Some Thoughts on Money, Part III: The Two Kinds of Banks (Again)

In our previous posting in this series, we began our analysis of the three primary schools of money, credit, and banking that started developing in the late 18th century. Before we look at them more closely, however, we need to examine the situation that led up to them. This will help us not only see where they went wrong, but also what they have in common — if anything.

To begin, we start with the realization that there are two kinds of banks. These are the "bank of deposit," and the "bank of issue" (also called the "bank of circulation").

The bank of deposit is pretty much what it sounds like, and what most people tend to think of as a bank . . . whether or not they are looking at an actual bank of deposit. A bank of deposit takes deposits (obviously), then lends out the deposits to borrowers. The bank charges interest on such loans, some of which is passed through to the depositors. The bank of deposit retains the rest of the interest as its revenue, from which it meets its costs and generates profit for the owners.

Assuming that a country is on the gold standard, the bank of deposit can either lend out the gold that was deposited, or it can keep the gold safe in its vaults and issue a banknote to substitute for the gold. These banknotes circulate as currency, or "current money." If a customer presents a banknote to the bank, the bank will either use the banknote to cancel a debt owed by the customer, or exchange the note for gold.

The bank of issue is a different creature altogether. The most common type of bank of issue is the commercial bank, that is, a bank intended to facilitate commerce. A bank of issue converts non-monetary wealth into money. If something has value, it can (in theory, anyway) be converted into money.

A bank of issue (again, in theory) does not need a customer to make a deposit before making a loan. Instead, a borrower comes to the bank and pledges something of value in exchange for a loan. Technically, if the pledge involves real property (i.e., land), the pledge is called a "mortgage." If the pledge involves anything other than land (that is, personal property), it is called a "pawn." The latter term is nowadays usually restricted to small loans made on "portable security," that is, items of relatively high value that can be transported easily.

The bank of issue creates the money, either in the form of a banknote that circulates as currency, or in the form of a demand deposit on which the borrower issues checks. A check, while it is money, does not usually circulate as currency, but is returned immediately (more or less) to the bank of issue for redemption after a single transaction. Usually the recipient of a check does not take it to the bank on which it was drawn and demand cash, but deposits it in his or her own bank, taking the banknotes issued by that bank or issuing checks.

The recipient's bank presents the check to the bank on which it was drawn in order to settle the account and complete the transaction. Since the original bank and the receiving bank often have thousands, if not millions of such transactions back and forth, very little cash changes hands — or needs to, as the accounts eventually "zero out" (again, in theory). This "zeroing out" is usually done through a clearinghouse, a financial institution designed to facilitate transactions between banks and minimize the movement of actual cash, which can be both unwieldy and unsafe.

In practice, however, there is a role for reserves of currency even with a "pure" bank of issue. Assuming a gold standard, a bank of issue may need gold on hand to reassure the public as to the value of its banknotes and demand deposits. A bank of issue does this by converting its banknotes and demand deposits into gold coin on demand (or into banknotes of the central bank that can be converted into gold) instead of using them to settle debts.

A bank of issue thereby assumes the character of a bank of deposit, at least in part. The bank has to maintain deposits — reserves — of whatever serves as the currency in order to insure its banknotes and demand deposits. It thereby backs its banknotes and demand deposits both with the loans it made to create the money (which might go bad), and a percentage of its total loans in gold, which is presumed always to be good, despite what history has shown.

In our next posting we will look at the "Bullion Controversy," which provided the fertile seedbed out of which grew the three schools of money, credit, and banking.

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News from the Network, Vol. 2, No. 35

This week the economists are vaguely predicting the end of the recession, it's just a matter of time, while last week we were informed it was definitely over, it's just a matter of time. The fact that these predictions are based on how much people are borrowing or receiving in government handouts and spending on consumption goods and services, and not on how much they are producing (in accordance with Say's Law of Markets, how much "money" they are making and spending), and how well the speculators and gamblers are making out on Wall Street doesn't seem to faze the experts one bit.

More and more the evidence mounts, not that the recession is ending, but that policymakers and academics have no real understanding of money, credit, and banking. They appear to be adhering irrevocably to the unquestioned dogma that new capital formation cannot be financed except by using existing accumulations of savings. This is an assumption proved absolutely false by Dr. Harold G. Moulton in his 1935 monograph, The Formation of Capital.

Restricting the financing of new capital formation to existing accumulations of savings means that you need a very small, very rich elite. The rich in this scenario are the only ones who can afford to save, then invest their unconsumed income in new capital. This in turn presumably creates jobs for the rest of us . . . those of us who are not replaced by advancing technology or cheaper foreign labor, that is. From the point of view of efficiency (using the word as Walter Bagehot used it in his 1867 apology for plutocracy, The English Constitution), Keynes believed that the State should control the rate of return on investment and the rate of capital formation (i.e., "own").

This is because the State as the State doesn't consume in the same sense that a human being does. With effective State ownership, all income can be directed to political, instead of economic ends — that is, in meeting the needs of the State, not in satisfying human wants and needs. Everyone becomes a dependent of the government, or, as a 1925 U.S. Supreme Court decision expressed it in Pierce v. Society of Sisters, "mere creatures of the State."

We can see why Kelso and Adler subtitled their second book, "A Proposal to Free Economic Growth from the Slavery of Savings." Nevertheless, the Just Third Way continues to inch forward:

• The big news this week was the 305th consecutive monthly meeting of CESJ. A number of important items were discussed, among them the East St. Louis project, the book by Dr. Muhiuddin Khan Alamgir (Notes from a Prison: Bangladesh), and progress on various other publication projects.

• Dr. Alamgir was released from prison a short while back, where he was held for 22 months on false charges (effectively a political prisoner), and has been elected to the Bangladesh parliament. He will be visiting the United States in September and wants to meet with CESJ and present the situation in Bangladesh. Dr. Alamgir is a good friend of Father William Christensen, S.M., of the Institute for Integrated Rural Development (IIRD) in Bangladesh.

• Due to the economic downturn, the IIRD has experienced a serious drop in contributions, in the neighborhood of 54% from prior years. They report that they are stretched to the limit. Please visit their website and consider what you might be able to do to help.

• At this critical point in history, it is important that people also come together and brainstorm about how to get the ideas of CESJ and the Global Justice Movement out into the public eye. If you have an initiative you'd like to propose and carry through to completion, please go to the CESJ website and let us know what you're doing/want to do. We want to get students involved, especially in East St. Louis. Norman G. Kurland has been particularly effective on radio interviews, especially over the telephone.

• As of this morning, we have had visitors from 34 different countries and 41 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brunei, Canada and Venezuela. People in Israel, Indonesia, Venezuela, Brazil, Argentina and spent the most average time on the blog. The most popular posting by far continues to be "What Caused the Economic Crisis," followed by the Keynesian paradox of thrift, and the letter to the Wall Street Journal on Caritas in Veritate, the news reports, the response to Dr. Michael Novak, and "What You Can Do to Address the Economic Crisis. With respect to the amount of time spent reading, the postings on the usury series, the "Reign of the British Currency School, and the Cobbett series appear to be the most popular.

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.

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Some Thoughts on Money, Part II: The Different Schools of Thought

Beginning approximately in the late 18th century, three broad schools of thought developed on money, banking, and credit. These have largely disappeared as discrete, identifiable schools in the general confusion that seems to have flooded into all areas of thought with the rise in positivism in all its forms. Many of the elements from these three schools, however — more accurately, two schools and a "sub-school" — have been incorporated (although not in any rational or meaningful way) into the confused mess known today as "monetary and fiscal policy." These three schools were:

• The (British) Currency School,

• The (British) Banking School, and

• The Free Banking School.

