News from the Network, Vol. 2, No. 22

As the economic situation worsens (despite the amount of whitewash the media pour on the situation) the level of activity in the Just Third Way and the Capital Homesteading movement seems to be picking up. Some of this is, no doubt, because more people are searching for answers in a world that seems to be growing ever shorter of them. If we look over the news items, however, we see that the bulk of activity is coming as a result of people taking the time to try and open doors so that the message of the Just Third Way can be communicated more effectively both to prime movers and to those who can get the Core Group to the prime movers.

• CESJ had its monthly Reports and News meeting today, Friday, May 29, 2009. A number of the items reported at the meeting are included in this posting.

• Norman Kurland traveled to New York City on Tuesday and met with David Walker, former Comptroller General of the United States. The meeting, arranged by some friends of CESJ, who also participated in the meeting, was very positive, and could lead to more meetings and contacts to open more doors to people who need to hear about Capital Homesteading and the Just Third Way as a solution to the financial crisis, the global debt burden, and provide a solid foundation for a just and humane future for all.

• The CESJ Mass Media Committee is in the process of formation. Ed Langhals of Williamsburg Revolutionary Radio has prepared a pro forma plan of organization and has sent it out for comment and input.

• We came across "Real Catholic TV," a network founded by graduates of the University of Notre Dame concerned with widespread ignorance among Catholics of their own faith. They got back to us almost immediately. CESJ has possible grounds for collaboration in a shared concern for the restoration of the natural law, the basis of Catholic social teaching.

• Norman Kurland agreed to set up an event covering financing health care in the "Organizing for America" network. Enthusiasm in the local area has been so marked as to close the event to additional people due to the potential of overflowing the available facility.

• We received a phone call from Michelle Ichigama in Atlanta, who is interested in applying a program similar to that designed for implementation in East St. Louis in Atlanta. She is also interested in the energy technology and its application within a program of expanded ownership of the means of production.

• Harriet Epstein set up a meeting with Rebecca Wales of the "Smart Girl Network," a group of conservative, politically-active women who started out taking Sarah Palin as a model, and who realize that there needs to be a new approach to politics.

• As of this morning, we have had visitors from 31 different countries and 41 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, with Canada, Brazil, and Egypt rounding out the "top five." People in Venezuela, Malaysia, Hungary, the Netherlands and the United States spent the most average time on the blog. The most popular postings are these news reports, with the postings on Judge Posner and the flaws in Keynesian economics rounding out the list.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

On Usury and Other Dishonest Profit, Part VII

As we have already discovered, redistribution through the tax system or by printing money does not address the problem underlying the current economic crisis. To be brief, the chief problem is the inability of many people to participate in the economic process by means of their labor and through direct ownership of the means of production.

That is, the reason people are not employed is because there are barriers that exist preventing them from either selling their labor, owning capital, or both, with the latter being far more common and much more critical. The Just Third Way addresses this problem by putting together three critical elements that most economic analysis omits:

1. Say's Law of Markets, that is, "production equals income." If you can't produce, you can't consume. If the economy is in a slump and goods and services remain unsold, it is because a significant number of people are not able to produce by means of their labor or capital, and thus do not have their own productions to exchange for the productions of others. Government redistribution, tax rebates, and inflation do not solve this problem, but make it worse.

2. Pure credit financing. Most economists and all politicians assume that capital can only be financed by cutting consumption, saving, then investing. This restricts ownership of capital to those who already own it, that is, to those who can afford to save. The assumption on which this is based is false. As Dr. Harold Moulton proved in his 1935 monograph, The Formation of Capital, a just and non-usurious commercial banking system can create money backed by the present value of a future stream of income to be generated by a new capital investment. Accumulated savings are not necessary for capital formation.

3. Binary economics. Because existing accumulations of savings (by definition a monopoly of the rich) are not necessary to finance capital formation, the rich can be left with their accumulations relatively intact, safe from the presumed need to redistribute. What needs to be redistributed is access to the means of acquiring and possessing property, a natural right specified in the Virginia Declaration of Rights of June 12, 1776. A program of widespread ownership of the means of production such as capital homesteading need not rely on redistributing what already belongs to somebody else. It can be based on extending new credit to people who currently lack ownership of sufficient capital to generate an adequate and secure income, and collateralized by capital credit insurance policies paid for with the standard risk premium already charged on loans.

We will start to see how these fit together in the next posting in this series.

On Usury and Other Dishonest Profit, Part VI

The problem is what to do about an unworkable economic system based on Keynesian economics. Unfortunately, the choices that are forced on most people aren't really much more than a thinly-disguised Hobson's Choice: either take what's offered, or nothing. To more and more people, however, "nothing" is starting to look better and better in comparison to Marxism, capitalism, or a continued reliance on the Great Defunct Economist, Lord Keynes.

Marxism, a system based on greed, seems to offer hope to many people. They pursue the ephemeral workers' paradise without realizing that Keynesian economics is about as close as any form of socialism can come to being workable — and it is clearly not working. In true Marxist fashion, they blame the greed of the capitalists and the stupidity of the bureaucrats for failure, and put all their trust in whatever hope for change can be promised by the latest political messiah, who will finally "soak the rich," bring down the false idols in the temples of capitalism, and give the workers their due, i.e., everything.

There are, nevertheless, many people who can see the inherent injustice of paying more for labor than it's worth, and the unfairness of forcing owners to assume all risk with no compensating reward. They tend to find solace in the prescriptions of Ayn Rand. Most particularly they find the capitalist paradise described in the fantasy world of Atlas Shrugged a virtual vision of heaven. Instead of working to come together in solidarity with others, they declare selfishness to be a virtue, greed to be beneficial, and (paradoxically) individualism to be the only common good.

There is, however, a way out — once we jettison unworkable Keynesian economics, and lay the groundwork for a more just system. As we mentioned in the previous posting, the principles of the new system are found in the work of four men: Jean-Baptiste Say, Harold G. Moulton, Mortimer J. Adler, and Louis O. Kelso, as well as in the Aristotelian natural law teachings best expressed in the three major monotheistic faiths, expounded by St. Thomas Aquinas, Moses Maimonides, and Ibn Khaldûn, and brought to fruition in the social doctrine of Pope Pius XI, ably analyzed and distilled by Father William J. Ferree, S.M., Ph.D., "America's greatest social philosopher."

On Usury and Other Dishonest Profit, Part V

The question is what to do about Keynesian economics. Keynesian economics is based on the assumption that people can spend what they have not earned, and consume what they have not produced or for which they have not traded their own production of goods and services. People can, presumably, be absolutely secure with respect to their incomes, with no risk other than the danger that the people who manage to produce will continue to play along.

The answer is . . . nothing. The fact is, Keynesian economics is based on false assumptions and profound misunderstandings of reality, especially the fundamental virtue of justice. No one can justly spend what he or she has not earned (charity is a separate case), nor can anyone justly consume what he or she has not produced or for which he or she has not traded his or her own production of goods and services. There can be no elimination of risk, an urge that is at the heart of usury. The usurer attempts to shift risk completely to the other party in his or her quest for completely risk-free gain.

Further, entitlements and fixed wage and benefits packages (low or high) — the backbone of a Keynesian system — violate distributive justice. As such, they are inherently usurious, if not (in some circumstances) actually usury. High fixed costs that are otherwise avoidable by shifting them to variable costs and spreading the risk violate justice by allowing others to take more than their due, and thereby destroy the basis of a stable social order. Low fixed costs that would otherwise result from a shift to variable costs and risk sharing violate justice by forcing others to take less than their due, and thereby destroy the basis of a stable social order.

Unfortunately, the system is arranged so that unions work tirelessly to achieve a situation where fixed costs for wages and benefits are high, often in excess of what the free market would determine to be fair and just, and there is no risk at all. On the other hand, the relatively few remaining capitalists work with equal dedication to drive fixed costs for wages and benefits below what a free and just market would determine, and eliminate their risk. In neither case is there any acceptance of the need to join together in solidarity and share both risk and rewards equitably. Greed and envy, two of the ugliest "seven deadly sins," are built into the system.

The problem is that many people do not see how things can be arranged differently. Given Keynes' assumptions, Chesterton's "Utopia of the Usurers" is not only here to stay, it must be continually extended, or face disaster. On the other hand, a system based on usury — distribution of production to people who have not earned it and who are not due it in either justice or charity (among which we must include non-dependents receiving wages or benefits in excess of their just due) cannot survive, either. Disaster seems inevitable, no matter what you do. In the next posting in this series, we will look at two unworkable, yet strangely popular solutions that are frequently recommended.

On Usury and Other Dishonest Profit, Part IV

Defined benefit pension plans seem like a great idea — when the economy is doing well and times are good. "Everybody knows" that "the corporations" have lots of money. It is only the muscle of organized labor backed up by the coercive power of the State that forces the capitalists to unclench their greedy fists and pay workers the wages and benefits they need to live in a decent manner.

