases in Value in Proportion with the Increase of the People settling on it, there being so many more Buyers; and its Value will infallibly be diminished, if the Number of its Inhabitants diminish. — – -On the contrary, A Plentiful Currency will encourage great Numbers of Labouring and Handicrafts Men to come and Settle in the Country, by the same Reason that a Want of it will discourage and drive them out. Now the more Inhabitants, the greater Demand for Land (as is said above) upon which it must necessarily rise in Value, and bear a better Price. The same may be said of the Value of House-Rent, which will be advanced for the same Reasons; and by the Increase of Trade and Riches People will be enabled to pay greater Rents. Now the Value of House-Rent rising, and Interest becoming low, many that in a Scarcity of Money practised Usury, will probably be more inclined to Building; which will likewise sensibly enliven Business in any Place; it being an Advantage not only to Brickmakers, Bricklayers, Masons, Carpenters, Joiners, Glaziers, and several other Trades immediately employed by Building, but likewise to Farmers, Brewers, Bakers, Taylors, Shoemakers, Shop-keepers, and in short to every one that they lay their Money out with.

Fourthly, Want of Money in such a Country as ours, occasions a greater Consumption of English and European Goods, in Proportion to the Number of the People, than there would otherwise be. Because Merchants and Traders by whom abundance of Artificers and labouring Men are employed, finding their other Affairs require what Money they can get into their hands, oblige those who work for them to take one half, or perhaps two thirds Goods in Pay. By this Means a greater Quantity of Goods are disposed of, and to a greater Value; because Working Men and their Families are thereby induced to be more profuse and extravagant in fine Apparel and the like, than they would if they were obliged to pay ready Money for such Things after they had earn’d and received it, or if such Goods were not imposed upon them, of which they can make no other Use: For such People cannot send the Goods they are paid with to a Foreign Market, without losing considerably by having them sold for less than they stand ‘em in here; neither can they easily dispose of them at Home, because their Neighbours are generally supplied in the same Manner; But how unreasonable would it be, if some of those very Men who have been a Means of thus forcing People into unnecessary Expence, should be the first and most earnest in accusing them of Pride and Prodigalty. Now tho’ this extraordinary Consumption of Foreign Commodities may be a Profit to particular Men, yet the Country in general grows poorer by it apace. — – -On the contrary, As A plentiful Currency will occasion a less Consumption of European Goods, in Proportion to the Number of the People, so it will be a means of making the Balance of our Trade more equal than it now is, if it does not give it in our Favour because our own Produce will be encouraged at the same Time. And it is to be observed, that tho’ less Foreign Commodities are consumed in Proportion to the Number of People, yet this will be no Disadvantage to the Merchant, because the Number of People increasing, will occasion an increasing Demand of more Foreign Goods in the Whole.

Thus we have seen some of the many heavy Disadvantages a Country (especially such a Country as ours) must labour under, when it has not a sufficient Stock of running Cash to manage its Trade currently. And we have likewise seen some of the Advantages which accrue from having Money sufficient, or a Plentiful Currency.

The foregoing Paragraphs being well considered, we shall naturally be led to draw the following Conclusions with Regard to what Persons will probably be for or against Emitting a large Additional Sum of Paper Bills in this Province.

1. Since Men will always be powerfully influenced in their Opinions and Actions by what appears to be their particular Interest: Therefore all those, who wanting Courage to venture in Trade, now practise Lending Money on Security for exhorbitant Interest, which in a Scarcity of Money will be done notwithstanding the Law, I say all such will probably be against a large Addition to our present Stock of Paper Money; because a plentiful Currency will lower Interest, and make it common to lend on less Security.

