Friday, February 27, 2009

News from the Network, Vol. 2, No. 9

Today's Washington Post gave a frightening outline of Mr. Obama's $3.6 trillion budget. It was only a few days ago that the president pledged to cut the deficit in half, but the current projection is for the worst deficit since World War II. The projected deficit of $1.2 trillion given in the Post article is $100 billion more than total projected individual income tax collections. Mr. Obama proposes to make up the difference by taxing the wealthy, that is, by more than doubling individual income tax collections.

The problem in Keynesian economics, of course, is that by taxing the wealthy you dry up the alleged source of financing for capital replacement and new capital formation, shrinking the corporate as well as individual tax bases and diminishing the number of jobs in the economy to make up the losses. The only way out of the corner that Mr. Obama and his advisors are busily painting themselves into is to print money (i.e., sell massive quantities of government debt to the Federal Reserve), then impose wage and price controls to try and keep the lid on the inflation that necessarily follows, a move that increases the power of the State even more.

Despite all of the apparent economic insanity of the new administration, however, there are a few candles that are managing to stay alight in Mr. Obama's winds of change that point the way to the Just Third Way:
• Reverend William Christensen, S.M., Ph.D., CESJ Counselor and head of the Institute for Integrated Rural Development in Bangladesh, has been asked to write the foreword for Dr. Muhiuddin Khan Alamgir's memoir, Notes From a Prison: Bangladesh, which is under consideration for publication by Economic Justice Media, an imprint of the Center for Economic and Social Justice. Dr. Alamgir, the former Minister of Planning for Bangladesh, was imprisoned on trumped-up charges of corruption and tax evasion, the reading of which brings Franz Kafka's surreal classic Der Process ("The Trial") to mind. Review copies of the unedited manuscript are available on request in "Word" format from CESJ.

• Sales of Economic Justice Media's annotated edition of The Emigrant's Guide by William Cobbett (1763-1835) are catching up to those of Michael D. Greaney's In Defense of Human Dignity, although both books have a long way to go before generating as many sales as Curing World Poverty (1994) or Capital Homesteading for Every Citizen (2004). As befits the "Apostle of Distributism," Cobbett describes life in early 19th century America in terms that complement the work of Alexis de Tocqueville, in that astute commentator's monumental Democracy in America (1835). Combined with Orestes Brownson's The American Republic (1865), the works present an unequalled picture of a way of life that many people still consider an ideal, and which in its essence embodies the principles of the Just Third Way: 1) A limited economic role for the State, 2) Free and open markets as the best means of determining just prices, just wages, and just profits, 3) Restoration of the rights of private property, and 4) Widespread direct ownership of the means of production. The common thread tying together all three authors is respect for the dignity of the human person at the most basic level.

• Earlier this week, the CESJ core group had a teleconference with members of the "American Auto Employee Ownership Committee," a group that (consistent with the principle of free association found in de Tocqueville's work) is organizing an effort to assist autoworkers purchase the troubled American automobile industry. The Committee objects to the waste, inefficiency, loss of jobs and, of course, the transfer of concentrated power from a small private elite to State bureaucrats. As an alternative, the Committee proposes breaking up the current massive concentrations of economic power by vesting each worker with an equitable ownership stake in the company for which he or she works. This can be accomplished under current law most easily by using the Justice-Based ESOP model developed by Equity Expansion International, Inc., www.eei-consultants.com, although other approaches are also being studied.

• We received an acknowledgement of the receipt of Capital Homesteading for Every Citizen from the Hon. Brian Lenihan, Finance Minister of the Republic of Ireland. The letter indicated that the minister would turn over the book and other materials to his staff for study.

• As a reminder, all Economic Justice Media titles are available in bulk (i.e., 10 or more books in a single order) for 20% off the cover price plus $1.50 per copy shipping. The same terms apply to all titles issued by Universal Values Media, Inc., a for-profit publisher that has implemented a "Justice-Based Management" system. UVM titles can be found at www.benson-unabridged.com. For more information, send an e-mail to onceandfuturebooks@yahoo.com, or thirdway@cesj.org. When used for fundraising, the discount is increased to 25% off the cover price — something to keep in mind for your school, church, or civic organization.

• As of this morning, we have had visitors from 44 different countries and 49 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 80% increase in total readership, according to the statistics counter of "Google Analytics." Most visitors are from the United States, with Canada, the UK, Ireland, and Poland rounding out our "top five" countries where we're read the most. The top spots for the average time spent on the blog, however, go to Venezuela, Croatia, Poland, Mexico, and Brazil, in that order. Our most popular posting continues to be the first in the ongoing series explaining why Mr. Obama's stimulus package is a disaster. Of the remaining "top ten," 1 is a "News from the Network" posting, 8 examine Keynesian economics, 3 are from the stimulus series, 1 addresses the financial crisis in Ireland, and 1 is on Abraham Lincoln and the 1862 Homestead Act (obviously there is some overlap, e.g., the financial crisis in Ireland traces the problem to its Keynesian roots). Most readers are using keyword searches indicating they want to learn about the serious flaws in Keynesian economics.
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, February 26, 2009

Bank Bailout, Part I: An Alternative to State Control of Money and Credit

As Marx and Lenin predicted, State control of money and credit is the fastest way to undermine the capitalist — or any — system, and establish socialism. If the Keynesians currently in control of the economy and who are acting as Mr. Obama's advisors would ever read The Communist Manifesto (especially number five on the list of actions to take to destroy private property . . . "Centralization of credit in the hands of the State."), they might realize why State ownership or control of the financial system is not so fine a thing as they appear to believe, and why the principles of the Just Third Way above and beyond both capitalism and socialism offers a much more rational and financially sound way of getting out of the current crisis when applied in a Capital Homesteading program.

Money and credit are again at the center of the current economic crisis. As an Associated Press report stated yesterday, the U.S. Treasury will be allowing "big banks" — those whose lending practices got them (and us) into the current mess — "more bailout funds." The debate on Wall Street seems more concerned with what form that ownership should take than with the obvious implications. No one seems to be raising the question as to whether the State should own anything, or posing alternatives to State socialism imposed through a program of nationalization of the most critical factor in any economy: money and credit.

A working knowledge of basic banking theory and a modicum of common sense, however, immediately raises questions about 1) the justification for State ownership of major (or any) banks, and 2) the necessity for a government bailout. First, of course, no one has ever adequately explained why it is necessary for the State to take control (and thus ownership) in a nationalization program that dare not speak its name. The bailout money is (presumably) taxpayer money, which suggests that taxpayers, not the State in the name of the taxpayers, should be the new owners. There are ways to do this that already exist in the law and, with a few modifications, could quickly be implemented.

Second, why a bailout, anyway? There are other remedies available, remedies that respect not only private property and contracts, but don't cost the taxpayer any money and are sound financially.

For example, most (if not all) the large banks that are in trouble are corporations. If a corporation goes bankrupt, the remedy in law (and in justice) is usually some form of reorganization. The purposes of bankruptcy are not to destroy the debtor or enrich the State at the expense of the creditors or taxpayers, but 1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and 2) repay creditors to the extent that the debtor has the means available for payment.

They lent money or provided goods and services in some form in good faith, and are entitled in justice to a return of their capital or other assets, all of it, if possible, a pro rata portion if not. In those instances where a creditor did not operate in good faith, the courts can come to an equitable arrangement that strives to be fair to all parties. So-called "toxic" assets can be written down or written off, as appropriate, and current shareholders (who bear responsibility for electing the boards of directors that hired the management teams who carried out bad lending practices) can have their shares cancelled or reduced in value after settling all legitimate creditor claims.

Reorganizing the bankrupt banks along the lines of an Employee Stock Ownership Plan ("ESOP")/Customer Stock Ownership Plan ("CSOP") combination is a possibility that should be considered before the State throws any more money at the problem. The ESOP already exists in law, and the CSOP could be enacted very easily, especially as a special emergency measure, simply by adding some features to existing ESOP law to extend "participation" in the ESOP to stakeholders besides employees, and calling the arrangement a CSOP. In our next posting on this subject, we'll look at how the powers-that-be might start the ball rolling on this much more rational alternative to a government bailout.

Wednesday, February 25, 2009

We Have Seen the Future . . . And It Doesn't Work

Listening to President Obama's speech last night, it becomes increasingly obvious that, despite his very evident good intentions, he is headed off in the wrong direction. He has managed to surround himself with a group of Ivy League elitists who still believe that the State can do anything, as long as you throw enough money at the problem.

Much of what the president says we can take as enthusiastic, if misdirected cheerleading. Unfortunately, the situation does not call for mindless optimism or money-tossing, but a genuine solution. The stock market is continuing to bounce up and down as speculators try and figure out whether the president's confidence will do the trick, or if something more substantive is needed. Meanwhile, there seems to be an adamantine belief among the powers-that-be that gritting our teeth, and reminding ourselves that, "we are not quitters" is enough to turn things around.