Unfortunately, when the economy goes into a downturn, the high fixed wages and benefits which labor was able to wrest from capital can force into bankruptcy the companies that are legally obligated to make good on the wage and benefits packages. The result is that the companies can no longer meet their obligations. If the qualified plan is insured by the Pension Benefits Guarantee Corporation, or "PBGC," that agency takes over the administration of the plan and guarantees the Plan Participants a minimum level of benefits.

If too many companies get into trouble, however, and are forced to turn matters over to the PBGC, the obligation is imposed on the taxpayer . . . meaning the workers who no longer have jobs and can no longer pay taxes. The stock market declines in response to the greater demands on rich taxpayers who must divert investment capital to taxes. This, in turn, means few (if any) jobs are created, consumption declines further, and more companies are forced into bankruptcy, keeping the cycle spiraling downward.

The picture is equally grim for those companies that do not go bankrupt — immediately. Saddled with declining profits and high fixed costs, many companies begin to default on the required payments to retirement trusts. This causes a serious underfunding problem. The problem is made worse by the decline in the stock market, which drives down the value of the assets held in the trust.

To make up for the decline in the value of trust assets, the sponsoring company must increase payments to the trust to meet the fixed benefit obligation — out of profits it isn't making. This drives share values down even further as the underfunding problem increases in magnitude. This increases the non-productive liabilities of the sponsoring companies at a time when they cannot meet the ordinary liabilities incurred for productive purposes. Eventually this, too, ultimately results in bankruptcies, adding downward pressure on the economy.

Government bailouts and "stimulus packages" can take some of the pressure off for a while and even create the illusion that the problem is being solved. Unfortunately, that is not the case. A diseased economy, however well the technique might work for some medical problems, is not cured by treating the symptoms. An economy is "cured" by correcting the underlying problems. Government action can even add to the problem, not the least by decreasing incentives to search for financially feasible and politically viable solutions.

Is there a way out of this seeming paradox? We will look at that tomorrow by examining the work of four great thinkers who appear to have been ignored, brushed aside with no consideration, or attacked without reason or argument. This is because, in large measure, their conclusions differ from those of the powers-that-be, hypnotized by the glamour of Keynesian economics, which promises everything, and delivers nothing but failure. I refer to Jean-Baptiste Say (1767 to 1832), Harold Glenn Moulton (1883 to 1965), Mortimer J. Adler (1902 to 2001), and Louis O. Kelso (1913 to 1991).

On Usury and Other Dishonest Profit, Part III

Much of the confusion surrounding the "sudden" spate of bankruptcies to which high wage and benefit packages seem to have made substantial contributions has to do with widespread misunderstanding of something called "Say's Law of Markets." Say's Law, named for a late 18th, early 19th century political economist, Jean-Baptiste Say, states what some economists regard as a "near tautology," but which embodies a profound reality in its seeming simplicity. That is, "product = income."

Once we think about this simple equation, we realize the truth of it. Every time a "production" (i.e., a good or service) is sold, it represents income for the seller. The raw materials or supplies used by the seller to produce a good or service also resulted in income for the producer of the raw materials or seller of the supplies, and so on down the line. Thus, everything that is sold in the aggregate generates the aggregate demand to purchase it. Say's Law of Markets can therefore be expanded by saying that "supply generates its own demand, and demand its own supply."

Unions often characterize wage and benefits packages as labor's fair share of production. This is incorrect. Unless a worker supplying labor is also an owner, he or she is not entitled to a share of production, fair or otherwise. The wage contract is an agreement by an employer to purchase a worker's labor. The wage contract does not entitle a worker to anything more, or the employer to anything less:

"Of these duties, the following bind the proletarian and the worker: fully and faithfully to perform the work which has been freely and equitably agreed upon; never to injure the property, nor to outrage the person, of an employer; never to resort to violence in defending their own cause, nor to engage in riot or disorder; and to have nothing to do with men of evil principles, who work upon the people with artful promises of great results, and excite foolish hopes which usually end in useless regrets and grievous loss. The following duties bind the wealthy owner and the employer: not to look upon their work people as their bondsmen, but to respect in every man his dignity as a person ennobled by Christian character. They are reminded that, according to natural reason and Christian philosophy, working for gain is creditable, not shameful, to a man, since it enables him to earn an honorable livelihood; but to misuse men as though they were things in the pursuit of gain, or to value them solely for their physical powers — that is truly shameful and inhuman. Again justice demands that, in dealing with the working man, religion and the good of his soul must be kept in mind. Hence, the employer is bound to see that the worker has time for his religious duties; that he be not exposed to corrupting influences and dangerous occasions; and that he be not led away to neglect his home and family, or to squander his earnings. Furthermore, the employer must never tax his work people beyond their strength, or employ them in work unsuited to their sex and age. His great and principal duty is to give every one what is just." (Rerum Novarum, § 20).

The cost of labor under a wage contract is an expense of doing business, and the worker is thereby compensated for his or her contribution. It is not an investment in the business on the part of the worker. A wage contract does not, therefore, entitle the worker to a share of the income generated by production after the payment of a wage. To make that claim is to fall into the trap against which Pope Pius XI warned when he stated,

"It is wholly false to ascribe to property alone or to labor alone whatever has been obtained through the combined effort of both, and it is wholly unjust for either, denying the efficacy of the other, to arrogate to itself whatever has been produced." (Quadragesimo Anno, § 53)

Further, asserting that the worker is due a fixed return from production, whether in the form of wages or benefits, is to put the worker in the position of a usurer. A borrower who must repay a fixed return on a loan, regardless whether the loan proceeds were invested in something that generated sufficient income to repay the loan, is paying usury, an unjust share of profits that may not even exist.

Similarly, an employer who pays a just, market-determined wage, and then is forced to pay an added fixed amount out of what would otherwise accrue to him or her as profits (if any) as additional compensation or into a defined benefit pension plan, is paying usury — and on the specious grounds that the worker is entitled to more than a just wage simply because he or she needs more, wants more, or can force the employer to pay more. This is binding not only on the employer: "the rich must religiously refrain from cutting down the workmen's earnings, whether by force, by fraud, or by usurious dealing," (Rerum Novarum, § 20), but on the workers when "by force, by fraud, or by usurious dealing" they cut down the employer's earnings by taking an unjust share of the profits.

What of the case in which an employer is paying a just, market-determined wage to workers who freely contracted for that wage without coercion, but they still need more in order to live in a manner befitting the demands of human dignity? The employer is, in that case, morally bound in charity — but not legally bound in justice — to pay the worker more: "It is a duty, not of justice (save in extreme cases), but of Christian charity — a duty not enforced by human law." (Rerum Novarum, § 21)

The unions, therefore, put themselves in the position of violating justice twice when raising wages and benefits above a free market-determined rate. They do this once by demanding a share of production to which they are not entitled, and once by using collective bargaining backed up by the coercive power of the State to demand more than what they are due in strict justice.

What of the "extreme cases" to which Pope Leo XIII refers? Unfortunately, the "extreme case" has become all-too-common today, especially in light of the declining value of human labor as an input to production. The consequence of this is that it is increasingly difficult for a worker, in competition with advancing technology and cheaper foreign labor, to generate an adequate and secure income through the sale of labor alone.

In that case, the worker has, in a sense, become the dependent of the employer. He or she is no longer an "independent other," capable of contracting freely — or of justly organizing with others to coerce higher wages and benefits. A worker who has no other recourse but to work for that employer, no other means of generating an income than the sale of his or her labor, and who is trapped within a system that inhibits or prevents the worker from supplementing his or her income in some just and equitable manner is, in substance, a slave without effective economic rights. When that is the case, the employer owes the worker enough for the worker and the worker's dependents to live on in a manner otherwise befitting human dignity.

We must specify "otherwise," for keeping an adult in a dependent relationship (e.g., treating him or her as a child or slave) when there is no justification such as mental incapacity or criminal acts, is an explicit offense against human dignity. The problem becomes what to do about the situation when an employer cannot pay a worker enough without one side or the other violating justice. Either the employer or the system violates justice by maintaining workers in a condition of unjustifiable dependency, or the workers or the system violate justice by forcing employers to pay usurious compensation unrelated to production — and without assuming any of the risks of ownership that would otherwise entitle workers to an equitable share of the profits . . . if any.

This sounds like an impossible situation — and it is . . . within the existing framework of economic analysis provided in large measure by Lord Keynes. The solution (assuming there is one) must lie outside the Keynesian paradigm, elsewhere, in a framework based on essential human dignity and that takes economic reality into consideration. We will look at such a framework, that of binary economics, beginning tomorrow.

News from the Network, Vol. 2, No. 21

"May you live in interesting times" is (so we're told) a particularly vitriolic Chinese curse. That is true from an individualistic point of view. In social justice, of course, "interesting times" are signals that there are flaws in the social order, and it's time to get organized and engage in a little "social justice tithing": put forth some effort, review the "action manuals" (i.e., Introduction to Social Justice, The Capitalist Manifesto, The New Capitalists, Capital Homesteading for Every Citizen), organize with like-minded others, study the problem, develop solutions, and get to work.