   2. All those who are Possessors of large Sums of Money, and are disposed to purchase Land, which is attended with a great and sure Advantage in a growing Country as this is; I say, the Interest of all such Men will encline them to oppose a large Addition to our Money. Because their Wealth is now continually increasing by the large Interest they receive, which will enable them (if they can keep Land from rising) to purchase More some time hence than they can at present; and in the mean time all Trade being discouraged, not only those who borrow of them, but the Common People in general will be impoverished, and consequently obliged to sell More Land for less Money than they will do at present. And yet, after such Men are possessed of as much Land as they can purchase, it will then be their Interest to have Money made Plentiful, because that will immediately make Land rise in Value in their Hands. Now it ought not to be wondered at, if People from the Knowledge of a Man’s Interest do sometimes make a true Guess at his Designs; for, Interest, they say, will not Lie.

3. Lawyers, and others concerned in Court Business, will probably many of them be against a plentiful Currency; because People in that Case will have less Occasion to run in Debt, and consequently less Occasion to go to Law and Sue one another for their Debts. Tho’ I know some even among these Gentlemen, that regard the Publick Good before their own apparent private Interest.

4. All those who are any way Dependants on such Persons as are above mentioned, whether as holding Offices, as Tenants, or as Debtors, must at least appear to be against a large Addition; because if they do not, they must sensibly feel their present Interest hurt. And besides these, there are, doubtless, many well-meaning Gentlemen and Others, who, without any immediate private Interest of their own in View, are against making such an Addition, thro’ an Opinion they may have of the Honesty and sound Judgment of some of their Friends that oppose it (perhaps for the Ends aforesaid), without having given it any thorough Consideration themselves. And thus it is no Wonder if there is a powerful Party on that Side.

On the other Hand, Those who are Lovers of Trade, and delight to see Manufactures encouraged, will be for having a large Addition to our Currency: For they very well know, that People will have little Heart to advance Money in Trade, when what they can get is scarce sufficient to purchase Necessaries, and supply their Families with Provision. Much less will they lay it out in advancing new Manufactures; nor is it possible new Manufactures Should turn to any Account, where there is not Money to pay the Workmen, who are discouraged by being paid in Goods, because it is a great Disadvantage to them.

Again, Those who are truly for the Proprietor’s Interest (and have no separate Views of their own that are predominant) will be heartily for a large Addition: Because, as I have shewn above, Plenty of Money will for several Reasons make Land rise in Value exceedingly: And I appeal to those immediately concerned for the Proprietor in the Sale of his Lands, whether Land has not risen very much since the first Emission of what Paper Currency we now have, and even by its Means. Now we all know the Proprietary has great Quantities to sell.

And since a Plentiful Currency will be so great a Cause of advancing this Province in Trade and Riches, and increasing the Number of its People; which, tho’ it will not sensibly lessen the Inhabitants of Great Britain, will occasion a much greater Vent and Demand for their Commodities here; and allowing that the Crown is the more powerful for its Subjects increasing in Wealth and Number, I cannot think it the Interest of England to oppose us in making as great a Sum of Paper Money here, as we, who are the best Judges of our own Necessities, find convenient. And if I were not sensible that the Gentlemen of Trade in England, to whom we have already parted with our Silver and Gold, are misinformed of our Circumstances, and therefore endeavour to have our Currency stinted to what it now is, I should think the Government at Home had some Reasons for discouraging and impoverishing this Province, which we are not acquainted with.

It remains now that we enquire, Whether a large Addition to our Paper Currency will not make it sink in Value very much; And here it will be requisite that we first form just Notions of the Nature and Value of Money in general.

As Providence has so ordered it, that not only different Countries, but even different Parts of the same Country, have their peculiar most suitable Productions; and likewise that different Men have Genius’s adapted to Variety of different Arts and Manufactures, Therefore Commerce, or the Exchange of one Commodity or Manufacture for another, is highly convenient and beneficial to Mankind. As for Instance A may be skilful in the Art of making Cloth, and B understand the raising of Corn; A wants Corn, and B Cloth; upon which they make an Exchange with each other for as much as each has Occasion, to the mutual Advantage and Satisfaction of both.