Very briefly, the tenets of these schools (and what follows contains some extreme oversimplifications to allow for space and time constraints) were:

The Currency School

As we have seen in previous postings, the Currency School believed that issues of banknotes backed by government debt should be strictly limited to a pre-determined amount, and the rest of the currency should either be gold coin or banknotes backed by gold. The definition of "money" was restricted to gold and banknotes backed either by gold or a limited amount of government debt. The role of the central bank was primarily to finance government operations without recourse to the tax system.

The Banking School

The Banking School believed that real bills, the needs of trade, and the "law of reflux" (that money created for productive purposes — not speculation, derivatives, or government spending, i.e., "fictitious bills" — was self regulating in that the money would return to the issuer when used to repay the loan) should govern bank operations. The definition of money included anything that could be used in settlement of a debt. The role of the central bank was to create money to provide adequate liquidity for industry, commerce, and agriculture and ensure that all currency throughout the region served by the central bank passed at par. The government should raise what money it needed through taxation or borrowing existing accumulations of savings.

The Free Banking School

The Free Banking School believed that competitive private banks would not over-issue banknotes or create too much money in the form of demand deposits or other negotiable instruments through the application of the real bills doctrine, whereas a monopoly issuer — such as a State-controlled central bank or government treasury would do so as a matter of course. Money was defined as anything that could be used in settlement of a debt. There was no recognized legitimate role for a central bank.

If we reflect on the basic tenets of each of these schools, we can see where many of the ideas they embody can be found in the monetary and fiscal policy followed by a number of today's governments. Unfortunately, due to the problem of trying to make incompatible elements work together as a system to achieve political rather than economic ends, especially when critical factors are omitted or ignored, or there is no fundamental agreement on principle, is a recipe for disaster. This is true regardless of the goodwill (or lack thereof) on the part of policymakers or the academics advising them.

In subsequent postings we will examine each of these schools briefly. We might then be able to see if there is a way to take the obvious good from each of them, and synthesize them into a rational whole. In this way we might be able to see if it is possible to discern any underlying principle that joins all of them at some level. We can then, perhaps, develop some principles of a coherent system that works for the betterment of our social institutions in a manner consistent with the demands of individual human dignity and personal sovereignty.

To do this we will look at how each system 1) defines money, 2) understands the role of banks of issue, and 3) assigns what role to a central bank.

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Some Thoughts on Money, Part I: Debt and Asset-Backed Money

Money, being anything that can be used in settlement of a debt, must represent something of value. Many things have been recognized throughout history as having value, often gold and silver or other items valued for their utility or beauty. Primitive economies often use draft animals as a standard of value, as they are usually the most valuable owned items, and money must be backed by something in which the issuer has an ownership interest. In ancient Rome and Ireland, for example, the standard was cattle. Our terms pecuniary and capital come from an obsolete word for cattle (pecus) and head of cattle (caput), respectively. In Ceylon, the standard of value was the elephant.

Of course, the standard of value doesn't have to be a draft animal. It can be anything that people generally recognize as having value, such as lumps of bronze, silver, or gold. Bronze money was even believed to have a sacred character in Rome, the alloy being considered essential to life for its utility in making tools and weapons. In Papua New Guinea, the standard of value was the severed human head.

The key is that, as Irving Fisher noted in The Purchasing Power of Money (1911, revised 1913), whatever is used as a currency must either itself convey something of value, such as gold, silver, livestock, or some other commodity (for example, the bread and other food tokens issued as Notgeld and Kriegsgeld in Germany and Austria-Hungary during the First World War and the subsequent hyperinflation), or represent a property right in something of value, such as inventories of gold, silver, livestock, or other commodities. In a modern banking economy, existing inventories of marketable goods and services, as well as productive assets (capital) serve this purpose, perhaps in the case of capital assets unconsciously echoing the ancient Roman bovine standard of value. When a certificate or some other symbol is issued and used as currency (current money) in place of the actual good or service, the money is said to be "backed" by whatever specific thing of value the symbol represents, whether it is herds of cattle, bars of gold or silver, or inventories of marketable goods and services or capital assets.

When the something of value backing the currency is debt instruments issued by the State (as is the case in most economies today), the currency is said to be backed by the full faith and credit of whatever government issues the currency. If the State is shaky either politically or economically, the currency will either have a low value, or fluctuate wildly in response to economic and political conditions. If the State is sound, and the government keeps its debt within reasonable bounds, the debt-backed currency will be relatively stable.

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Aristotle on Private Property

Throughout history widespread ownership of the means of production has been understood as the foundation of a stable social order. Political scientists from the earliest times have stressed this fact. The moral law, embodied in the codes of ethics of every culture and civilization that has ever existed, without exception proclaims the natural right of every human being to be an owner through the universal prohibition against theft. "Theft" is a violation of private property.

How the rights of private property are exercised necessarily differs from place to place and in different times. Nevertheless, the substance of private property, the right to control and to receive the fruits of ownership, cannot be altered. As Heinrich Rommen, one of Germany's premier jurists before escaping from the Nazis, explained in his book on the natural law,

"Thou shalt not steal" presupposes the institution of private property as pertaining to the natural law; but not, for example, the feudal property arrangements of the Middle Ages or the modern capitalist system. Since the natural law lays down general norms only, it is the function of the positive law to undertake the concrete, detailed regulation of real and personal property and to prescribe the formalities for conveyance of ownership. (Heinrich Rommen, The Natural Law, A Study in Legal and Social History and Philosophy. Indianapolis, Indiana: Liberty Fund, Inc., 1998, 59.)

Aristotle stressed the importance of the institution of private property many times in the Politics. While all the cites are far too numerous to quote, the following should give a good idea of the Philosopher's attitude towards private ownership of the means of production:

It is evident then that it is best to have property private, but to make the use of it common; but how the citizens are to be brought to it is the particular business of the legislator. And also with respect to pleasure, it is unspeakable how advantageous it is, that a man should think he has something which he may call his own; for it is by no means to no purpose, that each person should have an affection for himself, for that is natural, and yet to be a self-lover is justly censured; for we mean by that, not one that simply loves himself, but one that loves himself more than he ought; in like manner we blame a money-lover, and yet both money and self is what all men love. Besides, it is very pleasing to us to oblige and assist our friends and companions, as well as those whom we are connected with by the rights of hospitality; and this cannot be done without the establishment of private property, which cannot take place with those who make a city too much one; besides, they prevent every opportunity of exercising two principal virtues, modesty and liberality. Modesty with respect to the female sex, for this virtue requires you to abstain from her who is another's; liberality, which depends upon private property, for without that no one can appear liberal, or do any generous action; for liberality consists in imparting to others what is our own. (Aristotle, The Politics, II.v.)

One comment: Aristotle's statement that, "it is best to have property private, but to make the use of it common," has sometimes been construed as support for socialism. On the contrary, as we discover from the "laws and characteristics of social justice" discerned by William J. Ferree, S.M., Ph.D., making the use of property common has, in ordinary circumstances, been construed as an admonition not to use what you own to harm yourself, others, or the common good as a whole. You are, when possible, to employ your property and other rights in a way that strengthens the proper use of the institutions of the common good and their compliance with essential human nature. That is, we individually own and exercise control over the goods of the earth, but always with an eye toward the common good of all humanity (solidarity), both at the level closest to the individual (subsidiarity), and all other levels of the common good (social justice).

