Some Thoughts on Money, Part XII: Application of the Real Bills Doctrine

To return once again to the subject of money, we realized in our last posting on the subject that it is not human labor that generates the bulk of production, but capital. The problem then becomes how people without ownership of the means of production — capital — can become owners without taking away anything from anybody else. Within the paradigm of the Currency School that declares that capital formation cannot be financed without using the accumulations of the wealthy, acquisition of an ownership stake by people without savings becomes impossible unless the wealthy voluntarily divest themselves of their presumably ill-gotten gains, or they are involuntarily divested by others. The former is unlikely, the latter is unjust.

The operation of the real bills doctrine would, of course, circumvent the presumed reliance on existing accumulations of savings, but the Currency School, on which virtually all modern schools of economics are based, rejects the real bills doctrine as a "swindle," "disastrous," or any other pejorative that comes to hand. Thus, despite the common sense embodied in the real bills doctrine, people trap themselves by the assumption that only existing accumulations of savings can be used to finance capital formation.

The key to understanding the real bills doctrine is to realize that "present value" includes today's value of a marketable good or service that does not yet exist, but for which a promise has been made to deliver once it is produced. That promise to deliver a marketable good or service, even though it relates to a good or service that has not yet been produced, has value. Consequently, a bill can be drawn on that promise, be backed by the real, present value of that promise, and redeemed once the marketable goods and services have been produced.

A good rule of thumb for purchasing capital, in fact, is based on an application of the real bills doctrine. An entrepreneur or investor is not really purchasing an investment as an existing thing, but as the present value of the future stream of income to be realized from the investment. Thus, if an investment is expected to yield nothing, it is hardly an investment, and has a present value of zero. If, however, an investment is expected to yield $1 million each year, then, obviously, the investment is estimated to be worth $1 million per year. If the purchase price of the investment is less than the value today of $1 million each year in the future, the investment is considered a "good buy." If, on the other hand, the purchase price of the investment is greater than the value today of $1 million each year, the investment is presumably not a "good buy."

Thus, the "present value" of a stream of income expected to be generated by an investment is real value, and — assuming that proper due diligence has been carried out by all parties to the transaction — a bill can be drawn, backed by that present value. That bill can be discounted, and money created using the bill as the backing of the money. It is not necessary to have accumulated savings in order to create money to finance the formation of that capital. The value of the investment itself can be used to "leverage" the purchase, for the asset is expected to generate its own repayment. These are the concepts of "financial feasibility" and "future savings."

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What Happened to Notre Dame?

Once again we interrupt our series on "thoughts on money" to post what we consider an Important News Bulletin. Readers of this blog may have gotten the idea over the past year or so that we believe one of the chief problems of the modern world to be the virtually complete abandonment of the natural moral law as the basis of a rationally-ordered human society. We have concurrence on this from such diverse authorities as Dr. Max Weismann, president of the Center for the Study of the Great Ideas in Chicago (co-founded by Dr. Weismann and Dr. Mortimer J. Adler, the late "Great Books" philosopher), Dr. Ahmed Subhy Mansour, president of the International Quranic Center, and Dr. Norman G. Kurland, president of the Center for Economic and Social Justice ("CESJ") in Arlington, Virginia.

To this role we can add another name, Dr. Charles E. Rice of the University of Notre Dame Law School, a friend of CESJ and the Just Third Way who has written an analysis of the decay of ethical standards and the virtual rejection of the natural law at Notre Dame, as exemplified in the decision by the Trustees and President of the University to confer an honorary degree on President Barack Obama in open defiance of a clear directive to the contrary issued by the American bishops. The book, What Happened to Notre Dame?, published by the St. Augustine Press in South Bend, Indiana, is a 192-page study of the state of American Catholic higher education and what it means for everyone. This is epitomized by the case of Notre Dame and its public humiliation of thousands of students, alumni, and supporters, Catholic and non-Catholic, Christian and non-Christian, who believe that there are principles by which humanity is constrained to live if we want to develop more fully as human beings in a manner consistent with our own nature. By the action of its president and board of trustees, Notre Dame betrayed what many people of all faiths, even none, considered the school's tacit apostolate to represent what it means to be a Catholic in America, a good citizen, and a decent person, as exemplified by the University's motto, "God, Country, and Notre Dame."

As we have stated previously on this blog, we had and continue to have no substantial objections to President Obama as a commencement speaker, at Notre Dame or anywhere else. We believe that there may have been, and probably were, better choices to represent what Notre Dame claims to represent. The selection of a speaker, however controversial, is a matter of prudence; the objective good or evil of the invitation to President Obama is not a matter for human judgment. Father Jenkins and the Notre Dame Trustees, according to their own Catholic belief, will be held accountable for their actions and the scandal they have given not by man, but by God, and punished or rewarded according to their true motives.

Conferring an honorary degree on Mr. Obama, however, is a matter for human judgment. It was a public act in open defiance of a clear directive that Father Jenkins and the Notre Dame Trustees affected not to understand, or reinterpreted for their own convenience and glorification, equivocating in a series of obviously self-serving and self-congratulatory justifications that fooled nobody. The repercussions of this decision on Catholic higher education in America are the subject of Dr. Rice's What Happened to Notre Dame?, an important contribution to the study of the state of the natural law in the world today. Dr. Rice's previous book on the natural law, Fifty Questions on the Natural Law: What is It and Why We Need It (1999), is still one of the better selling books on the subject, but does not get down to cases as does What Happened to Notre Dame?

Nor is Dr. Rice alone in his analysis or conclusions. Two of Notre Dame's most eminent writers and natural law philosophers have joined with Dr. Rice in his efforts to "wake up the echoes" and focus the attention of the public at large on exactly what has happened, not just to "Catholic America," but to all America, as well as the rest of the world, by the widespread abandonment of the natural moral law. Dr. Ralph McInerny, who holds the "Grace Chair of Philosophy" at Notre Dame and is the author of a large number of philosophical works and novels, has written a brief preface. (By mere coincidence over the past week and a half I have been rereading Dr. McInerny's noted "Father Dowling" murder mysteries when I should have been working on my book on money, credit, banking, and finance.) Dr. Alfred Freddoso, the "John and Jean Oesterle Professor of Thomist Studies" at Notre Dame and author of many scholarly works (but, alas, no murder mysteries), has written the introduction.

To gauge the effect that Father Jenkins's and the Trustees' act has had on the Notre Dame community and the public at large, some selections from a review of What Happened to Notre Dame? by Dr. Samuel Nigro, another friend of CESJ and supporter of the Just Third Way, are revealing. Anyone who knows Dr. Nigro will probably be able to see where we toned down some of the rhetoric and deleted some incisive but inflammatory passages, but have hopefully left his righteous — and justified — anger intact. (Needless to say, Dr. Nigro's opinions do not necessarily reflect the views of this writer, other contributors to this blog, CESJ, or the Just Third Way. They do, however, offer a valuable barometer of feeling among members of the Notre Dame family.)

The title of this book is a question I have been asking for a long time. I graduated from Notre Dame in 1958. Three of my children are graduates. But about 20 years ago, I gave up on Notre Dame. It was not easy to do. My family has been heavily involved in Notre Dame since Knute Rockne. My uncle was Knute's roommate when both were students and remained best friends. My uncle began the Rockne Club that went on for 40 years after Knute's death. When I was a student, my uncle would take me for a pre- and post-game feast at Bonnie Rockne's house. There, a very old South Bend Tribune sports writer told me that it was my father, Charley Nigro, on the train ride back from the 1924 Army game who pushed and prodded that the just-named "Four Horsemen" be photographed on four horses. It was not easy to give up on Notre Dame. But sometime in the late 1980s, I began to ask "What happened to Notre Dame?" Not even sports scores mattered any longer. Well, this book tells all.