This is why it is so important not only that people promote the Just Third Way by opening doors, but that they first study and internalize the basic principles of the Just Third Way so as to open doors effectively. We can't, for example, allow our natural inclination to get disheartened about the increasingly depressed economic and political situation, or take cold and illusory comfort in assuming that "they" (whoever "they" are) somehow — without being tested — won't allow it, go for it, support it, or whatever.

We need to keep in mind at all times (as Father Ferree reminds us in Introduction to Social Justice) that in social justice terms, nothing is impossible. Even understanding that, in social justice terms, nothing is impossible takes a great deal of effort; it's too easy to assume that what needs to be done can't be done for some reason or other. We need to ask ourselves whether we believe something is true, is right — and then whether God would somehow allow that which is not true or not right to continue without giving us the means to correct it. As Father Ferree explains, we have been given the means. It's up to us to use it.

• CESJ had its monthly executive committee meeting on Wednesday. An important initiative was the formation of a CESJ Mass Media Committee to study how best to communicate the message of the Just Third Way using the best available technology and techniques.

• Harriet Epstein reported briefly on a connection with a new political organization, "Smart Girls Politics," who have taken Sarah Palin as an exemplar representing the effect politically conservative women can have in the public arena. Harriet was instrumental in helping to set up a meeting with CESJ and a representative of the group, to take place early in June.

• There was a brief overview of the CESJ annual celebration and the subsequent Rally at the Fed. The consensus was that the celebration was an outstanding success, especially through the efforts of O'Connor Catering. The emphasis on East St. Louis was strengthened and given a greater focus.

• The Rally at the Fed, despite the bad weather, was a success, bringing together many disparate elements into a "Coalition for Capital Homesteading," and conveying the Declaration of Monetary Justice to Federal Reserve staff, who received the annual presentation with openness and friendliness, although honestly expressing uncertainty as to whether the "higher ups" were giving the document sufficient attention.

• On Thursday, members of the CESJ core group met with people in the Pro Life movement to discuss the feasibility of incorporating a Just Third Way-based economic agenda into the Pro Life movement's goals. The group responded favorably, indicating that future discussions would be valuable.

• As of this morning, we have had visitors from 31 different countries and 45 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, with Canada, Brazil, and Venezuela rounding out the "top five." People in Venezuela and Malaysia spent the most average time on the blog. The most popular postings are these news reports, with the posting on Lincoln's Homestead Act, Judge Posner, and the flaws in Keynesian economics rounding out the list.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

On Usury and Other Dishonest Profit, Part II

Eons ago — a few decades, anyway — G. K. Chesterton wrote about the "Utopia of the Usurers." Chesterton, of course, was looking at the people who were, in his opinion, in charge of the financial system. These were the ones castigated by Pope Pius XI in Quadragesimo Anno in 1931,

105. In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.

106. This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.

The irony of yesterday's disclosure that the Pension Benefits Guaranty Corporation has accumulated a deficit of $33.5 billion — $22 billion of it in the past six months — is that the people whom Chesterton considered most oppressed by usury's utopia, the ordinary worker, is now in the position of being (next to the State itself) the chief of usurers. Like Shylock, workers have contracted for a pound of flesh, the payment of which is killing off the companies that employ them. As we noted yesterday, companies are being forced to borrow money or sell new equity just to meet the enormous burden of fixed retirement benefits instead of investing in new plant and equipment that could generate profits to meet a more just retirement arrangement.

The double irony — or perhaps a paradox of the sort in which Chesterton delighted — is that it is not the workers who are destroying the companies that employ them, thereby destabilizing their chances of continued employment and wrecking the economy. The culprits in this institutionalization of worker usury (from which, incongruously, the workers derive no real benefit) are the unions, those organizations intended to look after the best interests of the workers.

Obviously something is wrong. The problem is what to do about it.

On Usury and Other Dishonest Profit, Part I

Back in 1745, Pope Benedict XIV issued Vix Pervenit, an encyclical condemning the charging of interest on loans of money made for consumption or speculation, that is, spent on things that do not generate an income to repay the loan. Often misunderstood as a condemnation of all interest, Vix Pervenit left intact the scholastic distinction between investment (loans made for projects that resulted in the production of goods and services), and consumption and speculation (loans made to purchase goods and services that are consumed instead of used to produce other goods and services, and loans made to gamble).

The confusion over interest and usury results from the fact that the pope did not address the issue of loans made for productive purposes. That had always been legitimate, a positive good, so there was no need to justify it again. Genuine investment has a "built in" ability to repay a loan by its nature, as the lender shares in the risk, and only gets back what is his or her due in justice as a share of production. The pope's concern, however, was the many ways people had devised to circumvent the moral prohibitions against usury by disguising loans of money made for consumption or speculation, as loans made for investment.

Unfortunately, the discussion was extremely technical, and the language and concepts used were unfamiliar to many people. The problem was exacerbated by the fact that the discussion brought in financial, legal, and philosophical terms without clearly distinguishing between them. The bottom line, however, was the unstated point that honest or legitimate interest consists of a share of the profits to a lender, based on the pro rata value of the loan to the production of goods and services. If, for example, a lender's contribution was determined to be, say, 10%, the lender was due in justice 10% of the profits realized from the project, or had to bear 10% of the losses. A fixed rate of interest on the principal was deemed usurious, if not actually usury. Any rate of interest on a loan of money for something that did not result in the production of goods and services was deemed usury, regardless of the finagling, word games, or other circumlocutions involved.

The reason for bringing this up is the release of news story by the Associated Press that the Pension Benefits Guaranty Corporation, the PBGC, the institution charged with insuring "defined benefit" retirement plans, is projecting a deficit in the billions as a result of the economic downturn and resultant flood of bankruptcies. ("Deficit surges at agency that insures pensions")

A "defined benefit plan" means that a plan participant is legally guaranteed a specific level of benefits on retirement, regardless of the value of the assets in the retirement trust or the ability of the Plan Sponsor to fund the obligations of the trust. "Defined contribution plans," which do not come under the PBGC, are obligated to pay out only what exists in the trust.

In accounting terms, a defined benefit plan is a "fixed cost," while a defined contribution plan is a "variable cost." Thus, a defined benefit plan has an inherent usurious character, while a defined contribution plan, by sharing in the risks of ownership, takes on the character of genuine investment.

When things are going well and a company is making large profits, a defined benefit plan is more advantageous to the company if they can keep worker or union demands for increased retirement benefits within reasonable limits. As demonstrated by the PBGC current deficit of $33.5 billion (three times the accumulated deficit of six months ago) and the projected underfunding of defined benefit plans in the hundreds of billions, however, high fixed costs for retirement plans are bankrupting companies at an accelerating rate. Companies are being forced to borrow money, take government bailouts, or sell new equity to finance not investment in new plant and equipment to generate future profits, but to pay accrued costs for something that did not result in the production of goods and services even when they were incurred.

This has put America's companies — and thus the jobs they provide the majority of workers — in serious and immediate danger of going bankrupt, with the resultant loss of jobs. The problem is that everybody seems to be blaming everybody else for the situation, with the result that nobody really knows what to do about it. Without knowing how this situation came about, however, a solution becomes impossible.

The OTHER Irish Disaster, Part II

While I do not claim any official position on the issue of Mr. Obama's receipt of an honorary degree at the University of Notre Dame this past weekend, I am a graduate of Notre Dame, and thus feel I have the right to speak out on this matter.

Frankly, it seems as if most people are missing the point. The guidelines from the American bishops regarding honoring pro-abortion politicians are (as has been pointed out to me by more than one legalistic authority, usually self-appointed), not binding in Canon Law. They are, however, morally binding. Further, "giving scandal" has always been and remains a serious sin. Actions that you personally might consider harmless or even praiseworthy need to be considered in light of their possible effect on others. As Jesus said, "It were better for him, that a millstone were hanged about his neck, and he cast into the sea, than that he should scandalize one of these little ones." (Lk. 17:2)

A school is presumed to act "in loco parentis" (in the place of the parents) to the students. As head of the university, Father John Jenkins is thus the head of "the Notre Dame family." It is his responsibility to see that students are trained scholastically and, more importantly, morally. He abrogates his responsibility and violates the trust placed in him by parents, alumni, faculty, supporters, and even the board of trustees (despite their approval) when by any word or act he suggests to those placed in his care and whose consciences may not have been properly formed that dissent from legitimate instructions from duly constituted authority is morally acceptable.

Ordinarily, whether one accepts the authority of one's religious superiors or even the doctrines of a particular religion is a private matter, or (as some seem to be saying), an "internal affair" of Notre Dame. Inviting the president of the United States to give a commencement address was and remains well within the right of any school, secular or religious, including Notre Dame. There is not only a place for free and open debate on controversial subjects, but a necessity for it if a school wishes to be worthy of the name "university."