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Thomas Hobbes on Private Property

Doing a little research on the foundations of Keynesian economics, we discovered that the Great Defunct Economist was in the line of economic thought established by the British Currency School. The tenets of the British Currency School were embedded in the British Bank Charter Act of 1844, in the United States National Bank of 1864 — and in Walter Bagehot's analysis of the London financial market, Lombard Street (1873).

Similar to the way in which one must read Adam Smith's The Theory of Moral Sentiments (1759) in order to understand The Wealth of Nations (1776), you have to read Bagehot's The English Constitution (1867) in order to understand Lombard Street — and Keynes' General Theory of Employment, Interest, and Money (1936). In The English Constitution, Bagehot comments favorably on the political philosophy of Thomas Hobbes, whose 1651 book, Leviathan, provided a blueprint for the totalitarian political State, which complemented Bagehot's blueprint for the totalitarian economic State.

It comes as no surprise, then, that Keynes, who followed Bagehot's analysis, believed that "money" was nothing more than purchase orders issued by the State (A Treatise on Money, Volume I, 1930, p. 1), and backed by the State's authority — the "faith and credit" of the government. This, in effect, made the State the owner of everything in the State. This is nothing more than the claim made by Hobbes in Chapter 29 of Leviathan:

A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, "That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign." Every man has indeed a Propriety that excludes the Right of every other Subject: And he has it onely from the Soveraign Power; without the protection whereof, every other man should have equall Right to the same. But if the Right of the Soveraign also be excluded, he cannot performe the office they have put him into; which is, to defend them both from forraign enemies, and from the injuries of one another; and consequently there is no longer a Common-wealth.

That is, private property (according to Hobbes) is prudential matter. Citizens are only permitted to own so long as the State permits it or finds it useful. The State is the real, ultimate owner of everything in the country, and ordinary people only enjoy ownership so long as the State finds it expedient that they should do so.

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News from the Network, Vol. 2, No. 34

Back in 1945 Christian apologist C. S. Lewis published a book called The Great Divorce. By that Lewis meant that he had undertaken the task of separating the "marriage" of heaven and hell that had taken place in modern society, and the blurring of the whole idea of good and evil, Christianity and non-Christianity, and so on.

We have our own "great divorce" to worry about these days. Of course, the problem of jettisoning the idea of good and evil is still with us, as can be seen in the rejection of the natural moral law that underpins all sound religions and philosophical systems. That may be (and we believe it is) at the root of many of the problems that afflict modern society. Regarding the financial system and the institutions of money and credit, however, we see this "great divorce" manifesting itself in the separation of money and credit from production.

The divorce of money and credit from production, in turn, results in a rejection of Say's Law of Markets, which holds that "production = income." If someone has the means with which to produce — whether labor or capital — then "money" is no problem. This is because in Say's Law, "money" is derived from production, being nothing more than a symbol of something of real value that has been produced, or the present value of something that will be produced. "Money," while it is not in and of itself of value, thereby functions to facilitate exchanges between individuals.

Consequently, "money" is not itself "effective demand" or "purchasing power," as Keynes and many other monetary theorists appear to believe. Money has purchasing power because it represents marketable goods and services, and stands in for the reality of production behind the symbol of money. What money is, is anything that can be used in such an exchange, standing in for the good or service of real value. This gives us the legal definition of money: anything that can be used in settlement of a debt.

Now you know All About Money. Be that as it may, the main events of the week are:

• There was another series of important meetings this week regarding the project in East St. Louis. A great many issues were settled and (of course) many more were raised. Matters appear to be reaching the point where an action plan can be determined.

• We received the second volume of John Maynard Keynes' Treatise on Money (1930). The Treatise on Money was Keynes' first attempt to systematize his thought. After a few years of reflection (and a complete trashing of the book by von Hayek), Keynes started from scratch with his General Theory of Employment, Interest, and Money (1936).

• Work on the draft of our book on ideas of money, credit, and banking through the ages has been progressing well. We finished up through the first third of the 20th century, and are currently in the middle of the Keynesian revolution, as is probably evident from the fact that we have been gathering additional, if somewhat obscure, Keynesian material.

• We are almost ready to begin with the work of Dr. Harold G. Moulton, president and co-founder of the Brookings Institution, whose 1935 monograph, The Formation of Capital, presents a solid proof of the real bills doctrine and a refutation of Keynesian economics. We also obtained a number of other books by Moulton, including the three other books in the series of which The Formation of Capital is the third volume: America's Capacity to Produce (1934), America's Capacity to Consume (1934), and Income and Economic Progress (1935).

• As of this morning, we have had visitors from 33 different countries and 43 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, Brunei, Canada and Venezuela. People in Israel, Indonesia, Venezuela, Argentina, and Brazil spent the most average time on the blog. The most popular posting by far continues to be "What Caused the Economic Crisis," followed by the Keynesian paradox of thrift (which seems to be especially popular in Brunei for some reason), and the letter to the Wall Street Journal on Caritas in Veritate, the news reports, the response to Dr. Michael Novak (which continues to be ignored), and "What You Can Do to Address the Economic Crisis. With respect to the amount of time spent reading, the postings on the usury series, the "Reign of the British Currency School, and the Cobbett series appear to be the most popular.

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.

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The Reign of the British Currency School Over the United States, Part II

The illogic of the British Bank Charter Act of 1844 was ridiculed by John Fullarton in his 1845 book, On the Regulation of Currencies; Being an Examination of the Principles, on Which It is Proposed to Restrict, Within Certain Fixed Limits, the Future Issues on Credit of The Bank of England, and of the Other Banking Establishments Throughout the Country. (London: John Murray, 1845.) Fullarton explained that "money" is anything by means of which, "transactions of purchase and sale may be conveniently and economically adjusted, without any interchange whatever of actual value, whether intrinsic or factitious." (N.B., "factitious" is not a misspelling. It means "artificial or invented," i.e., a "legal fiction.") As Fullarton continued,

"You cannot, therefore, include the bank-note under the generic designation of money, without finding yourself immediately embarrassed by the claims of bills of exchange, bankers' cheques, and a variety of other typifications of the same principle of credit, all of which being more or less competent to perform, and, in point of fact, performing the functions of money, and some of them on a scale of vast extent, have primâ facie just the same pretensions to be rated as money which bank-notes have." (On the Regulation of Currencies, 29)

As reported by Norman Angell in his 1929 book, The Story of Money, the noted American historian Dr. Charles A. Beard declared, "the Federal Reserve Act of 1913 represents the union of 'Jacksonian hopes' with 'financial propriety'." The Federal Reserve Act is fundamentally different from the proposal sponsored by Republican Senator Nelson Aldrich that came out of the 1910 meeting on Jekyll Island.

The Democratic administration of President Woodrow Wilson pushed through the Federal Reserve Act of 1913 as a populist measure, with the support of William Jennings Bryan, "the Great Commoner," at that time Wilson's Secretary of State, with the assistance of Carter Glass, Democratic Congressman from Virginia, whose greatest achievement is considered the 1933 Glass-Steagall Act that, until jettisoned by Congress in the 1980s, restored necessary separation of function to America's financial system. One of the goals of the Federal Reserve Act was to break up the concentrated control over money and credit held primarily by financier J. P. Morgan, and centered in New York City. The "Pujo Committee" (from the fact that Democratic Congressman Arsène Pujo of Louisiana chaired the committee) assigned the major share of blame for the disastrous "Panic of 1907," when the Dow lost 50% of its value, to Morgan.