Notre Dame lost its soul. That is, it is no longer committed to the Catholic transcendentals of Truth, Oneness, Good, and Beauty, but to economics, public relations, and relativism, i.e., a sales effort using the Catholic Church as its pitchman. Professor Rice details four decades of Notre Dame undermining the Natural Law, and discarding the protective umbrella of the Gifts of the Holy Spirit (Wisdom, Understanding, Counsel, Fortitude, Knowledge, Piety, and Fear of the Lord).

The book was published within three months of Notre Dame's conferring an honorary Doctor of Law Degree onto President Barack Obama. That the scholars (sic) of Notre Dame saw nothing wrong in this is proof that Notre Dame cares nothing about truth, the oneness of humanity, the common good, or the beauty of the universe — only for the bottom line.

This is a depressing book as it chronicles the degeneration of Notre Dame from the Catholic University which educated me, to the quisling 1967 Land O'Lakes Declaration wherein some universities declared their independence and "autonomy" from the Vatican and, at the same time, double-spoke their "Catholicism." Thankfully, Professor Rice tells what needs to be done, and all can hope that, after this crucifixion, there will also be a resurrection. Until then, however, Notre Dame is a façade of Catholicism, a "Pretender of the Faith," and a traitor to its origins. It stands for nothing but contemporary showbiz and the commercialization of truth. Notre Dame may have the money now, which is what they wanted, but it does not have the Faith nor the Gifts of the Holy Spirit to deserve its name as the one-time greatest Catholic University in America.

We have not had a chance yet to read What Happened to Notre Dame? As readers of this blog are aware, we're a "little" involved in a number of other literary projects, such as the republication of Dr. Harold Moulton's 1935 classic The Formation of Capital, a compendium of the more important short writings of Father William Ferree, S.M., Ph.D. (Introduction to Social Justice, 1948, and Discourses on Social Charity, 1966), our own paper and book on money, credit, banking, and finance (untitled as yet), a possible new edition of another book by William Cobbett, Dr. Muhiuddin Khan Alamgir's prison reminiscences, and so on.

Judging from the current condition of society, however, What Happened to Notre Dame? should help wake up people to the basic problem of modern society — the near-total abandonment of the natural moral law as the basis of a just social order — and make them more receptive to possible solutions embodied in the proposals of the Just Third Way, such as Capital Homesteading, the Abraham Federation, and the large number of specific proposals detailed on the CESJ website.

Dr. Charles Rice's What Happened to Notre Dame? can be ordered online from:

Amazon ($10.20, list $15.00)

Barnes & Noble (List, $15.00, online, $12.00, member, $10.80)

We strongly suspect (although we could be wrong) that What Happened to Notre Dame? is not covered by the new definition of "academic freedom," and is probably not available at the campus bookstore.

Naturally we can't recommend somebody else's book without putting in a plug or two for our own publications. In Defense of Human Dignity (2008) might prove useful in orienting readers to realize that there are natural law solutions to today's problems that are financially and economically feasible as well as morally sound. It can be purchased online from:

Amazon ($20)

Barnes & Noble (List and online price, $20, member price, $18)

And, of course, you will want to read Capital Homesteading for Every Citizen, available as a free download from the CESJ website, along with Louis Kelso and Mortimer Adler's The Capitalist Manifesto, 1958, and The New Capitalists, 1961, with the all-important subtitle, "A Proposal to Free Economic Growth from the Slavery of Savings." Capital Homesteading is also available from:

Amazon ($18)

Barnes & Noble (online price, $18; member price, $16.20)

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Some Thoughts on Money, Part XI: Application of the Real Bills Doctrine

As we saw in the previous posting in this series, the real bills doctrine claims that it is possible to create money as needed without inflation if (and only if) the new money is backed by something that has real value and is used to finance something that generates its own repayment. Not only can this be done without using existing accumulations of savings, it results in a net increase in the productive wealth of the community. As Henry Thornton pointed out,

Country banks, also, as well as the Bank of England, have been highly beneficial, by adding, through the issue of their paper, to the productive capital of the country. By this accession our manufactures, unquestionably, have been very much extended, our foreign trade has enlarged itself, and the landed interest of the country has had a share of the benefit. (An Enquiry into the Nature and Effect of the Paper Credit of Great Britain, 1802, 176-177)

Thornton concluded that, "The paper has thus given to the country a bonâ fide capital." (Ibid.)

Not surprisingly, this same process can — and frequently is — used to "monetize" not just the present value of a future stream of income, but of existing inventories of marketable goods and services, as well as expected future inventories. If something has a definable present value, then it can be monetized before it has actual existence. The only thing absolutely necessary in this process is not existing accumulations of savings, but the ability to make promises and honor them. In this way an individual, a company, or even an entire country can start with absolutely nothing, and begin building wealth on a foundation of trust and solidarity, not the accumulated wealth of an elite few.

As we can see, the real bills doctrine embodies within itself the fact that, it is not human labor that generates the bulk of production, but capital. As both capitalists and socialists realize, no mere human can possibly have labor sufficiently valuable to be able to accumulate the incredible amount of savings necessary to finance capital. The socialists, as we have seen, claim that, therefore, the capitalist is a thief, stealing surplus value from the workers and the consumers. The capitalist claims that this is not theft, but the reward due to the godlike capitalist for his or her special abilities that make his or her labor tremendously more valuable than the run of the mill human being. In reality, of course, it isn't a question of how productive human labor is at all, but of how productive capital is, combined with the fact that capital can be financed without first accumulating savings, and that capital pays for itself out of its own future earnings.

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News from the Network, Vol. 2, No. 39

Following up on last week's introductory editorial to the news items, the answer to the puzzle as to where people are supposed to get the money to increase spending to support the gains in the stock market is, as predicted, more and more consumer debt, and throwing more money down rat holes, just as Keynes recommended in The General Theory of Employment, Interest, and Money, III.10.vi. According to an Associated Press report ("Bernanke: Consumer loan program still needed," 09/25/09),

"An ongoing need still clearly exists" for the program, which also is aimed at making sure loans flow to the troubled commercial real estate market, Bernanke said in brief remarks to a conference here [Washington, DC] sponsored by the Congressional Black Caucus Foundation.

Thus, the solution to the overwhelming burden of consumer debt and lack of jobs and access to the means of acquiring and possessing capital is . . . more consumer debt, and throwing more money into failed speculative investments, i.e., down a rat hole. This is clearly financial genius of so high an order that no one outside of academic economics can grasp it. Something as pedestrian as the Declaration of Monetary Justice is probably 'way below Mr. Bernanke's head.

• On Tuesday, September 29, 2009, at CESJ, Dr. Muhiuddin Khan Alamgir, former Minister of Planning for Bangladesh and current Member of Parliament, will be giving an informal talk to members of the Center for Economic and Social Justice and guests. Dr. Alamgir is a Ph.D. economist with a degree from Boston University. He is on the board of the Institute for Integrated Rural Development ("IIRD") in Dhaka, a non-profit organization credited with lifting thousands of people in Bangladesh out of dire poverty. One of the IIRD's current projects is a proposed worker-owned garment factory, "JBM Garments, Ltd.," to compete with the sweatshops. Dr. Alamgir will be speaking about his experiences as a political prisoner for 22 months, as well as current conditions in Bangladesh, and plans for the future. Due to the short notice, please let CESJ know by noon on Monday, September 28, 2009, if you plan to attend. Contact information is available on the CESJ website. There will be no charge, but space is extremely limited and reservations are required.