Again, however, that is not the point. The guidelines established by the American bishops are clear: no Catholic university will for any reason bestow honors on pro-abortion politicians. Mr. Obama, for whatever reason, is pro-abortion. When this was first pointed out to Father Jenkins, he equivocated by claiming that he thought the instructions applied only to Catholic politicians, although that is not stated in the guidelines. When Father Jenkins' interpretation of the guidelines was corrected, he equivocated again, maintaining that he was proposing to honor Mr. Obama not as a pro-abortion politician, but as president of the United States, although it is difficult to understand how to separate the two. Further waffling and ambiguities followed.

The bottom line is that, although explicitly ordered not to do so, Father Jenkins gave an honor to a pro-abortion politician. This makes the whole issue one of simple honesty. If Father Jenkins does not believe what the Church teaches, or refuses to obey legitimate authority, he is free to leave. That is his choice. Father Jenkins may be absolutely sincere in believing that he did the right thing. He may be firmly convinced that the only way to advance the Pro Life cause is to dialog with pro-choice politicians, shower them with accolades, and insult anyone who disagrees with him or voices dissent from his opinion.

As an individual, Father Jenkins is free to do all this, and more. He is free to express any and all opinions, and believe anything he likes as long as he does not act on any belief that will harm other individuals, groups, or the common good — including giving scandal. The problem is that Father Jenkins was not acting in this instance as a private individual, but as an official representative of an institution that claims to be Catholic. He is therefore morally bound to act in a manner consistent with that position, or surrender it. It is a matter of complete indifference whether the trustees, the media, the student body, or anyone else approve his actions. As Edmund Burke pointed out in a different context in a speech to the Electors of Bristol in 1774,

Certainly, Gentlemen, it ought to be the happiness and glory of a Representative, to live in the strictest union, the closest correspondence, and the most unreserved communication with his constituents. Their wishes ought to have great weight with him; their opinion high respect; their business unremitted attention. It is his duty to sacrifice his repose, his pleasures, his satisfactions, to theirs; and, above all, ever, and in all cases, to prefer their interest to his own. But, his unbiassed opinion, his mature judgement, his enlightened conscience, he ought not to sacrifice to you; to any man, or to any sett of men living. These he does not derive from your pleasure; no, nor from the Law and the Constitution. They are a trust from Providence, for the abuse of which he is deeply answerable. Your Representative owes you, not his industry only, but his judgement; and he betrays, instead of serving you, if he sacrifices it to your opinion.

By remaining as president after violating this sacred trust, Father Jenkins is being profoundly dishonest. He is using his position to undermine the Church's authority and teachings, especially with respect to those entrusted to his care. If Father Jenkins were employed in a business, he would justly be fired without notice for acting against the interests of his employer. In moral philosophy what Father Jenkins did is called "betrayal of a benefactor," a sin for which Dante, in his Infierno, reserves the lowest place in Hell.

Because Father Jenkins' dishonesty is open and public, and a cause of scandal, it is the duty of the American bishops who issued the guidelines that Father Jenkins openly flouted to engage in fraternal correction, and offer instruction to him to help reorient him in a more moral direction. To do anything less is to put any bishop who refuses to get involved in the same position as Father Jenkins himself. By his silence such a bishop consents to an act that he, as a member of the American Episcopate, had previously condemned, and concerning which a significant proportion of his brother bishops have already made clear is scandalous.

Nor can anyone, bishop, priest, or lay, use the presumed silence of the Vatican as an "out." Archbishop Burke, a high Vatican official, gave a speech on May 8, 2009 that I personally witnessed, and in which His Excellency declared in no uncertain terms that Father Jenkins' bestowal of an honor on President Obama was a serious error. By persisting in that error, Archbishop Burke stated, Father Jenkins and the Notre Dame board of trustees had placed the university in the position of no longer being worthy to be called Catholic. Even if Archbishop Burke had not spoken, however, the failure of others to act in what we believe to be a moral manner does not excuse us from doing what we believe to be right.

That being said, I also believe that the position taken by Mr. Obama at Notre Dame and the speech he gave opens up some potential avenues by means of which the Pro Life cause can make significant gains. This may even have been what Father Jenkins intended. Unfortunately, Father Jenkins failed to realize that he could have achieved the same end legitimately, without thumbing his nose at the Catholic Church and the Pro Life movement, simply by not bestowing an honorary degree on Mr. Obama. In any event, the end never justifies the means. Whatever Father Jenkins' good intentions, the fact remains that he gave grave scandal not just to Catholics, but to honest people everywhere, decreasing respect for all religion by his example, and undermining all moral authority.

This past Friday we sent an e-mail to Dr. John Fitz Gerald of the noted Irish think tank, the Economic Social and Research Institute, and received an acknowledgment within an hour, assuring us that he would review the material. Whether he gets around to it, he at least has seen it, and it may prompt some action in a situation he was describing as hopeless.

Dear Dr. Fitz Gerald:

Please excuse the fact that this letter is almost word-for-word what I sent to your colleague, Dr. Alan Barrett, on April 30, 2009. The issues raised in today's article in the Belfast Telegraph ("Ireland's Celtic Tiger May Be Gone for Good"), and the list of problems recited in the April 29, 2009 article in the Irish Independent, ("Republic's Economy is Fastest Shrinking in Developed World") are fundamentally the same. Both sets of concerns can be addressed by implementing innovative solutions that are both financially feasible and ecologically sound.

In view of that, I would like to introduce to you the work of the Center for Economic and Social Justice ("CESJ"), www.cesj.org, and suggest some possible areas of cooperation between your organization, and our all-volunteer think tank and its interfaith membership.

CESJ was founded in 1984 by a small group of Jews, Christians, Muslims, and others who came together on the basis of a set of shared values based on the natural law tradition of the west to promote the economic justice principles developed by Dr. Louis O. Kelso and Dr. Mortimer J. Adler, and the social doctrine of Pope Pius XI as analyzed by "America's greatest social philosopher," Father William J. Ferree, S.M., Ph.D., who was one of CESJ's co-founders.

Kelso and Adler's work is best set forth in the two books they co-authored, both with misleading titles but profound thought, The Capitalist Manifesto (1958) and The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings (1961). Louis Kelso is best known as the inventor of the Employee Stock Ownership Plan ("ESOP"), a financing vehicle that has resulted in more than 11 million workers becoming part owners of the more than 11,000 companies for which they work. Mortimer Adler, as you are probably aware, designed the "Great Books" program at the University of Chicago, Illinois, and was considered the premier American Aristotelian of the 20th century.

Father Ferree was, at different times, president of Chaminade College in Honolulu, Hawaii, Rector of the Catholic University of Puerto Rico, and Chairman of Dayton University in Ohio. His most important work was his doctoral thesis, The Act of Social Justice (1941) in which he explained Pope Pius XI's revolutionary breakthrough in the field of social morality. At the time of his death in 1985, Father Ferree was hard at work on a new book intended to integrate the economic justice principles developed by Kelso and Adler into the social teachings of the Catholic Church.

After reviewing the work of your institute as described on your website, I believe that an approach CESJ calls, "The Just Third Way," especially as embodied in our "Capital Homesteading" proposal, might have much to offer you. In particular, we have specific proposals designed to address the problem areas targeted in the article in the Irish Independent, especially the chief problem, unemployment, highlighted in the Belfast Telegraph:

Unemployment. Demand for capital and labor follows increased consumer demand. Economic growth and thus job creation thereby results from increases in consumer spending, as Dr. Harold Moulton demonstrated in his 1935 monograph, The Formation of Capital. Consistent with "Say's Law of Markets," which states that production equals income, and thus supply generates its own demand, and demand generates its own supply, the Just Third Way addresses the problem of unemployment by opening up democratic access to capital credit for new, financially feasible investment. As new capital is formed and financed in ways that allow first the workers, and then every citizen to share equitably in the ownership of the new capital, jobs are created first to produce the capital, then to supply labor for the new or expanded productive enterprise. The wages paid during this process increase consumer demand, which leads to additional new capital formation and more job creation. Additionally, when companies can obtain financing for new capital by selling shares to the workers and other citizens instead of retaining earnings, all earnings above working capital needs can be paid out, further increasing consumption income and thus effective demand, once the workers and other citizens have paid for their shares out of dividends.

Housing. The Just Third Way would address the housing and building trades crisis with a new ownership/financing vehicle called the "Homeowners' Equity Corporation" ("HEC"). A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the central bank at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants. The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes. Financing the purchase of properties through the central bank and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt.

Deflation. The Just Third Way addresses the twin evils of inflation and deflation by the same method. In classic banking theory, money can be created at will without inflation if (and only if) the money is used to finance capital projects that pay for themselves out of their own future earnings. Because money can be created through the banking system and backed up by the central bank for as many financially feasible projects as are brought to commercial banks for financing, there is no danger of deflation. Because the money created for capital investment is canceled once the loan by means of which the money was created is repaid, there is no danger of inflation. There is always enough money, and the price level remains stable. The need to accumulate savings to use as collateral is eliminated by using capital credit insurance, backed up by a capital credit reinsurance pool to spread risk even further, instead of concentrating the risk in individual borrowers, lending institutions, or the State.