But as it would be very tedious, if there were no other Way of general Dealing, but by an immediate Exchange of Commodities; because a Man that had Corn to dispose of, and wanted Cloth for it, might perhaps in his Search for a Chapman to deal with, meet with twenty People that had Cloth to dispose of, but wanted no Corn; and with twenty others that wanted his Corn, but had no Cloth to suit him with. To remedy such Inconveniences, and facilitate Exchange, men have invented MONEY, properly called a Medium of Exchange, because through or by its Means Labour is exchanged for Labour, or one Commodity for another. And whatever particular Thing Men have agreed to make this Medium of, whether Gold, Silver, Copper, or Tobacco; it is, to those who possess it (if they want any Thing) that very Thing which they want, because it will immediately procure it for them. It is Cloth to him that wants Cloth, and Corn to those that want Corn; and so of all other Necessaries, it is whatsoever it will procure. Thus he who had Corn to dispose of, and wanted to purchase Cloth with it, might sell his Corn for its Value in this general Medium, to one who wanted Corn but had no Cloth; and with this Medium he might purchase Cloth of him that wanted no Corn, but perhaps some other Thing, as Iron it may be, which this Medium will immediately procure, and so he may be said to have exchanged his Cloth for Iron; and thus the general Exchange is soon performed, to the Satisfaction of all Parties, with abundance of Facility.

For many Ages, those Parts of the World which are engaged in Commerce, have fixed upon Gold and Silver as the chief and most proper Materials for this Medium; they being in themselves valuable Metals for their Fineness, Beauty, and Scarcity. By these, particularly by Silver, it has been usual to value all Things else: But as Silver it self is no certain permanent Value, being worth more or less according to its Scarcity or Plenty, therefore it seems requisite to fix upon Something else, more proper to be made a Measure of Values, and this I take to be Labour.

By Labour may the Value of Silver be measured as well as other Things. As, Suppose one Man employed to raise Corn, while another is digging and refining Silver; at the Year’s End, or any other Period of Time, the compleat Produce of Corn, and that of Silver, are the natural Price of each other; and if one be twenty Bushels, and the other twenty Ounces, then an Ounce of that Silver is worth the Labour of raising a Bushel of that Corn. Now if by the Discovery of some nearer, more easy or plentiful Mines, a Man may get Forty Ounces of Silver as easily as formerly he did Twenty, and the same Labour is still required to raise Twenty Bushels of Corn, then Two Ounces of Silver will be worth no more than the same Labour of raising One Bushel of Corn, and that Bushel of Corn will be as cheap at two Ounces, as it was before at one; ceteris paribus.

   Thus the Riches of a Country are to be valued by the Quantity of Labour its Inhabitants are able to purchase, and not by the Quantity of Silver and Gold they possess; which will purchase more or less Labour, and therefore is more or less valuable, as is said before, according to its Scarcity or Plenty. As those Metals have grown much more plentiful in Europe since the Discovery of America, so they have sunk in Value exceedingly; for, to instance in England, formerly one Penny of Silver was worth a Days Labour, but now it is hardly worth the sixth Part of a Days Labour; because not less than Six-pence will purchase the Labour of a Man for a Day in any Part of that Kingdom; which is wholly to be attributed to the much greater Plenty of Money now in England than formerly. And yet perhaps England is in Effect no richer now than at that Time; because as much Labour might be purchas’d or Work got done of almost any kind, for 100£ then, as will now require or is now worth 600£.

In the next Place let us consider the Nature of Banks emitting Bills of Credit, as they are at this Time used in Hamburgh, Amsterdam, London and Venice.

