THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Tuesday, June 30, 2009

On Usury and Other Dishonest Profit, Part XXIV

From a more realistic understanding of the demands of human dignity, of money and credit, and the three principles of economic justice, we can derive the necessary characteristics of a sound — and, above all, human — financial and economic system. We have distilled these necessary characteristics into four basic "pillars" of an economically and politically just society. These are:
1. A limited economic role for the State,

2. Free and open markets as the best means for determining just prices, just wages, and just profits,

3. Restoration of the rights of private property, particularly in corporate equity, and (the "fatal omission" in virtually all economic systems today),

4. Widespread direct ownership of the means of production, individually or in free association with others.
In understanding these four pillars, we must always keep in mind the principles from which they are derived: 1) respect for human dignity, 2) a more realistic understanding of money and credit, and 3) the principles of economic justice. In this context, the principles of economic justice in particular must be kept explicitly before us at all times: a) Participation (or Participative Justice), b) Distribution (or Distributive Justice), and c) Harmony (Social Justice).

A Limited Economic Role for the State

The State is a necessary institution, the need for which is embedded in human nature by our Creator. Any particular State, however, is a human creation, whether spontaneous by chance human interaction and the accidents of history, or by conscious design. That being the case, the State is subordinate to the human person; the State was made for man, not man for the State. Citizens are bound to the State by a natural law "social contract," consisting of the State's implicit agreement to abide by those rights that are inherent in the human person by virtue of humanity itself, among which are life, liberty, property, and the pursuit of happiness, and the citizens' duty to obey the State in all things that do not violate the natural law.

The primary responsibility of the State is care of the common good. The common good is that complex network of institutions within which the human person normally acquires and develops virtue, that is, becomes more fully human and fits him- or herself for his or her final end. Thus, in what at first glance may seem like a paradox, each human person realizes his or her individuality best within a social context.

The State therefore has the task of maintaining a stable and orderly society that respects individual rights as well as the demands of the common good. This requires maintaining and protecting those rights and other institutions of the common good. This extends to demanding, in extreme cases, the sacrifice of individual members of society (as in a just war) in order to maintain the integrity of the common good. Otherwise the whole of society would be flawed to such an extent that the acquisition and development of virtue by each member of society would be rendered unnecessarily difficult or impossible.

A stable and orderly society is so great a good that we must, on occasion, tolerate even unjust laws and situations if correcting the flawed institution would result in the serious disruption or destruction of the social order. As long as a law, however unjust, does not force any individual to commit an act that violates his or her individual conscience, it can and must be tolerated until such time as individuals organize and carry out acts of social justice to restructure and reform the affected institution(s), putting an end to the injustice.

The State's proper role is thus not to ensure equality or even equitability of results. That is, the State is not supposed to care for individual goods, singly or in aggregate, except in a dire emergency as an expedient, but to ensure equality or equitability of opportunity. The State carries out this function by passing and enforcing just laws in conformity with the natural moral law. The State thereby provides a "level playing field," and protects our natural rights to life, liberty (free association), access to the means of acquiring and possessing private property in the means of production, and acquiring and developing virtue ("pursuit of happiness").

As a human creation, the State only gets its authority from those who come together to form the State. As explained by Aquinas, clarified by Bellarmine, and corrected by Pope Pius XI, consistent with the demands of human dignity, God grants sovereignty to each individual human being. When human persons organize in a group, a portion of this sovereignty is delegated by revocable grant to the group, which becomes a "person" itself by means of that grant.

Depending on the role that the group is intended and designed to play in the common good, this revocable grant of sovereignty may be extremely limited and temporary, or very great in scope and of long duration. Because the State's role is care of the common good itself, the grant typically constitutes the full amount of all that can legitimately be granted, subject in all cases, of course, to the demands of individual human dignity within the common good.

The State may consist of a number of different levels of sovereignty, and even divide different aspects of sovereignty internally, but all, ultimately, derive from the human persons who make up the State. Individuals, as an organized expression of their values and goals, form such institutions as means of assisting each individual's acquisition and development of virtue, and thus enhance the quality of each person's individual and social life.

When the State abuses its authority, and the abuse has a material effect on the common good, the citizens have the duty to change rulers, even the form of government in order to correct the problem. Similarly, when citizens, individually or in free association with others, become able to carry out a task that is traditionally carried out by the State, the State is obligated to devolve its authority and responsibility for that task back to the citizens, or it is guilty of abusing its authority.

Thus, when the citizens are able to take care of their material needs without undue interference by the State, the State is obliged by the terms of the natural law "social contract" that binds citizens to the State to permit the citizens to meet their own needs through their own efforts. Further, when the citizens organize and come together in solidarity with the goal of meeting their material needs, the State is obliged to pass and enforce any laws necessary to make it possible for the organized groups of citizens to meet their material needs in the most efficient and cost effective manner possible.

Finally, the State is obliged to assist all citizens to the fullest extent possible in gaining power over their own lives so as to meet their material needs adequately through their own efforts. Except as an expedient to address an emergency situation, the State may never maintain citizens in a dependent condition (effective infants) on itself or others through failure to assist the citizens in becoming independent adults, or by failing or refusing to pass any necessary enabling legislation that would allow all citizens equal access to the economic and political institutions of the common good.

Thus, the first pillar of an economically just society, a limited economic role for the State, is a necessary foundation for the other three pillars, the second of which — free and open markets — we will examine in the next posting in this series.

Monday, June 29, 2009

Can We Spend Our Way Out of a Recession?

Due to the extended series on usury (which we hope to complete soon) and the fact that the Wall Street Journal and the Washington Post seldom pay attention to letters that call their fundamental assumptions into question, we didn't post this letter last week. We're making up for that now, as we await word on whether or not the new encyclical on justice will be released today, and when and where it will be available.

Dear Sir(s):

Today's statement by the Honorable Messrs. Hoyer and Miller, while not the point of their article ("Congress Must Pay for What It Spends," WSJ, 06/25/09, A13), revealed why Congress — or anyone else — isn't able to pay for what it spends. Referencing "the necessary, though costly, efforts to get our economy out of recession," they expose our government's adherence to discredited Keynesian economics and reliance on programs that fail because they reject reality.

A recession is, "An extended decline in general business activity." (American Heritage Dictionary.) Unserviceable and non-productive debt increases. Marketable goods and services are not produced because they cannot be sold. Jobs disappear as companies lay off workers who would otherwise be productive.

According to Keynes, the way out of this is to debauch the currency to redistribute effective demand through the "hidden tax" of inflation. This defies common sense. You cannot get out of debt by spending money. The only sane solution was given by Jean-Baptiste Say (1767-1832), whose "Law of Markets" was rejected by both Marx and Keynes. As Say explained in Letters to Malthus (1821),

All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce. . . . From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.
The way to end a recession is not to increase liabilities and spending, but to increase feasible capital investment and production, as Dr. Harold Moulton, president of the Brookings Institution explained in his 1935 monograph, The Formation of Capital. Carried out within a free market circumscribed by a strong juridical order to ensure equality of opportunity and protection of persons and property, the process is not costly, but profitable.

Louis Kelso and Mortimer Adler outlined a financially sound means to achieve this end in their two co-authored books, The Capitalist Manifesto (1958) and The New Capitalists (1961). To the principles of Say and Moulton, Kelso and Adler add the necessity for everyone to participate in the ownership of capital to achieve a stable and sustainable economic recovery.

Friday, June 26, 2009

News from the Network, Vol. 2, No. 26

Welcome to our 300th blog posting. While it seems a little self-serving to announce your "tercentenary" in your own news report, nobody else is going to do it. Fortunately, we can quickly pass from that to the real news items.
• The current issue of Inside the Vatican (June-July 2009) contains as its lead story an article by Michael D. Greaney, " 'They': The Illusion of Barriers to a More Just Social Order."

• Rowland Brohawn reports that work is progressing steadily on editing and formatting the video footage of the annual demonstration outside the Federal Reserve on Wednesday, April 15, 2009.

• Two responses from the mailout of the "Declaration of Monetary Justice" have been received. One was from the Federal Reserve Bank of Richmond, Virginia, while the other was from the Federal Reserve Bank of New York. Both responses were relatively neutral, conveying the impression that they did not feel it was within their area of competence to address the proposal.

• The Declaration of Monetary Justice itself will be amended in the near future to include the proposal that every citizen and legal resident be vested with a single, non-transferable, no cost, voting and fully participating share in his or her local Federal Reserve Bank. We believe that changing the ownership structure of the Federal Reserve System will distance the System from control by the politicians and financial interests, and allow the System to fill its proper role more efficiently and in a cost-effective manner.