Government debt. The Just Third Way's Capital Homesteading proposal includes a complete reform of a nation's tax system. Much of the complexity found in the tax systems of many countries results from the basic assumption of Keynesian economics that capital formation cannot be financed except out of accumulated savings. While Keynes' assumption contradicts classic banking theory as well as historical fact analyzed by Dr. Harold Moulton, the world's tax systems reflect the presumed necessity of favoring the wealthy in order to induce them to save and reinvest their income to finance capital formation and thereby create jobs. This greatly reduces consumption income, and the government inflates the currency to increase effective demand so that "excess" production can be cleared. This lays the foundation of the erroneous Keynesian belief that there is a necessary tradeoff between inflation and unemployment. This also greatly reduces the tax base, forcing the government to borrow both to meet its expenditures as well as to cause inflation to increase consumption and maintain the desired number of jobs artificially. Without the need to reduce the tax base by favoring the rich or make up for the decrease in effective demand by inflating the currency through government borrowing, the State can begin following sound, non-politically motivated monetary and fiscal policies and begin paying down debt without risking the harm that Keynes was convinced would result.

If these brief descriptions of some of our proposals intrigue you, I invite you to pay a visit to the CESJ website, www.cesj.org. I would draw your particular attention to the free download available of our book, Capital Homesteading for Every Citizen, as well as the paper on the HEC. You may also be interested in a short article I published on the internet two days ago on a proposal for the economic recovery of a city many people in the United States consider a basket case: East St. Louis, Illinois.

If you have any questions, or if you would like to discuss anything on the website or grounds for possible future collaboration, you will want to make contact with Dr. Norman G. Kurland, president of CESJ, whom I have copied on this e-mail.

Dr. Kurland's concern for justice for the poor has been evident since his work in the Civil Rights movement in the American south in the early 1960s, to his collaboration with the late labor statesman Walter Reuther of the United Auto Workers in Reuther's "Citizens' Crusade Against Poverty." Later, Dr. Kurland was instrumental in persuading the late Senator Russell Long of Louisiana to champion the Employee Stock Ownership Plan ("ESOP") invented by Louis Kelso.

Dr. Kurland also served as Deputy Chairman for the Presidential Task Force on Project Economic Justice under President Ronald Reagan, and presented the report on CESJ's efforts to promote economic and social justice in a 1987 private audience with His Holiness Pope John Paul II, more fully described in CESJ's "accomplishments brochure." Most recently, Dr. Kurland has developed the concept of the "Natural Resource Bank" which would have the capacity to vest all inhabitants of a region with a direct, definable private property stake in the land and natural resources. Dr. Kurland was also influential in developing the HEC, described above.

Thank you. We look forward to hearing from you.

News from the Network, Vol. 2, No. 20

We had fewer meetings this week, but the few we had were as productive as last week's. There may be some kind of "inverse law" at work here. As the world situation gets worse, whether it's the Ford Motor Company issuing 300 million new equity shares to meet past, non-productive costs, or the Reverend John Jenkins, president of the University of Notre Dame (considered America's iconic Catholic university) defying direct orders from his superiors, unambiguous directives from the American bishops, and the clear mandate of students, alumni, and friends and supporters of the university in order to curry favor with the current administration, Just Third Way proposals begin to look better and better.

The Just Third Way, based on the inherent dignity of each person, strives to empower every individual with control over his or her own life, and thereby acquire the ability to throw off the yoke imposed by concentrated ownership of the means of production, whether that concentration is in the hands of a private elite (capitalism), a State bureaucracy (socialism), or the weird State-controlled capitalism we see in Keynesian economics.

For the record, it's interesting to note that in October 2008, CESJ invited Father Jenkins to participate in a dialog with David Walker, former Comptroller General of the United States, on the current economic and financial crisis. CESJ sent Father Jenkins copies of its major publications, including Capital Homesteading for Every Citizen (2004), Curing World Poverty (1994), Introduction to Social Justice (1948), and the latest by Notre Dame alumnus Michael D. Greaney, In Defense of Human Dignity (2008). Possibly presaging his cavalier treatment of everyone concerned with his incomprehensible honoring of a U.S. president who has taken a strong public stance against virtually everything Notre Dame presumably stands for, Father Jenkins' dismissive reply ignored the books, and stated that he wasn't interested in talking with CESJ.

Nevertheless, despite the Father Jenkinses of the world — or, perhaps, because of them — the Just Third Way is beginning to make substantial progress as those who pass for leaders in today's world more and more reveal themselves to be false idols with feet of clay.

• Monday afternoon the CESJ core group had a meeting with a publisher. A number of possible projects were discussed, including exploring the prospect of arranging for a panel discussion on the anticipated new encyclical on justice, as well as surfacing "prime movers" as potential champions of Capital Homesteading. Of particular note in this "relationship building phase" was the scheduling of a regular time to have a telephone conference call each week.

• Michael Greaney published a brief piece on the city of East St. Louis, Illinois, in the "Helium" internet writers' cooperative. The article has received favorable comment from a number of individuals involved in the "Metro East Citizens' Land Cooperative," or MECLC, described in the text.

• The CESJ core group had a series of important discussions on the nature and application of the act of social justice on Thursday of this week. Drawn from the "laws and characteristics" of social justice found in Father William Ferree's pamphlet, Introduction to Social Justice, the discussions covered the difficulties involved in working with people outside a core group who have not yet internalized the essential principles that define a group as that group, and bring it together in solidarity. Particularly helpful were Father Ferree's reflections on the act of social charity. The discussions highlighted the importance of completing the editing and formatting of the planned "Ferree Compendium." Norman Kurland made an excellent suggestion in that regard, proposing that the letter from Father Andrew (Andrea) Felix Morlion, O.P., Ph.D., written on the occasion of Father Ferree's death in 1985, either be inserted in its entirety as a brief preface, or that the sentence describing Father Ferree as "America's greatest social philosopher" be integrated into the existing foreword in some fashion. Father Morlion was the founder of the International University of Social Studies in Rome, and (among other accomplishments) carried out difficult and dangerous missions for Pope Pius XII and Pope John XXIII.

• As of this morning, we have had visitors from 35 different countries and 44 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, with Brazil, Canada, and Australia rounding out the "top five." People in Egypt and Venezuela spent the most time on the blog. The most popular postings are the series on "Easter Economics," with the "State is God" natural law postings coming up rapidly.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Party Like It's 1914, Part III

Early in the 20th century, Judge Peter S. Grosscup of the United States Circuit Court of Appeals, wrote a series of articles highlighting the threat of what he saw as the growing economic disenfranchisement of the average American. As one of Teddy Roosevelt's "Trust Busters," Judge Grosscup was well aware of the dangers that threatened the country, ultimately the world, from monopoly control over the means of production, which means, in the end, control over the means by which people sustain their lives and liberties.

Judge Grosscup advocated "peoplizing" the means of production, possibly by instituting federally-chartered corporations with the Congress providing oversight instead of the different state governments. Widespread ownership would be mandatory in order to stop the flow of investment from ownership of the means of production, to ownership of savings deposited in financial institutions and used by others to finance increasing concentrations of ownership of the means of production.

Unfortunately, beyond the general recommendation, Judge Grosscup had no further recommendations to make. This was prior to the establishment of the Federal Reserve System that (consistent with the "Real Bills" doctrine) would have the power to finance capital formation without first requiring people to put up non-existent savings. There was no practicable means, given the necessity of maintaining the rule of law and respect for the natural rights of mankind, for opening up democratic access to the means of financing acquisition and development of the means of production.

In 1958, however, Louis O. Kelso and Mortimer J. Adler co-authored a book with the misleading title, The Capitalist Manifesto. They followed this up in 1961 with The New Capitalists, another somewhat misleading title. The importance of the second book is not described in its main title, however, but in its subtitle: "A Proposal to Free Economic Growth from the Slavery of Savings." As described in the two books, it is not necessary to confiscate and redistribute wealth belonging to others in order for ordinary people to gain an adequate ownership stake in the means of production. By using the money creation powers of the Federal Reserve, it is possible to extend loans for financially feasible projects so that "the rest of us" could begin gaining income from ownership that would supplement and, eventually, replace income realized from selling labor.

Kelso and Adler's work is most familiar in the form of the Employee Stock Ownership Plan, or "ESOP." Their thought, however, extends far beyond this innovative, yet somewhat limited vehicle. The Center for Economic and Social Justice, "CESJ," has developed a proposal called "Capital Homesteading" that would open up the means to acquire and possess private property in the means of production to everyone.

The Capital Homestead Act is a comprehensive national economic strategy for empowering every American citizen, including the poorest of the poor, with the means to acquire, control and enjoy the fruits of productive corporate assets.