• On Thursday, September 24, 2009, at the invitation of Rev. Virgil Wood, Michael D. Greaney, CESJ's Director of Research, participated in a panel discussion at Harvard University Divinity School on integrating the concepts of Dr. Martin Luther King, Jr. into a just economic framework. Mr. Greaney briefly presented the outline of the Just Third Way, concentrating on what appears to be the single most significant barrier to economic growth and democratic participation in capital ownership: the dogmatic belief that capital formation cannot be financed except by using existing accumulations of savings, by definition a monopoly of the rich. Students attending the discussion seemed particularly intrigued by the subtitle of the second book by Louis Kelso and Mortimer Adler, "A Proposal to Free Economic Growth from the Slavery of Savings," with a number of them writing down the link where the free download is available.

• Unfortunately, neither The Capitalist Manifesto (1958) nor The New Capitalists (1961) is currently in print. People interested in seeing these two critically-needed works back in print should send a note to the Kelso Institute, KELSOINSTITUTE@aol.com.

• On Monday, the foreword for Dr. Harold G. Moulton's landmark monograph, The Formation of Capital, was put into final editing. CESJ's new edition of The Formation of Capital may be available by the end of the calendar year. Norman Kurland has distributed a number of copies via e-mail to highlight the importance of Moulton's work and to emphasize the fact that existing accumulations of savings need not keep the human race in bondage to "the slavery of savings."

• As of this morning, we have had visitors from 41 different countries and 44 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brunei, Canada, and Venezuela (unless you count the Long Lost Land of Not Set). People in Aruba, the Netherlands, Indonesia, (Not Set), Venezuela, and Brazil spent the most average time on the blog. The most popular posting continues to be "What Caused the Economic Crisis," "Who is Responsible for Our Health Care?" followed by the Keynesian "paradox of thrift," what you can do to end the economic crisis, and the news items. With respect to the amount of time spent reading, the postings on Lincoln's Homestead Act has seen a sudden burst of popularity, followed by the "thoughts on money," usury, the paradox of thrift, the reign of the British Currency School, and William Cobbett.

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 X: Application of the Real Bills Doctrine

Sound implementation of the real bills doctrine of Adam Smith and Henry Thornton has the potential, as Louis O. Kelso and Mortimer J. Adler put it in the subtitle of their second book, "to Free Economic Growth from the Slavery of Savings." (The New Capitalists, 1961) That, however, still leaves open what Kelso and Adler called "the universal collateralization requirement."

Collateral is a type of "self insurance," by means of which the bank guarantees that it will not lose the proceeds of the loan should the project not perform as expected. This is where existing accumulations of savings come in. Existing accumulations of savings, almost always equal to previously-invested wealth, are used to "insure" a loan, but are not used to finance capital formation directly.

In some circumstances, a bank might decides that a project is either sufficiently sound on its own merits not to require collateral, or the project itself serves as collateral. For example, a development project might require the initial purchase of land that, due to the mere fact that development is scheduled, becomes more valuable. Thus, even though the proceeds of a loan made without existing collateral might be used to purchase the land, the increase in the value of the land serves to "self-collateralize" the loan — the loan itself brings the collateral into existence.

Once a loan officer has decided that a proposal is sound and the individuals or groups involved are a good credit risk (that is, it looks as if they can be trusted to keep their word), a loan is made. The bank, however, does not take the money out of its vault, or issue new banknotes against its reserves. Instead, the bank creates new money, either by printing banknotes or creating a demand deposit, backing the new money with the present value of a lien on the proposal — a "real bill."

The borrower takes the new money, and purchases whatever is required to make the project productive. Once the project starts generating income, the borrower repays the loan, plus a fee to the bank for the use of the bank's good name. The bank cancels the amount representing principal, and records the rest as revenue, using it to cover its own expenses and profit distribution, putting it back into circulation.

The end result is a net increase in the wealth of the community, but without the absolute necessity of existing accumulations of savings. Existing accumulations of savings obviously had a role in this process, but that role is, just as obviously, not irreplaceable as many of today's experts appear to believe.

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Some Thoughts on Money, Part IX: The Banking School and Banking and Finance

Objections to the real bills doctrine, and the reason the real bills doctrine is regarded by the vast majority of today's economists as "discredited," are based on an absolute faith in the dogma that it is impossible to finance capital formation without first cutting consumption and saving. That being the case, even monetary economists and free market advocates reject the real bills doctrine.

Ironically, however, the real bills doctrine provides the foundation for the quantity theory of money — as well as the practice of the science of finance in a free market. Economists from across the spectrum twist what should be relatively simply theories wildly out of shape in order to make their theories work while rejecting the basic premise on which the theories rest. They argue that unreality is real in order to get around the logic of the real bills doctrine, all the while ignoring the fact that the real bills doctrine is proved every time capital formation is financed through leveraged purchases.

Instead of accepting the logic and the fact of corporate finance, people insist that something else is really going on, that there is fraud or theft involved somehow and somewhere, that an incomprehensible trick is being played somehow by accountants and lawyers, so on, so forth. All of this proves, of course, either that the corporation is inherently evil or a mystic creation by the Almighty instead of a mere human tool.

These analyses are based on the belief that it is absolutely impossible to form capital unless savings already exist. If it appears that capital formation has taken place without first saving, the socialists assume that somebody is being robbed or cheated (usually by the theft of surplus value), while the capitalists assume that some deity like Entrepreneurship has somehow managed to perform a miracle that ordinary mortals cannot grasp.

A third possibility, one embodied in the Just Third Way, is that the individuals or groups that put together capital projects are neither thieves nor gods, but ordinary people exercising their natural freedom of association and their natural capacity to make promises. A plan is put together and financing needs determined.

This plan (presumably tested for both financial and engineering — physical or "practicable" — feasibility as far as is possible without having a working model) is taken to a bank of issue. The loan officer (or equivalent) at the bank of issue examines the plan, and (if he or she decides it might be feasible) turns it over to experts that a bank ordinarily retains to carry out its due diligence before making a loan. If the experts pass on the proposal, the loan officer examines what is offered as collateral, that is, as security for the loan.

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The Recession is Over . . . Again, Part II of II

In the previous posting on the End of the Great Recession (again), we noted that the only way to get the economy started again was to stimulate consumer demand. There is, however, a catch to that. The only real way to get an economy started again is to stimulate demand naturally, not artificially — and that means opening up means for ordinary people to be able to spend the income generated by capital instead of having the rich reinvest it or the government tax it and redistribute it. Otherwise, income that would otherwise have been spent on consumption is reinvested to finance new capital, accelerating the accumulation of wealth that cannot be consumed and is therefore reinvested . . . .

You get the idea. To solve this problem requires that ordinary people — people who will spend their capital income on consumption instead of reinvesting it — become owners of the means of production. This does not mean taking away capital from capital owners and redistributing it to capital non-owners. Instead, it means opening up access to capital credit on the part of non-owners so that they become owners of the estimated $2-3 trillion of new capital formed each year in the United States.

Purchase of capital by non-capital owners will, in and of itself, spur demand. This is because capital goods may be capital goods to the purchaser, but they are marketable inventory — consumer goods — to the producer and the seller. The sale of these goods make a profit, or at least are intended to make a profit. In accordance with Say's Law of Markets, this profit represents income to the owner of the capital. If spent on consumption instead of reinvesting the proceeds in more capital, the capital income will provide the demand to get the economy moving again.

This, of course, raises another question: where are people supposed to get the credit with which to purchase capital? Don't people have to cut consumption, save, then invest before they can purchase capital, even capital that pays for itself out of future earnings?