• CESJ is currently exploring a general overhaul of its internet communications vehicles and strategy. Mr. Ed Langhals of "Williamsburg Revolutionary Radio" is contributing a great deal to this effort.

• The Clarendon Foundation has just launched its website. The Clarendon Foundation is a tax exempt nonprofit corporation that was organized in March, 1991 as a public interest law firm in the Commonwealth of Virginia. In September 1991, the Foundation added a new nonprofit activity of providing free instructional television service to accredited educational institutions. The FCC has granted licenses for educational broadcast services in 21 markets across the United States.

• As of this morning, we have had visitors from 31 different countries and 39 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Brazil, Canada, Venezuela, and the UK. People in Egypt, Venezuela, the Netherlands the United States and Brazil spent the most average time on the blog. The most popular postings are the series on usury (which we hope to wind up next week), and the news reports. While the postings on Keynesian economics have dropped out of the top ten, the usury postings give a critique of that discredited economic system and a contrast with the binary economics of Louis Kelso and Mortimer Adler.
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.

Thursday, June 25, 2009

On Usury and Other Dishonest Profit, Part XXIII

To say that people need to get organized and carry out acts of social justice is all very well, but the question then becomes, "organized to do what?" We've seen that programs based on Keynesian economics are contrary to human nature, that is, to reality. That being the case, they are necessarily doomed to fail. On the other hand, the analyses of Jean-Baptiste Say and Harold Moulton are true as far as they go, but seem to leave something out. If a non-usurious economic system is consistent with human nature, it should be possible to put human ingenuity to work. We should be able to design a system that not only makes good economic and financial sense, but is fully consistent with human nature.

We have already hinted at the essential elements of such a system, but let's recap them briefly:
1. Respect for human dignity. This sounds like a throwaway line, or something tossed in for the "touchy-feelie" crowd. On the contrary, this is the most important aspect of any institution or system devised by humanity for humanity. "Dignity" means recognition and protection of the full spectrum of natural rights of every individual, among which are life, liberty (freedom of association), access to the means of acquiring and possessing private property in the means of production, and the acquisition and development of virtue ("pursuit of happiness"). Human dignity extends to the "secondary" or "derived" rights, those which are not explicitly natural rights, but which necessarily accompany the natural rights and optimize the enjoyment and exercise of each individual's natural rights within the common good. The existence of rights implies the functioning of justice, the highest temporal virtue. Justice must be tempered with charity, but we must never define the exercise of charity or justice in any way that confuses the two, or in a way that negates one or the other. Charity is not truly charity if justice has not been observed as perfectly as possible, while justice that is not tempered with charity tends to reduce or even eliminate the "human factor." Thus we may never, for example, violate one individual's natural rights for the benefit of another, regardless of the need. All elements of every human institution must be derived from and be directed toward respect for the human dignity of everyone.

2. Money and credit. Until we understand that this thing we call "money" is derived solely from production of marketable (exchangeable) goods and services, that is, from the ability to deliver on the promise to convey or transfer things of value, we will continue to be baffled by the mavens of Wall Street and government pundits who blindly follow the false assumptions of Lord Keynes and other economists who fail to grasp the nature of employment, interest, and money. "Money" is anything that can be used in settlement of a debt. "Credit" is the act of creating money by making a promise to deliver something of value. We can create money legitimately by making a promise to deliver anything of value in which we have ownership. We can create money illegitimately by making a promise for someone else to deliver something of value in which they have ownership. The ability to create money is a natural right under "freedom of association." Because money and credit have such a profound effect on the common good, the creation of money and the extension of credit must be strictly regulated and policed by the State when passing through the channels of commerce. (Private transactions affecting only two parties can be much less formal, and may or may not be properly regulated by the State, depending on the type of transaction and the materiality, i.e., its relative importance.) We must, however, never confuse the State's regulatory role with the creative function. Money and credit are "derivatives" of production (whether existing goods and services or the present value of to-be-produced goods and services), and the State by its nature produces nothing.

3. The principles of economic justice. The principles of economic justice are applications of respect for human dignity. Economic justice thus encompasses the moral principles that guide people in creating, maintaining, and perfecting economic institutions. These institutions determine how each person produces an independent material foundation for economic subsistence. The ultimate purpose of economic justice is to free each person economically to develop to the full extent of his or her potential, enabling that person to engage in the unlimited work beyond economics, that of acquiring and developing virtue, and so fitting one's self to mankind's proper end. The triad of interdependent principles of economic justice are the principles of 1) Participation (or Participative Justice), 2) Distribution (or Distributive Justice), and 3) Harmony (Social Justice). Participative justice refers to the right that everyone has to participate fully in all institutions of the common good, especially the right of equal personal access to the means, or "social tools," to participate fully as a producer to meet one's needs as a consumer. In economic justice, this refers to the right each person has to participate in the economic process as a supplier of labor, an owner of capital, or both. Distributive justice is often misunderstood as distribution on the basis of need, the principle directing charity. As defined by Aristotle (Ethics, V), however, distributive justice is based on a proportionality of value given and received. This virtue deals with a distribution or division of something among various people interacting cooperatively with one another, in shares proportionate to the value of each one's relative contribution to the outcome. The third principle of economic justice operates as the "feedback principle" for ensuring that participative and distributive justice are in balance and working properly. This principle of limitation prevents such concentrations of capital ownership as are injurious to the economic rights of others, i.e., their right of effective participation in production and to earn thereby a viable income in the form of the distributive share to which they are justly entitled by the value of their contribution.
These essentials of a non-usurious economic system guide us in discerning the four pillars of a just market economy, an application of our natural right to freedom of association. We will examine the four pillars in the next posting in this series.

Wednesday, June 24, 2009

On Usury and Other Dishonest Profit, Part XXII

Before we get into what to do about the problem of usury, we need to know how to do what we want to do. That is where social justice comes in. This is going to be a little choppy and somewhat sketchy, as it is a very condensed version of what is contained in Father Ferree's Introduction to Social Justice (1948).

Social justice is the particular virtue whose object is the common good of all human society, rather than, as with individual justice, the individual good of any member or group. Social justice is one of the basic social virtues in the field of social morality.

Social justice guides humans as social beings in creating and perfecting organized human interactions, or institutions. Social justice is the principle for restoring moral balance and harmony in the social order.

Social justice imposes on each member of society a personal responsibility to work with others to design and continually perfect our institutions as tools for personal and social development. To the extent an institution violates the human dignity of any person or group, organized acts of social justice are required to correct the defects in that institution.

Social justice is the specific virtue ("habit of doing good") that relates to reforming our social structures ("institutions"). In other words, the act of social justice fixes what's wrong socially so that we can do good individually.

There are (so far as we know . . . ) seven "laws" and six characteristics of social justice.

Let's go over them one by one.

The first law is that the common good be kept inviolate. Care for the common good is our most important work. To endanger the common good for private gain is wrong. Safeguarding the common good is a top priority.

Two, cooperation, not conflict. The unity of human society cannot be founded on opposition. The common good is the object of social justice, not individual goods. Unbridled greed, competition and dictatorship are wrong.

Three, your first particular, individual good in your place in the common good. "Man is by nature a political (social) animal." (Aristotle) Individual rights are best protected in a social environment.

Four, each individual is directly responsible for the common good. Every individual is directly responsible for the "common good" — the social order. This is because the common good is built up in "hierarchical order." That is, the human person under a sovereign Creator is at the top of all institutions in the social order. Institutions — laws, customs, traditions, families, the State, organized religion — are "social props" created by humanity to assist in the perfection of each individual.

Five, higher institutions must never displace lower institutions. Not the highest level, not the lowest level, but the most appropriate level is "where the action is."

Six, freedom of association. Everyone and every group has the right and duty to organize. The solution to social problems must be social, that is, organized.

Seven, Specialization: All vital interests should be organized. Organizations should be deliberately designed to perfect the common good. This is a full-time job that never ends. Each person a specialist in his or her own life. The choice is between organization for or against the common good, not organization or no organization. Not a new way of life, but a new purpose in life.

The Six Characteristics of social justice:

The first characteristic of social justice is that social justice can only be carried out by members of groups. Individuals as individuals act . . . Individually! Individuals as members of groups act socially. To effect social change, individuals must act within their institutions as members of those institutions, not outsiders or mavericks. Finally, it takes time.

Two, tend to perfection, but do what is possible with others in an organized manner with what is available. Rather than not work at all for the common good or to work ineffectively, we must be willing to work with imperfect people and institutions.

Three, nothing is impossible. In social justice, there is no such thing as "helplessness." No problem is too big. No problem is too complex. By "nothing is impossible" we mean that anything designed by human beings — especially our institutions — can be redesigned by human beings, joined together in free association to effect changes in the common good. No field is too vast. Social justice gives us the tools to make any problem solvable.