The Federal Reserve Act of 1913 did, in fact, overthrow the reign of the British Currency School and Wall Street in the United States from 1914 until 1917, when the United States entered World War I. At that time, the Congress decided to finance the war by borrowing rather than raising taxes, and figured out a way ("open market operations") to circumvent the prohibition in the Act against the Federal Reserve dealing in primary government securities.

That is, the Federal Reserve was and remains forbidden to purchase government debt directly from the United States Treasury ("primary securities"), another branch of the government. The idea was to prevent the federal government from being able to monetize its deficits, and to provide the private sector with a "flexible" currency based on the country's industrial, commercial, and agricultural assets instead of a "fixed" currency backed by federal government debt, as was the case under the National Bank Act of 1864. The Federal Reserve is, in theory, only empowered to purchase "secondary" government securities already on the "open market" in order to regulate the reserve requirements of member commercial banks.

Despite appearances, the Federal Reserve System is a sub-branch of the United States federal government. The "shares" held by member banks are, in effect, interest bearing membership deposits that cannot be sold, traded, used as collateral for a loan, or convey any right to vote. The federal government, not the private commercial member banks, owns the Federal Reserve System.

The Reign of the British Currency School Over the United States, Part I

Much of the monetary conspiracy ideas floating around today appear to be garbled versions of the tenets of the "British Currency School" that grew out of the currency crisis of 1797. Due to a sudden drain on the gold reserves of the Bank of England due to the wars with France, the British government forced the Bank to suspend convertibility of its banknotes into gold on February 26, 1797, a ban that lasted until 1821.

Based on a distorted understanding of the work of Henry Thornton (1760-1815), the "father of central banking," a group of British economists in the 1840s and 1850s that came to be known as the British Currency School argued that excessive issues of banknotes is a major cause of inflation. To restrict the circulation of paper money and stop inflation, issuers of new banknotes should be required to have 100% gold reserves, and existing notes could not exceed a fixed amount of government debt (£14 million in the Bank Charter Act of 1844). The "real bills" doctrine so ably defended by Thornton was dismissed out of hand as "discredited." Thus, the three most basic tenets of the British Currency School were:

• The only "real" money is gold, silver, and government-issued or authorized banknotes backed by gold or government debt.

• All issues of paper money (which term is restricted to government-issued or authorized banknotes) are automatically inflationary, regardless of what backs the notes.

• Only existing accumulations of savings can be used to finance capital formation.

Henry Thornton effectively "pre-refuted" the position of the British Currency School in his 1802 book, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Thornton supported the "real bills" doctrine and the Quantity Theory of Money, demonstrating that all credit instruments are "money," and that banknotes and other forms of paper money are non-inflationary when backed by "real" assets, i.e., constituted "real bills" as opposed to "fictitious bills" representing speculative or non-existent assets, government debt, or consumption. Dr. Harold G. Moulton conclusively proved Thornton's analysis in 1935 in The Formation of Capital, in which he showed that the real bills doctrine had been responsible for financing the tremendous growth of the United States in industry, commerce, and agriculture in the 19th century.

The British Currency School, however, ignored Thornton's actual analysis, rejected the real bills doctrine, and used their theories as the basis for the Bank Charter Act of 1844, which mandated a ceiling for banknotes backed by government debt, with the rest of currency gold sovereigns and token silver coins. They did not include demand deposits or commercial paper in their definition of "money," which permitted the private sector to obtain needed money and credit to finance economic growth and development.

Consequently, Walter Bagehot, in his 1873 book, Lombard Street, took the tenets of the British Currency School for granted, and used it as support for his assertions that the money power must be concentrated in the hands of a financial elite. The Bank Charter Act of 1844 was the basis for the United States National Bank Act of 1864, which led to the Coinage Act of 1873, the so-called "Crime of '73," which adhered strictly to the belief that only gold coin and government debt-backed banknotes constituted "real money."

Why Everyone in the World is Crazy

Recently we've been having an interesting discussion in the Kelso Binary Economics Discussion Group on the meaning of money. This was sparked by the first installment of the two-part posting on the "Jubilee proposal" that all debts be forgiven periodically. We offered what we thought was a reasonable compromise between the demand that all debts be written off, and the insistence that the trillions of pounds of flesh demanded be delivered in full.

Much to our astonishment, we received an angry response from a reader. The surprising part was not the anger or even the fact of the response. We've been taking the paucity of polemics inserted into the com box relative to the number of our readers as a sign that everyone agrees with us . . . right?

No, the astonishing part of the missive was the fact that, although we had explained our definitions of the terms we used to the respondent previously at great length, the excited letter-writer accused us of 1) not answering previous manifestos, and 2) not understanding the claims about money, credit, interest, or debt presented therein. By not accepting the writer's definitions (admittedly extremely garbled to the point of incomprehensibility), we demonstrated just how far out of it we are, that we must be operating in bad faith, why we will never convince anybody of what we're talking about, and so on, and so forth.

The respondent, however, was wrong - and not because of the disagreement with us. The fact is, the debate can never end because our two sides cannot agree on the meaning of the most important terms in the debate. We will therefore continue to talk past one another, the adherents on each side assuming that those taking the more or less opposite stance are actuated by malice, or simply too stupid to understand the issue. The debate can never be resolved because, in reality, without a common understanding of principles and terms, there is no debate. As G. K. Chesterton once pointed out,

It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought always to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours. (G. K. Chesterton, St. Thomas Aquinas, "The Dumb Ox." New York: Image Books, 1956, 95.)

Thus, because the letter-writer ignored basic definitions, we could argue for all eternity without either side convincing the other of anything except, perhaps, that the entire world is crazy except for the speaker. It is the easiest thing in the world to prove that everyone else in the world is a knave or a fool (probably - and paradoxically - both) on your principles. The path of true reason, even faith, is to prove somebody wrong on his or her own principles.

Bring the Jubilee: A Possible Solution

Obviously, unilateral debt forgiveness could very well cause more harm than good. This would be both to the property rights of persons, and to the common good as a whole by convincing people that debts don't have to be paid. A morally sound (and thus practical) program of debt forgiveness would therefore have to prioritize debts on some consistent and reasonable basis.

Step I: Determine whether the debt was incurred for a productive or non-productive purpose.

There are two kinds of credit. There is "good credit" — credit extended for investment in capital projects that generate their own repayment — and there is "bad credit": credit extended for consumption, speculation, or government spending.

Step II: Determine whether the credit was extended out of existing accumulations of savings, or was created by means of the loan.

You can loan out money that you've saved, or you can loan money by creating it in exchange for a lien on someone's existing assets or the present value of future assets. If you make a loan out of savings and the loan is for a productive project, you are due interest as a right of property. If the loan out of existing accumulations of savings is for a non-productive project, you are not due interest, because "interest" is a share of profits, and a non-productive project does not generate profits.

If you make a loan by creating money, whether for a productive or non-productive project, you are not due interest as you had no property right before the loan created the money. In all cases, however, you are due the principal of the loan, that is, the amount you lent.

Step III: Categorize the Debts

Category 1: Into this category go all debts on which the borrower has the ability to make the payments, including interest, if due in justice. These debts should not be forgiven, and all principal and interest payments should be made as agreed.

Category 2: Into this category go debts on which the borrower cannot pay everything, but can pay something. These debts must be judged on a case-by-case basis.

• If the loan was made out of past savings for a productive purpose and the project is profitable, but not profitable enough to pay the principal and all the interest, the interest rate should be adjusted to reflect the lender's and borrower's just degree of risk sharing. All principal payments should be made.

