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Raw Material Economics: Lesson 7

By Charles Walters

This is an excerpt from Paul’s book Raw Material Economics, published by Acres U.S.A.
Reprinted with permission from the publisher.

Any eclectic reader must restate its premises routinely before moving on to higher ground. Carl H. Wilken did this with his many publications and with the figures furnished by the government’s data collectors.

“The American people have become a group of specialists,” said Wilken. “and have forgotten that each group is interwoven with every other group in the indivisible economy of the United States. As special groups gain advantage over each other, they immediately find that other sectors of our economy—those which furnish the markets—do not keep pace with them in the consumption of goods, and they all fall back into what is usually called a depression. In fact, a depression is nothing more than an unequal price balance between groups. With an ample supply of raw materials and labor, proper pricing of goods and services should automatically create the income to exchange and consume our production.”

Here, in edited abstract form, are Wilken’s foundation concepts.

         It is a simple fact that the financial measure of our economic welfare, whether individual, corporate or governmental, consists of adding up two columns of figures—income and disbursements. Regardless of what our theories may be, these two totals tell the story of our economic well-being.

         Income consists of primary bartering power, which is created by the production and sale of new wealth—things obtained from the earth, farms, mines and seas—and earned income, which is derived from wages, interest and profits.

         Disbursements include everything on the “outgo” side of the ledger, whether the accounts of an individual or the government. Even the wages and salaries of those in public service must be regarded as disbursements, since public employees are not producers of wealth.

         The amount of primary bartering power, or primary income, depends upon two things—the number of units produced and the price received for them by the producer. In the processing industries and professions, the amount of income is governed by hours or days of labor time the rate of pay. It is therefore fundamentally necessary that the total annual production of goods and services rendered, times prices, plus wagers interest, fees and profits must create an income large enough to pay for all the costs of operating the nation as a business. The total must pay for the costs of government, pay the cost of producing raw materials and for their processing and distribution..

         Our problem has not been on of production, but of distribution. We have been unable to get the necessary distribution of income, which in turn is ability to buy, into the hands of consumers. Our problem, then, is to put more dollars in the hands of the consuming public. This can e done only by increasing the number of units of production and by maintaining proper prices for the goods produced and of course by maintaining wages, fees, profits, interest rates, all of which supply income and in turn purchasing power.

How, then, could money be withdrawn form the capital reservoir soundly? There was only one way, Wilken argued. “The sound method of drawing money from the capital reservoir is by the annual production and sale of goods and service.” In other words—by earning it.

Wilken used a bushel of corn as an example. When the primary producer, the farmer, took the corn to market, the first stop in the distribution system became a fact. The elevator operator was equipped with capital that had been created through the years of an expanding economy, and the savings of people. With his capital he helped make up, and in fact was a part of, the reservoir of credit dollars. When the price of corn was eighty cents a bushel, the elevator operator drew eighty cents out of the capital reservoir and paid the farmer for the corn, and to him the eighty cents constituted new money, money that offset the bushel of corn now a part of the economy. The eighty centers did not have to be repaid by the farmer.

But, when the price of corn was only forty cents a bushel, the elevator operator drew only about forty cents from the capital reservoir, and simple arithmetic tells us that the flow of money from the reservoir in that case is just half as large as when the corn is priced at eighty cents.

Unfortunately, businessmen think as businessmen must. Their psychology tells them that profits are predatory, and not participation in the welfare of the whole. Thus, the ritualistic attack on parity and the banker’s love affair with debt. Using economic mythology as a smokes screen, the equation is made to appear as a charade wherein producers have merely to resent collateral security and pay interest to lenders. These lenders then create money out of thin air so that borrowers can produce at the expense of the entire community. There is a problem with all of this. No money is created to make distribution possible. Obviously it is as important to supply money to consumers so that they can consume as it is to create money so producers can produce. Obviously, also, the business of larding out new money always into the production side of the equation tends to cause consumption to falter.

It is this business of creating pure smoke money for one sector of the economy, and denying earnings to another sector, that has established the principle that inventory buildup results in faltering parity, when in fact faltering farm parity results in inventory buildup.

About the Author

Charles Walters founded Acres U.S.A. and completed more than a dozen books as he edited the Acres U.S.A. magazine, while co-authoring several more. A tireless traveler, Walters journeyed around the world to research sustainable agriculture, and his trip to China in 1976 inspired others. By the time of his death in 2009, Charles Walters could honestly say he changed the world for the better.