No. The idea that you need to cut consumption and save before investing is a fallacy that has shackled economic development and kept many people in poverty and want who didn't need to be there. The fact is that it is entirely feasible — in fact, extraordinarily beneficial to the economy as a whole as well as individuals — to invest before saving. Since "money" is nothing more than a promise, a contract to deliver wealth (as even Keynes admitted in his Treatise on Money, 1930), all the money that is needed can be created out of the capacity of a borrower to make good on his or her promise to repay the loan out of future profits. Existing accumulations of savings are not necessary, except to serve as collateral — and collateral can be replaced by capital credit insurance and capital credit reinsurance.

A program to achieve the goal of widespread ownership of the means of production can be found in "Capital Homesteading for Every Citizen," an application of the principles of the Just Third Way as found in the binary economics of Louis Kelso and Mortimer Adler. Freedom from the constraints imposed by reliance on the false claim that existing accumulations of savings are absolutely necessary to finance capital formation is, in fact, the whole point of Kelso and Adler's second book, The New Capitalists (1961), with the "revealing" subtitle, "A Proposal to Free Economic Growth from the Slavery of Savings."

Capital ownership is certainly a more attractive prospect than Mr. Bernanke's "jobless recovery" that benefits speculators and gamblers at the expense of the truly productive. It's also the only thing that is actually going to work.

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News from the Network, Vol. 2, No. 38

The Great Recession is over!! . . . again. It's not entirely clear exactly how this can be so when no new jobs are projected — nor are any proposals to get direct ownership into people's hands being considered. It becomes a great puzzle just where people are supposed to get the money to increase spending, unless they go deeper into debt.

Everything seems to be based on the expectation that the holidays will bring an enormous increase in consumer spending (debt funded?), and the speculators and gamblers on Wall Street will cause additional gains in the stock market. Of course, in light of Mr. Bernanke's announcement that the Great Recession is over, the stock market is up . . . at least as this is being written before noon. The day isn't over yet, and it's become fairly typical that whatever was happening an hour ago on Wall Street is countered by what happens an hour in the future.

So much for this week's Big News. Most of what has been going on this week within the Just Third Way is responding to inquiries from the public, which doesn't make for short bulleted points in a news brief posting. More and more, the essential question in the inquiries, whether or not explicitly stated, is how are people without savings or access to the savings of others supposed to acquire ownership of the means of production? Unfortunately, due in large measure to the failure of modern economics to take the actual operation of the science of finance into account, the main schools of economic thought cannot address this issue. Instead, they dismiss it as unimportant, or put the blame for the failure to gain ownership on some flaw in a person's nature.

A reading of Kelso and Adler's second book, The New Capitalists (1961), would show them where they went wrong, and what can be done about it, as is evident from the book's subtitle: "A Proposal to Free Economic Growth from the Slavery of Savings." If they want a proposal with specifics to get things back on track they might want to browse through Capital Homesteading for Every Citizen. Both books are free, so that should be no problem . . . unless they're afraid that getting something for free will not adequately stimulate the economy.

We therefore make this offer: Any economist or policymaker who reads the e-texts of The New Capitalists and Capital Homesteading for Every Citizen and who doesn't think that the proposals are sound can either tell us what is wrong with them and why they won't work, or send us a stimulus check with lots of zeros to the left of the decimal point to comfort us in the affliction of our political and economic blindness.

• Early this week we began turning what originated as a request to explain the definition and origin of "money" as we understand it into a major article. The focus of the article is how something called the "real bills doctrine," while it reflects the reality of the practice of accounting and the science of finance, is unaccountably rejected by the economic establishment and thus by policymakers.

• The real bills doctrine, mentioned a number of times on this blog, is that money can be created without inflation or deflation (defining inflation as "demand-pull" inflation in which an increase in the money supply exceeds an increase in the supply of marketable goods and services) if — and only if — the increase or decrease in the money supply is matched by an increase or decrease in the supply of marketable goods and services. The real bills doctrine is an application of the logic behind Say's Law of Markets and the quantity theory of money, M x V = P x Q. Most modern schools of economic thought reject the real bills doctrine without explaining why in any substantive manner, and even erroneously credit Henry Thornton with repudiating or rejecting the real bills doctrine that he defended.

• Also this week we prepared a response to a friend of CESJ who sent an article that appeared to contain vague terminology with respect to capitalism. CESJ and most people and organizations in the Just Third Way reject the term "capitalism" as too vague in its modern spectrum of meanings, and too pejorative in its classic sense. As might be expected from the title of this blog, we prefer "the Just Third Way" to "capitalism" to describe a system based on a limited economic role for the State, free and open markets as the best means of determining just prices, just wages, and just profits, restoration of the rights of private property, and widespread ownership of the means of production.

• Work is proceeding on the editing of Dr. Alamgir's book, Notes from a Prison: Bangladesh. Some editing questions have arisen that will probably delay release until later this year or early next year.

• As of this morning, we have had visitors from 37 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 (unless you count the Long Lost Land of Not Set). People in Aruba, the Netherlands, Indonesia, (Not Set), Venezuela, and Brazil spent the most average time on the blog. The most popular posting continues to be "What Caused the Economic Crisis," "Who is Responsible for Our Health Care?" followed by the Keynesian "paradox of thrift," what you can do to end the economic crisis, and the news items. With respect to the amount of time spent reading, the postings on Lincoln's Homestead Act has seen a sudden burst of popularity, followed by the "thoughts on money," usury, the paradox of thrift, the reign of the British Currency School, and William Cobbett.

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 Recession is Over . . . Again, Part I of II

Yesterday's Wall Street Journal carried yet another article announcing that the Great Recession is once again over. ("Bernanke: Recession 'Likely Over'," WSJ, 09/16/09, A2) By this time even the venerable Journal might be having some doubts over whether a "jobless recovery" signaled almost exclusively by increasing speculative frenzy in stocks qualifies as a "recovery" at all. They certainly didn't put the news on the front page. That top spot was reserved for articles on a new call for more troops in Afghanistan, the return of gambling "Day Traders" to Wall Street, and the anticipated cost of the looming health insurance mandates . . . oh, yes — and firefighting bookkeepers in California.

I have nothing against brave accountants. Being a CPA, I naturally assume that we are the bravest of the brave, and contribute more to the success of any endeavor than anyone else. We could have won the Second World War in months just by parachuting a few score auditors into Berlin, Rome, and Tokyo, and demonstrating to the Axis leaders that the presumed benefits of world conquest were more than offset by the cost inefficiencies and waste of resources.

In any event, the Wall Street Journal seems to be taking this latest announcement with just a grain of salt. It's been announced too many times. The Journal is even giving credit to the recent surge in the stock market not to any leading (or misleading) economic indicators, but to the speculators taking advantage of the increasingly wild swings in the market. If you know how to gamble, you can make money whether the market goes up or down.

The bottom line in this latest "recovery" is found in the subhead: "Fed Chief Doesn't Expect Many New Jobs to Appear Soon; Retail Sales Climb 2.7%." In other words, things are not getting better. Instead, we're seeing the usual Fall spate of purchasing as people finish off the Summer and return to school and jobs, buying their Winter clothing and school supplies and gearing up for the holidays.

Retailers are evidently more than a little worried, even given the "climb" of a whopping 2.7%. Last week, Wednesday, September 9, 2009, I saw my first Christmas ad — Carnival Cruise Ships, telling me to book early to be sure and avoid the rush, all to the tune of my least favorite "holiday" song that has nothing to do with any holiday: "Jingle Bells." I have seen about half a dozen other Christmas ads since.