This long-range agenda involves major restructuring of our tax system and our Federal Reserve policies to lift unjust artificial barriers to more equitable distribution of future corporate capital and faster growth rates of private sector investment. It would shift primary national income maintenance policies from inflationary wage and unproductive income redistribution expedients to market-based ownership sharing and dividend incomes.

The Capital Homestead Act's central focus is the democratization of capital (productive) credit. By universalizing citizen access to direct capital ownership through access to interest-free productive credit, it would close the power and opportunity gap between today's haves and have-nots, without taking away property from today's owners.

The Capital Homestead Act is designed to:

1) Generate millions of new private sector jobs by lifting ownership-concentrating Federal Reserve credit barriers in order to accelerate private sector growth linked to expanded ownership opportunities, at a zero rate of inflation.

2) Radically overhaul and simplify the Federal tax system to eliminate budget deficits and ownership-concentrating tax barriers through a single rate tax on all individual incomes from all sources above basic subsistence levels. Its tax reforms would:

a) eliminate payroll taxes on working Americans and their employers;

b) integrate corporate and personal income taxes; and

c) exempt from taxation the basic incomes of all citizens up to a level that allows them to meet their own subsistence needs and living expenses, while providing "safety net" vouchers for the poor.

With the financial crises that seem to erupt every time the administration announces yet another glimpse of recovery, it might be time to take a look at something that might actually work, rather than continue to print money and sell equity that is spent for obligations incurred in the past instead of invested in the future.

Party Like It's 1914, Part II

As Vladimir Ilyich Lenin is reputed to have said, "The Capitalists will sell us the rope with which we will hang them." By proposing to sell 300 million new shares to raise capital to meet non-productive existing obligations instead of to form capital to generate profits to meet those obligations, the Ford Motor Company is selling the rope with which the company can be hanged. Not only that, this Jewel in the Crown of the capitalist system is working as hard as possible to build the scaffolding and perfect the mechanism of the trap door through which it will drop.

Lest the analogy appear too obscure, the scaffolding is the capitalist system as transformed by Keynesian economics. "The drop" (the trap door through which the condemned falls, hopefully to break his or her neck and not suffer slow strangulation) is the replacement of systemic, "internal" controls of the financial markets and banking institutions with increasing levels of government regulation down to the micro-management level. By raising capital for non-productive expenses instead of capital investment, the Ford Motor Company is simply making a bad situation worse, or (as folk wisdom puts it), trying to get out of a hole by digging it deeper.

The irony, of course, is that none of this is necessary. Henry Ford had the opportunity in 1914 to spread ownership out among his workers. This would have shifted the practice of raising pay by relying on increasing fixed wages and benefits, to variable profit sharing from the bottom line. Every accountant (and hopefully every CEO) knows that it is easier to remain in the black if you shift as many costs as possible to variable, and reduced fixed costs to the minimum.

This is because a company only incurs a "variable cost" when it produces something. A fixed cost, on the other hand, must be paid whether or not you produce anything at all. A variable cost thus has a "built in" way to pay it, assuming that what is produced can be sold. In contrast, a fixed cost is, essentially, money down a rat hole if nothing salable is produced. Using capital raised by a new issue of equity to pay expenses that didn't result in production even when they were incurred (as the Ford Motor Company proposes) is economic suicide.

To make matters worse, Henry Ford, one of the "high priests of capitalism," put the final nail in the coffin of the capitalist system in 1919 when he undermined the rights of private property of minority owners in the Ford Motor Company. Capitalism is only marginally palatable because, however distorted, it is based on the natural right of private property. By effectively taking away one of the principal rights of private property — the right to enjoy the income generated by what is owned — Henry Ford undermined the very system he helped establish and maintain . . . another example of the Ford Motor Company's orientation toward self-destruction.

Possibly because he mistrusted banks (which he believed were controlled by an international Jewish cabal), Ford decided to finance a plant expansion using retained earnings instead of selling new equity or borrowing the money. Some of the minority owners (i.e., owners with less than a controlling interest), the Dodge brothers, protested. They weren't interested in why Henry Ford refused to borrow from banks or issue new shares to finance plant expansion. They wanted the dividends to which they were entitled under the traditional rights of private property. Henry Ford refused to pay dividends, and the Dodge brothers sued.

The case, Dodge v. Ford Motor Company (204 Mich. 459, 170 N.W. 668. (Mich. 1919)), became a landmark. Among other issues, the court redefined the traditional right to receive the "fruits of ownership" (i.e., income from what is owned — dividends) for minority shareholders as limited to the power to sell their shares if they weren't happy with the dividend policy of the majority owner(s).

While unacknowledged, Dodge v. Ford Motor Company helped set the stage for the Crash of 1929 and the current financial crisis. It did this by shifting the incentive for share ownership from anticipation of a future stream of dividends, to speculation in the value per share itself. "Investment" became redefined in the popular mind (and in that of many financial professionals) as buying and selling in anticipation of a rise or fall in the value per share, not putting resources to work in a productive endeavor. The result was a near-total divorce of "investment" and share ownership from the revenue stream generated by profits of production.

The problem of financial and economic divorce is now pervasive throughout the world. Money is divorced from the production and productive capacity that necessarily backs it. Workers are divorced from ownership of the means of production other than their own labor — which is rapidly decreasing in value in competition with advancing technology and cheaper foreign labor. Academic economists, financial advisers, Wall Street magnates, and political leaders are divorced from common sense, and unable to comprehend the possibilities for reform and recovery represented by binary economics, the "economics of reality," as the subtitle of one of Louis Kelso's books puts it. (Two-Factor Theory: The Economics of Reality. New York: Random House, 1967)

What happened to the Dodge brothers? They sold their shares in the Ford Motor Company, and used the cash to start their own automobile manufacturing concern. They eventually designed what many automobile enthusiasts consider one of the greatest cars of all time, the 1926 Dodge. This not only dethroned the ubiquitous "Tin Lizzy" (Ford's Model T), it took a large market share from Ford, and cost the Ford Motor Company millions in lost sales — and then cost Henry Ford more millions to design the Model A and retool all his factories and retrain all his workers.

Unfortunately, we still haven't learned the lessons that cost the Ford Motor Company so much. Neither, evidently, has the Ford Motor Company. The problem becomes what to do about it.

Party Like It's 1914, Part I

The Ford Motor Company has announced that it will sell 300 million new equity shares to raise the cash to meet its health care obligations to the UAW. ("Ford to sell 300 million common shares") Aside from the fact that this gives both unions and management tremendous incentive to push for government-run and taxpayer-funded health care (otherwise known as "socialized medicine"), using a company's capitalization to pay expenses unrelated to production is self-defeating for the company, and adds to the inflationary wage/price spiral that has inhibited economic growth and development ever since Keynes' disproved theories became unquestioned economic dogma. Ironically, this has not only happened before, the Ford Motor Company led the way.

In January of 1914 Henry Ford raised the basic wage rate at the Ford Motor Company from $2.34 per day to $5.00 (See Robert Lacey, Ford, The Man and the Machine, 1986). At first limited to certain classes of machinists and widows with children, the increase caused so much envy among all workers that Ford was forced to make $5.00 the basic minimum for everyone. Workers employed at other auto plants and unemployed people from across the country descended on Ford in search of jobs, causing riots that had to be broken up with fire hoses in subzero weather. A number of small businesses located near the Ford plant were destroyed during the disturbances.

Other auto manufacturers were forced to raise their pay rates to keep qualified workers. The increase in pay unlinked to increases in productivity started an inflationary wage/price spiral. Exacerbated by the inflationary monetary policies instituted in the First World War with the hijacking of the new Federal Reserve System to finance government deficits instead of private sector capital formation, Ford's unilateral wage increase eventually resulted in a typical autoworker in 2009 making in wages and benefits more than twice in one hour what an autoworker made in 1909 in an entire week — Saturdays included.

Contrary to the Keynesian fallacy that inflation results in genuine wealth creation, the increase is almost pure illusion. We don't have the time to do in-depth research, so the following figures are necessarily approximate, but they give a good idea of the effect that inflationary Keynesian economic policy and theory have on real income.

According to the Bureau of the Census, U.S. median income in 2007 was approximately $50,000.00, subject to an effective federal tax rate of about 20.7%, which we'll round to 20% (this includes the workers' share of FICA, c. 7.5%). That left approximately $40,000 in disposable income for the "typical" wage earner. This is a lot of money, but what does it mean? The average price of an automobile in 2006 was $22,651, or 45.3% of median disposable income. The average price of a house in 2000 was $120,000.00, or 240% of median disposable income.

In comparison, a Ford worker making $5.00 per day, six days a week in 1914, could expect to take home $1,250.00 — all of it disposable. A Model T Ford "Runabout" in 1914 cost $440 (and was reduced to $345 in 1916), or 35.2% of disposable income. An elderly uncle of mine recalls that his father purchased a farm in Lancaster County, Pennsylvania, in 1906 for $400, or 32% of the lowest-paid Ford worker's disposable income. (I used anecdotal evidence because the Census Bureau only goes back to 1940 for house prices.)

