"Then he dealt his final blow. His new banking law permitted the government to regulate the percentage of fractional reserves that private banks were required to keep on hand to meet withdrawals by depositors. As you may know if you have studied the banking laws of your period, the so-called fractional reserve was a dodge whereby a banker could loan money he didn't have and never had. It actually permitted him to create new money, based not on gold, nor on his own credit, but on the credit of his customers. LaGuardia proceeded to regulate with a vengeance. He ordered fractional reserves increased in a program that called for one hundred per cent reserves at the end of three years. The disgruntled bankers made a test case and took it to the Supreme Court. The Solicitor-General argued that the law and the order made under its authority were not only constitutional but that fractional reserves as hitherto used were clearly in violation of the constitutional provision giving Congress the sole right to coin money and regulate the value thereof. The Court upheld the administration on all counts in a famous decision written by Mr. Justice Frankfurter, and the manipulation of the money power was destroyed in the United States."
"Then private banks were destroyed?"
"Not entirely. They remained a useful institution for some people as depositories for they soon offered services to their customers that the Bank of the United States did not give. If you like to have your deposits received by messenger at your home or want to cash a check in the middle of the night, the private bankers will gladly oblige. And there was still plenty of room for speculative credit pools for people who wished to risk their capital in expectation of high return. The banks continue to lend money at high rates where the risk is great and not easily figured, but they have to lend real money now, not stuff that they draw out of the ink well. The fractional reserves decision put an end to that. You will find what an important part the speculative bankers played in the penetration of South America. They still play an important role. They supply an element of private initiative and enterprise in industry that government cannot hope to provide."
"What about the South American penetration? The records were rather vague or perhaps I had gotten out of my depth."
"Some historians call it rape rather than penetration. Up until 1970 the United States had been steadily losing ground in South America. During the reign of Edward Europe grew steadily more industrialized and found her greatest market in South America. The Asiatic market had been worthless since the 1930's and South America with its raw materials was in a position to reciprocate. On the other hand the United States was an agricultural export nation, and this annoyed several South American states, especially Argentina. But the Forty Years War changed all this. The United States had undergone an economic improvement as a result of the Banking Act which had decreased the spread between production and consumption by lowering the percentage of the cost charges, in a commercial article, unavailable for purchasing power."
"I don't follow you."
"I suggest that you note it down and wait until you study the current economic system. You were probably educated in the conventional economic theories of your period which were magnificent and most ingenious, but—if you will pardon me saying so—all wrong. But to return to our muttons; the improved economic condition produced the usual political reaction and a conservative administration was elected after LaGuardia. There still remained however considerable spread between production and consumption. It had always been the conventional point of view, especially in the economic beliefs of the Conservative Party, that a prosperous nation required a favorable trade balance or gold balance as it was formerly called. In simple language that means that a country is best off when it exports more than it imports. Phrased in that way it sounds silly, for it is surely evident that a country that ships out more than it takes in gets poorer every year in terms of real wealth. Nevertheless there was an element of truth in it, a very practical truth at that time. The economic life was organized in such a comical fashion that each year the country produced goods of greater value than the people of the country were able to buy back and use up. This was known as over-production and many were the esoteric nonsensical things said about it. But the situation was that simple. The system of necessity produced more than it consumed. Of necessity. You can go into the mathematics of it later. Being an engineer you are bound to see the truth of it, and will probably be vastly amused by it."
"Do you mean to say that that was all there was wrong with business in the United States in my day?"
"That was all. And all of your labor troubles, and poverty, and physical suffering were as unnecessary as they were tragic."
"That seems preposterous. If it was as simple as that it could have been fixed. I could work out some scheme to fix it myself, half a dozen schemes. Why in the navy we wouldn't have put up with any such damn nonsense. Why didn't somebody see it?"
"Some people did, C.H. Douglas, Goulds Gainesborough, Bronson Cutting and a few others, but it was almost as difficult to convince people of the fact as it had been to convince an earlier generation that the world was round. In each case the fact was true and the fact was simple but the sturdy common sense of the man who had been brought up to believe in a flat earth or a 'favorable trade balance', rejected the truth. The socialists understood this truth of course, but they insisted that there was only one solution. There were many good solutions for so simple a problem. We believe nowadays that we have a solution more suited to the United States than socialism. But come, we are getting a long way off from South America.
"From 1970 to the turn of the century a partial solution was found. Our excess wealth was poured into our sister continent and it was developed as a new frontier. Gold mined from the Chilean Andes helped for a while to preserve the fiction of a favorable trade balance. After that and in addition to it, almost any sort of wildcat financing was acceptable that would keep up the flow of goods to the south. The private bankers turned to this rich field of exploitation and convinced the public that the new El Dorado lay under the Southern Cross. The whole shaky business piled up until practically the entire continent was mortgaged to the skies in return for goods that we couldn't use ourselves and would have poisoned us if we had kept them. But the Latin temperament had a simple solution. I sometimes wonder whether it was planned or was the inevitable result of the circumstances. But when the due day came each government folded up and a new government calmly repudiated the commitments of its predecessor.
"The first incident of the A.-B.-C. War occurred in 2002 April. The Argentine government had refused to recognize its debts to us both public and private, and several stiff notes had been exchanged. Our South American squadron was ordered to Buenos Aires. Chile and Brazil each informed the United States that any display of force in Argentina would be regarded as an unfriendly act.
"Nevertheless the squadron was not recalled. It steamed into the harbor and had no more than anchored, two old aircraft carriers and an odd dozen of minor craft, when it was attacked from the air and sunk to the last man, before a plane could rise. We don't know yet who did it, but we do know that both the Chilean and Brazilian navies and air fleets had made a rendezvous some two hundred kilometers off Buenos Aires."