Four, eternal vigilance. The work of social justice is never finished.
Institutions are always changing. When institutions stop filling our needs, or do so inadequately, we need to organize and correct those institutions — and this is happening all the time!

Five, effectiveness. The work of social justice is never finished. It must, therefore, be effective. We can't just have a vague "good intention" for the common good, and ignore the outcome. For something to be "socially just," we must ensure that we are making progress toward our goal of a good society. (And always remember that ends don't justify means!)

Six, you can't "take it or leave it alone." Social justice is a personal ("rigid") obligation on each individual. Everyone has the ability to work on the common good, therefore everyone has the obligation to work on the common good!

As Father Ferree reminds us,
". . . . The power that we have now to change any institution of life, the grip that we have on the social order as a whole, was always there but we did not know it and we did not know how to use it.

"Now we know.

"That is the difference."

Tuesday, June 23, 2009

On Usury and Other Dishonest Profit, Part XXI

In Social Justice there is never any such thing as helplessness. No problem is ever too big or too complex, no field is ever too vast, for the methods of this Social Justice. Problems that were agonizing in the past and were simply dodged, even by serious and virtuous people, can now be solved with ease by any school child. (Rev. William J. Ferree, S.M., Ph.D., Introduction to Social Justice, 1948)
What Social Justice demands is something specifically social: the reorganization of the system. (Ibid.)
As far as most people are concerned, "the way things are" is a given. It cannot be changed. The only recourse when confronted with injustice, then, is to search for the individuals who are guilty of committing the injustice. Just or unjust, you can't do anything about the system, so you go after those whom you believe to be responsible. Somebody has to be guilty . . . don't they?

Unfortunately, the ones usually blamed for the injustice are frequently just as individually helpless to change things as those who are suffering from the injustice. Does that mean that nothing can be done? No. The response when faced with individual helplessness in the face of social injustice is to organize, and through the "people power" gained, restructure the institutions that are causing the problem.

Thus, if we want to blame the takers and givers of interest on loans of money make for consumption with wrongdoing, we must change the system to make it possible to function in society without taking or giving interest on loans of money made for consumption. In the current state of society, that means providing the means whereby people can increase their income and so be able to afford what they need to live in a manner befitting the demands of human dignity without borrowing.

The case for State borrowing is similar. The scholastic philosophers "allowed" the State to borrow when tax revenues were too low, but that was not because government usury is somehow right while individual usury is wrong. The reasoning is that the State maintains and protects the common good, the social order. The maintenance of a stable social order is such a great good that the principle of double effect may be applied. The principle of double effect states that we are permitted to do something that has evil effects in order to obtain a greater good.

Some caveats, of course, apply. First, the wrong we do may not be "objectively evil," that is, evil by its very nature. Taking a profit, for example, is not wrong in and of itself. What is wrong is taking a profit when no profit is due. Second, evil that is done must not be directly intended. Third, the intended good must be greater than the unintended evil.

Thus, an individual may accept interest on a government obligation without doing wrong, and the government does not do wrong to pay interest on what it borrows, as long as there is no other way to raise the funds for necessary State expenditures. Similarly, in the current state of society a consumer may pay interest on a loan of money made for consumption purposes, and a lender take it without wrongdoing — as long as there is no other way for the individual to obtain what is needed to pay for necessary consumption items, and the lender is not charging more in interest than would have been obtained from a borrower who used the loan proceeds for a capital investment.

There is a final caveat, however. That is, we are not permitted to let an inherently unjust condition of society remain uncorrected. A society in which people or the State cannot obtain sufficient funds to meet ordinary expenses without usury is a society that has some seriously flawed institutions. The problem then becomes how, when the helplessness of the individual is a virtual byword, and the State is supposed to keep its hands off individuals' goods, to correct the situation.

That is the subject of the next posting in this series, in which we will examine the "act of social justice."

Monday, June 22, 2009

On Usury and Other Dishonest Profit, Part XX

In the previous posting in this series we examined how a commercial bank can legitimately create money to finance the formation of capital when there is insufficient or non-existent savings in the system. We discovered that a commercial bank can create money in concert with a borrower. Money can be created out of the bank's ability to have its promises accepted everywhere in combination with the borrower's ability to produce marketable goods and services.

This power of commercial banks in combination with borrowers sets up a seeming paradox. A bank of deposit shouldn't be used to finance capital projects. By doing so, as Dr. Harold Moulton proved, consumption must be cut to the extent that the new capital is no longer financially feasible. On the other hand, only by lending its deposits for capital investment is it legitimate for a bank of deposit to charge interest. Profit sharing is a right of private property, and "interest" is nothing more than a saver's rightful share of what his or her savings helped produce.

A bank of issue — a commercial bank — is designed to create money to finance capital investment without the necessity of existing accumulations of savings. This presents a problem, because there is no saver with whom the borrower needs to share the profits. The money — the savings — didn't exist before the borrower and the bank got together and, through joint action, created the money. No one, therefore, has a right to interest, because no one is putting up something that he or she owns, that is, in which he or she has private property.

Having private property in something (that is, having ownership of something) confers the right to enjoy the fruits of ownership (the usufruct thereof). Usury consists of enjoying the fruits of ownership — taking a profit — from something that does not generate a profit, or in taking more than the owner is entitled to. Usury is like demanding apples from a pine tree, or in taking two bushels of apples from a tree that only produced one bushel.

The less obvious aspect of usury is that it also involves taking a profit from something that you don't own, regardless how much profit it generates. The problem with the "Real Bills" doctrine, then, is that nobody owned the money that was lent before the loan was made that brought the money into existence. To charge interest on such a "pure credit" loan, then, is illegitimate, and constitutes usury, for (again) you can't take a profit from something you don't own.

This is because the bank doesn't own the money it created, the borrower does. What the bank owns is a claim on future income expected to be generated by the capital financed by the loan, and a lien on the capital — not the money that was created. All interest (the word comes from "ownership interest"), that is, all the profits generated from the capital in which he or she invested, thus belongs by right of private property to the borrower.

Does this mean that the lender — the bank — legitimately gets nothing? By no means. Because it provided a service, the bank is due a fee. The fee should be enough to cover the bank's costs and provide a market-determined just profit. The bank also took a risk that the loan would not be repaid. It has a right to be compensated for that risk. This "risk premium" is usually built into the "interest rate," although it is not, strictly speaking, "interest." (The risk premium can generally be determined by subtracting the "risk free" interest rate paid on government debt from the rate actually charged to the borrower.)

Thus, it is possible to finance capital formation in a modern industrial economy without the necessity of usury. Admittedly, the superabundance of consumer credit and government borrowing will always be usurious and thus a serious problem until it can be eliminated as a usual thing. Consumer borrowing at interest is clearly contrary to the prohibition against usury.

Interest on consumer loans can be "allowed" not because paying or taking interest on loans of money for consumption purposes is somehow no longer wrong, but because requiring someone to do what is impossible is wrong. Interest can be taken and paid today because the system works that way, and it is beyond the power of a single individual to change the system. The problem then becomes what to do when the system forces you to do what is wrong.

Friday, June 19, 2009

News from the Network, Vol. 2, No. 25

The news this week is superficially thin. There have, however, been a few brief but significant events.
• Joe Recinos dropped in from El Salvador, where he is working on a project that would, if successful, result in workers owning 70% of a number of business enterprises. El Salvador and other countries in the region are also discussing a currency union, possibly with the goal of building a foundation for a future political union. Norman Kurland pointed out the importance of reforming the regions central banks so as to encourage democratic access to capital credit so that everyone can become an owner. CESJ is currently studying the feasibility of and preparing a position paper on every citizen and legal resident of a country becoming a direct owner of his or her country's central bank. This would be through the medium of a single, lifetime, no-cost, non-transferable, fully-participating voting share in the central bank. If instituted in the United States with the Federal Reserve, such a program would eliminate concentrated control over money and credit, provide sufficient liquidity to restore and grow the economy in a sound and responsible manner, and answer the fears of people who believe the only solution to today's economic problems is to abolish the financial system rather than reform it. A "natural resources bank" that would vest ownership of the land and and natural resources directly in the people was also discussed.

• CESJ held its monthly Executive Committee meeting on Wednesday, June 17. Much of the discussion centered around revamping CESJ's communications in order to present the message of the Just Third Way to a broader audience.

• Norman Kurland of CESJ received a telephone call from an official at the Federal Reserve, reporting that she had personally handed the "Declaration of Monetary Justice" to Chairman Bernanke. Norm reiterated the importance of meeting personally with Mr. Bernanke in order to explain our proposals more fully and to respond directly to any questions the Chairman might have.