Thus, the modern autoworker can expect to spend approximately 280% of his or her annual disposable income on transportation and housing, compared to the autoworker of the early twentieth century's approximately 70% of disposable income. Using only these crude approximations, we conclude that the autoworker of 1914 was at least 200% better off than his or her modern counterpart.

"But," you are tempted to say, " what about the quality of life, and the vastly increased goods and services available to today's worker?"

To that we answer, if Say's Law of Markets were in operation instead of disrupted and undermined by Keynesian economics, ownership of the means of production was widespread, and all new capital formation financed out of "pure credit" (see The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings), production would equal income. Workers' real income would increase rather than decrease as they were able to take advantage of advancing technology and economies of scale as owners as well as providers of labor.

Ultimately, the issue seems to boil down to 1) lack of understanding of money, credit, banking, and finance, 2) bad uses of credit, and 3) defining "power" as control over others rather than control over your own life. We will look at each of these in subsequent postings.

How to Use a Central Bank

Here are copies of two letters we sent last week to the Wall Street Journal and the Washington Post regarding potential sources of new capital for commercial banks that the "stress tests" appear to mandate. As required by letters to editors that hope to have a chance of getting published, we restricted ourselves to the single issue of using the Federal Reserve properly as a source of liquidity for financial feasible industrial, commercial, and agricultural private sector projects. We did not cover the equally important issue of the necessity for widespread direct ownership of the means of production — including financial resources that can be created "out of nothing" and thus have no existing owner(s) — to secure a sound economy.

Widespread direct ownership of the means of production, however, only becomes politically and financially feasible when the central bank is used to create money to finance the acquisition of capital by people who currently own little or nothing in the way of income-generating assets. Pointing out how the Federal Reserve is designed and originally intended to operate is thus only half the battle. The other is to bring programs like Capital Homesteading to the attention of "prime movers" and others who can implement it and deliver its benefits to the people of the United States and the world.

Letters, The Wall Street Journal
wsj.ltrs@wsj.com

Dear Sir(s):

No doubt the authorities making the decisions in response to the so-called "stress tests" regarding the amount of capitalization required by commercial banks believe they are acting in the best interests of the economy and the financial markets. If they truly understood money, credit, banking, and finance, however, they would realize that additional capitalization by foreign or domestic investors, or the taxpayers, is completely unnecessary. The solution already exists and can be implemented without the use of tax monies or government loans.

The Federal Reserve System was established in part to provide the country with a "flexible currency" that would expand when the economy required more money in circulation, and contract in response to the dangers of inflation. Under § 13 of the Federal Reserve Act of 1913, a commercial bank that wishes to make loans that are not covered by its current reserves can discount (sell) qualified industrial, commercial, and agricultural loans to the local Federal Reserve Bank.

The central bank of the United States has the power to create money to purchase these loans, either in the form of Federal Reserve Notes (promissory notes) or demand deposits. The Federal Reserve thereby provides the commercial bank with 100% reserves backing the money created through the discounting process, or (if you will) "instant capitalization." No taxpayer money, foreign investors, or federal bailouts are needed. It is only necessary to stop using the Federal Reserve to monetize government deficits, and start using the central bank for the purpose for which it was intended.

Letters, The Washington Post
letters@washpost.com

Dear Sir(s):

With respect to the additional capitalization requirements for commercial banks proposed as a result of the bank "stress tests," how long will it take the public to understand that increased government involvement in the private sector is not part of the solution, but part of the problem? Ironically, a solution already exists in plain sight.

The Federal Reserve System was established to provide liquidity for the private sector through the commercial banking system without the need for pre-existing reserves (capitalization). Using the Federal Reserve to finance government spending came later, when politicians decided it was easier to fund the United States' entry into World War I by borrowing money from the central bank instead of through taxation.

Under § 13 of the Federal Reserve Act of 1913, a commercial bank can sell (discount) qualified industrial, commercial, and agricultural loans to its local Federal Reserve Bank. The Federal Reserve has the power to create money to purchase these loans, thereby providing the country with an asset-backed currency supported by 100% cash reserves. There is no need for consumers to cut spending in order to save, for foreign investors, or for bank bailouts.

News from the Network, Vol. 2, No. 19

A superficial review of this past week brings to mind noted comedian John Cleese's instructional business video on meetings, bloody meetings. Fortunately, we did not fall into the trap of having meetings just to have meetings, or to attend an event just to rack up points for "busy work." Every meeting and event this week resulted in major progress for the Just Third Way.

• Monday evening the CESJ core group had an introductory meeting with a publisher that promises to be one of the most significant in recent years. Originally scheduled for two hours, the meeting lasted until 12:30 the next morning. The topics centered on the necessity of getting word about the Just Third Way to prime movers not only in the United States, but throughout the world. As long as the meeting went, it was all too short, and many of the discussions were postponed to a time when they could be taken up in greater depth. The importance of the meeting was to establish a relationship with an influential journal that has an international readership and reputation. Subscribers include people who are interested in what is going on in the power centers of the religious world, and how it relates to critical events taking place around the world.

• One of the premier worker-owned companies in the United States, Mid South Building Supply, Inc. of Springfield, Virginia, with locations in Virginia and Pennsylvania, received the ESOP Association's AACE Award in the "Printed Materials, 250 or Fewer Employees" category, and was runner-up in the "Special Events, Promotions, Series, 250 or Fewer Employees" category. Due to the long-standing professional and philosophical relationship that exists between Mid South, and CESJ and EEI, Andrew Tavss, company president, invited Norman Kurland, Dawn Brohawn, and Michael Greaney to be present at the banquet and ceremony, held at the Marriot Renaissance Hotel in Washington, DC. Special mention should be made of Mid South's entry into the 2009 ESOP Employee Ownership Month Poster, designed by Linda J. Lowe. While the poster did not win the contest, many people familiar with Mid South's design, incorporating children's alphabet blocks and a construction crane, felt that Ms. Lowe's composition was more innovative and original than the winner. Unfortunately, we were not able to figure out how to insert the image of the poster on this blog.

• On Friday, the CESJ "core group" (Dr. Norman Kurland, Dawn K. Brohawn, Rowland L. Brohawn, and Michael D. Greaney) and Dr. Ahmed Mansour, president of the International Qu'ranic Center of Northern Virginia, attended the National Catholic Prayer Breakfast in Washington, DC. Antonin Scalia, Associate Justice of the United States Supreme Court, delivered the opening remarks, while the Most Reverend Raymond L. Burke, Archbishop Emeritus of St. Louis, Missouri, Prefect of the Apostolic Signatura at the Vatican (analogous to the Chief Justice of the Supreme Court) gave the Keynote Address. The Keynote Address was followed by a spiritual reflection and prayer by the Most Reverend Jean Benjamin Sleiman, Latin Rite Archbishop of Baghdad, while the closing prayer was delivered by the Reverend Monsignor Eugene Morris, Director of the Office of the Diaconate of the Archdiocese of St. Louis.

• Justice Scalia's erudite talk, which was somewhat more in-depth than the usual opening remarks one hears, contrasted the difference between worldly wisdom based on a purely materialist view of life, and the apparent absurdity of Christianity — or any other religion, for that matter — using reason illuminated by faith to understand reality. His Honor related the experiences of St. Paul of Tarsus in Athens, where the Athenians listened to him out of curiosity and their love of novelty, walking away when Paul started talking about miracles, and St. Thomas More, who gave up every worldly advantage for reasons that people of his time and even ours find incomprehensible.

• Archbishop Burke's address explained how true patriotism and love of country must be based firmly on the precepts of the natural law written in the hearts of all humanity. Organized religion has the task of guiding the State to help civil authorities act in accordance with the moral precepts discerned by reason. This does not, however, mean that the Church, Mosque, Synagogue, or Temple dictates or forces civil government to act in specific ways, but interprets the principles of the natural law and helps authorities and ordinary citizens discern and understand how far the civil order is in conformity with the essential precepts of the Law. His Excellency urged prayer and fasting to help open the minds of civil authorities to the principles of natural reason. To this we would add that acts of social charity (loving our institutions as we love ourselves) followed by acts of social justice directed at reforming the institutions of the common good to enable those institutions better to assist each individual in acquiring and developing virtue are a necessary follow-up to such spiritual exercises.

• As of this morning, we have had visitors from 33 different countries and 45 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, with Brazil, Canada, and Romania rounding out the "top five." People in Egypt and Venezuela spent the most time on the blog. The most popular postings are the series on "Easter Economics," with the "State is God" natural law postings coming up rapidly.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Rebuilding After the Quake, Part II

While (according to reports) the Mafia has moved into the rebuilding after the earthquake business in Italy, the most immediate requirement in a relief program is to take care of the material wants and needs of the people involved. Initially that can be taken care of by the various humanitarian and relief organizations. The whole point of a relief program, however, is to help get people back on their feet so that they can once again start providing for themselves out of their own efforts and resources.

