"Okay." Perry placed ten chips on 'US'.
"Now I'll act for Uncle Sam and pay the public servants four shekels, buy raw materials for four shekels, and use two shekels to buy consumption goods from you."
"Here you are." Perry handed Davis a playing card who placed it on 'US' and gave Perry the remaining two chips.
"Now sell goods to 'Public servants' and 'Owners of raw materials'."
Perry did so, handing out four cards and receiving back eight shekels.
"Now pay the interest on your loan. You'll be doing so in the course of the time period."
"Okay, here's ten shekels."
Davis placed them in the bank. "The banker, with his family, clerks, and so forth, needs some consumption goods. Here are two shekels." Perry solemnly received them and proffered one card to Davis.
"Now pay yourself your profit of eight shekels. Turn it over to your wife. She handles the money in your household. She takes it and spends it for consumption goods." Perry took eight shekels, placed it by the black queen, then picked it up again and placed it by the black king, and placed four cards under the black queen. Davis added a comment. "That operation is symbolic of thousands of wives of entrepreneurs spending their husbands incomes on all manners of goods produced in thousands of factories.
"The eon is over. The cycle is finished. Your factory has depreciated to no value at all. I must remind you that your note is due at the bank."
"Wait a minute. Why do you assume that the factory is now worthless?"
"It isn't necessary. Had you figured for a shorter period, the cost item labeled 'Factory' would have been just the percentage of depreciation during the shorter period. There would have been a smaller number of articles manufactured, smaller items in all respects. The final cost per unit would have been the same, but we decided to run through a full cycle, from the beginning to the end of a producing unit. But come, come, you are stalling for time. What about my note? You owe me one hundred shekels."
Perry counted up his chips and grinned at him. "You'll have to whistle for it. I have only ninety-two shekels. I have four playing cards you can have for the balance."
"I've no use for playing cards. I'm a banker and I have your promise to pay."
Perry shrugged his shoulders and did not reply.
Davis continued. "Very well let's get on with the next stage of the game. You have four units of 'over-production' and can't quite pay your note at the bank. But your banker respects your ability. Your original security is still good, and the banker says that conditions are essentially 'sound'. He re-finances you to go into production again. You sign a new note, this time for one hundred and eight shekels and now have one hundred shekels to your account. But your banker cautions you not to be guilty of 'over-production'. You go away, feeling somewhat confused as you don't see where you made your mistake, but the banker must be right for you certainly were left with four playing cards that you could not sell. You decide that the market only requires fifty-nine cards instead of the sixty-three you produced. So you do it all over again, producing only fifty-five cards which with your carry over of four gives you fifty-nine to sell. What is the result?"
"Why, I come out even I suppose."
"Do you? Last time you spent forty-four shekels on wages and thirty shekels on materials to build sixty-three playing cards. How much do you spend this time?"
"Let me see. Forty-four and thirty is seventy-four. The labor and materials cost per unit is one sixty-third of that." Perry set it up on his slide rule. "It comes to one point one one seven five (1.1175) shekels per card. I'm producing fifty-five cards this time. Fifty-five times one point one seven five is sixty-four and seven-tenths shekels."
"Those people bought thirty-seven cards with their seventy-four shekels last time. What can they buy this time?"
"Thirty-two and a fraction."
"Exactly. You sell your best market five fewer cards than last time. As a result of doing the only reasonable thing, you have more cards left over than before, you've thrown some people out of work, you have created less real wealth for the community to use and you are even farther from being able to pay off your note at the bank for you now owe one hundred and eight shekels and have only ninety-one with which to pay."
"Ninety-one? I figured ninety-two."
"No, ninety-one? Perhaps you forgot that your interest is eleven shekels on a hundred and eight."
"That's right. I figured ten, like last time. Now what happens? It looks like I'm going broke."
"Wait a bit. Do you see what caused the original 'overproduction'?"
"Why yes, the banker got money out of me that he didn't turn around and spend with me. Everybody else spent their money as it came in."
"Then what's the trouble?"
"Well, it looks to me as if it was the interest you expected me to pay. If I hadn't had to pay you that interest I'd have come out even."
"Not so fast. They weren't exactly equal and could not therefore have been the same thing. Even bankers have to eat. Why should he run a bank if he isn't paid to do it? Tell me, what would the effect have been if anyone else had saved part of his income instead of spending it?"
"Ohhhoh!" Perry slapped his thigh. "I see! If anyone saves income that he receives from the cycle, it is thrown out of balance and over-production results."
"Exactly. In the problem that we have just gone through I cast the banker as the thrifty villain simply because banks were the worst offenders. They charged as much interest as they could get, and spent very little on consumption, whereas the workers, by and large, had to spend all they got as they went along. But all were guilty of the economic crime of not spending all their purchasing power and thereby saving themselves into bankruptcy, even a father with his life insurance policy and baby with his penny bank."
"Wait a minute, Master Davis. It seems to me that money saved eventually finds its way back into purchasing, even after several years. It all balances out in time. There should have been some consumers spending their savings in that first cycle to make up for those who managed to save."
"There were, of course. If savings are actually tucked away in a sock, it doesn't do much harm. It balances out with just a small carry over of inventories. But most money is not saved that way. Ordinary people invest in life insurance and savings accounts. Industrialists and financiers put it into capital expansion—use it to increase production. In each case it goes into new production."
"But how can that be harmful? We have just shown that money used for production creates new purchasing power to buy the goods produced."
"That's true but you are looking at just one part of the picture. Listen to me carefully. This is the crucial point: Potential purchasing power not spent for consumption but saved and invested for production in a later cycle has appeared as cost in both cycles. When it reappears as purchasing power in the second cycle, it is needed there, and still leaves the first cycle out of balance. For example, if money saved out of your playing card cycle were saved to finance a jelly bean production cycle every shekel of it would appear as cost in the jelly beans and would be needed to purchase jelly beans. It's not available to buy playing cards. To make this exposition rigorous I should mention the possibility that capital funds are occasionally spent on consumption and that money is sometimes taken out of production entirely, but this also produces unemployment and its attendant evils. The Panic of 1907 was of this nature, artificially created by the Morgan Bank and associated interests.
"But let's get back to your playing card factory. It is in trouble. These cycles continue. Each time the bank owns a bigger piece of your business and more of your employees are out of work. Eventually they are in dire distress and private charity cannot carry the load. Congress provides relief. At first Congress tries to pay for relief with new taxes but you business men howl that you are losing money now, which is true. Taxes on everybody—such as the sales tax—rob Peter to pay Paul, and increases purchasing power not a whit. It helps a little to tax the higher bracket incomes but in the long run that inhibits production by striking at a source of capital expansion. Congress is forced to look elsewhere for money to subsidize purchasing power and provide relief, for the spread between production and purchasing power has grown enormous, more than thirty percent in your day, billions of dollars a year. Some congressman from the middle west who cut his teeth on the Bryan campaigns proposes that the government print greenbacks to provide relief for the unemployed, but the bankers condemn this as 'unsound', 'inflationary', 'radical', 'striking at the roots of our institution'. They have great political power and carry their point. There is but one thing left to do and the government does it. It borrows for relief from the banks. True, the banks have very little cash money but the same law that permitted them to lend you money out of the inkwell enables them to lend to the government with the whole United States as security, the security being represented by interest-bearing tax-free bonds. The national debt climbs sky high but the system is held together a few more years, until the banks own practically everything, even the government."