While their choice in music might have something to do with the fact that I did not rush out immediately to book my holiday cruise, I would guess that many people are holding off buying anything that they don't have to until the job market improves . . . which Mr. Bernanke assures us will not be any time soon. Savings, in fact, have gone up, from zero a few years ago to 6.9% as of the end of June. This creates a definite problem. Capital formation — and thus job creation — is fueled not by government stimulus or speculative frenzy on Wall Street, but by consumer demand, as Dr. Harold Moulton demonstrated in his 1935 monograph, The Formation of Capital.

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Some Thoughts on Money, Part VIII: The Sad Case of John Law

The real bills doctrine is popularly supposed to have originated in the theories of John Law. It's actually rooted in the whole theory of "money" as the medium of exchange and Aristotle's analysis of "money" in the Politics. The Aristotelian roots of the real bills doctrine may, in fact, explain why Mortimer Adler found the ideas of Louis Kelso so consistent with his philosophical orientation (or maybe not). Most economists and historians who bother about the issue, however, will cite John Law and the "Mississippi Bubble."

In the early 18th century, the misuse of Law's principles of banking and finance by the duc d'Orleans, regent for Louis XV, bankrupted France. Briefly, despite continued protests by both Law and the French parliament, the regent got it into his head that banknotes issued by John Law's bank were somehow valuable in and of themselves. The regent took over Law's bank, renamed it the Banque Royale, and cranked up the printing presses.

When Law, in concert with the French parliament, protested the enormous issues of paper money backed only by the State's promise to pay, warning that a disaster was imminent, Law was "escorted" out of the palace by armed guards and his former free access to the regent cut off. When the inevitable disaster against which Law had warned came, the regent (of course) blamed Law for everything. Law was barely able to get out of France ahead of the mob. (A good, if somewhat financially garbled account of what happened can be found in Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds, 1848, available in many reprint editions.)

The "Mississippi Bubble," as Law's failure came to be known, convinced the adherents of the Currency School that only gold, and banknotes backed by gold, were "real" money. Political expedience dictated that banknotes backed by government debt be included in the definition of money — especially since the Bank of England only got its charter by agreeing to lend virtually its entire capitalization in gold and silver to the government of William III.

This set up the inherent contradiction in the Currency School that persists to this day, having been embodied as an absolute dogma in Keynesian economics. That is, 1) banknotes (and demand deposits) backed by government debt are acceptable if kept within bounds to control the inevitable inflation (an impossibility when the State is given a free hand to create money at will, regardless of the nominal checks and balances established), and 2) banknotes (and demand deposits) backed by private sector assets are not acceptable, and are not even "real" money, being automatically inflationary, as "proved" by the fact that Law's plan resulted in the French government printing up gargantuan amounts of banknotes backed only by government debt.

Obviously, the main thrust of the Currency School was to discredit by any means possible the real bills doctrine that was the central theory supporting the Banking School, whether or not the alleged refutation actually made any sense. That they succeeded admirably is demonstrated by the fact that most economists since the early 19th century have simply asserted that the real bills doctrine has been disproved, discredited, or whatever term best serves to divert the reader's or the student's attention from the fact that no disproof or discredit has actually been presented. Consequently, we see the real bills doctrine referred to in the literature as fallacious and even "notorious" (Leland B. Yeager, "Preface" to the Liberty Fund edition of Vera Smith's The Rationale of Central Banking and the Free Banking Alternative, 1936, xix) but without a single reason being given why the doctrine is discredited, fallacious, or notorious.

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Some Thoughts on Money, Part VII: The Banking School and the Real Bills Doctrine

To return to our interrupted series on some thoughts on money, we start by taking a look at the "school" that opposed the position of the Currency School, the Banking School. The basic tenets of the Banking School were that 1) a paper currency was at least as good as a gold currency, even having several advantages over gold, and 2) the definition of "money" included anything that can be used in settlement of a debt, but especially banknotes and commercial ("mercantile") paper of all types. The one proviso that all adherents of the Banking School insisted must be in place was that the backing of a paper currency has to consist of real assets, that is, something with a present value that can be expressed in terms of the currency.

This is, in essence, the real bills doctrine. According to such supporters as Adam Smith (The Wealth of Nations, 1776, II.ii), Henry Thornton (An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 1802), and John Fullarton (On the Regulation of Currencies of the Bank of England, 1845), paper money (and, of course, demand deposits) can be created at will without inflation or deflation if (and only if) the amount of paper money does not exceed the present value of existing and future marketable goods and services in the economy. Smith added the caveat that, in order to ensure that people had confidence in the paper currency, the amount of paper currency could not exceed the value of gold and silver in the economy.

Subsequent economists, such as David Ricardo — who supported the Currency School — twisted Smith's meaning and stated that Smith meant that the amount of paper currency could not possibly exceed the amount of gold and silver in the economy. That is, Ricardo claimed that Smith declared that the real bills doctrine would somehow magically prevent the amount of paper currency from exceeding the amount of gold and silver in the economy. This is demonstrably false — paper issues can certainly be created at will and in unlimited amounts — and clearly not what Smith meant at all. It was, however, an easy straw man that has been used to "discredit" Smith's argument in support of the real bills doctrine ever since.

Thornton agreed with Smith that it was a good idea to have the paper currency convertible into gold in order to build people's confidence in the paper currency. Once confidence was established, however, it was far more expedient and much more efficient to eliminate gold altogether as too expensive and unnecessary to use as currency.

John Fullarton argued that, in accordance with a "law of reflux" that he invented, the proportion of paper currency (including demand deposits and all other negotiable instruments), and gold would be self regulating . . . always given that the backing of the paper currency was in the form of real bills, not fictitious bills, speculative projects, derivatives, consumer debt, or government debt. Excess paper issues would flow back to the issuer for redemption in gold or in payment of the debt by means of which the paper currency was created until parity was reestablished.

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Ireland: Business Requires Sacrifice, Part III of III

Providing the answer to the question we posed in the last posting in this series as to how people could starve in the midst of plenty was a man we've already referenced a number of times in these postings: Jean-Baptiste Say. Say's Law of Markets, which is named for this late 18th, early 19th century political economist, states what some economists regard as a "near tautology," but which embodies a profound reality in its seeming simplicity. That is, "production = income."

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

That being the case, if you can't produce, you can't consume — and if you cannot turn your existing or future production of marketable goods and services into money by drawing a bill and discounting it, the market will be restricted to those who have either accumulated sufficient savings, have jobs that pay them out of existing savings, or those who receive tax monies from the State and so have effective demand. If the economy is in a slump and goods and services remain unsold, it is because a significant number of people are not able to produce by means of their labor or capital, and thus do not have their own productions to exchange for the productions of others. Government redistribution, tax rebates, and inflation do not solve this problem. Instead, such measures make the situation even worse by maintaining, even increasing the "ownership gap."

Thus, the Irish government does not need to accept abortion or other measures contained in the Lisbon Treaty if that is contrary to the will of the majority of the people, even if "business" continues to assert it as a necessary tradeoff to gain the somewhat elusive benefits of Keynesian economic programs. The real problem is how to get ownership of the means of production into the hands of ordinary people who currently own no capital and have no savings with which to purchase capital.

That problem is addressed — and solved — by the economic justice principles developed by Louis Kelso and Mortimer Adler, and the social justice principles developed by Pope Pius XI and explained by Father William Ferree. These are combined in the Just Third Way, especially as found in the "Capital Homesteading" proposal of the Center for Economic and Social Justice.

Capital Homesteading is an analogue of the nineteenth century American programs enacted to bring about a broad distribution of the ownership of land. The proposal would expand the concept to include ownership of advanced technologies, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy.