Food and clothing can be shipped into the region for as long as it takes to get the area productive again, and should not be a problem. Italy has a high standard of health care, so even with the destruction of hospitals in the area, other hospitals can take over the patient load. Even with respect to shelter, summer is coming, so temporary housing can be used for a longer period than might otherwise be the case.

This will allow the primary focus to be on rebuilding the area's productive capacity, helping it to begin producing wealth as fast as possible, both to begin once more taking care of people's needs and to pay for the rebuilding process. CESJ's "Capital Homesteading" proposal could quickly be implemented, both to provide financing for rebuilding productive capacity, and to build direct ownership into the people in the area so that they benefit materially to the maximum degree possible.

By bringing in contractors from outside region, it should also be possible to begin rebuilding housing, whether repair of damaged historical structures, or new construction that blends into the area's cultural heritage. By using CESJ's "Homeowners' Equity Corporation" or "HEC," such housing can be financed through the central bank using "interest free" loans, and repaid by tenants over time whose rental payments earn them shares in the HEC. The HEC should fit in well with Europe's tradition of commune- or community-owned housing, although in contrast to those approaches, the tenant rapidly becomes an owner through building equity instead of a pile of rent receipts.

Finally (a misleading way of saying, "at the same time") a program similar to that being used to rebuild one of America's most economically devastated cities, East St. Louis, should be implemented, the "Metro-East Citizens' Land Cooperative," so that people in the area will not only share in the rebuilt productive enterprises and home ownership, but gain ownership of the land and infrastructure that in most places is traditionally owned by the local government.

The best thing you can do is to send a link to this posting to the Italian Ambassador to the United States, the Hon. Giovanni Castellaneta, via some of the contacts listed on the embassy's website. You might also want to try sending something to the American Red Cross, your own national Red Cross, or even the International Committee in Geneva.

Rebuilding After the Quake, Part I

The government of Italy has expressed concern that the Mafia, which has allegedly already established a base in the area affected by the earthquake, is working to seize control of the rebuilding process, diverting cash from the rebuilding effort, to lining its own pockets. This not only slows or inhibits traditional forms of assistance, it helps obscure the flaws inherent in doing things in the usual way. Failure can be blamed not on providing the wrong kind of assistance in an inappropriate way (a systemic problem), but on corruption and graft — an individual problem. Before individual problems can be dealt with effectively (individual justice), the systemic problem has to be corrected. That is a job for social justice, which looks not to individual goods, but to the common good, that network of institutions within which the human person carries out the business of daily life and thereby acquires and develops virtue.

While it might not be as widespread in its effects as the tsunami that devastated Southeast Asia, or as politically-sensitive as Hurricane Katrina, the series of earthquakes that have overwhelmed central Italy are fully as costly in human and cultural terms as these other disasters. Thus, we can learn from the mistakes of the past in how similar events have been handled, and implement a solution that is much more efficient, cost-effective, and (above all) more respectful of human dignity than the "usual" type of response, to say nothing of providing automatic checks and balances against Mafia-style corruption in the form of building direct ownership into each citizen and resident of the affected area. Man, as Aristotle observed, pays most attention to that which is his own.

The most immediate need after search and rescue has been finished is to make whatever redistribution of wealth is necessary to provide the survivors with adequate food, clothing, and shelter until the rebuilding process can begin. International humanitarian organizations such as the Red Cross, churches, and governments best handle such immediate relief efforts. Particularly in light of the economic upheavals over the last two years, preference should probably be given to relief efforts by private organizations, individuals, and non-profits instead of governments that are already beginning to be overwhelmed by the needs of their own, economically-devastated citizens.

Such private sector initiatives have, in the past, proven themselves more than equal to such tasks. It is when they try to finance the rebuilding that private resources become inadequate and people begin looking to government to supply funds beyond the scope of most private individuals or organizations. Unfortunately, at this time most governments, as we already pointed out above, are starting to be overwhelmed by the task of trying to take care of the victims of the global financial meltdown.

Further, governments (for all the good intentions that may motivate their efforts) are not really oriented to providing for individuals. By their nature and their specific role as guardians of the common good, governments by necessity look to mass solutions that often leave specific individuals to fall through the cracks. For that reason we should look at private sector alternatives for financing areas suffering from the effects of disasters, whether natural (as with an earthquake), or manmade (as in the case of the global financial meltdown), leaving governments (especially the Italian government) to provide whatever legislation may be necessary to allow the private sector initiatives to operate at optimal efficiency and respect for human dignity.

The Center for Economic and Social Justice ("CESJ") has developed a number of programs and potential financing vehicles that, once the appropriate legislation is in place, can be implemented quickly and tap into the potential of the Italian central bank to create money to finance the rebuilding. This would be financially sound and economically (and politically) feasible as long as the rebuilding is carried out in ways that 1) allow everyone in the area devastated by the quakes to participate in the benefits of rebuilding through direct private ownership of what is rebuilt, and 2) use financing vehicles that allow what is rebuilt to pay for itself out of future earnings.

Some specifics will be covered in the next posting on this subject. In the meantime, you can alert people that there may be a feasible alternative to the usual sort of rebuilding available, and direct them to the CESJ web site and this blog.

Letter to Judge Richard A. Posner

While not widely known as an advocate of worker ownership, Judge Posner has published a number of books relating to economic issues, the most recent of which is A Failure of Capitalism, recently reviewed in the Wall Street Journal. Avoiding the issue whether or not capitalism failed long ago, we sent a letter to His Honor yesterday pointing out some areas in which (according to the review) his analysis of the situation might have left one or two things out. Here's the letter.

Richard A. Posner
Judge, United States Seventh Circuit Court of Appeals
Senior Lecturer, University of Chicago Law School

Dear Dr. Posner:

Earlier today I read the excellent review that Mr. L. Gordon Crovitz wrote of your book, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression in the Wall Street Journal. Admittedly, reading a brief review is not the same as reading the book, but, from my perspective as a Certified Public Accountant, I believe there are four areas you might not have addressed adequately in your analysis.

First, there is a need for financial professionals to gain a better understanding of money, credit, and banking. All three areas are pervaded with incorrect Keynesian assumptions that inhibit or prevent optimal functioning of their respective roles in a free market-disciplined economic process. A case in point is the Keynesian dogma that capital formation can only be financed out of existing accumulations of savings, a belief disproved by Dr. Harold G. Moulton of the Brookings Institution in his 1935 monograph The Formation of Capital.

Second, obviously more and better regulation is needed. The problem is that too many people understand "regulation" in terms of "State control." What is needed is not State control, but what accountants call "internal control," or arranging the financial system so that automatic checks and balances are in place. The State's role must be limited to policing the system, not running it.

Third, increasing competition in the system and breaking up financial monopolies is the best way to achieve the necessary degree of internal control. Financial institutions "too big to fail" need to be restructured, not offered taxpayer bailouts. Even more important, no financial institution should combine within itself incompatible functions, as resulted from the lifting of the Glass-Steagall constraints. This allowed the consolidation of commercial banks, investment banks, brokerage firms, mortgage banks, ratings agencies, and hedge fund operators under a single roof. What resulted was the virtual elimination of the checks against abuses that each of these institutions embodied when operated independently in their own self-interest. Proper separation of function also addresses Henry Simons' concern about the dangers of permitting the State to use the central bank to finance government deficits.

Fourth, the public sector should integrate the principles of economic justice found in the binary economics of Louis Kelso and Mortimer Adler, who extended Moulton's insights into sound monetary, fiscal, and other macro-economic policy. At the micro-economic level, the private sector should integrate binary economics' ownership, financial structures, and governance systems.

Simply reading these points, of course, tells you little or nothing. For that reason, I would urge you in the strongest possible terms to review a short monograph titled, "A New Look at Prices and Money," by Dr. Norman G. Kurland, president of the Center for Economic and Social Justice, published in the Journal of Socio-Economics. Dr. Kurland is a 1960 graduate of the University of Chicago law school, where he led the class in "Competition and Monopoly" taught by Aaron Director and Dean Edward Levi. He worked in the Civil Rights movement in the in the early 1960s, and later served as Director of Planning for the "Citizens' Crusade Against Poverty" chaired by the late labor statesman Walter Reuther of the United Auto Workers.

Later, Dr. Kurland headed Louis Kelso's Institute for the Study of Economic Systems, and then became Kelso's Washington counsel. In that capacity Dr. Kurland was instrumental in persuading the late Senator Russell Long of Louisiana to champion Kelso's Employee Stock Ownership Plan ("ESOP"). Dr. Kurland also served as Deputy Chairman for the Presidential Task Force on Project Economic Justice under President Ronald Reagan. He is currently working with the American Auto Workers' Ownership Committee (AAWOC) to present an alternative to the administration's proposal to save Chrysler and General Motors. Dr. Kurland is also principal author of Capital Homesteading for Every Citizen (2004). Capital Homesteading is a comprehensive package of macro-economic reforms to our national monetary, tax, welfare, labor, and trade laws, all consistent with basic free market, private property, and limited government principles.