Those Places being Seats of vast Trade, and the Payment of great sums being for that Reason frequent, Bills of Credit are found very convenient in Business; because a great Sum is more easily counted in Them, lighter in Carriage, concealed in less Room, and therefore safer in Travelling or Laying up, and on many other Accounts they are very much valued. The Banks are the general Cashiers of all Gentlemen, Merchants, and great Traders in and about those Cities; there they deposit their Money, and may take out Bills to the Value, for which they can be certain to have Money again at the Bank at any Time: This gives the Bills a Credit; so that in England they are never less valuable than Money, and in Venice and Amsterdam they are generally worth more. And the Bankers always reserving Money in hand to answer more than the common Run of Demands (and some People constantly putting in while others are taking out) are able besides to lend large Sums, on good Security, to the Government or others, for a reasonable Interest, by which they are paid for their Care and Trouble; and the Money which otherwise would have lain dead in their Hands, is made to circulate again and thereby among the People: and thus the Running Cash of the Nation is as it were doubled; for all great Payments being made in Bills, Money in lower Trade becomes much more plentiful: And this is an exceeding great Advantage to a Trading Country, that is not over-stock’d with Gold and Silver.

As those who take Bills out of the Banks in Europe, put in Money for Security; so here, and in some of the neighbouring Provinces, we engage our Land. Which of these Methods will most effectually secure the Bills from actually sinking in Value, comes next to be considered.

Trade in general being nothing else but the Exchange of Labour for Labour, the Value of all Things is, as I have said before, most justly measured by Labour. Now suppose I put my Money into a Bank, and take out a Bill for the Value; if this Bill at the Time of my receiving it, would purchase me the Labour of one hundred Men for twenty Days; but some time after will only purchase the Labour of the same Number of Men for fifteen Days; it is plain the Bill has sunk in value one fourth Part. Now Silver and Gold being of no permanent Value; and as this Bill is founded on Money, and therefore to be esteemed as such, it may be that the Occasion of this Fall is the increasing Plenty of Gold and Silver, by which Money is one fourth Part less valuable than before, and therefore one fourth more is given of it for the same Quantity of Labour; and if Land is not become more plentiful by some proportionate Decrease of the People, one fourth Part more of Money is given for the same Quantity of Land, whereby it appears that it would have been more profitable to me to have laid that Money out in Land which I put into the Bank, than to place it there and take a Bill for it. And it is certain that the Value of Money has been continually sinking in England for several Ages past, because it has been continually increasing in Quantity. But if Bills could be taken out of a Bank in Europe on a Land Security, it is probable the Value of such Bills would be more certain and steady, because the Number of Inhabitants continue to be near the same in those Countries from Age to Age.

For as Bills issued upon Money Security are Money, so Bills issued upon Land, are in Effect Coined Land.

Therefore (to apply the Above to our own Circumstances) If Land in this Province was falling, or any way likely to fall, it would behove the Legislature most carefully to contrive how to prevent the Bills issued upon Land from falling with it. But as our People increase exceedingly, and will be further increased, as I have before shewn, by the Help of a large Addition to our Currency; and as Land in consequence is continually rising, So, in case no Bills are emitted but what are upon Land Security, the Money-Acts in every Part punctually enforced and executed, the Payments of Principal and Interest being duly and strictly required, and the Principal bona fide sunk according to Law, it is absolutely impossible such Bills should ever sink below their first Value, or below the Value of the Land on which they are founded. In short, there is so little Danger of their sinking that they would certainly rise as the Land rises, if they were not emitted in a proper Manner for preventing it; that is, by providing in the Act That Payment may be made, either in those Bills, or in any other Bills made current by any Act of the Legislature of this Province; and that the Interest, as it is received, may be again emitted in Discharge of Publick Debts; whereby circulating it returns again into the Hands of the Borrowers, and becomes Part of their future Payments; and thus as it is likely there will not be any Difficulty for want of Bills to pay the Office, they are hereby kept from rising above their first Value; For else, supposing there should be emitted upon mortgaged Land its full present Value in Bills; as in the Banks in Europe the full value of the Money deposited is given our in Bills; and supposing the Office would take nothing but the same Sum in those Bills in Discharge of the Land; as in the Banks aforesaid, the same Sum in their Bills must be brought in, in order to receive out the Money: In such Case the Bills would most surely rise in Value as the Land rises; as certain as the Bank Bills founded on Money would fall if that Money was falling. Thus if I were to mortgage to a Loan-Office, or Bank, a parcel of Land now valued at 100£ in Silver, and receive for it the like Sum in Bills, to be paid in again at the Expiration of a certain Term of Years; before which, my Land rising in Value becomes worth 150£ in Silver: ‘Tis plain, that if I have not these Bills in Possession, and the Office will take nothing but these Bills, or else what it is now become worth in Silver, in Discharge of my Land; I say it appears plain, that those Bills will now be worth 150£ in Silver to the Possessor; and if I can purchase them for less, in order to redeem my Land, I shall by so much be a Gainer.