That, and a few more billions for the banking industry so that the State can nationalize the banks and establish a monopoly over access to the means of acquiring and possessing private property.

The main problem is that nothing the president and his advisors propose or even say does anything to diminish State power, break up the power of concentrated ownership, or, worse, increase production or broaden ownership of the means of production by ordinary people. There is no appreciation or even recognition of the four essential elements of an economically (and thus politically) just society:
• Limited economic role for the State,

• Free and open markets as the most just way to determine just prices, just wages, and just profits,

• Restoration of the rights of private property, and

• Widespread direct ownership of the means of production.
Clearly, both the president and his advisors are still enamored of the Keynesian delusion that money and production need not be linked directly (or at all), and that the State can run up deficits forever with no ill effects, to say nothing of being convinced that the non-productive State can run things better than a productive private sector. This is the only way to rationalize Mr. Obama's increasing the federal budget by nearly $1 trillion in "stimulus" spending, claiming he will not increase taxes for anyone making less than $250 thousand a year, and (instead of balancing the federal budget) cut the deficit in half.

Logically, the only way to make up a tax cut on one group without increasing the deficit is to tax other groups more. Thus, Mr. Obama necessarily proposes (even if he doesn't say so) to engage in the ever-popular "soak the rich" technique, which somehow never seems to have the intended results.

It's been made clear in many postings on this blog that we consider the rich part of the problem. Their monopoly over access to the means of acquiring and possessing private property (i.e., "capital credit") means that the vast majority of humanity is condemned to perpetual servitude in the form of wage slavery, debt slavery, welfare slavery . . . and whatever else you can come up with to ensure a condition of dependency for most of the rest of us.

Unfortunately (and this is one of the reasons we regard Keynesian economics as certifiably insane), the rich are absolutely necessary within the Keynesian paradigm. To understand this, let's look at the Keynesian paradox into which the president has locked himself.

"Soaking the rich" sounds well and good . . . in theory. A State should never run up a deficit, but should tax at a level sufficient to meet current expenditures. Further, sticking it to the rich and powerful is always a popular move in a presumably egalitarian society, where unrecognized barriers to full participation in the economy foster resentment and envy instead of the more rational response of organizing to eliminate such institutional obstructions in a just and sane manner through acts of social justice. Refusing to increase taxes on the poor and middle class and promising to cut the federal deficit in half, however, leaves "the rich" as the only source of funding for the stimulus and the decrease in the deficit.

No one, not even the State, can create new money to increase demand for more than there is production to buy. Nor can taxes be more than the aggregate amount of current income (current production) and savings (unconsumed past production) that exist in the country. Even a State that indulges in levying the "hidden tax" of inflation by printing money to cover its deficits can't tax more than a country produces. All the State can do is redistribute purchasing power by stealing the value of older currency and transferring it to recipients of the State's largesse by printing additional debt-backed money. Prices rise in response to the greater amount of currency in circulation, fostering the illusion that wealth is increasing when, in fact, inflation doesn't produce wealth at all.

The biggest danger in Mr. Obama's admittedly attractive enthusiasm and conviction is that hope and change will, in and of themselves (with the addition of a few billion more dollars) solve all our current problems. On the contrary, his reliance on Keynesian advisors puts him into an untenable, even paradoxical position. Keynesian economics, which depends on protecting the rich as absolutely necessary for the wellbeing of the poor, does not allow him to do what he wants to do.

Mr. Obama wants to focus on creating jobs as a means of getting the economy moving again. "Creating jobs" is directly opposed to the natural job creation that comes in response to the increase in demand that could result by investing in new productive assets in ways that make people who formerly owned no capital into capital owners. The future consumption incomes of former non-owners would result from new job and ownership incomes from the private sector, not State largesse. The rich would be encouraged to use their investment income for consumption instead of more investment.

A State program of "job creation" almost inevitably means "boondoggling," or "make-work" jobs outside the market system. These kinds of jobs are intended only to provide people with income, not vest them with ownership of new production. Boondoggling and featherbedding do nothing to increase production of marketable goods and services, but are purely inflationary. Boondoggling only serves to increase the waste and inefficiency that Mr. Obama says he wants to eliminate.

To make this clear, in the "Bizarro World" of Keynesian economics there is a necessary — repeat, necessary — tradeoff between employment and inflation. If you want full employment, you must endure inflation caused by government deficits. If you want low inflation, you must put up with high unemployment. Any other arrangement is impossible . . . in Keynesian economics.

This is because (in Keynes' upside-down universe) there are only two ways to create jobs. The first is to get the rich to invest in new capital formation. As we learn in college macroeconomics courses, the State increases consumer spending either by cutting taxes or handing out money. The increase in "effective demand" lures businesses to use their savings to invest in new capital, which creates jobs, and increases effective demand even more. If the State either cuts taxes or hands out more money, it has to engage in inflationary money creation (borrowing from the central bank) in order to make up the loss in tax revenues or finance the handouts. This is because if the State taxes the rich in order to make up for lost tax revenues or fund the handouts, it decreases the amount the rich can use to finance capital formation and create jobs.

The second means of job creation is for the State to subsidize jobs directly by paying businesses to hire people for whom the business would otherwise have no use. The funds for a direct State subsidy can only come from increasing taxes on the rich (in which case you take money away from the rich to hand back to the rich so they can afford to hire people they don't need to hire), or by increasing the deficit.

Thus, in the Weird World of Keynes, unless you want to stifle job creation by taking away the money the rich have to invest, increased government spending can only come by increasing the deficit. Why? Keynes believed that it is impossible to finance capital formation out of "future" or "forced" savings, that is, by extending capital credit to be repaid out of the future profits of the new capital itself.

According to Keynes, then, money to stimulate demand, subsidize jobs, or decrease the deficit cannot come from the rich, because in the Keynesian universe the savings and income of the rich are the only source of financing for new capital. If the government taxes away the wealth of the rich to decrease the deficit, the rich can't invest their savings in new capital formation, and no new jobs will be created. If the government taxes away the wealth of the rich in order to subsidize job creation, all that is accomplished is that the State takes money away just to hand it back — the situation remains the same, and no new jobs will be created, because the State simply restores the status quo: businesses reduce jobs to meet their tax bills, and then hire the people back to fill subsidized positions.

No, the only way to create jobs in Keynesian economics is by increasing the deficit . . . and Mr. Obama has just pledged to cut the deficit in half at the same time he has promised to create jobs. The president, despite his welcome optimism and conviction that things do not need to be the way they are, has by his reliance on Keynesian economic advisors trapped himself in an impossible situation. Within the Keynesian framework, Mr. Obama can only keep his promise to create jobs by breaking his promise to cut the deficit in half, and he can only keep his promise to cut the deficit by doing what Keynesian dogma tells us will destroy the economy forever.

Of course, if you admit the validity of Say's Law of Markets and the "Real Bills" doctrine, and combine them with the expanded ownership proposals supported by the binary economics of Louis Kelso and Mortimer Adler, you don't need the rich. You can tax away the gargantuan mountains of wealth by means of which the rich, supported by the Keynesian dogma that the rich, and only the rich, can finance and own the new capital that presumably creates jobs for the rest of us, hold the world hostage. It doesn't seem to occur to anyone in power that if everyone owned an adequate stake of capital, we wouldn't need artificial job creation, inflation, State control over virtually every aspect of our lives — or the rich.

There is a way out of the dead end street that Mr. Obama has managed to get himself into by following the dictates of Keynesian economics. That would be to implement Capital Homesteading at the earliest possible date, not after he and his advisors have gotten us into a worse mess than we are already in. It will not be an immediate "quick fix," and there will be shrieks of pain . . . but the loudest shrieks by far will come from Keynesians who see their religion discredited, their idols thrown down, and the State moneylenders driven from the temple.

Tuesday, February 24, 2009

Stimulus, Part IX: What's Wrong with Worker Ownership?

As we learned in the previous posting in this series, socialism — State ownership or control of the means of production — is not the answer to economic, social, or political problems. At best a stopgap, if implemented as a solution, socialism only ends by making matters infinitely worse. As the English economist Charles Morrison pointed out in 1855 in his Essay on the Relations Between Labour and Capital, the only way to ameliorate the injustice of having only a few owners of capital as the value of labor falls in competition with advancing technology is to make ordinary workers owners of the means of production.

Unfortunately, the economic and legal institutions of the Great Britain of Morrison's day were not conducive to allowing workers to be owners. For example, limited liability for corporations could only be obtained on a case-by-case basis by special act of parliament, and then only rarely. This meant that any worker deemed to be an "owner" under law was personally liable for the debts of the corporation . . . and "ownership" included profit sharing in any amount, any input to management decisions, and participation in anything else traditionally understood as the "fruits of ownership." The worker didn't need legal title; even a farthing in "profit sharing" made him or her an "owner" in the eyes of the law, and liable for the debts of the corporation.