• If the loan was made out of past savings for a productive purpose that did not make a profit, no interest should be paid, but the principal is still due.

• If the loan was made out of past savings for a productive purpose that made a loss, no interest should be paid, and only a pro rata portion of the principal should be repaid.

• If the loan was made out of newly-created money for a productive purpose, all previous interest payments above a service fee and a fair risk premium should be applied to the principal. If the lender has received anything above the total amount of the principal, a just service fee, and a fair risk premium, it should be refunded to the borrower as an overpayment. All future payments, if any, are applied only to the principal.

• If the loan was made out of newly-created money for a non-productive purpose, all interest payments above a just service fee should be applied to the principal. If the lender has received anything above the total amount of the principal, it should be refunded to the borrower as an overpayment. All future payments, if any, are applied only to the principal.

Category 3: Into this category go debts on which the borrower cannot make payments of any kind. These are written off in their entirety.

Step IV: Restructure the Financial System to Institute a More Just Distribution of Ownership Opportunities

This is the most difficult, but the most important step of all: making as certain as humanly possible that such a situation does not recur. This can best be done by implementing Capital Homesteading on a global basis at the earliest possible date. This does not have to wait until the debt crisis is solved. In fact, it is far better if Capital Homesteading is put in place immediately, and then the debt crisis can be dealt with without getting into a panic mode. In and of itself Capital Homesteading may empower people with the ability to service currently unpayable debt.

Thus, the program should be:

• Implement Capital Homesteading and place a moratorium on all currently unserviceable debt.

• Once Capital Homesteading is in place, categorize all unserviceable debt in accordance with the guidelines in Step III above, taking projected income from Capital Homesteading into account.

• Restructure and reschedule debt when possible, forgive debt when necessary.

• Increase credit voucher amounts to anyone whose property rights were harmed by debt forgiveness, permitting them to be made whole. This amount should not be so great that it materially diminishes the credit voucher amounts going to everyone else. When it is a corporate person who has suffered harm, the tax deduction for bad debt write-off should be changed to a tax credit, as long as the full amount of the tax credit claimed each year is paid out to the shareholders in the form of tax-deductible dividends. In both cases (additional credit and tax credit), the amount should be subject to an annual maximum until the harm has been repaired.

These suggestions will doubtless need refinement, but they appear to be a reasonable way of handling the debt crisis from the perspective of the Just Third Way.

News from the Network, Vol. 2, No. 33

According to a CNNmoney dot com report ("Recovery maybe here, but hold the celebration say economists"), "the worst economic downturn since the Great Depression is over." The problem is that nobody knows it yet: "most average Americans won't feel like things are significantly better in the near term."

Inasmuch as virtually all of the so-called "economic growth" has been the result of artificial stimulation by the federal government and the wild swings in the speculative market for secondary equity and debt, it is difficult to see how the alleged recovery is supposed to be sustained. Nevertheless,

The Wall Street Journal's survey of top economists, published Wednesday, found that 57% believe the recession is already over, while another 23% believe that the economy will turn in the next month or two. Most economists now expect growth in the gross domestic product, the broad measure of the nation's economic activity, of about 3% or more in the period of July through September.

Unless these so-called gains are the result of actual production of marketable goods and services in which ordinary people participate fully by contributing both labor and ownership, instead of State subsidies and buying and selling intrinsically worthless stocks and bonds back and forth on Wall Street, the so-called recovery will prove to be as ephemeral as the Keynesian New Deal. The New Deal resulted in a brief burst of artificially-stimulated prosperity until 1936, when things began to fall apart again. The "top economists" seem to forget that Keynesian programs did not end the Great Depression. It was the Second World War — and the world no longer has the capacity to carry on a struggle on that scale without facing total annihilation both financially and physically. . . aside from the fact that engaging in a war to reestablish prosperity scarcely meets the requirements for a just war.

Be that as it may, the main events of the week are:

• A series of important telephone conferences on the East St. Louis project have taken place this week. A great many details were discussed and relationships realigned. Several action items were reviewed and future assignments suggested. Some project specifics were reviewed and the process of evaluation begun.

• Work on the new book on money and credit is advancing rapidly. The middle section, consisting of an historical survey of ideas about money, credit, banking, and finance through the ages is nearing completion of the first draft stage. Among other things, our research has traced the roots of Keynes' misconceptions about money and credit. These embody, in part, the fallacies embedded in the British Bank Charter Act of 1844 and the United States National Bank Act of 1864, both considered applications of the theories underlying the proposals of the "British Currency School."

• A number of e-mails have been sent, following up on various personal contacts that were made over the past two weeks. No responses have been received, possibly because of the usual slowdown that occurs in August.

• We have located and purchased a rare copy of Keynes' Treatise on Money (1930), the book which Friedrich von Hayek reviewed and declared was filled with errors. Keynes made a few references to his Treatise on Money in subsequent works, but otherwise seemed content to let it lapse into obscurity without either correcting or repudiating it. Consequently, the two-volume Treatise on Money is one of Keynes' rarest titles. If you have books in the areas of economic and social justice, you might want to consider donating them to CESJ, after first checking to see if we don't already have them in our research library. We will do an internet search to determine the fair market value of the donation, and credit you with a tax-deductible contribution. (We usually use abebooks dot com to find out the price of collectible and used books.) You do not have to check first to see if we want any copies of The Capitalist Manifesto (1958) or The New Capitalists (1961), or even any of Kelso's later books. We have a constant demand for both titles, which are becoming increasingly difficult to obtain at reasonable prices.

• As of this morning, we have had visitors from 31 different countries and 42 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, Brunei, and Argentina. People in Israel, Venezuela, Argentina, Brazil, and Singapore spent the most average time on the blog. The most popular posting by far is "What Caused the Economic Crisis" from last week, followed by the letter to the Wall Street Journal on Caritas in Veritate, the Keynesian paradox of thrift (which seems to be especially popular in Brunei for some reason), the news reports, the response to Dr. Michael Novak (which has received no reply), the recent postings on the economic situation in Ireland, and the brief series on William Cobbett. With respect to the amount of time spent reading, the postings on "Can We Spend Out Way Out of the Recession," the usury series, and the Cobbett series appear to be the most popular.

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.

Bring the Jubilee: The Issue

Over the last couple of weeks one of the participants in the Kelso Binary Economics discussion group has been looking into the problem of overwhelming debt. This is a difficult issue, and not one easily solved, especially by the unilateral solutions that are, more and more frequently, being proposed.

It's not, for example, merely a question of forgiving debt. Debts are owed to somebody. Every debt that is forgiven means, effectively, a loss to whoever lent the money, thereby harming or even destroying that person's property rights.

Nevertheless, the concept of Jubilee could be extremely useful in view of the current world situation — as long as we realize and understand that the push of debt forgiveness for some inevitably means a shove against the human rights of property for others. The question then becomes how we manage the former without undue harm to the latter.

The concept of the "principle of double effect" is useful in this context. Most simply put, the principle of double effect allows us to do something that is not bad in and of itself, but which has bad consequences. In the case of debt forgiveness, writing off debt is hardly bad — but it does have the bad result of harming others' property rights.

The "requirements" of the principle of double effect are pretty straightforward:

• The act is itself good, or at least morally neutral;

• You intend the good effect, and not the bad either as a means to the good, or as an end itself;

• The good effect outweighs the bad effect in circumstances sufficiently serious to justify causing the bad effect, and you do all you can reasonably do to minimize the harm.