I need not say any Thing to convince the Judicious that our Bills have not yet sunk, tho’ there is and has been some Difference between them and Silver; because it is evident that that Difference is occasioned by the Scarcity of the latter, which is now become a Merchandize, rising and falling, like other Commodities, as there is a greater or less Demand for it, or as it is more or less Plenty.

Yet farther, in order to make a true Estimate of the Value of Money, we must distinguish between Money as it is Bullion, which is Merchandize, and as by being coin’d it is made a Currency: For its Value as a Merchandize, and its Value as a Currency, are two distinct Things; and each may possibly rise and fall in some Degree independent of the other. Thus if the Quantity of Bullion increases in a Country, it will proportionably decrease in Value; but if at the same Time the Quantity of current Coin should decrease, (supposing Payments may not be made in Bullion) what Coin there is will rise in Value as a Currency, i.e. People will give more Labour in Manufactures for a certain Sum of ready Money.

In the same Manner must we consider a Paper Currency founded on Land; as it is Land, and as it is a Currency

Money as Bullion, or as Land, is valuable by so much Labour as it costs to procure that Bullion or Land.

Money, as a Currency, has an Additional Value by so much Time and Labour as it saves in the Exchange of Commodities.

If, as a Currency, it saves one Fourth Part of the Time and Labour of a Country; it has, on that Account, one Fourth added to its original Value.

When there is no Money in a Country, all Commerce must be by Exchange. Now if it takes one fourth Part of the Time and Labour of a Country, to exchange or get their Commodities exchanged; then, in computing their Value, that Labour of Exchanging must be added to the Labour of manufacturing those Commodities: But if that Time or Labour is saved by introducing Money sufficient, then the additional Value on Account of the Labour of Exchanging must be abated, and Things sold for only the Value of the Labour in making them; because the People may now in the same Time make one Fourth more in Quantity of Manufactures than they could before.

From these Considerations it may be gathered, that in all the Degrees between having no Money in a Country, and Money sufficient for the Trade, it will rise and fall in Value as a Currency, in Proportion to the Decrease or Increase of its Quantity: and if there may be at some Time more than enough, the Overplus will have no Effect towards making the Currency, as a Currency, of less value than when there was but enough; because such Overplus will not be used in Trade, but be some other way disposed of.