Consequently, no owner with a social conscience could possibly allow his or her employees to be put in that position. In a bankruptcy, employees generally are first in line right after any obligations owed to the State. Owners, however, are last in line, and without corporate limited liability could end up in prison if their personal assets were not sufficient to cover the debts. In such a legal environment, people like Karl Marx decided that since ownership could be so disastrous for the worker, and concentrated ownership was so obviously bad, the only solution was to abolish private property altogether, and give the State all ownership.

While socialists thought of this as benefiting humanity, they failed to realize that they were, in effect, advocating that human beings change from being human. Private property is a "natural right." Maintaining that private property (along with other natural rights such as life and liberty) is not absolute in the human person is to say in effect that people are no longer human. True, the exercise of property must be limited by the demands of the common good, the needs of the owner, and concern for other people, but we cannot say that these limitations negate private property as a natural right, any more than laws against murder or involuntary servitude negate our natural rights to life and liberty.

Monday, February 23, 2009

Stimulus, Part VIII: Is Socialism the Answer?

As we saw in the previous posting in this series, the downside of the tremendous industrial, commercial, and agricultural expansion in the United States during the 19th century — falling prices that caused hardship in the agricultural and labor sector as industry and commerce became more productive — could have been avoided had ownership of the new industries and commercial enterprises been democratically and directly owned.

Lack of widespread ownership led to the disruption of Say's Law of Markets, for Say's Law presumes that there are no barriers or obstacles to anyone who wishes to do so employing his or her labor, capital, or both in producing goods and services to generate income and enter into exchanges with other producers.

This in turn led to the rejection of the "Real Bills" doctrine and the massive monetary confusion that developed during the 19th century. Say's Law assumes that people realize we don't really purchase what others produce with "money," but with what we ourselves produce. The Real Bills doctrine maintains that "money" represents goods and services that have been produced, or the present value of future production.

All that is necessary for a free and just market to operate is for people to have the ability to turn their current or future production into "money" (promises to deliver wealth on demand) so that they can carry out exchange easier. This also allows new capital to be financed by trading the present value of a project for a promise to repay the "money" out of future profits instead of by cutting consumption, saving, then investing, as Keynes assumed must be done.

If, however, people are prevented from turning their current or future production into "money," especially through the extension of bank credit, a serious problem results. As we saw in the 19th century, as technology became more productive than human labor, it became increasingly difficult for workers who had only their labor to sell to make ends meet. They simply could not compete with the ability of capital to produce more goods and services at a lower cost than was possible with human labor — nor did they have democratic access to the financial system that would allow them to finance the acquisition and formation of new capital so that they, too, could become owners instead of being limited to suppliers of labor.

To some commentators, the solution was obvious. Because of the natural right of private property, the owner of capital has the right to receive the income generated by what he or she owns. That being the case, so certain reasoning went, property itself must be evil, because it prevents the worker from gaining a fair share of production. Since having a few owners of the means of production is clearly bad, there should be no owners of the means of production. Private property must be abolished, and control vested in a presumably benevolent and (because power naturally and necessarily follows property) all-powerful State.

Unfortunately, as Lord Acton observed, power corrupts, and absolute power corrupts absolutely. The State may start out as benevolent, but once it becomes the sole owner of the means of production (and, because "control" is property in all codes of law, the State doesn't even have to take actual title, just force nominal "owners" to obey the State's orders), it necessarily becomes absolutely corrupt. Having the State own or control the means of production is called "socialism" or "communism," the differences between the two being merely semantic and political. Socialism, however, in addition to fostering absolute State corruption, is contrary to human nature, as it abolishes the natural right of every human being to own the means of production.

Friday, February 20, 2009

News from the Network, Vol. 2, No. 8

While most of the world is properly worried about the economic crisis, and the financial markets continue to drop on the expectation that the stimulus — even if it works — will take a long time to kick in, some people are beginning to realize the potential of the Just Third Way for a just and workable solution to the problem. Several encouraging events have taken place this week, giving definite signs that progress, despite the best efforts of academia and the media, is being made.
• The manuscript of Dr. Alamgir's book, Prison Notes from Bangladesh, has been received, and is being reviewed for possible publication either by CESJ's imprint, "Economic Justice Media," or by Universal Values Media, Inc., a for-profit publisher specializing in fiction with a natural law orientation. We expect to have a response ready for Dr. Alamgir within a few weeks. So far the book looks very good. It is a graphic reminder that, despite all the headlines being seized by "fundamentalists" who have managed to stray far from the fundamentals of any religion, there are devout and sincere people out there willing to work with others of all faiths to advance the common good of all, rather than attack and destroy those with whom they disagree.

• Over the last five years CESJ's publishing program has been steadily expanding, with our editors targeting high quality books that explain and reinforce the Just Third Way, particularly difficult concepts like private property, social justice, and (most mystifying to many people) money, credit, and banking. We now have more books "in the pipeline" than we have in print, but hope to speed up the process, especially in light of the obvious and critical need for materials that prove something besides stale and unworkable Keynesian solutions is possible.

• Last month The Wanderer, a national Catholic weekly newspaper, published an article in support of "social credit," a proposal from the 1920s by Major C. H. Douglas to redistribute surplus production in the form of fixed prices and a national dividend. The article began by citing Michael D. Greaney's book, In Defense of Human Dignity, in which the article on social credit concluded that social credit, because it seems to undermine or abolish the natural right to private property, does not appear to be consistent with Catholic social teaching. Unfortunately, the article in the Wanderer gave no reasons or arguments for or against the claim that social credit is not consistent with Catholic social teaching, merely stringing together a long series of quotes from individuals in support of social credit. We sent a letter to the Wanderer, which included a list of eight critical questions for the social credit movement, pointing out the flaws in criticizing without offering a critique, but have not yet received a reply. We followed up early this week with a proposal to rewrite the letter as an article presenting the arguments against social credit as a valid expression of the natural law (and thus Catholic social teaching), so that people can judge for themselves on the merits of the case.

• We received an inquiry from a parochial school in St. Louis asking about using CESJ's and UVM's ("Universal Values Media," www.benson-unabridged.com) books as texts. We let them know that educators and schools are entitled to the 20% wholesale discount on any books from either CESJ or UVM, and what the shipping costs would be within the 48 contiguous states. We also let them know that, if used as fundraising items, the discount is increased to 25%, giving the parish, school, or other organization, for example, $5 for every $20 book sold. A thousand books sold for the benefit of a school, parish, or other organization would thus generate approximately $5,000.00, a significant amount in these times, when the regular flow of donations and contributions has diminished considerably for many organizations. Books also confer significant benefits of their own, that items such as chocolate, cookie dough and wrapping paper — innocuous enough in themselves — do not. With Lent coming on, Christian groups might be particularly interested in natural law approaches to solving social problems found in CESJ's books, while the values-oriented approach in UVM's fiction would provide a more beneficial form of entertainment than can usually be found in the major media. If you or your organization would like to find out more about using CESJ's and UVM's publications as texts or fundraising items, send an inquiry to onceandfuturebooks@yahoo.com.

• As noted in a previous blog posting, we received a very encouraging thank-you note from the Hon. Enda Kenny, leader of the Fine Gael party in Ireland for sending him and other party leaders copies of Capital Homesteading for Every Citizen. Fine Gael is Ireland's second largest political party, and its platform appears to have many similarities with the Just Third Way. We look forward to hearing more from Mr. Kenny and Fine Gael, as well as the other parties in Ireland, all of which are gravely concerned with the present crisis, for which Capital Homesteading might offer a viable solution.

• On Thursday, Norman Kurland received a telephone call from a journalist in Warsaw, Poland, who wants to write one of his opinion columns on the Just Third Way for Warsaw's largest daily newspaper. The journalist, Mr. Pompowski, was referred to Norman Kurland by Dr. Norman Bailey, former chief economic advisor to the National Security Council under President Reagan. As Dr. Kurland noted in his e-mail follow-up to Mr. Pompowski, "I look forward to seeing your opinion column. I hope that it will inspire the Polish people and Polish political, moral, and academic leaders to study and implement a Just Market Economy based on the principles of Personalism of the late Great Pope John Paul II and the binary economics of my mentor Louis O. Kelso. As I mentioned, . . . writings from the home page of our Center for Economic and Social Justice website at http://www.cesj.org may be useful to provide you and your readers with the policy and legislative changes that are needed to lift the artificial barriers to universal access by every citizen to the ownership of productive capital assets when they are newly-created or existing assets change hands."