There is one more requirement in social justice. That is to organize with others to restructure the relevant institution(s) so that the situation is less likely to reoccur. How to do this is described in the pamphlet by William J. Ferree, S.M., Ph.D., Introduction to Social Justice.

That being said, how do we apply these principles to the issue of debt forgiveness? First, of course, we have to see if what we propose meets the requirements of the principle of double effect:

Is forgiving debt good or morally neutral? Absolutely.

Do we intend to harm others' property rights, or is direct harm to property rights (as opposed to debt forgiveness) our goal? Absolutely not.

Does the good of forgiving debt outweigh the bad of harm to property rights? That's harder to answer. Not all debt is unserviceable, and even debt that is unserviceable may not be entirely unserviceable. That leaves us with the problem of exactly how we might engage in debt forgiveness that is both fair and has a chance of accomplishing the desired goals.

William Cobbett, "The Poor Man's (and Woman's) Friend," Part IV (Final)

Cobbett's emphasis on widespread ownership of the means of production readily explains his evident hostility to industrialization. The process of industrialization, while not inevitably linked to the capitalist economic model (ownership of the means of production concentrated in the hands of a private elite), was bound to it by the usual form of financing capital formation and the reliance on existing accumulations of wealth. Under these prevailing (and incorrect) assumptions, workers in industrial concerns were considered necessarily stripped of ownership and forced to rely exclusively on wages for their subsistence, and forced to work in inhuman conditions.

That being the case, Cobbett naturally tarred industrialization with the same brush he used to blacken the system developed under the Tudors that concentrated ownership of land in the hands of an elite few. Cobbett attributed the start of this process to Henry VIII Tudor and his confiscation of Church lands and the property of the multitudes who disagreed with his religious and political changes. (See Cobbett's A History of the Protestant Reformation in England and Ireland, 1829.)

The concentration of ownership of the means of production, however, actually began earlier, under Henry VII Tudor. Henry VII asserted a right to rule based on something other than the consent of the people assembled in parliament, and abolished the near-autonomy of the duchies of York and Lancaster that had always provided a counter to the concentration of power in the crown, and always cherished a deep hostility toward Ireland, which had provided a base of support for the House of York as well as putting forth a seemingly endless stream of pretenders to the crown, such as Lambert Simnel and Perkin Warbeck.

Thus, industry was not evil, per se, but the structures of ownership and the method of financing capital formation presumably required that the working classes be reduced to a condition that Cobbett characterized on more than a few occasions as slavery. This set up a paradox, for Cobbett was fully aware that the agricultural life he advocated was impossible without an adequate industrial base to support it.

Thus, it was the presumed necessity of concentrated ownership that accompanied industrialization, not industrialization itself, that Cobbett condemned. (This is a distinction that many authorities today, indoctrinated in the Keynesian dogma that wealth must be concentrated if society is to advance, seem unable to make. This may be the source of the blanket assertion that Cobbett was "always wrong" in his economic analysis.) The United States was thus, for Cobbett, the Land of Opportunity because there was widespread ownership of the means of production (chiefly land), and industrialization, with its presumed inevitable concentration of ownership and the stripping of the working classes of private property, had not yet gained a foothold. In sum,

What he [Cobbett] saw was the perishing of the whole English power of self-support, the growth of cities that drain and dry up the countryside, the growth of dense dependent populations incapable of finding their own food, the toppling triumph of machines over men, the sprawling omnipotence of financiers over patriots, the herding of humanity in nomadic masses whose very homes are homeless, the terrible necessity of peace and the terrible probability of war, all the loading up of our little island like a sinking ship; the wealth that may mean famine and the culture that may mean despair; the bread of Midas and the sword of Damocles. In a word, he saw what we see, but he saw it when it was not there. And some cannot see it — even when it is there. (G. K. Chesterton, William Cobbett)

While Cobbett did not state it explicitly, the importance of America was that it was a truly new thing, a genuinely novus ordo that broke with the past at the same time that it delivered on all the promises previously made but which could never be kept under the old social arrangements and structures. In America,

• The reliance on the rich to form capital out of their existing accumulations of savings and thus provide jobs for workers who thereby became their effective slaves was eliminated due to the free or extremely inexpensive land.

• There were no real social classes because everyone had equal opportunity to be economically self-sufficient; classes could be discarded without any danger of harm to the social order.

• With artificial distinctions of social and economic class removed, every person was politically equal, with equal rights and duties.

• Under equal opportunity to advance socially, economically, and politically, people were closer to what God made them, and thus individuals and society were more peaceful and less prone to unrest in civil, domestic, or religious society.

In other words, in America people could become more fully human than they were able within the institutional structure of Europe.

It is possible (very easy, in fact) to poke some very big holes in Cobbett's view of America . . . if we concentrate on finding specific instances where the principles of America were contradicted, the most obvious being the institution of chattel slavery. That does not change the fact that in America Cobbett saw an important advance in the form of a break from old, flawed institutions, and a move toward something more consistent with what it means to be fully human.

Like the individual human being charged with the duty to acquire and develop virtue — the habit of doing good — America now had the duty to acquire and develop institutional patterns of doing good. Both individuals and societies have this potential. It therefore becomes the obligation of the human person with respect to him- or herself, and the citizen organized with like-minded others with respect to the whole of society, to acquire and develop individual and social virtue, respectively.

The ideas expressed in the Declaration of Independence, the Virginia Declaration of Rights, the U. S. Constitution, etc., — all were directed at creating and sustaining a new order within which the human person could become more fully him- or herself. The principles were there. It was now up to apply them in a manner consistent with the natural law that defines the human person as human.

What You Can Do to Address the Economic Crisis

On Sunday, August 9, 2009, I took a neighbor lady to Mass at a local parish. The celebrant chose the proposed health care plan currently being pushed through Congress (as soon as they come back from vacation, of course) as the subject of his "Homily." (I had to look that up. A "Sermon" is based on the scripture reading for that day, while a "Homily" is on any subject consistent with Christianity that has some relevance to the congregation. Now you know.)

Some people walked out on the sermon, and a couple of people went up to the priest afterwards and told him how outraged they were that he would dare talk about "politics" and "attack" the infinite wisdom of the State. They didn't put it that way, of course, but the implication was that the priest had no right to do anything other than get up and talk in vague platitudes and make people feel good about themselves.

For the record, the priest only commented about the moral implications of the health care proposal as it has been explained in the newspapers. He told no one what to do, restricting himself to pointing out that, as described, the proposal is not completely consistent with the moral teaching that is common to all religions and philosophies with a basis in the natural law.

Seeing the people who walked out and hearing the comments, I got the impression that the bishop would soon be receiving secret reports on the priest's no doubt scandalous behavior and making people feel bad about themselves. (Knowing how the bishop feels about the subject, however, I have a sneaking hunch any such reports will quickly be deposited in File 13.) Nevertheless (although it is not my habit), I wrote a "fan letter" to the priest, if only to give him some documentary evidence to support the contention that not everyone was offended or outraged by the sermon. I mean homily.

With respect to the Just Third Way, however, the point was to seize the opportunity, and try to see if CESJ or any of the other organizations in the Just Third Way could find some way to introduce more people to the possibilities offered by the Doctors' Plan for Universal Health Care in particular, and Capital Homesteading in general. In this way, we will be able to respond more effectively to our critic (and others) who told us we would "rue the day [we] ever heard of health care financing reform." (cf. our July 30 posting on "Who is Responsible for Our Health Care?") Here's the letter, with incriminating names removed to protect the guilty:

Dear Father:

First, let me say once again how much I appreciated your homily at Mass yesterday on the dangers represented by the health care plan currently being pushed through the Congress. It was a necessary wake-up call and reminder of the need for moral guidance in these matters, particularly in light of your obligation to present the teachings of the Church in a practical and comprehensible manner. I hope I adequately conveyed my approval of your action in our brief discussion after Mass.