If we enquire, How much per Cent. Interest ought to be required upon the Loan of these Bills; we must consider what is the Natural Standard of Usury: And this appears to be, where the Security is undoubted, at least the Rent of so much Land as the Money lent will buy: For it cannot be expected that any Man will lend his Money for less than it would fetch him in as Rent if he laid it out in Land, which is the mose [most] secure Property in the World. But if the Security is casual, then a kind of Ensurance must be enterwoven with the simple natural Interest, which may advance the Usury very conscionably to any height below the Principal it self. Now among us, if the Value of Land is twenty Years Purchase, Five per Cent. is the just Rate of Interest for Money lent on undoubted Security. Yet if Money grows scarce in a Country, it becomes more difficult for People to make punctual Payments of what they borrow, Money being hard to be raised; likewise Trade being discouraged, and Business impeded for want of a Currency, abundance of People must be in declining Circumstances, and by these Means Security is more precarious than where Money is plenty. On such Accounts it is no wonder if People ask a greater Interest for their Money than the natural Interest; and what is above is to be look’d upon as a kind of Praemiumfor the Ensurance of those Uncertainties, as they are greater or less. Thus we always see, that where Money is scarce, Interest is high, and low where it is plenty. Now it is certainly the Advantage of a Country to make Interest as low as possible, as I have already shewn; and this can be done no other way than by making Money plentiful. And since, in Emitting Paper Money among us, the Office has the best of Security, the Titles to the Land being all skilfully and strictly examined and ascertained; and as it is only permitting the People by Law to coin their own Land, which costs the Government nothing, the Interest being more than enough to pay the charges of Printing, Officers Fees, &c. I cannot see any good Reason why Four per Cent. to the Loan-Office should not be thought fully sufficient. As a low Interest may incline more to take Money out, it will become more plentiful in Trade; and this may bring down the common Usury, in which Security is more dubious, to the Pitch it is determined at by Law.

If it should be objected, That the Emitting It at so low an Interest, and on such easy Terms, will occasion more to be taken out than the Trade of the Country really requires: It may be answered, That, as has already been shewn, there can never be so much of it emitted as to make it fall below the Land it is founded on; because no Man in his Senses will mortgage his Estate for what is of no more Value to him than That he has mortgaged, especially if the Possession of what he receives is more precarious than of what he mortgages, as that of Paper Money is when compared to Land: And if it should ever become so plenty by indiscreet Persons continuing to take out a large Overplus, above what is necessary in Trade, so as to make People imagine it would become by that Means of less Value than their mortgaged Lands, they would immediately of Course begin to pay it in again to the Office to redeem their Land, and continue to do so till there was no more left in Trade than was absolutely necessary. And thus the Proportion would find it self, (tho’ there were a Million too much in the Office to be let out) without giving any one the Trouble of Calculation.

It may perhaps be objected to what I have written concerning the Advantages of a large Addition to our Currency, That if the People of this Province increase, and Husbandry is more followed, we shall overstock the Markets with our Produce of Flower, &c. To this it may be answered, that we can never have too many People (nor too much Money) For when one Branch of Trade or Business is overstocked with Hands, there are the more to spare to be employed in another. So if raising Wheat proves dull, more may (if there is Money to support and carry on new Manufactures) proceed to the raising and manufacturing of Hemp, Silk, Iron and many other Things the Country is very capable of, for which we only want People to work, and Money to pay them with.

Upon the Whole it may be observed, That it is the highest Interest of a Trading Country in general to make Money plentiful; and that it can be a Disadvantage to none that have honest Designs. It cannot hurt even the Usurers, tho’ it should sink what they receive as Interest; because they will be proportionably more secure in what they lend; or they will have an Opportunity of employing their Money to greater Advantage, to themselves as well as to the Country. Neither can it hurt those Merchants who have great Sums out-standing in Debts in the Country, and seem on that Account to have the most plausible Reason to fear it; to wit, because a large Addition being made to our Currency, will increase the Demand of our Exporting Produce, and by that Means raise the Price of it, so that they will not be able to purchase so much Bread and Flower with 100£ when they shall receive it after such an Addition, as they now can, and may if there is no Addition: I say it cannot hurt even such, because they will get in their Debts just in exact Proportion so much the easier and sooner as the Money becomes plentier; and therefore, considering the Interest and Trouble saved, they will not be Losers; because it only sinks in Value as a Currency, proportionally as it becomes more plenty. It cannot hurt the Interest of Great Britain, as has been shewn; and it will greatly advance the Interest of the Proprietor. It will be an Advantage to every industrious Tradesman, &c. because his Business will be carried on more freely, and Trade be universally enlivened by it. And as more Business in all Manufactures will be done, by so much as the Labour and Time spent in Exchange is saved, the Country in general will grow so much the richer.