• We received an interesting telephone call this week from Mr. Tom Laney, a member of the United Auto Workers ("UAW") who is involved with an effort to have the workers purchase Chrysler. Mr. Laney earlier sent an e-mail to Norman Kurland and purchased a copy of In Defense of Human Dignity. Mr. Laney then contacted Michele Mauder and Santino Scalici and mentioned CESJ. Norman Kurland sent Mr. Laney a note with links to material on the CESJ web site he could look at. Norman Kurland later received a note from Ms. Mauder, who said she was intrigued with CESJ's approach, which embodies Justice-Based Management as an integral part of any worker-owned company. Ms. Mauder is organizing the Chrysler Employee Buyout Committee. They have a web site, www.employeeownedauto.org, which may be worth a visit to see an alternative to what is otherwise being proposed to "save" the American auto industry. It is noteworthy that the late labor statesman Walter Reuther, a champion of ownership rights for workers, was head of the UAW. The union he headed could find no better way to honor his memory.

• Mr. Christian Miller, an engineer on the west coast whose son is in the military in Iraq, has been proposing an Iraq oil share proposal similar to that of the Just Third Way. He has a web site, www.iraqoilshares.org. Mr. Miller called and looked at our web site, we looked at his, and Norman Kurland has had a number of exchanges with Mr. Miller.

• As of this morning, we have had visitors from 43 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 150% increase in total readership, according to the statistics counter of "Google Analytics." Most visitors are from the United States, with Canada, the UK, Ireland, and Brazil rounding out our "top five" countries where we're read the most. Due possibly to Norman Kurland's interview with a Polish journalist, there was a sudden leap in inquiries from Warsaw, all on the same day. The top spots for the average time spent on the blog, however, go to Venezuela, Croatia, Poland, Mexico, and Jordan, in that order. Our most popular posting continues to be the first in the ongoing series explaining why Mr. Obama's stimulus package is a disaster. Of the remaining "top ten," 1 is a "News from the Network" posting, 8 examine Keynesian economics, 2 are from the stimulus series, and 1 addresses the financial crisis in Ireland (obviously there is some overlap, e.g., the financial crisis in Ireland traces the problem to its Keynesian roots). The bottom line, of course, is that the slavish adherence to Keynes is wrecking the world's economies, and the sooner people begin to look at the situation in terms of Kelso and Adler's binary economics, the better off everyone will be.
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, February 19, 2009

Stimulus, Part VII: Show Me the Money!

In the previous posting in this series we learned that the Keynesian dogma that new capital formation can only be financed by cutting consumption, saving, then investing is false. Even more dangerous than that assumption, however, is the idea that money and production should not be directly linked. This gives us the more damaging of Keynes' dogmas:

Keynesian Dogma Number 2: Money can be created for consumption and government spending without the necessity of first cutting consumption and saving, but not for investment in new capital.

Dr. Moulton's Finding: The periods of increased consumption that, in each and every case preceded periods of intensive capital formation in the United States from 1830 to 1930 meant that savings were necessarily depleted to finance the increases in consumption. The financing for new capital formation did not, as many economists still presume, come from England and the Continent. The financing came from the extension of credit by commercial banks.

Analysis: The belief that the financing for America's industrial, commercial, and agricultural expansion came from Europe is easily refuted. European economies needed all the financing they could get to develop their own growing industrial, agricultural, and commercial bases, in many cases pillaging their respective colonial empires to provide the necessary capital — the justification for the colonies in the first place. They had nothing to spare for investment in the United States, a competitor, the returns from which would necessarily be lower than what could be realized from colonies. The perceived need for sources of external financing is one of the ultimate causes of the "Seven Weeks War" between Prussia and Austria-Hungary in 1866, the Franco-Prussian War of 1870, and the otherwise unaccountable sudden acquisition of a colonial empire by the Second Reich once Bismarck consolidated German unification under Prussia.

The only possible source of financing for America's enormous expansion during the 19th century was extension of bank credit under the "Real Bills" doctrine. Rather than being inflationary, as Keynesians claim, the 19th century was a period in which productive capacity exceeded money creation at so tremendous a rate due to technological advances, that deflation (insufficient money supply) and falling prices, not inflation, were the chief problems. Contrary to Keynes' assertion in The Economic Consequences of the Peace (1919) that industrial, commercial, and agricultural development could only have proceeded at so great a rate when wealth and ownership of the means of production are concentrated, the United States outstripped all of Europe in the rate at which the country developed economically, and did so in a country in which, until the late 19th century, ownership of the means of production was relatively widespread.

Had ownership of the means of production in the United States been even more equitably distributed, the general lowering of prices throughout the 19th century would have been a great boon to everyone as their money became worth more. Instead, it was a curse to farmers and ranchers and anyone else (such as wage workers with no ownership stake) who owned no share in the industrial and commercial advancement as the industrial and commercial sectors of the economy became increasingly important and outstripped the agricultural sector.

The ownership of land was more or less widely distributed, but, as Judge Peter Stenger Grosscup was to note in a series of articles from 1905 to 1914, ownership of industry and commerce was becoming increasingly concentrated. This meant that the owners of vastly productive industrial and commercial capital could not possibly consume all of their income. This led to the situation Keynes attempted to fix by making it worse, trying to increase effective demand by redistribution and inflation, concentrating ownership further, and disconnecting the financial sector from the productive sector of the economy.

Wednesday, February 18, 2009

The Just Third Way and Capital Homesteading in Ireland

In early February, CESJ sent copies of Capital Homesteading for Every Citizen to a number of party leaders and other politicians in Ireland. (The Capital Homesteading "flyer," designed for ordinary people is also useful, as is the Capital Homestead "Summary," intended as a guide for policymakers.) Yesterday we received an acknowledgment and thank-you from the Hon. Enda Kenny, leader of the Fine Gael party, Ireland's second largest political party, which describes itself as being in the "progressive center." Mr. Kenny's note was brief but substantive, as befits an Irish politician (or any politician, for that matter) in these times of crisis when more immediate matters take precedence — such as saving his country from financial meltdown.

Fine Gael's platform appears consistent with the Just Third Way in many respects, or expresses goals that can be met efficiently and effectively by implementing Capital Homesteading and other Just Third Way programs. This would not only allow Fine Gael to work more effectively with its traditional partner in government, the Irish Labor Party, but also Fine Fail, the Irish Republican Party, Ireland's largest political party and the one currently in power. Fine Gael's focus on law and order, enterprise and reward, and fiscal responsibility, along with its advocacy of limited State involvement in the economy, can easily fit into a Capital Homesteading program based on the four pillars of a just economy:
• Limited economic role for the State,

• Free and open markets for maximizing incentives and choice in determining just prices, just wages, and just profits,

• Restoration of traditional rights of private property, and

• The lifting of barriers that inhibit or prevent universal access to direct ownership of the means of production.
Even Fine Gael's position that the State has a necessary role in financing and owning infrastructure can be modified without violating any of the party's basic principles through the use of Community Investment Corporations, or "CICs." A CIC would enable citizens in a region to own the land and infrastructure directly by issuing each one a single no cost, non-transferable, fully voting, fully participating share in the CIC, which would hold legal title. Infrastructure could then be financed by no-interest capital credit loans extended by commercial banks to the CIC and discounted at the central bank. (N.B. — "No-interest" does not mean "free." Both commercial banks and central banks must still charge service fees to cover expenses and, in the case of commercial banks, meet the "risk premium" for capital credit insurance and generate a just profit for their shareholders.)

Such improvements would be repaid not out of taxes collected by the State, but out of revenue generated by user fees such as tolls for roads and bridges, and service charges for sewage, water, and similar utilities. Overcharges would be returned to the citizens in the form of dividends that would be tax-deductible at the corporate level, and all new infrastructure financed not by bond issues or increased taxes, but through the extension of commercial bank credit discounted at the central bank. This would enhance the value of the currency by backing it with existing hard assets or assets in construction instead of the less-certain future tax collections as is currently the case in most countries. If the central bank were to be owned by every citizen of a country in the same way that every citizen in a region would own a CIC, any excess revenue could also be returned to the citizens in the form of dividends — and the fiscal and monetary system would be more directly accountable to the citizens.

The bottom line is that the Just Third Way has a great deal to offer Mr. Kenny and Fine Gael, to say nothing of every other party in the Republic. His response gives some promise that Capital Homesteading will, indeed, begin to receive serious consideration at the highest levels of government in Ireland.

Tuesday, February 17, 2009

Stimulus, Part VI: Does the "Real Bills" Doctrine Work?

As we saw in the previous posting in this series, in theory money can be created as needed if both parties to the creation of the money — the producer of future wealth and the present financial institution — keep their promises. Because the amount of money created matches the value — wealth — to be created, there will be no inflation if everyone keeps the promises made.