• An e-mail response to a "mass mailing" resulted in a very productive exchange with some individuals involved in corporate finance and the money markets. One of the individuals agreed that the four pillars of the Just Third Way (1, limited economic role for the State, 2, the free market as the best means of determining just wages, just prices, and just profits, 3, restoration of the rights of private property, especially in corporate equity, and 4, widespread direct ownership of the means of production) are sound and desirable goals. He did not agree, however, despite the obvious growing concentration of economic power in the hands of a few and the correlative economic disenfranchisement of the many, that there are any barriers that inhibit or prevent people from participating in the economy, both as suppliers of labor and as owners of capital.

• As of this morning, we have had visitors from 32 different countries and 39 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Venezuela, the UK, with Brazil and Finland rounding out the "top five." People in Egypt, Venezuela, the Netherlands the United States and Brazil spent the most average time on the blog. The most popular postings are the series on usury (which we hope to wind up next week), the news reports, and the Keynesian "paradox of thrift."
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.

Thursday, June 18, 2009

On Usury and Other Dishonest Profit, Part XIX

You can get out of debt by spending more money . . . or so Keynesian economics would have us believe. The only thing that happens, however, is not a diminution of debt, but a transfer of existing and new debt, a shuffling of liabilities. For example, a government bailout doesn't eliminate debt, but transfers the debt from a private company to its new owner, the State. The government borrows money to fund economic stimulus packages in order to increase effective demand in the economy.

Increasing effective demand encourages companies to borrow money (i.e., go into debt) to create jobs. Job creation entices consumers to borrow money to purchase goods and services on the assumption that future wage income will allow them to pay back the loan. The government then engages in a new series of bailouts to transfer private debt (and ownership) to the State, beginning the cycle all over again.

Clearly this is insane, or (to use the technical term), "nuts." A government or a private company can't decrease liabilities by increasing them. Neither can people increase effective demand (disposable income) unless they have the means to engage in production, as Jean-Baptiste Say pointed out, by means of their labor, capital, or land.

Unfortunately, in the Keynesian paradigm, the only way to finance capital formation to increase production is to cut consumption and save. Since saving decreases effective demand (i.e., cuts consumption), this makes the investment in new capital non- or less feasible. Thus, as we have already seen, the only way in the Keynesian paradigm to keep things going is to engage in redistribution of what already exists, either directly through the tax system, or indirectly through inflation.

The sane alternative is to discard the Keynesian paradigm and start using commercial banks, that is, banks of issue, in the way they were designed and intended to operate. This is what Dr. Harold G. Moulton advocated to finance recovery from the Great Depression following the Crash of 1929 in his short book, The Formation of Capital (1935).

A commercial bank operates in conformity with something called the "Real Bills" doctrine. Unilaterally rejected by Keynes & Co. as "discredited" (without giving any reasons), the Real Bills doctrine is that a commercial bank (as opposed to a bank of deposit) can create money without inflation, as long as the new money is backed by existing marketable goods and services, or the present value of a reasonably-expected future stream of income generated by the production of marketable goods and services.

The Real Bills doctrine, in short, recognizes that, because production = income, this thing we call "money," that allows us to transfer claims on production between parties to a transaction, is derived from production itself — not from government debt. Money is, in fact, a "derivative" of production. Money is illegitimate (i.e., counterfeit — whether legal or illegal) if not backed by the present value of existing marketable goods and services, or the present value of a reasonably-expected future stream of income generated by as-yet unproduced marketable goods and services. Money is legally defined as anything that can be used in settlement of a debt. It doesn't have to be in the form of government-issued currency, or even in any physical form at all. Money can take the form of an oral agreement or a handshake, if both parties reach a "meeting of the minds."

What, then, is "currency"? Currency is "current money," i.e., something that has a standard value in an economy, and passes from hand to hand without having to be revalued every time a transaction takes place. Currency can (and most often is) regulated by the government, but it doesn't have to be. Currency is simply a socially-supported convenient form of money.

Legal tender, despite the mystique that has developed around those two words, simply refers to the fact that the form of money to which legal tender status has been attached (and it doesn't even have to be a recognized currency) cannot be refused if tendered in payment of a debt. There appear to have been some statutory changes in various countries that limit the application of legal tender status (nobody ever said the interpretation or enforcement of laws was consistent or logical — just that it is supposed to be so), but the essential principle remains. It is altered or amended for the sake of expedience, e.g., the IRS would find itself in grave difficulties if everyone paid his or her taxes in cash, to say nothing of the fact that there isn't enough legal tender currency in circulation for everyone to pay his or her taxes in cash. This does not, however, change the basic principle: legal tender is that which cannot be refused in payment of a legal debt.

A commercial bank, therefore, can create money by taking a lien on existing inventories of goods and services, or the present value of future production of inventories of marketable goods and services that a prospective borrower brings to the bank. The bank exchanges a demand deposit or (formerly) prints bank notes, and loans it to the borrower. The borrower takes the funds and invests in some project expected to generate a future stream of income.

As the income comes in, the borrower repays the bank, plus whatever service fees, interest, and risk premium is charged on the loan. For its part, the bank cancels the loan principal and the funds used to repay the principal — the amount of money created to finance capital formation. The additional money the bank takes in debt service (service fees, interest, and risk premium) is "pocketed" by the bank and booked as revenue. Out of this, the bank meets its expenses, retains earnings, or pays out profits in the form of dividends. What money the bank doesn't cancel reenters the economy as the bank expends the funds.

Herein we see the paradox of commercial banking. While not usurious, commercial banks engage in usury — even though (in theory) they lend money only for productive projects, and taking a profit where a profit is generated is perfectly legitimate, even moral. This is a right of private property. A right implies the functioning of justice, a moral virtue. Thus taking a profit ("enjoying the fruits of ownership") is not only allowed, it is virtuous in the Aristotelian sense.

How this is possible will be examined in the next posting in this series.

Wednesday, June 17, 2009

On Usury and Other Dishonest Profit, Part XVIII

When a bank of deposit charges more on a loan made for consumption than is required to cover its costs and restore the full value of what was borrowed, the bank is engaged in usury. The only just profit-taking by a bank of deposit results from a loan made to finance a project that generates a profit. By right of private property the bank is entitled to a share of profits commensurate with the contribution to the productive process made by the financing. In today's economy, this is usually construed as the market cost of capital.

The problem is that, if existing accumulations of savings are used to finance capital formation, the capital that is formed is less financially feasible! This near-paradox was "discovered" by Dr. Harold Moulton, when he pointed out the rather obvious fact that if levels of consumption are decreased in order to finance capital formation, the market for the goods and services to be produced by the capital being formed also decreases. In other words, the incentive to invest in new capital formation ("effective demand") disappears, making is much less likely that the investor will be able to pay for the new capital.

Keynes' response to this is to inflate the currency. This "creates" effective demand by transferring (i.e., "stealing") purchasing power from savers whose accumulations are denominated in currency, to those receiving government largesse. This (allegedly) makes the capital financially feasible by generating artificial effective demand. This magically turns into genuine effective demand when jobs are created using the new capital to produce goods and services.

The "magic," however, turns out to be sleight-of-hand, for the value of the wages received from the new jobs is lowered in response to inflation. The workers for hire who have only their labor to sell for wages end up worse off than they were before. They still cannot purchase enough of the goods and services produced to keep the new capital financially feasible, so the companies begin reducing the number of jobs and lay people off. This begins the cycle all over again, with the government injecting increasing amounts of effective demand into the economy by inflating the currency, all the while throwing the system further and further out of balance, until some event (such as the Crash of 1929 or the home mortgage meltdown of 2008) causes a economy-wide, sometimes world-wide financial disaster.

The Keynesian balancing act of walking a tightrope between inflation and unemployment is, in light of such events as happened in 1929 and 2008, unsustainable. The rope — the economy and its financial infrastructure — is heavily frayed. At some point the rope can't be tied back together again. All the slack has been used up by the government playing games with the currency, private property, and the methods of corporate finance. You can't tie two pieces of rope together without slack.

At this point, it seems as if nothing can be done. Within the Keynesian paradigm, that conclusion is correct. Economists and politicians keep insisting that the recession is over, but they fail to realize that they have done nothing but make the ultimate collapse worse by inflating the currency to rescue failed companies from bad debts — that is, trying to get out of debt by spending more money.

There is, however, a way out, one that we will start to look at in the next posting in this series.

Tuesday, June 16, 2009

On Usury and Other Dishonest Profit, Part XVII

At its simplest, banking consists of people making deposits, and the bank lending out the deposits. People making deposits are called (obviously) "depositors," while the people to whom the bank lends the deposited funds are called "borrowers." This most basic form of bank is called a deposit bank or a "bank of deposit," to use three words when two will do.