A "Capital Homestead Act" would implement a national economic policy based on the binary growth model, designed to lift barriers in the present financial and economic system and universalize access to the means of acquiring and possessing capital assets. A Capital Homestead Act in any country would allow every man, woman and child to accumulate in a tax-sheltered Capital Homestead Account, a target level of assets sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.

Capital Homesteading would, at least, be a more rational approach to economic growth and development for Ireland than implementing the human sacrifice alternative. Moloch consumes, he does not produce.

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News from the Network, Vol. 2, No. 37

The Big News of the week is, of course, Mr. Obama's health care speech, and (especially) his promise not to increase the deficit "by one dime" to fund it. Two possible objections come to mind immediately. One, Mr. Obama is not addressing the fact that, whether funded out of current tax revenues or deficits backed by future tax revenues, many people are concerned with what seems to be an absolute insistence on continued government funding of abortion.

Using tax dollars to fund abortion directly or promote it in any way forces people who are opposed to abortion to "materially participate" in the procurement of abortion. This is an act that a significant number of people view as morally repugnant and contrary to the natural moral law. If the justification for legal abortion is based on a woman's presumed right to choose, the legal justification for government funding or support of abortion in any form is obviated.

This is because taxpayers have no choice whether or not they pay taxes. By using "government money" (i.e., taxpayer money) to fund or support abortion, people are forced to pay for something they may regard as criminal, or at least morally wrong. The only way to justify abortion on the grounds of a "right to choose" is to extend that right to everyone. To ensure that abortion is truly a free choice on the part of everyone affected — including those who are currently forced to pay for it — all government support and funding must be halted. It makes no sense to take away the free choice of some people to support that of others, and thereby create a privileged class in what is presumably a legally classless society.

Two, Mr. Obama is not being realistic about funding. The only viable plan to fund health care reform (and all other government programs and operations) is to jettison the dogmatic belief in the absolute necessity of existing accumulations of savings to finance capital formation, and the seemingly inevitable corollary that everything must, ultimately, come from the State. This would allow a complete and long overdue overhaul of the tax system with the goal of leaving people with more of their own income to meet expenses such as food, clothing, shelter, education . . . and health care . . . without relying on charity or government redistribution.

Projections suggest that it would be possible to fund all government programs, including Social Security and Medicare, as well as a universal health care program out of current tax revenues, eliminate the deficit, reduce the debt, exempt $100,000 for a family of four from all taxation, and still keep a single tax rate under 50% for all income over the exemption. With the increase in the tax base as a result of Capital Homesteading and the consequent reduction in the debt and government entitlements to redistribute existing wealth to make up for inadequate income (often caused by excessive taxation and deficit spending that increases inflation to fund government entitlements to address inadequate income), projections suggest that the tax rate could be cut in half within a generation.

If anyone knows a way to get this information to Mr. Obama, he or she would be doing everybody a favor. Other "favors for everybody" are reflected in this week's happenings:

• On Monday, CESJ participation in a seminar at Harvard Divinity School in Rockefeller Hall, in the lounge adjacent to the Cafeteria, from 12:00 to 2:00 p.m. was discussed. The event, to take place September 24, is in honor of Dr. Martin Luther King, Jr., a "teachable moment" to discuss the integration of the principles of the beloved community into a sound and holistic approach to the economy. Dr. Harvey Cox and Dr. Virgil A. Wood, both long-time associates of Dr. Martin Luther King, Jr., and Sr., will lead a discussion on the spiritual and economic dimensions of the King Jubilee Dream.

• On Tuesday, members of the Equity Expansion International, Inc. team participated in a two-hour internet discussion with two entrepreneurs in New Delhi, India, to discuss implementation of a program of worker ownership and Justice-Based Management at their company. From the perspective of the Just Third Way, this represents a potential opportunity to develop a new paradigm of economic development for the world that avoids the wealth- and power-concentrating models of the past in one of the fastest developing economies in the world.

• Work continues to progress on the publishing projects. In the course of the research for the books, it is becoming increasingly clear that many of the economic problems being experienced today may result from a misunderstanding of money, credit, banking, and finance. This appears to have developed out of a rejection of the tenets of the Banking School and unquestioned acceptance of those of the Currency School (described in previous postings), resulting in a virtual divorce between production of marketable goods and services and the creation of money. One result has been diversionary discussion over the definition of inflation, with the various sub-schools of thought seemingly more concerned with proving everybody else wrong instead of figuring out who is right and what to do about it.

• The "Truth Be Told" newsletter, a publication of the "Lay Dominicans — Western Province," has republished Michael D. Greaney's original article on universal health care in its September 2009 issue. The article first appeared in Social Justice Review, and contains many of the features that were later more fully developed in the "Doctors' Plan," especially with regard to the question as to how health care reform can be financed. This is particularly appropriate in light of Mr. Obama's pledge to fund health care reform without increasing the deficit "by one dime." Truth Be Told can be downloaded free from the website of the Western Province.

• As of this morning, we have had visitors from 36 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, Brunei, the UK, Venezuela, and Canada. People in Aruba, Israel, Indonesia, the Netherlands, and Brazil spent the most average time on the blog. The most popular posting continues to be "What Caused the Economic Crisis," followed by the Keynesian "paradox of thrift," what you can do to end the economic crisis, and the news items. With respect to the amount of time spent reading, the postings on the "thoughts on money," usury, the paradox of thrift, the reign of the British Currency School, and William Cobbett 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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Ireland: Business Requires Sacrifice, Part II of III

According to the Wall Street Journal of 09/08/09, businesses are putting pressure on the Irish government to accept the Lisbon Treaty, including its pro-abortion provisions, in the name of economic growth and development. That is a very bad argument, and here's why.

The problem with virtually all economic policy today is that it is stuck in the Malthusian framework — and "business" seems intent on forcing the consequences of this flawed paradigm on Ireland in the quest for profit that never seems to materialize . . . at least for those who would be most affected by the provisions of the treaty: the people of Ireland. It comes as no surprise to learn that Malthus published the first edition of his Essay on Population (1798) at almost the same time that the great controversy broke out between the Currency School and the Banking School with the suspension of gold payments by the Bank of England in 1797 — a "temporary" measure that lasted until 1821. The Currency School bought into Malthus' limited wealth assumption, and asserted an absolute reliance on existing accumulations of savings to finance capital formation. The Banking School rejected Malthusian assumptions, and asserted that existing accumulations of savings were not necessary to finance capital formation (the real bills doctrine).

There are, of course, gray areas in the controversy. John Maynard Keynes, for example, claimed to reject Malthus, but relied absolutely on existing accumulations of savings to finance capital formation (General Theory, II.7.v), while Adam Smith, one of the premier adherents of the real bills doctrine, inserted some proto-Malthusian doctrine into The Wealth of Nations (1776) by implicitly limiting ownership of the means of production to the rich and restricting "labor" to gaining income only through wages ("The Wages of Labour," I.viii). Despite the proven falsity of Malthusian doctrine, however, it had joined with the tenets of the Currency School to present a seemingly unshakeable and monolithic battlefront to common sense and empirical observation. As the economist Joseph Schumpeter noted,

The teaching of Malthus' Essay became firmly entrenched in the system of the economic orthodoxy of the time in spite of the fact that it should have been, and in a sense was, recognized as fundamentally untenable or worthless by 1803 and that further reasons for so considering it were speedily forthcoming. It became the "right" view on population, just as free trade had become the "right" policy, which only ignorance or obliquity could possibly fail to accept — part and parcel of the set of eternal truth that had been observed once for all. Objectors might be lectured, if they were worthy of the effort, but they could not be taken seriously. No wonder that some people, utterly disgusted at this intolerable presumption which had so little to back it began to loathe this "science of economics" quite independently of class or party considerations — a feeling that has been an important factor in that science's fate ever after. (Joseph Schumpeter, History of Economic Analysis. New York: Oxford University Press, 1950, 581-582.)