In actuality, however, 1) capital typically continues to produce long after the financing of the capital has been repaid, 2) bankers tend to lend based on a low estimate of future production, and 3) producers tend to produce as much as they can over and above the low estimate on which they obtained financing. Thus, money typically buys more than before if all money creation is restricted to financing new capital formation or in exchange for existing inventories. There is not only no inflation, but an actual appreciation of the currency. The amount of goods and services available for sale increases at a greater rate than the creation of new money. This is the opposite of the classic definition of inflation, in which money is created at a greater rate than goods and services are produced.

We do not, however, need to rely on what some people might regard as a bit of esoteric reasoning to prove that the "Real Bills" doctrine works. We have hard data to substantiate the claim — data that Keynes completely ignored. In 1935, Dr. Harold G. Moulton, then-president of the Brookings Institution, published findings that contradicted the Keynesian New Deal that was then in the process of being implemented in the United States. Dr. Moulton's little book, The Formation of Capital, began by examining cycles of consumption and investment covering the period from 1830 to 1930. He then analyzed the results of his examination and determined that what he found directly contradicted the entire justification of the Keynesian New Deal. We can understand the significance of Dr. Moulton's findings by giving two standard Keynesian dogmas (one in this posting, another in the next), showing what Dr. Moulton discovered, and analyzing Dr. Moulton's finding.

Keynesian Dogma Number 1: New capital formation can only be financed by first cutting consumption, saving, then investing.

Dr. Moulton's Finding: From 1830 to 1930, during which the United States experienced periods of the greatest industrial, agricultural, and commercial expansion in history, periods of intensive new capital formation were preceded not by decreases in consumption as Keynes declared was absolutely necessary, but great increases in consumption.

Analysis: Dr. Moulton drew two conclusions from this observation. 1) Effective demand (i.e., consumption) does not derive from an increase in the quantity of goods and services available (i.e., from increased investment). On the contrary, a rational businessman or investor will only invest in new capital formation, or even replace existing worn-out capital, if effective demand for his good or service already exists. The demand for capital goods is derived from consumer demand, not the other way around as Keynes believed.

In any event, given (as Keynes believed as an absolute) that savings necessarily equals investment, it is impossible to finance new capital formation out of existing pools of savings. Why? They don't exist. Banks do not let savers accumulate idle cash in their accounts. On the contrary, every dollar sitting idle in a savings account is a dollar not making money. The function of a "bank of deposit" or savings bank is to aggregate the accumulations of savers, and lend the money to borrowers. An accumulation of savings is already invested. Remember Jimmy Stewart's speech in It's a Wonderful Life? If everyone who had a savings account at a bank of deposit demanded his or her savings in full, in cash, in order to finance new capital formation, the bank would be forced to call in all its loans. This, in turn, would force borrowers to liquidate (sell) their investments — holdings of capital — in order to repay the loans immediately. All new capital investment would be matched by an equal and opposite disinvestment in existing capital, a zero-sum effort. Under Keynes' assumption that saving must precede investment, there could never be any economic development, merely a continuous transfer of existing capital back and forth, an endless game of redistribution.

While Keynesian monetary and fiscal policy is predicated on the necessity of redistributing existing wealth, and is designed to do just that, the real use of existing savings (and thus existing investment) is to insure that bank loans extended to finance new capital formation (and thereby create money) can be paid back, whether or not the new capital formation is successful. The existing savings/investment function as "collateral," so that the bank's shareholders and account holders do not lose too much money if something goes wrong. Consistent with the old saw that you need money to make money, existing savings/investment does not itself provide the financing for new capital formation. It makes new capital formation possible by insuring the lender against unexpected loss.

As we see in the subtitle to the second book by Louis Kelso and Mortimer Adler, The New Capitalists (1961), this use of savings as collateral instead of as the direct source of financing suggests not only that something other than existing pools of savings are used for new investment ... but that something other than accumulated wealth can be used for collateral. If, after all, collateral is a form of self insurance, why not use actual insurance, "capital credit insurance," in the place of savings? Thus the subtitle of Kelso and Adler's second book, "How to Free Economic Growth From the Slavery of Savings," not only makes perfect sense, but frees us from the slavery of reliance on the dogmas of the world's premier defunct economist: John Maynard Keynes.

Monday, February 16, 2009

What's Wrong With This Picture?

According to an Associated Press report, Tzipi Livni, who hopes to be appointed the new prime minister, has declared that Israel can achieve peace with the Palestinians by surrendering approximately half of Israel's territory, thereby securing the safety and continuance of a Jewish State.

It's difficult knowing where to begin.

On a practical note, the most common demand from the surrounding Muslim States and the Palestinians is not that Israel surrender territory, but that Israel surrender its existence. Aside from the fact that territorial appeasement has never worked (the surrender of the Sudetenland before the Second World War merely whetted Hitler's appetite for the rest of Europe), it would likely be taken as a tacit acknowledgement that Israel's possession of any territory at all is illegitimate — exactly as radical Muslims have been claiming since the late 1940s. One can almost hear the rhetoric following such a surrender: "Israel has finally admitted it has no right to exist. We demand that these half measures stop, and the Jews have the good sense to leave or be killed."

Then there's the whole idea of a religious State, whether Jewish, Muslim, or Christian (or Tibetan Lamaism, for that matter). Shouldn't a State have a religion? Not in the sense that we understand "religious State." Citizens should have a religion (and must, in order to be human, if we believe Aristotle), but so far as the State itself is concerned, what religion a citizen follows is a matter of personal choice, as long as the practice of that religion does not harm other individuals, groups, or the common good.

Does that mean that the State must necessarily be indifferent or even hostile to religion? That may be an even bigger mistake than having a religious State. A religious State at least acknowledges that religion plays an important role in society. A State that ignores religion or is overtly hostile, however, is refusing to acknowledge reality. Whether or not you believe that God or gods exist(s), religion's role in the civil order is to teach essential principles of morality and natural law. This is a necessary role, for no State can decide issues of right and wrong on its own authority, or it ends up, essentially, making up its own standards against which to measure its own actions.

Whether you call the natural law the general consensus of all mankind rooted in human nature as to what constitutes "the good," or you believe that human nature is a reflection of a divine nature, and thus constitutes "the good," the natural law is as close as humanity is going to get to an objective standard of morality, and thus "right" and "wrong." A State that rejects a sound understanding of the natural law, or even the concept of natural law itself on the grounds that it is derived, ultimately (as is the case with all law) from religious belief, makes a serious mistake, and undermines the basis of and justification for its own existence.

Where does this leave Israel? Is there no hope at all for peace?

There is a great deal of hope for peace, if those involved in the process can learn to think beyond the parameters that have been imposed on the discussions. The Abraham Federation represents a well-thought-out solution to the situation in the Middle East, and warrants serious consideration by people interested in a "win-win" proposal instead of the usual "win-lose" scenarios that end up a loss for all concerned.

Friday, February 13, 2009

News from the Network, Vol. 2, No. 7

Much of the news this past week centered on the stimulus package, which (depending on your source) had a spread of $750 billion to $3 trillion, with the "final" price tag as of this morning being $790 billion. As is common in Keynesian programs, there doesn't appear to be any clear idea exactly how and to what extent the economy will be stimulated, and how the effect is to be sustained once the money is gone. Of course, this happened before, in the "mini-depression" of 1936-37, when the stimulus of the New Deal began petering out and the increased real demand due to the Second World War had not yet kick started the economy. Nevertheless, there are some non-vague events that have taken place this past week, suggesting that something more is possible than a fuzzy stimulus package with a very real — and colossal — price tag that doesn't seem directed at benefiting ordinary people.
• Norman Kurland made a trip to East St. Louis on Monday of this week, returning late Tuesday. After a series of important meetings Norm visited some impressive facilities housed inside a geodesic dome and obtained photos that the primary author of this blog lacks the technical competence to display. After meeting with Mayor Alvin Parks, it was decided to focus efforts on getting a meeting with the area's Representative in Congress and his staff to gain the Congressman's support for the East St. Louis project.

• Dr. Max Weismann of the Center for the Study of the Great Ideas in Chicago gave a mutual letter of introduction to Norman Kurland and Winston Elliott III of the Center for the American Idea. Dr. Weismann commented, "Please examine each other's websites and I think all three of us should share links — we're on the same team."

• Michael D. Greaney sent a report of the efforts of CESJ and the Colonel John Fitzgerald Division of the Ancient Order of Hibernians ("AOH") in Arlington, Virginia, to reach a common ground in promoting economic and social justice in Ireland and the United States to the National Hibernian Digest, the official journal of the AOH, for its important March/April issue. CESJ and the Colonel John Fitzgerald Division are exploring the possibility of collaborating on social justice projects (especially education) within the Catholic Diocese of Arlington.