Clearly a deposit bank cannot lend out more than is deposited. The only way for a bank of deposit to get into trouble (aside from the ever-present danger that borrowers will not repay their loans) is for depositors to demand back more money than the bank has on hand, the balance having been loaned to borrowers.

As viewers of the Frank Capra film It's a Wonderful Life (1946) know, a deposit bank can't make any money for itself or its depositors if it doesn't make loans — but at the same time, that means that the depositors cannot demand all their money. The funds are (presumably) invested in the community, and are not "liquid." In order to allow depositors to withdraw all their funds, the bank would have to call all the loans (probably bankrupting all its borrowers in the process), pay out the depositors, and shut its doors. . . just as the evil Mr. Potter planned when he caused a run on the Savings and Loan.

The funds loaned out by deposit banks represent accumulations of savings, that is, unconsumed income from prior periods. Given that the purpose of production is consumption, the existence of savings means that goods and services were produced that were not consumed, and the purchasing power that (per Say's Law of Markets) came into being with that production was — in an ideal world — set aside to meet future anticipated consumption needs. This keeps the economy in balance, the bank of deposit serving a valuable and necessary service. The proper role of a bank of deposit, therefore, is to provide a secure place for people to accumulate savings to meet future anticipated consumption needs, and lend them out to other people in the interim to allow them to meet current consumption needs.

There are two problems with deposit banking, however, both related to our subject. One, if a deposit bank charges a borrower more than a just fee for providing a loan for consumption purposes, the bank is engaging in usury. A loan of money spent on consumption obviously does not generate a profit by its nature. Taking a profit in the form of an interest rate on a consumption loan is therefore unjust — the bank is taking a profit when no profit was made. This is a form of theft.

Even the calculation of a just fee is problematical. If the amount of the fee is based on what the money would have generated in the way of profits had it been invested in a productive project, it constitutes usury. You can't morally take a profit from one individual or group on the grounds that you might have made an equal or greater amount of profit by lending to someone else. In essence, this is to make one individual or group pay for the opportunity cost of your not taking the moral (and productive) alternative.

Basing the fee charged on a loan for consumption purposes on the time value of money, while it makes a better case, is still usury. The time value of money is based on what a current sum of money will be worth in the future, or what a future sum of money is worth at the present time. Often this is calculated based on some expected or anticipated rate of return, that is, on what the sum of money would generate if it were invested in a productive project. Paradoxically, this is usually the "riskless" rate of return, typically determined by the rate paid by the government on its borrowings, one of the most obvious forms of usury in any economy, government by its nature being non-productive.

Basing the fee on the rate of inflation (if any) is more sound. A lender has the right in justice to have the full value of what was borrowed restored to him or her. A unit of currency that buys a one pound loaf of bread this year, yet only half a one pound loaf of bread next year has clearly lost half its purchasing power. In justice, the borrower should then restore to the lender two units of currency for every one unit borrowed, or the lender has incurred a loss through the transfer of purchasing power from the lender to the borrower.

The problem is that inflation is itself usurious by its nature. Inflation allows a debtor to make a profit from the decreasing value of the currency. This has the effect of transferring purchasing power from savers to debtors, without the debtors having produced anything or having provided any service to the lender. In times of inflation, debtors make a profit by consuming, and benefit by being wasteful and spendthrift. Effectively, during inflation, debtors steal purchasing power from lenders by paying back debts with "cheaper" units of currency. Keynesian monetary policy is based in large measure on these principles, redistributing purchasing power through the "hidden tax" of inflation.

The seemingly unavoidable plunge into usury by banks of deposit is obviously not good for society. The seemingly moral alternative, however — banks of deposit lending only for productive investment — while individually moral (and thus permissible), actually causes more harm to the economy than charging interest on consumer or government loans made out of existing accumulations of savings. Why this is so we will cover in the next posting.

Monday, June 15, 2009

On Usury and Other Dishonest Profit, Part XVI

Many people believe that allowing a bank to create money and charge for it constitutes usury. The money was created out of nothing, therefore nobody owned it before it was created. To take a share of profits for this type of money creation is to take a profit dishonestly.

To this they add that, if banks by this process take more out of the economy than they put in (as is obvious that they do), the money supply will gradually disappear unless money is imported from outside the economy. Eventually the banks will own everything in the economy.

There is some truth in these positions — but some serious misunderstandings and distortions as well.

First, we have to realize that, even if a region is served by a single commercial bank, a single loan that results in the creation of new money does not constitute the entire money supply. The money supply actually consists of anything that can be used to settle a debt — anything. Thus, the money supply is not restricted to currency or demand deposits, but to anything that has value that can be exchanged for other things that have value. "Money" is not just currency and demand deposits, then, but is derived from the total produced goods and services that exist in an economy, and the present value of a projected future stream of income from to-be-produced goods and services.

Thus, everyone (not just banks) has the capacity to "issue money," that is, to make promises. What they don't have is the capacity to issue currency, legal tender or otherwise. This is why we have banks. Not everyone knows everyone else, and even if they do, not everyone trusts everyone else. Everyone has to trust the issuer of a currency, or the promises standing behind the currency won't "pass current," that is, be readily acceptable by virtually everyone without question.

Not that it's strictly necessary that money be in the form of currency or demand deposits. If you have packs of cigarettes and someone else is willing to exchange his dead chickens for your cigarettes, two debts have been created and settled in the transaction, and money has been created and canceled.

Thus, the only thing necessary to be able to create money is the power to make promises and the trustworthiness to make good on the promises you make. When a bank exchanges its good word for a lien on the present value of a borrower's project that does not yet exist, it is creating money that did not rely on existing savings. For this service the bank is legitimately due a fee; what the bank is doing is not usury. The bank is also entitled to a "risk premium" based on the likelihood that the borrower will not repay the loan, thereby leaving the bank responsible for making good on promises that are backed by bad promises. A risk premium is not usury, either, any more than an insurance premium is usury.

What is usury, however, is charging an interest rate, that is, a share of profits, on money that did not previously have an owner. That is, the money did not come out of an existing accumulation of savings belonging to someone, but was created "out of nothing," that is, out of the bank's general trustworthiness and the borrower's presumed ability to pay back the loan. Now that is usury, because a lender is only entitled to a share of profits generated by that which he saved, owns, and lent to another for a productive project.

Thus we have the conundrum that commercial banking, while not usurious by nature, is engaged in usury. This is due, ironically, to the mistaken belief that capital formation can only be financed out of existing accumulations of savings. While demonstrably false, this belief is so engrained even among bankers and professional economists that they truly don't seem to realize that they are misusing a system in a way that undermines the very system they think they are protecting. A commercial bank is an institution designed and intended to operate to finance capital formation without the need for existing accumulations of savings. The problem is that most people act as if a commercial bank is an entirely different kind of bank, the bank of deposit.

The difference is what we will look at in the next posting.

Friday, June 12, 2009

News from the Network, Vol. 2, No. 24

As was not unexpected, today's Wall Street Journal carries a report by Robert Farago of "The Truth About Cars" web site, detailing the actions that politicians have already taken to interfere in business decisions at General Motors . . . despite their promise to keep their hands off. Clearly, no one took that promise seriously, but it does seem as if they have jumped the gun just a little, not even waiting until the dust has settled from the most recent disaster caused by State interference in the economy before commencing the next one. It is probably safe to state that no consideration whatsoever was given to the possibility of a 100% worker/retiree/dealership buyout, financed by discounting qualified loan paper from commercial banks at the Federal Reserve, which has, to all intents and purposes, been operating as the Federal government's money machine since 1917, despite prohibitions that still exist in the Federal Reserve Act of 1913. Still, progress in getting the principles of the Just Third Way out to the public and potential movers and shakers continues unabated, with some very promising signs that people are beginning to take notice:
• A meeting scheduled on Monday of this week with a representative of "Smart Girl Politics" was canceled due to travel conflicts. The meeting will be rescheduled at the earliest possible date.

• Copies of the "Declaration on Monetary Justice" along with an explanatory cover letter were sent out to selected U.S. Representatives and Senators. If you belong to business, banking, labor, religious, environmental, academic, professional, civic or other organizations or third parties that want to endorse the Declaration, have them join the Coalition for Capital Homesteading. Rowland Brohawn designed the special letterhead and formatted a special edition of the Declaration for the effort.

• During this week, Norman Kurland engaged in a series of discussions on the "Doctors' Plan for Universal Health Care Coverage." Much of the debate dealt with the dangers of allowing the State more than a regulatory role. A number of reform advocates appear to see no danger in a monopoly State-run system. The problem that we see, however, is that (just as is the case with General Motors) politicians will not be able to keep themselves from using a government-run health care system to further their political aims and agendas. As Dr. Leo Alexander, Chief Medical Adviser at the Nuremburg War Crimes Trials noted in his landmark article in the 1949 issue of the New England Journal of Medicine, "Science under dictatorship becomes subordinated to the guiding philosophy of the dictatorship." ("Medical Science Under Dictatorship.") The same is true for any government-run monopoly.