The Malthusian idea that there could be such a thing as excess people is, even from the crudest and most materialistic approach, utter nonsense. Even a rational materialist would say that unemployed people are a wasted resource, not a drain on society, regardless of their value as human beings. Nevertheless, Malthus' theories allowed the rich to assume that the misery and degradation of the working classes was their own fault for refusing to limit their numbers. Malthusian theory gave the rich a necessary salve to their consciences, and helped justify concentrated ownership of the means of production. People continued to believe — falsely — that if people were poor, it was because 1) they lacked the discipline to save and thereby accumulate the necessary financial capital to purchase productive assets, and 2) they were incapable of restraining themselves from breeding up to and beyond their own ability to support themselves.

There was, however, a slight problem with these assumptions. The predicted shortages didn't seem to be making their scheduled appearance. The new technologies that came in with the Industrial Revolution were producing marketable goods and services in such huge quantities that the problem was finding enough buyers with disposable income to purchase the tremendous amount of output, not a surplus of demand emanating from Malthus' Imaginary Multitudes. Supply and demand were becoming increasingly out of balance, but not because there was not enough to go around. On the contrary, the world was facing the paradox of people starving in the midst of plenty, even superabundance. What was going on?

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Ireland: Business Requires Sacrifice, Part I of III

We interrupt our series on thoughts on money to bring you another important news bulletin. It's not too great a stretch, for if businessmen, economists, and politicians understood money, credit, and banking, the world wouldn't be in the mess it's in. Yesterday's Wall Street Journal carried an article, "Businesses Ask Ireland to Quit Blocking EU Treaty" (09/08/09, A12). The gist of the article seemed to be that the Irish government is going to have to face economic reality and accept the Lisbon treaty and its ultra-Keynesian framework, along with its pro-abortion provisions and other measures unacceptable to the majority of the Irish people, if Ireland wants to prosper materially.

The bottom line is, does "business" have the right to dictate matters not just of national political policy, but of individual and social morality for the sake of economic expedience? Or does business, in common with every other person, natural or artificial, have the obligation to conform itself to essential principles of the natural law within the framework of the common good of all humanity? Is it even possible to be moral within the Keynesian economic paradigm that seems to demand great sacrifices in order to obtain benefits that never seem to materialize?

Even Keynesians are beginning to admit that the "New Deal" that allegedly brought the United States out of the Great Depression didn't really "kick in" until 1939 (Robert Skidelsky, John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman. London: Penguin, 2005, 494-500, 504, 509-510). Keynes himself admitted that something was wrong in the "mini-depression" of 1937-38, but blamed everything on Roosevelt's failure to go the whole way and let Keynes govern the United States, at least economically (William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940. New York: Harper Perennial, 2009, 242-243). What pro-New Dealers fail to realize even to this day, however, is that the New Deal didn't bring the prosperity of 1939, it was something called World War Two. It was in all the papers, but economists seem to have missed it.

The question becomes, "Is there another way?" Does a people have to accept the imposition of laws alien to their customs, traditions, and beliefs to achieve prosperity? Or can a modern economy be fitted into traditional morality and ethics without violating the essentials of the natural law? Does Ireland have to accept human sacrifice in the form of abortion and all the other currently-popular (and disproved) measures to spur economic development in order to grow economically?

Not according to such diverse thinkers as Jane Jacobs and R. Buckminster Fuller. As Dr. Jacobs pointed out in her book, The Economy of Cities,

It is becoming conventional (especially among the very well-off) to assume that poor and unproductive people cause their own poverty by multiplying — that is, by their very numbers. But if it is true that poverty is indeed caused by overpopulation, then it follows that poor people ought to prosper wherever populations decline appreciably. Things do not work out that way in the real world. (Jane Jacobs, The Economy of Cities. New York: Vintage Books, 1970, 118-119.)

How do things "work out" in the real world? Fuller pointed out some rather obvious facts in his book, Utopia or Oblivion:

While all the metabolic gains are taking place [i.e., as economic and social development takes place], favorable changes in population trends will be realized. Biological population is apparently operative on a quantum basis. Nature increases the seed and fertilization starts in inverse proportion to the probability of successful growth and survival of each of the ecologically complementary species — of all of life on earth. As the chances for maple trees to survive decrease, nature starts more maple-tree seeds whirling off in their rotorships to find plantable sites. . . .

In the same way, the human population's starts, gains, and recessions are geared directly to changing survival and birthrate probabilities. The first 17th-century European colonists in America had an average of 13 children per family. As the first waterworks and sewer systems came into use, improving the sanitary conditions and survival probability, the numbers of children per family swiftly decreased (only reversing momentarily in meager degree to rectify the abnormal deathrates of warfaring) until with full industrialization attained in America, the birthrate is now 1.9 children per family. (R. Buckminster Fuller, Utopia or Oblivion: The Prospects for Humanity. New York: Bantam Books, 1969, 200-201.)

In other words, the more advanced a society becomes, the lower its reproductive rate; lowering the rate of reproduction does not advance a society: "population has a natural tendency to keep within the powers of the soil to afford it subsistence in every gradation through which society passes." (John Weyland, The Principles of Population and Production as They are Affected by the Progress of Society; with a View to Moral and Political Consequences. London: Baldwin, Cradoc, and Joy, 1816, 107.)

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Health Care in Japan

Yesterday's Washington Post had an interesting article about how the United States could make affordable health care available to everyone simply by following the Japanese model. Unfortunately, the article seemed somewhat dismissive of the free market. We sent a letter to the editor briefly stating what appeared to be wrong with the Japanese approach, which, much to our surprise, received no response.

Dear Sir(s):

Blaine Harden's article on the Japanese health care system ("Health Care in Japan: Low-Cost, for Now," Washington Post, 09/07/09, A1, A4), while provocative, does not give adequate coverage to the possibility that the free market, albeit regulated when necessary by the State to ensure strict compliance with standards and fair competition, has the potential to deal more effectively with the situation than what is now currently in place in the Empire of Japan. Harden cites three aspects of the Japanese system that seem to be responsible for controlling cost: 1) banning insurance company profits, 2) limiting doctor fees, and 3) accepting limitations on health care.

All three could be handled better by the free market and avoid the dangers cited: 1) Reorganizing insurance companies on a mutual basis with the policyholders as shareholders with the full rights of private property would return profits to the insured. 2) Doctor fees would be lowered in response to free competition and patient access to information. 3) The profit motive has been proved to motivate the search for lower-cost and more effective alternatives, whether for manufacturing widgets or providing health care.

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Some Thoughts on Money, Part VI: The Currency School

As we have seen in previous postings, the principles of the Currency School were embodied in the provisions of the British Bank Charter Act of 1844 and the United States National Bank Act of 1864. Both were attempts to restore stability to the monetary system after a period of monetary chaos. In this, both succeeded — to a degree, and then only by sacrificing a currency that could expand and contract in response to the needs of the economy.

The Bank Charter Act of 1844 did this by imposing a strict limit on the amount of currency that could be backed by government debt (£14 million, adjusted at various times), and mandated that the rest of the currency must be backed by gold or be gold, that is, the currency was either paper banknotes representing gold bullion in the Bank of England, or gold coin itself.

In this, the Currency School made two fatal errors. The first is obvious: "money" consists of much more than gold coin and banknotes. As John Fullarton pointed out in 1845 (and other economists before and since), "money" is anything that can be used in settlement of a debt. The "circulation" of a country therefore is not restricted to gold coin and paper banknotes backed by State claims on somebody else's gold, but of demand deposits ("checking accounts"), bills of exchange, commercial paper, bills of lading — anything, in short, that is accepted in the channels of commerce in settlement of a debt.