• CESJ's two most recent publications, Michael D. Greaney's In Defense of Human Dignity and William Cobbett's The Emigrant's Guide, have now sold enough copies to cover the initial costs of publication. Wholesale orders in quantities of ten or more of either title can be obtained from CESJ, P. O. Box 40711, Washington, DC 20016 for $16.00 per copy plus $1.50 per copy shipping. Copies of Capital Homesteading for Every Citizen can be included in the order, for $14.00 per copy and $1.50 per copy for shipping. You may combine different titles in a single order as long as the total number of books is 10 or more. Additional discounts may apply for orders of 25 or more copies shipped to a single address. Please include a street address for shipping, as UPS does not deliver to P. O. Boxes. Individual copies of any of these titles can be ordered on the internet from Amazon or Barnes and Noble, as well as by special order from many bookstores.

• Last week's shipment of copies of Capital Homesteading to a number of politicians in Ireland may have come at the right time. According to the Irish Independent, Finance Minister Brian Lenihan, a recipient of one of the copies, is facing a crisis and calls for his resignation due to allegations that he mishandled the recent bank bailout. Immediate study of the Capital Homesteading proposal will not only give Mr. Lenihan a solution to the overall crisis, but provide a way to correct his missteps in the most effective and cost-efficient manner. The Minister's mistakes and damaging admissions may very well provide the necessary incentive to start promoting serious consideration of Capital Homesteading.

• We received word from Reverend William Christensen, S.M., Ph.D., a missionary in Bangladesh, that Dr. Muhiuddin Khan Alamgir, an Islamic moderate, has prepared a book, Prison Notes from Bangladesh, detailing his experiences as a political prisoner for nearly two years under the former military-controlled government in that country. Due to the sensitive nature of the book, Dr. Alamgir is seeking a publisher in the United States. CESJ has agreed to take a look at the manuscript for possible publication under its "Economic Justice Media" imprint, if the book proves suitable.

• As of this morning, we have had visitors from 35 different countries and 46 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 148% increase in total readership, according to the statistics counter of "Google Analytics." Most visitors are from the United States, with Canada, the UK, Brazil, and Ireland rounding out our "top five" countries where we're read the most. The top spots for the average time spent on the blog, however, goes to Croatia at more than twice the average time of any other country, followed by Venezuela, Mexico, the Netherlands Antilles, and Jordan, in that order. (After Croatia, however, with nearly a quarter of an hour for the average visit, there are only a few seconds' difference between, e.g., the United States of Mexico and the United States of America.) Our most popular posting, with 25% more hits than the next most popular, is the first in the ongoing series explaining why Mr. Obama's stimulus package is a disaster. Of the remaining "top ten," 3 are "News from the Network" postings, 5 examine Keynesian economics, 2 are on the stimulus package, and 1 addresses the financial crisis in Ireland (obviously there is some overlap, e.g., the financial crisis in Ireland traces the problem to its Keynesian roots). The bottom line, of course, is that the slavish adherence to Keynes is wrecking the world's economies, and the sooner people begin to look at the situation in terms of Kelso and Adler's binary economics, the better off everyone will be.
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, February 12, 2009

The Homestead Act: Abraham Lincoln's Greatest Legacy

Most of what you read today, the 200th anniversary of the birth of Abraham Lincoln, will justifiably focus on "the Great Emancipator's" achievements in freeing the slaves and saving the Union. Unfortunately forgotten in the well-deserved plaudits for our 16th president is what some insightful commentators believe deserves to be ranked with those two triumphs: the Homestead Act of 1862.

Throughout the rest of the world it was expected that a small minority would own or control the means of production. When land was the predominant form of capital, with few exceptions land was held in colossal latifundia or great feudal estates. Lincoln knew that if he couldn't come up with a democratic means of divesting the federal government of its vast western land holdings, the historic pattern would simply be repeated in the United States, and a rigid class structure imposed on America's government of the people, by the people, and for the people.

Lincoln therefore devised a plan whereby any U.S. citizen, or anyone who declared the intention of becoming a citizen, and was over the age of 21 could acquire a quarter section — 160 acres — of federal land in the "Great American Desert." After developing the land and living on it for five years (the "quid pro quo"; the land wasn't truly "free"), the homesteader was granted clear title.

The Homestead Act opened up the west to rapid development. The amazing productivity of the west from agriculture, ranching, and mining supplied the east with needed raw materials as well as a market for the manufactured goods of the east. The fact of ownership ensured that the homesteaders enjoyed the full stream of income from their newly-acquired capital, which could then be used to purchase eastern goods. This in turn ensured that America's nascent industrial sector had an opportunity to grow with equal rapidity at a time when European markets were closing off to American manufactured goods.

Unfortunately, while Lincoln's vision ensured rapid economic development and growth in the United States in the latter half of the 19th century, the Homestead Act addressed only one type of capital: land. Industry and commerce were growing in importance, however, and would soon result in a type of industrial feudalism, in which the small shopkeeper and artisan was forced out of business in competition with large concerns. The new trusts and corporations were owned by a very few people, and the great mass of people had no ownership stake in the company for which they worked.

There are hints in some of Lincoln's writings that he might have been thinking of applying the Homestead Act concept to the rising industrial and commercial enterprises, but we cannot be certain. Lincoln was killed before he was able to put the Civil War behind him and get to work on the task of rebuilding the country. Consequently, the tremendous incomes generated by the new technologies and the great commercial enterprises went not to consumption, but were reinvested, causing ownership of the means of production to become increasingly concentrated over time, and spurring ever-greater swings in the business cycle as production and consumption became disjoined, apparently in response to a seemingly iron law of economics.

This "iron law," however, was the result of a demonstrably false premise: that capital formation could only be financed by cutting consumption, saving, then investing. On the contrary, as Dr. Harold Moulton discovered in the early 1930s, in the United States from 1830 to 1930, which (as we saw above) covered periods of immense capital expansion and economic development, every period of great capital expansion was preceded not by decreases in consumption, but by increases in consumption! Savings were not being accumulated, but depleted! Banks did not lend existing pools of savings to finance capital formation, but created new money by extending credit for capital projects that were expected to pay for themselves out of profits to be made in the future.

We thus come to the conclusion that Lincoln might have, had he lived. Just as "free" land provided the opportunity for thousands of people to become owners of one type of capital, "newly-created" money tied to specific capital investments could provide the opportunity for millions — even billions — of people in the United States and throughout the world to become part owners of the companies for which they now work as wage slaves.

"Capital Homesteading" is a proposal to open up democratic access to capital credit so that every American has the ability and the means to acquire and possess a reasonable capital ownership stake. On this bicentennial of the birth of Abraham Lincoln there could not be a better way to honor his memory than to work to extend his vision to every citizen.

Wednesday, February 11, 2009

Doubling Down in Washington

We wish that our 200th posting could be a little happier.

In the ultra high stakes political games played in Washington, DC, $1 million is the lowest chip. The amount on the table at risk is usually measured in billions. According to the headline in today's Washington Post, however, Mr. Obama has raised the stakes in his game of Big Buddy Bailout to more than $1.5 trillion, just as we predicted in this blog last week. This is more than double the original wager of $750 billion.

Mr. Obama appears to be "doubling down." Doubling down is a technique in Blackjack in which you double your bet after receiving your first two cards. The difference, however, between straightforward gambling and what Mr. Obama is doing is that the president hasn't been dealt any cards. All he has is a blind faith that failed and disproved Keynesian economics will, despite decades of evidence to the contrary, finally pay off and allow the American economy to break even.

The problem, as we've been pointing out for several weeks, is that you can't create money in any amount without expecting inflation, unless you are careful always to link creation of new money to new production (not unsold past production), or to the financing of a project that will generate new production. Creating additional purchasing power for existing inventories simply makes each unit of currency worth less than before, redistributing existing wealth from current holders of financial assets to those receiving government payments.

This form of money creation can lead directly to hyperinflation, the surreal condition in which the price level rises faster than money can be created. Ordinarily, of course, the price level rises in response to the creation of additional purchasing power for existing inventories. When carried out on the massive scale that Mr. Obama is now demanding, however, the amount is genuinely beyond the power of the ordinary human mind to grasp.

The response of any producer or retailer to such a gargantuan influx of essentially worthless money will be to raise prices as fast as possible to make up for an anticipated inflationary loss that cannot, in human terms, be quantified — how do you visualize $1.5 trillion? The State then gets into the position that the Reichsbank faced in the early 1920s at the height of the hyperinflation.

The German central bank simply could not create money fast enough to meet daily transactions demand for currency, much less keep up with the inferno of the rising price level. Producers stopped producing, for there was no assurance that they could trade what they produced for anything of value. Farmers refused to sell their produce in exchange for crates of worthless currency, and there was virtually no industrial production generating anything that could be used for barter. The validity of Say's Law — that we can only purchase to the extent that we produce — was proved in the most vivid and devastating manner possible.