• Earlier today CESJ president Norman Kurland sent letters to some of the people he met while attending the National Catholic Prayer Breakfast on May 8, 2009, in Washington, DC, which Norm and a CESJ delegation consisting of Rowland Brohawn, Dawn Brohawn, Dr. Ahmed Mansour of the International Qu'uranic Center in Northern Virginia, and Michael D. Greaney attended at the invitation of Dr. Robert Moynihan and Ms. Debbie Tomlinson of Inside the Vatican magazine. Two of the contacts are members of "Legatus," an organization for Catholic CEOs, the mission of which is to 1) foster continuing religious education of its members, 2) translate the social teaching of the Catholic Church into practical applications, and 3) spread the faith through good example, good deeds and high ethical standards. Indications are that the members of Legatus should be very open to learning about Justice-Based Management ("JBM") and applying it in their companies.

• As of this morning, we have had visitors from 32 different countries and 38 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, Venezuela, and Brazil rounding out the "top five." People in Venezuela, Egypt, Malaysia, the Netherlands and the United States spent the most average time on the blog. The most popular postings are the news reports, with the postings on usury and Henry Ford's mistakes 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.

Thursday, June 11, 2009

On Usury and Other Dishonest Profit, Part XV

Commercial banking theory (which is, essentially, bank of issue theory) is relative easy to understand, once we remove the mystique that surrounds money. A bank — any bank, including banks of deposit as well as banks of issue — is essentially a clearinghouse for the exchange of promises. The function of a bank is to substitute the bank's good word for that of an individual borrower, and transfer these generalized promises that the bank stands behind between debtors and creditors.

At its simplest, a commercial bank operates in this fashion. A prospective borrower has something with a present value. This can be anything from an accumulation of existing wealth, such as inventories, or a sound proposal that will (if all goes as expected) generate inventory — and thus income when sold — in the future. As every finance major in college knows, the future stream of income from a capital project, whether industrial, agricultural, or commercial, has a "present value."

How this present value is determined is more of an art than a science, and one expert in the process will typically give between three to five present values in his or her opinion as to the expected actual present value. No one knows the future, of course, so as long as the opinion is based on the best data that can be gathered and the valuation expert is reasonably competent, his or her opinion is as good as anybody else's.

In any event, the prospective borrower cannot, realistically, go around to everyone in the economy, convince all the people with whom he or she will be dealing of the present value of the project. It is even more unrealistic to convince them all again to accept his or her individual promise to deliver wealth on demand to settle all the individual debts that will be incurred to bring the project to fruition. That is, to carry out the project, the prospective borrower would have to borrow the labor of some people, the raw materials of others, and so on, and pay them when the project starts to generate income.

Instead, the prospective borrower goes to a bank of issue, or commercial bank. He or she then only has to convince one individual, the bank's loan officer, of the present value of the project, and convince the loan officer to accept his or her promise to deliver wealth to the value of what is borrowed, plus a fee for being allowed to use the bank's good name, at such time as the project generates sufficient income.

After the usual bargaining (the borrower always believes the value of his or her project to be higher than the banker does), the borrower and the lender agree on the present value. The bank creates a demand deposit or prints notes in the amount of the lien it takes on the future income to be generated, and hands the checkbook or notes over to the borrower.

The borrower spends the money thus created (hopefully in ways that will generate the income needed to pay back the loan and make enough other profit to justify the effort), and begins making profits. A portion of the profits are used to make the debt service payments, which means payments of principal and interest on the loan.

When the bank receives the payments, it cancels that portion of the payment that represents principal (the original loan amount), and puts the rest into a revenue account to meet its own expenses and generate a profit for the bank. It's important to note that only the money that was created is canceled. The money that represents a charge over and above the original amount of the loan is not canceled, but reenters the economy as the bank pays its expenses and distributes dividends to its shareholders. The bank cancels no more money than it created in the first place. The amount over and above that collected by the bank as revenue reenters the economy, just as it would for any other business, whether to meet the bank's expenses, reinvest as retained earnings, or pay out profits.

Strictly speaking, none of this is by its nature usurious — but it can result in usury. That is what we will examine in the next posting in this series.

Wednesday, June 10, 2009

On Usury and Other Dishonest Profit, Part XIV

John Maynard Lord Keynes believed as an article of faith that financing for capital formation could only come from existing accumulations of savings. In order to have sufficient savings to finance the almost unimaginably expensive (in individual terms) new technology that came out of the Industrial Revolution, the world needs a small, elite class of capital owners whose capital generated so much income that they can't possibly consume it. (The Economic Consequences of the Peace, 2.iii)

In consequence, excess income is necessarily invested in additional capital. This increases the rate of savings even more. This results in job creation for the majority of humanity, and ensures that wages, not income from capital, is the sole source of income for the great mass of people. This arrangement of the economy is not only financially necessary, it bestows social and psychological benefits as well that the great mass of people be kept economically (and thus politically) powerless. (General Theory, VI.24.i)

The problem is that, once we examine the process of capital formation, we realize that Keynes' assumptions were wrong. Existing savings are not the source of financing for capital investment, directly, that is. Most savings are already in the form of investment — as Keynes declared (and we do not dispute), "savings = investment." (General Theory, II.6.ii) There is a modicum of savings in the form of hoards, that is, sterile cash not put to any use even as bank reserves (which are a legally-mandated investment in transactions cash), but this is, for the purposes of this discussion at least, negligible, and may be disregarded.

This brings us, finally, to the source of financing for new or replacement capital formation. Clearly, commercial banks do not lend out their reserves, for then they would no longer have the cash or government securities (cash equivalents) in reserve.

Instead of lending their reserves, then, commercial banks create money in the form of demand deposits. This money is (or is supposed to be) backed by qualified industrial, commercial, and agricultural loans. A commercial bank (so commercial banking theory goes) should never create money for consumer loans or anything else that does not generate its own repayment. The new money is backed by a lien on whatever the loan finances. Commercial banks, of course, require collateral in the form of existing investment (this is where savings, which equal investment, come into the picture).

Collateral (accumulations of savings in the form of existing investment) thus acts as a form of insurance. Savings does, in fact, enter into the process of investment in new capital, but not in the way Keynes believed. Bank reserves — another form of savings; an investment in transactions cash to meet legal requirements — also act as a kind of insurance, but (again), not in a way Keynes would have recognized or understood, given his assumptions. Reserves "insure" that there is sufficient cash or cash equivalents on hand to meet the daily demand for cash, not (as many people suppose) to back every loan (demand deposit) in full.

Instead, what backs the demand deposits of a commercial bank are the liens on the assets financed with the loan proceeds. In theory, it is possible to have a commercial bank that has no cash reserves at all. If the only business a commercial bank carried out were to make loans and accept loan payments, it would never have to cash a check or accept a deposit other than their own loan proceeds. This was, in fact, the way the Reichs loan banks in Germany were set up to run, and did run prior to World War I. Unfortunately, to finance the war effort, in 1915 the German Imperial government added short term government loans to the list of financial instruments eligible for discounting at the loan banks. This started the first round of what ultimately became the hyperinflation of the early 1920s.

In theory, then, all demand deposits of commercial banks are backed 100% by the assets that the loans themselves finance. To provide security for the loans, banks also demand that the borrower pledge additional assets as collateral, usually in the form of existing capital investments. This is so that, should the assets financed with the loan not generate sufficient income to repay the loan, the lender can seize the collateral and be able to cancel the loan with the proceeds realized from the sale of the collateral. To provide security for the bank and assure the bank's customers that the bank is sound and can meet its obligations, a certain percentage of the bank's assets are kept in cash or cash equivalents to meet the daily demand for cash.

Thus, given, say, a 20% "reserve requirement," all loans made by a commercial bank are backed (in theory, at least) 220% by assets: 1) 100% by the present value of the assets financed with the loans, 2) 100% by the collateral pledged by the borrower, and 3) 20% by bank reserves in the form of cash and cash equivalents. We can therefore see that, contrary to Keynesian dogma, existing accumulations of savings do not, in fact, directly finance capital formation.