The second fatal error of the Currency School is less obvious, but still serious. That is, a fixed or inflexible currency is hardly adequate to the needs of a modern or developing industrial or commercial economy. Consequently, the British government went through periodic "currency crises" even after the passage of the Bank Charter Act of 1844. They finally gave up after 1914, going off the gold standard domestically, and backing the currency completely with government debt.

This leads us into a third error, and one that the Currency School tried to avoid by mandating a legal limit to the amount of currency that could be backed by government debt. That is the fact that governments are rarely able to keep their hands off the printing presses, and will, if given the opportunity, create more money than can be backed by the present value of future tax collections. This is because the State spends money to achieve political, not economic ends — and the art of politics often involves garnering as much of the public revenue for your own constituents as possible, while letting someone else's constituents pay for it.

Various expedients have been tried to inhibit or prevent the State from inflating the currency in this manner. The problem is that if there is a loophole, however small, the politicians will find a way through it, as they did in the United States in 1917 when a way was found to circumvent the prohibition against monetizing government deficits found in the Federal Reserve Act of 1913. This was the origin of the so-called "open market operations."

Thus, almost a century after the Federal Reserve Act of 1913 was enacted to break up concentrated control over money and credit and provide a flexible currency backed by hard assets to meet the needs of industry, commerce, and agriculture, the U. S. currency is backed almost entirely by government debt, with a small amount of legally-mandated gold to back the United States Notes that nobody ever sees anymore.

The problem with backing the currency with government debt is two-fold. One, as we already noted, the State can rarely resist the temptation to monetize deficits. Going into debt is much easier and certainly more politically expedient than raising taxes. Taxes are immediately unpopular, while debt only becomes unpopular when it has to be repaid, or when the effects of unrestrained government spending begin to be felt throughout the economy.

Two, again as we have noted, when the currency is backed by government debt, the money supply is determined by political considerations, not the needs of industry, commerce, and agriculture. Any politician that can come up with a "good" reason for printing more money can, with relative ease, obtain funding in that manner rather than through the accountable method of raising taxes.

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News from the Network, Vol. 2, No. 36

Since we've gone on record saying it's impossible to predict what the stock market is going to do, we can claim a perfect record in our predictions. The crap shooters on Wall Street and the bull shooters on Capitol Hill haven't yet realized that you can't disjoin money from production — or share values from the present value of the future stream of income a company is expected to generate — and expect to have a stable currency, any more than you can separate the great mass of people from ownership of the means of production and expect to have a stable economy.

We think of it as "job security." As long as there are such serious flaws in our institutions, we have our work cut out for us. Further, as Father Ferree pointed out, "the work of social justice is never done." Flaws that need correcting will always be popping up, if only because (as Pope Pius XI pointed out) society is "radically unstable," and continually in need of repair by the human beings who put society together in conformity — more or less — with our nature. It's that "more or less" that ensures we will always have work to do in the areas of economic and social justice, for, humanity being imperfect, we will never achieve perfection in our creations.

The following items, then, are evidence of every human being's tenured position as a material cause of economic and social justice:

• Earlier this week we sent "feelers" out to a number of individuals, one of which has sparked an interesting discussion on the validity of the real bills doctrine and its application in an advanced modern economy. So far the discussions have involved clarifying language and concepts, but it appears that validity or non-validity of the real bills doctrine may be a critical factor in advancing the Just Third Way, especially when the all-important question of where the financing is to come from for new capital investment.

• Another feeler went out to columnist Michael Gerson of the Washington Post regarding a piece he wrote on health care reform. We found we agreed with his points. The problem was that he left something out: where the money comes from to pay for it, whether health care reform is a private or public sector initiative. From the standpoint of the Just Third Way, the money will come from full individual participation in the economic process, thereby generating an adequate and secure income sufficient to meet ordinary needs, whether by sale of labor, ownership of capital, or (preferably) both.

• The letter sent to the Irish Independent on the real bills doctrine and copied to a number of parties involved in trying to find solutions to the economic crisis has not received any replies to date. It may be that the real bills doctrine is simply too far outside the frame of reference being used by most people to be grasped when presented within the confines of even a lengthy letter to the editor.

• Work is progressing on a number of publishing projects, including Dr. Alamgir's book, Notes from a Prison: Bangladesh, Dr. Harold G. Moulton's The Formation of Capital, a compendium containing Father William Ferree's Introduction to Social Justice and Discourses on Social Charity, and a volume looking at money, credit, and banking from the perspective of the Just Third Way.

• As of this morning, we have had visitors from 36 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 Aruba, Israel, the Netherlands, Indonesia and Venezuela 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 response to Dr. Michael Novak, "What You Can Do to Address the Economic Crisis," the news briefs, and William Cobbett. With respect to the amount of time spent reading, the postings on the Keynesian liquidity trap, usury, the paradox of thrift, and William Cobbett 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 V: The Great Gold Gabfest

The suspension of specie payments by the Bank of England in 1797 not unnaturally sparked a gigantic controversy. People split into one of two parties, the "Bullionists" and the "Anti-Bullionists." Because it seemed logical and was based on a simple, easy-to-understand fallacy, the Bullionist position eventually carried the day — even though many people had no real grasp of the situation. This lack of understanding is prevalent even today, being manifested chiefly in the fixed belief that only existing accumulations of savings can be used to finance capital formation.

The belief that capital formation can only be financed out of existing accumulations of savings means there has to be a class of people who, owning capital that generates far more income than they can possibly consume, are forced to reinvest the surplus to form capital. This, in turn, provides jobs for the great mass of people. The greater accumulations of the wealthy (and the less wealth held by ordinary people) the better off the economy will be. Harold G. Moulton, the author of The Formation of Capital, responded to this claim a little over a century after the British Bullionist debate in the following manner:

In view of this basic assumption that the fundamental requirement for progress was the restriction of consumption as a prerequisite to the formation of capital, it is not surprising that the doctrine of economic salvation through individual thrift should have been so strongly emphasized. The restriction of consumption and the setting aside of funds for investment purposes were regarded not only as the means by which the individual obtained security and got ahead in the world, but also as the road to social progress.

In line with this reasoning, institutional devices which promoted inequality in national wealth and income were held to be not necessarily disadvantageous — from the long-run point of view. Economists have been wont to point out that the growth of economic inequality might even turn out to be a blessing in disguise.

Unfortunately for the Bullionists, however, the idea that you cannot engage in productive activity — invest — before you save falls apart when we ask where the original savings came from to finance the productive activity that generated the savings to invest. If we stop to reflect on this for a moment, it means that production can only take place after production has taken place. This is an obvious contradiction and a logical fallacy.

The Bullionists only recognized as "real money" existing accumulations of gold, and claims by the State on those accumulations: government debt backed by the State's power to tax away the citizens' gold. That is, the State's power to redistribute existing wealth through inflation. The Bullionists therefore made the argument that if banks were not required to exchange their banknotes into gold, the banks would issue banknotes without regard to the supply of "real money" available. This would lead automatically to inflation, so that to maintain a stable currency, it was necessary to restore convertibility to the currency, that is, require that banknotes be exchangeable into gold on demand.

The two most prominent spokesmen for the Bullionist position were John Wheatley and David Ricardo. In a bizarre twist of fate, Henry Thornton, who supported the real bills doctrine and the quantity theory of money that discredited the Bullionist position, is considered one of the Bullionist's strongest supporters, and a leading figure in the Currency School!

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