It is nothing to the Purpose to object the wretched Fall of the Bills in New-England and South-Carolina, unless it might be made evident that their Currency was emitted with the same Prudence, and on such good Security as ours is; and it certainly was not.

As this Essay is wrote and published in Haste, and the Subject in it self intricate, I hope I shall be censured with Candour, if, for want of Time carefully to revise what I have written, in some Places I should appear to have express’d my self too obscurely, and in others am liable to Objections I did not foresee. I sincerely desire to be acquainted with the Truth, and on that Account shall think my self obliged to any one, who will take the Pains to shew me, or the Publick, where I am mistaken in my Conclusions, And as we all know there are among us several Gentlemen of acute Parts and profound Learning, who are very much against any Addition to our Money, it were to be wished that they would favour the Country with their Sentiments on this Head in Print; which, supported with Truth and good Reasoning, may probably be very convincing. And this is to be desired the rather, because many People knowing the Abilities of those Gentlemen to manage a good Cause, are apt to construe their Silence in This, as an Argument of a bad One. Had any Thing of that Kind ever yet appeared, perhaps I should not have given the Publick this Trouble: But as those ingenious Gentlemen have not yet (and I doubt never will) think it worth their Concern to enlighten the Minds of their erring Countrymen in this Particular, I think it would be highly commendable in very one of us, more fully to bend our Minds to the Study of What is the true Interest of PENNSYLVANIA; whereby we may be enabled, not only to reason pertinently with one another; but, if Occasion requires, to transmit Home such clear Representations, as must inevitably convince our Superiors of the Reasonableness and Integrity of our Designs.

B. B.

Philadelphia, Arpil [sic] 3, 1729.

FINIS.

Figure 1: Personal and mutual fund cumulative acquisition of corporate equities

In the jilted age of cynicism towards our institutions, the enormous success of capitalism over the past 60 years can be summed into the above chart.  It represents the cumulative effect of households systematically investing in equities, and then selling them at higher prices.

Figure 2: Personal cumulative acquisition of equities and mutual funds

Secondary to this story is the continual shift away from direct equity ownership into mutual funds.

What is most striking, however, is the fact that the non-financial corporate sector has operated almost entirely without outside capital for the past decade:

Figure 3: Cumulative Net Capital raised 2000 to now

Contrast this the 90s, where equity issuance went negative in the latter half, but companies still raised capital on the credit markets:

Figure 4: Cumulative Net Capital Raised 90s

You haven’t spent much time on the finance blogosphere if you haven’t seen the conspiracy theories surrounded evaporating trading volumes.  The simple fact is that companies have contracted equity supply.

Moreover, the need for outside capital has nearly vanished.

Fiscal and Monetary Policy Accommodation model estimate

While not the only driver of economics and asset returns, policy-making has a great deal of influence over growth and prices.  In order to estimate its effects, we generalise both monetary and fiscal policy to a percentage which represents how loose or tight policy is at a given point.

We do this by regressing coincident macro variables against policy outcomes, and subtracting the realised policy outcomes from the model.  The residual leaves us with the relative tightness of policy which contributed to the growth outcomes for that time period.

A neutral (0%) policy stance does not represent zero growth, but sample trend growth, +2.5%.  Ergo, slightly negative (tight) values do not necessarily indicate a negative growth stance.

The reasons for recession and growth extend far out the generalisation of policy relative tightness.  Policy-making really just shapes what trends deliver at the margin.

The chief observation is that, relative to the economic variables, fiscal policy actually has been tighter under the Obama administration than under George W Bush.

F1: Per capita Initial Claims now in most desirable 30% of historical readings

With leading indicators like per-capita initial claims edging into the top 30% of all desirable readings (figure 1), the unemployment rate at a post-recession low of 7.8%, and the S&P 500 now less than 10% from its pre-bust peak, the question we now have is: what now?

We have been waiting for the labour, asset and home markets to clear for three and a half years.