The empirical data and findings published by Dr. Harold G. Moulton, as we have already seen, verified that Keynes was wrong in his assumptions about how capital formation is financed. In the next posting we will examine the case why commercial banking is not by its nature usurious — and also why it does not seem to work to the advantage of everyone, causing many people to conclude (falsely) that Keynes was, after all, correct in his assumption that wealth must be concentrated, and the economy subject to strict State control. (General Theory, V.24.iii)

Tuesday, June 9, 2009

On Usury and Other Dishonest Profit, Part XIII

We realize that this discussion of where money comes from to finance new capital investment is starting to sound like an extremely involved episode of The History Detectives. It is, however, necessary to cover this ground. People's ideas of money, credit, and interest have been so confused by the diligence of Lord Keynes and his disciples, that countering the economic policies inspired by the Great Defunct Economist requires a great deal of explanation.

The standard Keynesian line is that private individuals accumulate savings, then invest them to finance capital formation. This is absolute, as any reader of Keynes' General Theory (1936) can tell you.

When you take an economics course in college, however, you are taught that the government either taxes people or prints money (taxing people through inflation), spends the money to create jobs and increase effective demand, and saving by the rich following the increase in effective demand provides the financing for capital formation. In Keynesian economics, of course, it is necessary to save in order to invest, but possible to invest without first saving by increasing government expenditures and thereby increasing the amount of financial capital available. That is, you can spend what you don't have, and invest without having produced anything to save.

If you understand the preceding paragraph, you, too, can get a doctorate in Keynesian economics and run any economy in the world into the ground.

The belief that you cannot create money to finance capital formation is the pillar of iron at the heart of Keynesian economics, an absolute on which the whole of the Keynesian system is built. Unfortunately, another adamantine pillar shores up the Keynesian system — and contradicts the first pillar, to say nothing of being some of the purest usury the world has ever seen. That is, the State can create money backed by nothing but more government debt, even beyond its ability to tax the citizens. This will increase effective demand ("Keynesspeak" for consumer spending, i.e., non-productive money creation or usury), thereby creating jobs and stimulating more effective demand. This is, in effect, the belief that you can spend your way out of debt.

Mark Gongloff's "Ahead of the Tape" column in today's Wall Street Journal, "On Borrowed Time: Consumer-Led Recovery" (06/09/09, p. C-1) suggests otherwise. Mr. Gongloff reports that, as of the end of 2008, accumulated consumer debt had reached $13.8 trillion, at the same time that 2008 GDP was $14.3 trillion. If all consumer debt had been paid off in 2008, people would have had a per capita 3.5 cents to spend for every dollar earned. Add in the possibly low estimate of outstanding U.S. government debt of $11.3 trillion, and in 2008 people had a per capita potential negative 75.6 cents to spend for every dollar earned . . . if every cent of GDP had been used to pay down debt.

The federal government now proposes to add another $288 billion to the mountain of debt and spur consumer lending to stimulate the economy, leaving approximately negative 77.6 cents of every dollar earned to spend on anything on a per capita basis. Thus, if people stop consuming (i.e., eating, drinking, living . . . ), there will be negative $11.1 trillion to invest in replacing worn out capital and growing the economy, thereby creating jobs.

The conclusion is obvious to anyone who has not been blinded by Keynesian rhetoric and predictions based on unfounded and illogical "hope" that the recession is on its way out: Recovery is impossible in the Keynesian framework. The savings required to invest in replacement and new capital formation simply do not exist, and do not exist to the tune of $25.4 trillion, more than ten times the annual new capital formation that takes place in the U.S. economy.

There is, however, paradoxically a great deal of hope in the current situation. The situation described above is absolutely impossible, as even people suffering from severe Keynesian financial delusions are beginning to realize. Once we realize that Keynes' iron dictum that savings must necessarily precede investment is necessarily wrong, the whole Keynesian house of cards tumbles down.

Obviously there has been new capital formation going on. Just as obviously there are no savings in the system to finance any capital formation, new or replacement. The money to finance capital formation couldn't possibly have come out of savings as Keynes insisted it must. The essential contradiction inherent in the Keynesian system is that it relies absolutely on something that Keynes declared was impossible: financing capital formation without existing accumulations of savings. How this is possible we will begin to examine in the next posting in this series.

Monday, June 8, 2009

On Usury and Other Dishonest Profit, Part XII

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where the financing of capital formation relied on existing accumulations of savings. As we have seen, not only were there insufficient savings to account for financing the incredible amount of new capital formed in the United States between 1830 to 1930, Keynes' belief that investment can only take place after cutting consumption and saving neglects one colossal fact on which Keynes also insisted: savings equals investment.

Had Keynes been consistent, he would have realized that he had said some things that, when they are put together, simply don't make sense: 1) savings consists of unconsumed income. 2) Savings equals investment, and 3) financing for capital formation can only occur by cutting consumption in order to save, or by liquidating existing investments.

Logically, then, there can never be any more of anything than already exists. If, as Keynes claimed, savings equals investment, then saving by one individual means investment by another — as Keynes admitted in his General Theory (II.6.ii). Thus, the only way to finance new investment is to liquidate existing investment!

This is a "chicken or the egg" argument. New capital investment can only be financed out of existing accumulations of savings . . . but all savings are already invested. If we wish to finance new investment, we must liquidate old investment . . . which means that the new investment is equal to the old investment, and we haven't really gained anything!

The problem (one of the problems, anyway) is that Keynes didn't understand the science of finance. He was absolutely correct that savings equals investment. No sensible person leaves accumulations of savings in the form of cash, except to supply working capital, which is itself an investment. He was absolutely wrong, however, that savings are used directly to finance new capital formation.

Savings are already in the form of investment. The accumulations of savers, assuming that they do not themselves invest directly, are deposited in a bank. The bank immediately turns around and makes new loans based on the savings, limited by whatever the reserve requirement happens to be. It would not make good business sense for a bank not to make loans when it could be making money.

In actuality, of course, a bank does not lend out the savings of depositors. Savings are immediately invested in the bank's reserves. In the United States, this means government bonds. Every dollar not invested in government bonds means one dollar on which the bank is losing money, even if the interest rate on government bonds is very low. Government bonds may make very low interest payments, but vault cash pays no interest at all. All commercial banks invest as much of their reserves in government bonds as possible, and keep as little in the form of cash as they can.

Nor do banks lend out their reserves. They are, in fact, forbidden to do so. They must keep on hand sufficient cash to meet their daily transactions demand, or have enough in government bonds that they can sell at a moment's notice to meet their daily transactions demand in order to prevent a "run" on the bank.

If commercial bank reserves are not lent out to customers, then, where does the money come from to finance new capital investment?

Friday, June 5, 2009

News from the Network, Vol. 2, No. 23

Possibly the biggest news during the past week is the odd belief on the part of many people in government and the media that the American taxpayer will somehow be the majority owner of the "new" General Motors. The problem with that claim, however, is that "ownership" and "control" are synonymous, and "ownership" consists in large measure of enjoyment of the "fruits of ownership," e.g., control, income, and so on. Unless someone has control and enjoys the income from what is owned, he or she cannot be said to "own." Apart from that, there are some substantive happenings this week in the network:
• Early this week, Michael D. Greaney, CESJ's Director of Research and Notre Dame graduate (1977) got into an e-mail discussion with Mr. William Dempsey of "Project Sycamore," a group formed to "protect the Catholic identity of Notre Dame" and describing itself as the "Guardian of the Grotto" (the "Grotto" being a reference to the replica of the famous Lourdes Grotto built on the Notre Dame campus. Mr. Dempsey had sent Mr. Greaney an e-mail expressing "guarded hope" that the scandal caused by the conferring of an honorary degree on President Obama by Reverend John Jenkins, president of Notre Dame, in violation of a directive from the United States Conference of Catholic Bishops, would soon be resolved satisfactorily. Mr. Greaney sent a response to Mr. Dempsey proposing that the best way to resolve what has become a public relations disaster for Notre Dame is to remove Father Jenkins as president, and replace him with Reverend Edward Krause, C.S.C., Ph.D., Notre Dame '63 (son of Notre Dame's noted Athletic Director, Edward "Moose" Krause), whose orthodoxy and commitment to social justice and Capital Homesteading as a Pro Life economic agenda are without question. Mr. Dempsey's position was that suggesting Father Krause as a replacement would be perceived as "officious intermeddling," and that the Board of Trustees would handle the matter without interference from the outside. Mr. Greaney's position was that, through the "act of social justice" it is possible to change even the most impossible-seeming situation. The discussion broke down after Mr. Greaney recommended a number of times that Mr. Dempsey read Father William Ferree's pamphlet, Introduction to Social Justice.