Second, I confess to being ill-prepared to talk with you, as our volunteer who was with me pointed out, and not having any business cards with me. Let me redress that omission by giving you Dr. Norman Kurland's contact information and our website address again in a possibly more legible fashion:

Dr. Norman Kurland, President
Center for Economic and Social Justice
www.cesj.org

Third and finally, I'd like to suggest some possible initiatives to take advantage of your bringing these issues out into the open.

One, you might want to visit the CESJ website, www.cesj.org, particularly the "executive summary" of the "Doctors' Plan for Universal Health Care," which was prepared, in part, with input from Dr. Steve White, past president of the Catholic Medical Association. You might also find Dr. Kurland's brief bio useful, as well as the short description of some of CESJ's accomplishments. Of special importance is the pamphlet, Introduction to Social Justice, written by one of CESJ's co-founders, the late Rev. William J. Ferree, S.M., Ph.D., "America's greatest social philosopher" (as he was termed by Rev. Andrew F. Morlion, O.P., Ph.D., confidential papal secretary and founder of the International University of Social Studies in Rome).

Two, your mention of Dr. Mercedes Wilson gave me an idea. We have on occasion characterized CESJ's "Just Third Way," particularly the "Capital Homesteading" application, as an economic agenda for the Pro Life movement, especially since the principles of economic justice on which the Just Third Way is based appear to provide a good follow-up to Caritas in Veritate. It would, I think, be very useful for Dr. Kurland and Dr. Wilson to talk. If you could help arrange a meeting, it would be mutually beneficial to both CESJ and Dr. Wilson, especially in her position as a member of the Pontifical Academy for Life. You might try mentioning my name in connection with the U.N. conference in Copenhagen that I attended with Father Matthew Habiger, O.S.B., Ph.D. (former head of Human Life International), but I doubt that she remembers me. (Father Habiger is currently on the CESJ board of counselors.)

Three, I spoke with Dr. Kurland earlier today about the possibility of giving a talk at the parish on the Just Third Way as a Pro Life economic agenda, and its congruence with the natural law (and thus Catholic social teaching). Dr. Kurland is generally willing to give talks if an organization can guarantee a large enough crowd, and a small honorarium and travel costs are covered. It might be possible to draw attendees from other parishes if a notice could be inserted in the local Catholic newspaper or other parish bulletins, possibly even nearby Catholic colleges and universities. Including people from institutions of hire (and higher) learning to a talk by Dr. Kurland might suggest some possible courses for them that convert them from the education-as-job-training paradigm to the realization that education is for life training.

If you like, I could drop off copies of a couple of our recent publications at the Rectory, Capital Homesteading for Every Citizen (2004) and In Defense of Human Dignity (2008), or (if you prefer), Capital Homesteading is also available on the website as a free download.

Again, thank you for your homily on Sunday. I think far more people appreciated it than were able to tell you. I saw one woman make applauding motions with her hands, which was most encouraging, even though I generally consider applause at Mass inappropriate.

Spending Cap and the Wealth Gap

Last Friday's issue of the Wall Street Journal carried an interesting piece by Stephen Moore on how the current government spending spree might be halted. The idea was that Congress should mandate a legally-binding limit on how much the federal government could spend, then raise taxes on wage incomes.

The problem is that the article left out the possibility of taxing dividends and capital gains as regular income, presumably in the belief that financing new capital formation requires the accumulations of the rich in order to be viable. That is not, in fact, the case, as anyone familiar with the basic theory behind banks of issue and central banking can tell you. Here is the text of the letter we sent to the Journal on the subject, with a sentence or two added for clarification:

Dear Sir(s):

Mr. Stephen Moore's editorial in last Friday's Journal ("It's Time to Legislate a Spending Cap," WSJ, 08/07/09, A11) is a step in the right direction, but it goes at the problem from the wrong direction. Politicians can always justify spending what they've been given. A legal limit on spending, binding or not, can be circumvented by passing another law.

It may be time to consider an alternate approach: don't try to figure out how much we can afford to surrender to the State, but how much the State needs to function effectively. The federal government should be required to prepare a budget and, when the budget is approved, set a single tax rate at a level sufficient to cover all current expenditures and begin retiring the debt. Government figures prior to the current spending spree suggest that a tax rate of approximately 46% on all income from whatever source derived (including dividends tax deductible at the corporate level and capital gains) above $30,000 per adult and $20,000 per dependent would balance the budget and retire the debt as of 2006 in 17 years.

This still leaves us, however, with the presumed necessity of using existing accumulations of savings to finance capital formation, and the reason behind giving preferential tax treatment to dividends and capital gains. The question becomes, are existing accumulations of savings necessary to finance new capital, and thereby provide jobs for non-owning workers?

Capital formation (and thus job creation) need not be financed out of existing accumulations of savings, as Dr. Harold Moulton of the Brookings Institution pointed out in his 1935 monograph, The Formation of Capital. Instead, the commercial banking system can provide investment capital for all financially feasible projects by discounting qualified industrial, commercial, and agricultural paper at the Federal Reserve. This would back the currency with liens on hard assets instead of government debt. By extending the credit in ways that create new owners who will use the income from their investments first to pay for the assets and then for consumption instead of reinvestment, effective demand and the tax base will increase, enabling the federal government to cut entitlements and lower taxes.

The Federal Reserve has proved it can create money for massive non-productive government spending. It's time to return the institution to its original purpose and provide adequate liquidity for private sector growth and development.

News from the Network, Vol. 2, No. 32

This week has been deceptively slow with respect to the Just Third Way. Most of the time has been taken up by "meetings, bloody meetings." These seem at first to accomplish very little, but they lay the groundwork for future action. This makes for rather boring reading until the planned actions are actually carried out, but the meetings themselves are important.

On the national front, people seem obsessed with the fact that the stock market seems to be recovering, evidently little realizing that the stock market has not acted as a genuine barometer of economic health since before World War I. It has little, if any direct link to the productive sector. The proceeds of shares sold on Wall Street or any of the other exchanges throughout the world do not benefit the issuing companies, but the brokers and investment bankers that purchased the shares from the companies, as well as subsequent owners of the shares.

Be that as it may, the main events of the week are:

• As noted above, there were several telephone conferences on the East St. Louis project, with the major conference taking place on Wednesday, August 5, 2009. Several action items were reviewed and future assignments suggested.

• A letter was sent on Thursday to the Irish Independent, Ireland's largest daily newspaper, in response to an op-ed piece on the need for people to get organized in order to find a solution to the economic crisis. The letter suggested that people investigate the Just Third Way, especially Capital Homesteading, as a viable alternative to failed government programs based on discredited Keynesian economics. We hope to post the letter next week. The op-ed piece in the Independent was sent to us by Mr. Christopher O'Connor, Treasurer and Financial Secretary of the Colonel John Fitzgerald Division, Arlington, Virginia, Ancient Order of Hibernians in America as one of the Division's social action initiatives. Division contact information is on the website.