The German and Austro-Hungarian economies faced the paradox that unfettered money creation caused prices to rise so fast that there wasn't enough money in circulation to purchase what little was for sale. This was at a time when one U.S. dollar was "worth" 4.2 trillion Reichsmarks at the official exchange rate, and nearly 16 trillion on the black market. There were mountains of paper money in circulation, but it was worth more as waste paper and fuel than as currency. A famous photograph shows two little girls holding an American dollar, and in the background a colossal pile of German currency that, on that day, equaled that dollar.

Hyperinflation is a logical and expected outcome of Mr. Obama's proposal. Germany was ultimately saved because they gave a monetary and fiscal genius, Dr. Hjalmar Schacht — the "Old Wizard," a man with the unusual middle name of "Horace Greeley" — full power to do anything necessary to stop the hyperinflation. This he did by demonetizing all the old currency, creating an asset-backed non-legal tender but fully convertible parallel currency (the Rentenmark), and absolutely forbidding any new issuances in excess of the value of the asset backing.

The situation was stabilized, but the fear inspired by the hyperinflation was so great that the German, Austrian, and Hungarian peoples demanded absolute guarantees of future stability, as well as victims to blame for the virtual apocalypse of the war and the subsequent financial meltdown.

Adolph Hitler provided both.

Tuesday, February 10, 2009

Stimulus, Part V: Future Wealth and Money Creation

As we saw in the previous posting in this series, there is a source of financing apart from existing pools of savings, "savings" being construed as unconsumed wealth. This additional source of financing consists of wealth that has not yet been created, as opposed to wealth that has been created and remains unsold or unconsumed.

Obviously wealth to be created in the future does not exist in the present. If, however, we assume that the individual or business will produce the wealth at some point, we can measure that assumption and quantify it in terms of money. Our assumption rests entirely on how trustworthy we believe that individual or business to be, and our assessment of the individual's or business' ability to make good on the promise that he or it will, in fact, produce wealth in the future. Remember (and this is important, and the basis for refuting Keynes' basic assumptions) — nothing exists in the present except our trust in the promise of that individual or business. Will the individual carry out the necessary tasks to produce the wealth? Will the business exist to do the same? This is the most important question that must be answered before we can place a present value on what is to be produced in the future.

Of course, Keynes also relies on trust, but a much less acceptable kind. Keynesian economics rests on the unspoken assumption that the State will continue to exist, and that it will continue to have the power to print money at will, and be able to coerce future generations of taxpayers into paying for present consumption. This means that future taxpayers must necessarily be empowered with the means to produce so that they have the wealth to repay the debt incurred by today's consumers.

Since future taxpayers will, consistent with Keynesian economics, be in the same position as today's consumers, it is highly unlikely that the debt can ever be paid. In all likelihood, it must be passed on forever to future generations until the State goes bankrupt. The United States is still suffering under the burden of debt incurred to finance the Keynes-designed New Deal two generations ago, while the bankruptcy of Social Security, the largest surviving New Deal program, is predicted within the current generation.

In any event, the "Real Bills" doctrine allows us to take a promise to produce wealth in the future (as opposed to the Keynesian promise to spend wealth at present) to a commercial bank. The bank makes a conservative determination as to the present value of promise, and creates that amount of money. In exchange, the bank takes a lien on the future production to that amount, plus an amount to compensate the bank for whatever risk is assessed, and a just profit for providing the service. These last are considered part of the cost of the project, and are taken into account when determining the present value of the promise so that there is no question of a banking taking back and destroying more money than was created.

Thus, under the "Real Bills" doctrine, we can create money "out of nothing" . . . if by "nothing" we mean the present value of wealth that we reasonably expect to be created in the future out of the productive potential of the individual or business to which we loan the money. Given that, there is no excuse for employing the bizarre Keynesian techniques that, in effect, try to get something for nothing, when we have the power to engage in production and provide for everyone's wants and needs simply by exchanging promises quantified in terms of money and making good on them.

Monday, February 9, 2009

Stimulus, Part IV: Creating Money for New Capital Formation

In the previous posting in this series, we observed that Keynes' basic assumptions, that new capital formation can only take place once consumption has been reduced, and that production does not equal income, violate not only common sense, but Generally Accepted Accounting Principles, or "GAAP." GAAP, contrary to what some people appear to believe, do not force individuals or businesses to conform to arbitrary rules and incomprehensible practices, but try to describe what actually happens in the microeconomic universe of a business entity and develop a set of uniform rules for the application of the principles of reality. If the people running the business are rational, they attempt to conform their internal institutions (that is, their practices and rules that dictate how business is carried out) as closely as possible to reality, that is, to GAAP.

Thus, in accordance with GAAP (and reality) a business only receives money when something the business has produced is sold, and can only participate in the creation of new money when it has something of value on which a bank or other financial institution can take a lien and issue generalized purchasing power — money — by means of which the bank and the business collaborate in transforming the specific wealth held by the business, into a generalized claim on wealth held by the bank so that what is produced can be sold, and "production" turned into "income."

Individuals and businesses can also create money between them and other individuals and businesses by direct barter exchange of commodities, goods, or services. This is how most international trade is carried on. This process is also consistent with the "Real Bills" doctrine, but we won't consider it in this discussion because we are concentrating on the role of the commercial banks and other financial institutions.

Keynesians have a problem, however, with the logical outcome of the "Real Bills" doctrine, and by far the more important part of it. Factoring inventory as described above simply makes exchanges easier by turning specific goods and services into generalized purchasing power, symbols of wealth to replace the actual wealth, which are eventually redeemed when the actual wealth is purchased and consumed, with the purchase price — revenue — used to provide the money to redeem the lien, pay the service fee, and provide income for the producer.

There is something else besides inventories that individuals and businesses have that is of value, and the value of this "something else" can be quantified and measured more or less precisely. Further, this "something else" is by far the most valuable thing that an individual or business possesses as a producer of wealth. Without it, the economic value of the individual or business is either greatly reduced or disappears altogether. In accounting, this "something else" is reflected in the "ongoing entity assumption." In financial or economic terms, this "something else" is the potential that an individual or business has to produce goods and services — wealth — in the future.

Friday, February 6, 2009

Funding the Stimulus Package

Kemp Harshman, Esq., Guest Blogger

The government stimulus package (a Keynesian remedy) could (and probably will) exacerbate the current credit crisis, just as the government interventions during the Great Depression had a limited impact. It was the start of WW II that actually turned the economy around.

Even without the stimulus, the government will have to raise over $1 trillion to fund the current level of spending for federal programs. With the stimulus, it will now have to raise a total of $2 trillion in new funding. Who will continue to buy the debt when our currency is being inflated and the interest rates are suppressed to artificially low levels?

If the government cannot raise tax rates (during the recession) and foreign borrowers (like China) refuse to continue their funding, the Federal Reserve will have to rely on monetary expansion (printing more dollars so the Treasury can buy its own notes). Fed Reserve Chairman Bernanke once stated that he would drop dollars from helicopters if needed to prevent an economy from sliding into a depression. Will that really work? This article from CESJ and this article from "Money Morning" address this question.

The result of the "stimulus" could be to suppress the private sector (since credit for businesses will dry up) and delay the recovery of the economy, saddle future generations with enormous tax burdens, and undercut the value of the dollar leading to high rates of inflation. If that isn't enough, the current foreign bondholders could take their money when their notes mature and buy up assets at bargain prices in the United States, instead of holding inflated dollars. We could end up living in a country that we do not own!

It is painful to watch the American economy implode because of the greed of the fat cats and the incompetence of the bureaucrats. We are far from the end of this "global credit crisis." Let us hope that, with the promise given by Capital Homesteading and similar proposals, the free market will re-emerge, and that the American people will find better solutions to their economic problems.

News from the Network, Vol. 2, No. 6

Every time we turn around, it seems as if President Obama wants more money that doesn't exist to spend on something that won't work. The projected bill is now up to over $900 billion, apparently on the theory that if $800 billion was unpalatable, increase it to $850 billion, then $900 billion. A few hundred billion here, a few hundred billion there . . . pretty soon Mr. Obama might be talking about real money, instead of whatever inflationary purchasing power he can persuade the Federal Reserve to print . . . to the point where now even Fidel Castro, who formerly praised the new president as "intelligent and noble," is raising his eyebrows. There are, however, a few bright spots that give signs that something might start penetrating even into the hallowed halls of the U.S. Capitol (and capital).
• We sent a mass e-mailing to every member of the Althing, the Icelandic parliament, this week regarding Capital Homesteading. So far we have not received any responses, but the responses to the previous mass e-mailing to the Irish legislature didn't spark immediate responses, either, and we eventually heard from fifteen members of the Dáil and one member of the Seanad. Since the e-mail was necessarily in English (our Icelandic language skills being sorely deficient), it may be taking them time to translate and read the letter, assuming that a secretary or assistant didn't simply automatically discard anything in a foreign language. If you're a citizen of Iceland, or even reasonably fluent in Icelandic, you might want to send an e-mail or letter to the new prime minister, Ms. Jóhanna Sigurðardóttir, suggesting that she give serious consideration to Capital Homesteading as a possible solution to the economic crisis. Her e-mail is johanna@althingi.is. The e-mails of all members of the Althing can be found here in English, and here in Icelandic. Since even a few dozen e-mails on a subject to a senator or representative in the United States are taken as a sign that the public is interested, the same should hold true in Iceland.