• For the record, we do not object to Mr. Obama's having given the commencement address or participating in a debate or dialog on the Pro Choice v. the Pro Life position. "Academic freedom" or the right of an educational institution to sponsor talks or presentations on any topic under the sun or moon was never the real concern, although many in the media chose to cast the issue in that light. Such a debate (had it actually taken place, instead of having vocal protestors turned over to the civil authorities and silenced) could have been very useful, even profitable for both sides, especially if the students, faculty, and administration of Notre Dame had a sound grounding in the principles of the natural law, particularly the rights to life, liberty, access to the means of acquiring and possessing private property, and acquiring and developing virtue (i.e., "pursuing happiness"). The problem was that the head of America's iconic Catholic educational institution defied a direct order not to confer honors on pro-abortion politicians. This not only legitimized disobedience and dissent from duly-constituted authority, it gave an implied endorsement to Mr. Obama's position. This is what has scandalized so many of every religious faith concerned with the jettisoning of ordinary standards of ethical and moral behavior. Father Jenkins' act — fully endorsed, according to his statements, by the Notre Dame Board of Trustees — was a public act, and undermined support for all organized religious belief and practice, weakening the effectiveness of religion in its ability to fill its necessary civil role as the chief teacher and guide of moral standards and behavior. It is thus the concern of every member of society, and not an internal matter of the university, as many people continue to insist.

• CESJ had an interesting discussion early this week with Mr. Geoff Barkume of "Real Catholic TV." While CESJ is unable at this time to take advantage of a strategic alliance with the "first all-internet Catholic television station," we found ourselves in agreement on the need for people of goodwill everywhere, whatever their faith or philosophy, to join together and work for the common good through organized acts of social justice.

• CESJ member Dr. Muhiuddin Khan Alamgir is now a member of parliament in Bangladesh. CESJ is working with Dr. Alamgir to publish his book, Notes from a Prison: Bangladesh, an account of his imprisonment on trumped-up charges due to his progressive political stance.

• CESJ had a luncheon meeting with Tim Cusick, a priest from St. Augustine, Florida, who is looking for practical ways to integrate the principles of the natural law and ethics into business and professional life. The bulk of the discussion involved explaining how Equity Expansion International, Inc. works to incorporate essential principles of the natural law into business through Justice-Based Management, and the opportunities that exist in working with EEI to surface "servant leaders" in business to guide the restructuring of companies along lines consistent with the basic principles of economic and social justice.

• On Saturday, June 6, 2009, CESJ will be presenting an alternative to public-sector control of the health care system in a way that meets Mr. Obama's stated goals, but which relies on the private sector. The presentation will be built around CESJ's "Doctors' Plan for Universal Health Care" on which we've been working with a number of medical professionals. The presentation is a part of the "Organizing for America" initiative. All available spaces were filled rapidly, so CESJ expects a lively discussion.

• We recently received an e-mail very briefly describing a statement by German jurist Ernst-Wolfgang Böckenförde, who is "highly esteemed" by the pope, calling for "the Church to write the definitive 'manifesto' against capitalism." Herr Böckenförde seems to have said that capitalism "must be overturned at its foundations, because it is inhuman," a statement with which we have little difficulty agreeing. The problem is that the title of the little snippet read, "And from Germany, Marx Reappears." This illustrates the problems with oversimplifications in the media, as well as among intellectuals and academia. (On the other hand, the report could be absolutely accurate.) The problem is that, as stated, "capitalism" is inaccurately portrayed as "inhuman," with the intimation being that Marxism — not mentioned in the short blurb — is therefore human. Capitalism is actually "semi-human," as it is based on a distorted understanding of a natural right (private property) and its exercise. Socialism ("Marxism"), on the other hand, is based on a total rejection of private property: "The theory of the communists may be summed up in a single sentence: the abolition of private property." (The Communist Manifesto, 1848). As phrased, the report comes across as advocating socialism, which has been explicitly condemned by more than one pope, whereas "only" the abuses and the malformed economic structures under capitalism are condemned; capitalism is not contrary to the natural law as is socialism. (Of course, polygamy, slavery, and the death penalty are not contrary to the natural law, either, which should probably tell us how we are to view capitalism.) Conditions imposed by capitalism are certainly inhuman — nearly as much as those imposed by the various forms of socialism. That "nearly," however, makes a significant difference . . . if by "significant" we mean that it is better to strangle slowly under capitalism than it is to be strangled and tortured quickly under socialism. The only realistic solution to the "tastes great/less filling" argument between capitalism and socialism is to restructure the social order in conformity with the principles of the natural law, especially with respect to the economic order and the three principles of economic justice. If His Holiness is still struggling with the encyclical, it may be because he hasn't heard of the clarification CESJ has worked out on economic justice, and the possibilities inherent in the Just Third Way, developed in large measure by a synthesis of the economic justice principles worked out by Louis Kelso and Mortimer Adler with the social doctrine of Leo XIII and Pius XI. Unfortunately, as far as we know only one book by Louis Kelso has been translated into German: How to Turn Eighty Million Workers Into Capitalists on Borrowed Money (1967), which was retitled, Two-Factor Theory, and translated in 1971 as Jeder Hat Ein Recht Auf Kapital — "Everyone Has a Right to Own Capital" (Econ Verlag GmbH, Düsseldorf/Wein). Of course, anyone who reads English can go to the CESJ website and download the free copies of The Capitalist Manifesto (1958) and The New Capitalists (1961), which (as we've mentioned before) are very bad and inaccurate titles for very good books. Dr. Moynihan said that he will try to locate contact information for Herr Bröckenförde while he is in Europe in the coming week so that a dialog can possibly take place between him and Norman Kurland.

• As of this morning, we have had visitors from 32 different countries and 40 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, Hungary, Malaysia, the Netherlands and the United States spent the most average time on the blog. The most popular posting is the letter to Judge Posner, followed by these news reports, with the postings on usury and Henry Ford's mistakes 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.

Thursday, June 4, 2009

On Usury and Other Dishonest Profit, Part XI

The question of where money comes from has baffled politicians and economists for ages. It's not that difficult to answer once we realize that "money" is just a promise to deliver wealth on demand. Anyone can create money just by promising to deliver wealth, and being trustworthy enough to make good on the promise. "Money," in fact, is legally defined as being anything — anything — that can be used in settlement of a debt. It doesn't have to be gold or silver, or even legal tender government certificates, as long as the recipient agrees to accept it, and the issuer delivers the promised wealth on demand when the money he or she issued comes back for redemption.

In his analysis of how capital formation was financed from 1830 to 1930, Dr. Harold Moulton discovered this was, in point of fact, the case. Contrary to the accepted accounts, issues of state and private banks used to finance capital formation were not backed by specie (gold and silver) to any great degree, whether or not imported from Europe. On the contrary (as a number of authorities make clear), paper money backed with commercial loans made for productive purposes ("mercantile paper"), equity shares of sound companies (including other banks), and other instruments conveying liens on existing, "hard" assets were absolutely essential if the United States was to develop economically, or even stay where it was. Popular misconceptions aside, paper money could and did, in fact, make up the bulk of circulating media, inadequately supplemented with foreign coin, notably the Spanish American dollar or "Piece of Eight," on which the U.S. monetary system was based.

Consistent with classic bank of issue theory, paper issues were backed by loans made for the purpose of forming capital. Banks purchased these loans by printing money or creating demand deposits (with the former being much more common), and retaining the loan paper as reserves until redeemed by the borrower. At that time the money was canceled or held in treasury until reissued.

This is the way an honest bank operated. There were also "wildcat banks," so-called because to redeem the bank notes you had to present them for payment at headquarters, located in an area so remote that there were only howling wildcats as neighbors. Wildcat banks would typically operate only long enough to print up a few bushels of paper money not backed by any commercial loans or specie (effectively counterfeiting), then go out of business . . . to open up a few months later in another area under another name. This practice was common enough to embed a deep and lasting distrust of all banks in the American psyche.

Citing official Congressional reports, George Tucker, a noted early 19th century American Congressman, novelist (he wrote one of America's first science fiction novels under a pseudonym, "Joseph Atterley": A Voyage to the Moon, 1827), and political economist, observed that the circulating media of the United States were primarily paper representing credit extended by commercial banks of issue. While the net imports of gold from 1834 through 1838 seem enormous at nearly $50 million, this was dwarfed by the amount of bank paper in circulation meeting the needs of commerce. As Tucker stated, writing in 1838,
By far the largest proportion of this class of credits is in promissory notes, especially in the mutual dealings of mercantile men. We may form some idea of their vast amount, when we find those which were discounted at the several banks in the United States, amounting, on the 1st of January [1838] to $485,000,000, and on the 1st of January preceding [1837], to 40,000,000 more. These discounts, moreover, constitute but a part, and, perhaps, not the largest part, of this description of credits. (George Tucker, The Theory of Money & Banks Investigated (1839), 132.)
No, the vast bulk of financing for America's economic growth in the 19th century was not gold and silver, whether from Europe or mined domestically. It consisted of making promises to repay loans made for capital formation out of the future profits generated by the very capital whose formation the loans financed.