• A letter was also sent to the Wall Street Journal in response to a proposal detailed in an editorial that a binding legal limit be placed on government spending and taxes be raised on labor incomes in order to balance the budget. We proposed a somewhat easier, more just, and certainly more financially feasible alternative in the form of the tax proposals contained in the Doctor's Plan for Universal Health Care. This letter, too, should be posted some time next week.

• We have not received any feedback from Michael Novak for our response to his comments.

• As of this morning, we have had visitors from 26 different countries and 42 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, Brazil, the UK, and Argentina. People in Venezuela, Argentina, the United States, Canada, and India spent the most average time on the blog. The most popular postings continue to be those in the series on usury, but the news reports are catching up. Yesterday's posting on "What Caused the Economic Crisis" received more hits in one day than any posting since the piece on President Obama's inauguration speech. With respect to the amount of time spent reading, the postings on "Can We Spend Out Way Out of the Recession" and the Cobbett series appear to be the most popular.

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.

What Caused the Economic Crisis?

Taking another break from William Cobbett (he won't mind . . . I hope), one of our loyal readers asked an obvious question the other day: "What caused the economic crisis?" Frankly, I think I'd rather try to understand string theory or turn Finnegan's Wake into a musical comedy than attempt to dig up all the causes of the current economic troubles. The roots of the problem go back several thousand years, and would take too long to explain in a blog posting in a way that wouldn't try someone's patience. We can, however, say what we believe to be the immediate cause of the mess — and a very quick possibility for a solution. So, in "elevator speech" form:

Q: What was the immediate cause of the economic crisis?

A: The immediate cause of the economic crisis was the creation of money for consumption, speculation, and government spending instead of for investment in capital projects that will pay for themselves out of future earnings.

Q: What is the solution to the economic crisis?

A: The solution to the economic crisis is to create money for financially feasible capital investment, and by that means empower every person with the means of acquiring and possessing a capital ownership stake sufficient to generate an adequate and secure income if thrift and frugality are exercised.

Like all "elevator speeches," the quick answer raises more questions than it answers — such as the issue that people are in trouble now, how will making them capital owners in the future do anything to help that? Here's the short answer to that:

Q: What are people supposed to do now, and until they own enough capital to generate an adequate and secure income?

A: Caritas in Veritate states the principles and suggests specific measures that can be undertaken at the present time to keep people alive and healthy in a manner befitting the demands of human dignity, but without prejudice to the need ultimately to empower people with the means to acquire and possess capital of their own.

That is, we need to take care of people now by making whatever redistribution of wealth is necessary to keep people alive and healthy in a manner that respects their human dignity. Do not, however, labor under the delusion that a redistribution of wealth is anything other than a barely tolerable expedient as an emergency measure. Such measures cannot last, and must be replaced at the earliest opportunity with a system that enables people to gain a living income through their own efforts, whether through their labor, their ownership of capital, or both. Society must apply the principles of economic justice. This, as we might expect, raises more questions:

Q: What are the principles of economic justice?

A: There are three principles of economic justice, 1) The principle of Participation (or Participative Justice), 2) The principle of Distribution (or Distributive Justice), and 3) The principle of Harmony (sometimes referred to as Social Justice).

Q: What are the basic things that a society must have to be economically just?

A: To be economically just, a society must embody the "four pillars of an economically just society" in some form: 1) A limited economic role for the State, 2) Free and open markets as the best means of determining just wages, just profits, and just prices, 3) Restoration of the rights of private property, especially in corporate equity, and 4) Widespread direct ownership of the means of production, individually or in free association with others.

That's about all anyone would have time (and the listener the patience) for in an "elevator speech" situation. For anything more, it's probably better to let the great thinkers speak for themselves. Thus, if people want details and specifics, refer them first to Father Ferree's Introduction to Social Justice, an analysis of the social doctrine of Pope Pius XI. It's relatively short, but challenging, as it forces people to question many of their basic assumptions about social justice.

Referring people to Introduction to Social Justice on the CESJ website also takes them (obviously) to the website. There they can find some very in-depth treatments of the principles of economic and social justice as well as specific proposals applying the principles, most especially Capital Homesteading.

You may have to warn people that the material presented on the CESJ website is not a panacea, nor is it easy for someone who might be stuck within certain modern thought frameworks and assumptions to grasp, but the advantage is that a serious investigator can always make contact with us directly via the contact information on the website.

William Cobbett, "The Poor Man's (and Woman's) Friend," Part II

It's common these days to pay lip service to people like William Cobbett, G. K. Chesterton, and Hilaire Belloc, and "support" the policy of widespread ownership of the means of production embodied in "distributism." Unfortunately, a number of the people who claim to support something they call "ownership of private property" don't really understand ownership or private property. As one self-appointed "authority" has declared on more than one occasion, "property is a right, but it is not an absolute right."

Now, the claim that "property is a right, but it is not an absolute right" can be understood in one of two ways, one right, and one wrong. The right way to understand it is that the right to be an owner is absolute, a natural right, inherent and inalienable in every single human being that is, was, or ever will be born. What is not absolute is what an owner can do with what he or she possesses, even, in some circumstances, what a person may own. That is, the exercise of private property must be limited by the wants and needs of the owner, other persons, and the common good as a whole.

The wrong way to understand the statement, "property is a right, but it is not an absolute right" is to assert (usually without any proof other than personal faith) that private property is "prudential matter" so that some or all people can have their allegedly natural right to be an owner taken away if some other people (those with the clubs, guns, or guillotine) decide that is the "right" thing to do.

Cobbett disagreed most emphatically with the idea that private property is somehow "prudential matter," and said so in no uncertain terms:

You may twist the word freedom as long as you please, but at last it comes to quiet enjoyment of your own property, or it comes to nothing. Why do men want any of those things that are called political rights and privileges? Why do they, for instance, want to vote at elections for members of parliament? Oh! because they shall then have an influence over the conduct of those members. And of what use is that? Oh! then they will prevent the members from doing wrong. What wrong? Why, imposing taxes that ought not to be paid. That is all; that is the use, and the only use, of any right or privilege that men in general can have. Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (William Cobbett, A History of the Protestant Reformation in England and Ireland, 1829, §456)

As surely as America's Founding Fathers (especially George Mason of Gunston Hall, who embodied the natural right to be an owner in the first section of his draft of the Virginia Declaration of Rights, June 12, 1776), Cobbett saw that political life — civil life itself — was rooted in private property: "All men are equal by nature; nobody denies that they all ought to be equal in the eye of the law; but, how are they to be thus equal, if the law begin by suffering some to enjoy this right and refusing the enjoyment to others?" (William Cobbett, Cobbett's Advice to Young Men, and (Incidentally) to Young Women, 1830, § 338) All of the italics in the quote are Cobbett's, by the way.

Is the point still unclear? Just in case anyone had any doubts on the matter, Cobbett kept repeating it — in italics:

What is a slave? For, let us not be amused by a name; but look well into the matter. A slave is, in the first place, a man who has no property; and property means something that he has, and that nobody can take from him without his leave, or consent. (Ibid., § 344)

Private property not a natural right? Private property "prudential matter"? Not likely — unless you are an advocate of mass enslavement, or a toady of the slavers.

In light of this, there is only one possible distributist — or Just Third Way — response to someone who claims that private property in the means of production is not a natural right, or that the wage-welfare system that forces people into dependency on the State is the only way to temporal salvation (instead of being, as Chesterton and Belloc emphasized over and over [and over and over] another form of slavery). That is to point out the rather obvious fact that Abraham Lincoln freed the slaves in 1863 . . . why are you trying to undo all his work?

William Cobbett laid it out quite plainly. Own or be owned. It's that simple.