• Similarly, early this week we sent copies of Capital Homesteading for Every Citizen to Ireland to the Taoiseach (the Prime Minister) and selected members of the Dáil Éireann and some other public individuals. If you want to send your own e-mails to members of the Dáil urging them to give consideration to Capital Homesteading, e-mail addresses are listed here. (This is the list as of November 2008, and appears to be the latest available.) You might also want to send a note to Mr. Gerry Adams, leader of Sinn Fein, info@sinnfein.org, who recently sought the help of Irish throughout the world in working toward a peaceful and united Ireland, for which a sound economy is a necessary first step. According to latest reports in the Irish Independent, the Irish unemployment rolls are growing at the rate of 1,500 per day. Mr. Brian Cowen, the Taoiseach, has expressed great alarm, and has predicted that unemployment will reach 400,000 by the end of the year, which amounts to between 12% to 20% of the total workforce, depending on whose figures you use. Mr. Cowen's e-mail on this matter is economicpolicy@taoiseach.gov.ie.

• On Tuesday, due to information published in The Wanderer, we received our first bulk order (10 copies) for our annotated edition of The Emigrant's Guide by William Cobbett (1763-1835), revered by G. K. Chesterton and Hilaire Belloc as "the Apostle of Distributism." A refreshing pro-American look at economic conditions in the early 19th century and a sharp contrast to current "stimulus" proposals, individual copies of The Emigrant's Guide can be ordered from Amazon or Barnes and Noble. If your club, school, church group, or other organization wants copies in bulk (minimum of ten copies per order) at the wholesale price (or if you just want to have a lot of copies yourself), and you live in the 48 contiguous U.S. states, they can be ordered directly from CESJ. The price is $16.00 per book, plus $1.50 per copy shipping. If you're ordering 25 or more copies, send us an e-mail before ordering so we can tell you what the total will be for shipping. (Also send an e-mail to enquire about bulk orders to Alaska and Hawaii, and Canada and Mexico.) Send payment with the order to CESJ, P. O. Box 40711, Washington, DC 20016. Be sure to include your street address, because UPS will not deliver to a P. O. Box. The same terms apply to In Defense of Human Dignity: bulk orders of a minimum of ten copies can be ordered from CESJ, single copies from Amazon and Barnes and Noble.

• Norman Kurland has been having an extremely interesting e-mail exchange with Dr. Max Weismann, head of the Center for the Study of the Great Ideas in Chicago. Co-founded by Dr. Weismann and the late Dr. Mortimer J. Adler, considered the premier American Aristotelian of the 20th century, the Center is concerned with the decay of moral philosophy in today's world, and thus has a certain congruency with CESJ's mission to advance the Just Third Way. The most recent exchanges have dealt with perceived differences in the approaches taken by Dr. Adler and Father William Ferree, S.M., Ph.D. (referred to at his death in 1985 as "America's greatest social philosopher") to the concept of "social justice." The discussion is a little esoteric for a blog, but we'll try to summarize it briefly . . . if possible. As a classic Aristotelian, Dr. Adler rejected the idea of a specific virtue called "social justice." Social justice, to him, was simply a redundant term for what Aristotle called "legal justice," legal justice describing the indirect effect that our personal acts of virtue have on the common good. Basing his analysis on the work of Pope Pius XI, Father Ferree disagreed. Social justice is a specific virtue, distinct from legal justice. Social justice acts directly, not indirectly, on the common good when individuals organize to restructure our institutions. To understand more of the discussion from CESJ's orientation, download the free copy of Father Ferree's Introduction to Social Justice, or you can wait for the new combined edition of Introduction to Social Justice and the transcript of Father Ferree's talks on social charity from 1966 that we expect to have ready in the next two to three months, or sooner, to be followed as soon as possible by The Act of Social Justice.

• As of this morning, we have had visitors from 26 different countries and 43 states and provinces in the United States and Canada to this blog over the past two months. Over the same period we have experienced over 178% increase in total readership, according to the statistics counter of "Google Analytics."
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, February 5, 2009

How Would YOU Spend $925 Billion (and Rising)?

As the amount of Mr. Obama's "stimulus" (newspeak, evidently, for "pork") continues to escalate from incredible, to unbelievable, to beyond human comprehension, we thought we'd ask ourselves a simple question: "How would we spend what will soon amount to over $1 trillion in light of Just Third Way principles?"

This is a question that can only be answered in stages. The first stage is to realize that, in a justly structured economy, there would never be a question of the State deciding how to spend a pot of money, and then putting an unconscionable burden of debt on future generations to pay for it. No, because certain proposals under the Just Third Way are, in part, predicated on the validity of Say's Law of Markets and the Real Bills doctrine, we realize that you can't spend what you don't have. Production equals income . . . and you can't just go out and create money (additional purchasing power) that is not tied to an equivalent value of new production.

It doesn't matter how much you have piled up unsold in warehouses, how many "toxic assets" a bank holds, or even how many homes are foreclosed. The money already exists to purchase these things. Creating more money inflates the currency — and creating what will soon amount to more than $1 trillion of purchasing power tied to existing goods and services could very easily ignite hyperinflation.

The "proper" response (actually, "barely rational response") when faced with the current situation is not to create new purchasing power for existing goods and services and redistribute wealth indirectly through the extremely risky method of inflation. When faced with such a colossal mess and an inability to think of anything better, the "right" thing to do is redistribute wealth directly by raising taxes to the point where all wealth that someone is not consuming is taken and redistributed among people who will use it for consumption — or at least tax the haves enough to provide the have-nots with enough to keep them alive and well until they can get back on their feet.

Thus, stage one is to keep people alive and well by taking care of them temporarily. This is going to cost some money, but it's money that's already out there. Tax the rich enough to meet these emergency needs, then lift the tax once the emergency is over.

This leads to stage two. The haves will immediately protest that if you tax away their unconsumed wealth, they won't be able to finance new capital formation, new jobs will not be created, and the economy will decline even more rapidly.

Answer: every reader of this blog knows that the commercial banking system combined with the Federal Reserve has the power to create money. It's where Mr. Obama plans on getting the bulk of the $1 trillion pork pie he's requesting. If you can create money for consumption, you can create money for investment. You don't need the haves to finance capital formation out of their unconsumed wealth. You just need access to capital credit.

Thus, stage two is to shut off the money spigot from the Federal Reserve to the government, consumers, and speculators, and turn it on for people who will use it to finance investment in new capital. This is all the stimulus anybody needs — and it won't cost the taxpayer one cent.

For stage three, things actually get easy. We need to identify our first investment, ideally one to which every single American currently has access . . . but is unable to finance due to lack of capital (not consumer) credit — that credit coming from opening up the Federal Reserve capital credit spigot for ordinary Americans.

What is most people's single largest investment? Their house. The problem is that it's not really an investment. Housing is a consumption item . . . unless . . .

Unless you're a landlord purchasing property to rent out to a tenant. Then what would ordinarily be a consumption item for you turns into an investment (capital) for you, and a consumption item for your tenant.

That being the case, what's wrong with being both landlord and tenant? The rent you pay as tenant then becomes the means by which you as landlord pay for your investment. This is the financial technique of purchasing only investments that pay for themselves within a reasonable period of time out of the income that the assets themselves generate, that is, "self liquidating" assets. The purchase of existing facilities, including rentable space, by creating new money to do so is as sound as financing future construction — better, in fact, because you have a "track record" of established tenancy or production to provide a solid indication of the present value of the future income stream.

An added bonus (and it's a big one) is that many analysts believe housing is the primary "leading economic indicator." Save the housing market, and (so many analysts believe) you will have saved the entire economy. (You could say something similar for food and clothing, but you must live where you live — meaning you can't live where you are not — while you don't have to grow your own food or make your own clothing right there.)

Stage three is thus to save the housing market, and do it in a way that turns a consumption item into an investment so that you can create the money to save the market in a non-inflationary way. We haven't mentioned it lately on this blog, but there is a proposal to do just that, the "Homeowners' Equity Corporation," or "HEC."

A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants.

The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.

Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of increasing mountains of government debt. Let the free market decide what happens to those institutions deemed "too big to fail." If they truly are "too big too fail," then they won't. Otherwise, they clearly weren't "too big to fail" at all.