Tuesday night on the Daily Show, Alan Greenspan, former Chairman of the Board of Governors of the Federal Reserve (1987-2006) was asked a fundamental question about the rewards of capitalism and how they're affected by the federal interest rate.
The US switched from a gold standard to the federal interest rate system we have today. For the sake of argument, let's say that $1 holds the value of one gram of gold. When the feds lower the interest rates by 0.5%, during an economic recession, after 9/11 for example, the actual value of $1 depreciates to 0.995 grams of gold. It may not seem like much, but this artificial inflation is able to stabilize the stock markets by increasing the dollar costs of stocks, even though the value has not changed.
While this is supposedly beneficial for the market in the short run, it has the opposite effect on salaried and wage workers. They are paid the same dollar amount, but the value of those dollars, thus the value of the work - goods or services they provide - has diminished. It's almost like getting a 0.5% pay cut.
Additionally, the interest rates of bank accounts - workers' savings - are correspondingly reduced. So the dollar amount one saves in a bank has less value, and there is less return for account holders.
But at least the Dow Jones is back over 13,000, right? The perception that the US economy (embodied by the stock market) is doing alright distracts workers (other than investors) from the reality of the depreciation of the value of their work as well as their savings.
It's also worth examining the US Treasury's change from the gold standard, especially in relation to developmental economics. When top American economists and organizations like the IMF or World Bank attempt to pull struggling economies out of "dark ages" and into a US-modeled free market economy, they strongly encourage the use of the gold standard. However, as Greenspan notes, "the gold standard was strangling the economy" and in its place, "you need somebody to determine, or some mechanism of how much money is out there." So in countries like Bolivia and Poland in the 1980s, the gold standard was introduced to control inflation and make their economies more like the American "free market" model, which doesn't even use the gold standard, employing this other mechanism of inflation control.
Stewart: So we're not a free market then, there is an invisible, a benevolent hand that touches us.
Greenspan: Absolutely, you're quite correct, to the extent that there is a central bank governing the amount of money in the system. That is not a free market...
Stewart: It seems to me that we favor investment, but we don't favor work. The vast majority of people work and they pay payroll taxes and they use banks. And then there's this whole other world of hedge funds and short betting and...it seems like craps. And they keep saying, "No, no, no, don't worry about it! It's free market! That's why we live in much bigger houses." But it really isn't [a free market] it's the fed, or some other thing, no?
Greenspan goes on to give his spin on the regulation required of a free market and the stabilization it necessitates. Government regulation reduces the uncertainty of the market, without which "economic activity, which is really dealing with people, just goes straight down."
Apparently a successful "free" market relies on fear, euphoria, and strict regulation.
More of this to be elaborated on later, including the laws of surplus value and necessary value...