For most of it, the United States seemed like it was slipping into the same class of economic malaise that Japan had suffered, and a close cousin to that of The Great Depression.

The policy response, both fiscal and monetary, seemed to only stem the tide to provide relief from the most acute effects, while the underlying economy was left in the muck.

It takes time for markets to clear after great disequilibrium.  “Green shoots” began to appear in early 2010:  inventories had been drawn down to unsustainably low levels, and governments internationally, having learnt something from studying The Great Depression, had prevented a death spiral.  Overtime increased to compensate for the low inventory levels.  Production rose.  Then payrolls began to return.  The corporate cash hoards began to invest, if not in new capacity, in greater efficiency.  Lending standards incrementally eased with employment fundamentals.

F2: New Privately Owned Housing Unit Starts %-y/y vs Real GDP %-y/y

While the United States saw asset markets clearing with progressive improvement, the labour, credit and housing markets had been stubbornly over-supplied.

The past few months have provided a strong indication that those markets are finally clearing.

The principal question now is whether the US economy will continue to muddle through, or whether the pace of market clearing will lead to more a more virtuous cycle.

We examine auto sales and new home starts (figure 2) because they provide evidence of spending with multiplicative effect, which is the favoured fuel for the virtuous cycle fire.

F3: Inflation converges on Wage-growth

The next step in recovery is for the pace of wage-growth to recover.  As we’ve already established, consumer price levels are governed by wage levels (figure 3).

We previously observed that the rate of wage-growth actually falls in the first leg of a recovery.  Our hypothesis is that the first group of employees to be hired back have minimal bargaining power.

F4: Layoffs & discharges as % of the civilian labour force

The relative bargaining power labour has to command higher wages may be on its way to increasing.  The percentage of labour force which was laid-off & discharged is presently at historical lows.  At 1.05%, only 11% of readings are lower (figure 4).

Indeed, the skills gap which exists in that unemployed buffer stock may in fact slow down employment growth at the same time as the already-employed command higher wages.

F5: The relationship we observe between the unemployment rate & wage-growth is not Wg = -Ur, but rather Wg = 1/Ur

Examining the relationship between unemployment and wage-growth (figure 5), we observe that (Wg = -Ur) is not true, but rather that (Wg = 1/Ur).  This is a significant observation:  the convexity of wages in price/wage spirals behave like any other commodity against supply limits with short-run inelastic demand.

To view this relationship between payroll growth, we normalise Non-farm Payrolls %-y/y and Personal Income %-y/y, and observe a leading relationship.  The result is somewhat surprising – is indicative of much higher

F6: Normalised payroll growth and personal income growth

Personal Income growth (figure 6).

It may be even more surprising that the bond market is also predicting somewhat higher wage-growth and inflation than at present.

This is not reflected in the absolute yields, or real rates net of inflation or wage-growth, but is visible in the 1s2s5s10s Treasury curve (figure 7).

This curve is one of the few things that has forecasting value over future wage-growth.  The sharp decline in wage-growth looks very much like the mid-80s, and the temporary deviation between wage-growth and the Treasury curve was followed up by a strong increase in

F7: 1s2s5s10s leads Wage-growth

wage-growth pace.

The recovery portion of this economic cycle has been dreadfully slow.  For some time after the recession officially ended, it appeared we would never see growth again.

Swinging into a higher pace of wage-growth will close out the first chapter of this economic cycle.  Demographics and capital structure will probably make for unimpressive mid-cycle growth, but so far, we really have been following the script of a recovery — just very slowly.

There is still political risk.  Japan attempted to cut back government spending, and combined with the Asian financial crisis, it set them back a decade.  The analogue between the United States and Japan, however, diverges in two key places:  the demographics of Japan are far grimmer than in the United States, and the bubble was much larger.

It still may take some more clearing in employment, credit and housing markets, but the table has been set to transition from recovery to mid-cycle.  Wage-growth climbing back up above the 2% level will be the sign I’m looking for to turn the page.