News from the Network, Vol. 3, No. 8

The economic news is, as expected, contradictory, confusing, and changing by the moment. At almost the same time we read that home sales in January were down although prices rose (this only puzzles those people convinced that the laws of supply and demand are somehow a Capitalist Plot To Take Over The World), and within minutes an announcement that January Home Sales Are Expected to Show Growth. Stocks fall immediately after Bernanke announces a rate hike . . . and then follows with another announcement to the effect that he was just kidding. Stocks rise. Banks are not lending, so policymakers discuss ways to "incentivise" banks to lend to meet political goals, then Biden announces that he will push to implement new controls to protect workers' savings from political decisions.

If any of this makes sense, please let us know. Be warned in advance, however, that any justification or explanation of recent economic policy or decisions that references Keynes or Keynesian economics will be rejected on the grounds that Keynesian economics — and Monetarist and Austrian — is based on one or two assumptions that do not make sense, and is therefore inadequate to explain what's going on.

Virtually all current economic proposals, remedies, solutions, and what-not avoid or ignore the need to produce something before you can redistribute it, tax it, or whittle away its value with inflation. No one is addressing the pressing need to revive Say's Law of Markets and the real bills doctrine in a way that allows full participation by everyone both as owners of labor and of capital. Instead, they concentrate on attempting to drain more blood out of some very squeezed turnips and stones.

Virtually all — but not all. Our efforts to introduce policymakers and prime movers to the possibilities inherent in the Just Third Way and Capital Homesteading continue unabated — although (as we keep pointing out) we need you to bait (or bate?) the hook and start opening doors.

• Outreach efforts continue, with a number of CESJ members and friends working to open doors to individuals who have a good chance at getting us to people in power — prime movers. Naturally, while this makes for dull reading in these news briefs, we cannot report any specifics on these efforts until they bear fruit. For example, reporting that we are going to meet with the Lord High Everything Else of Titipu could easily result in canceling the meeting, or in giving His Lordship a bad opinion of us and reason to reject everything we say — no one likes to have his or her hand forced, and reporting these meetings could come across as trying to do just that. Since by the nature of these efforts and the admittedly low profile of CESJ on the public radar only a few actually do bear fruit, the most we can do is report that efforts are being made.

• While not all efforts at door opening are successful, we urge you to step up your efforts in that direction. The more efforts are made, the more will be successful — but no efforts will be made unless you undertake them. We cannot "sell ourselves." We need those "third party endorsements." Thus, if you truly believe that the Just Third Way and Capital Homesteading have the potential to pull the economy out of the recession in a way that opens up equal opportunity for participation by everyone as owners of labor and of capital — not just tame welfare recipients — then you should be making constant efforts to surface prime movers.

• The four-pronged strategy is not just surfacing potential prime movers, of course. It also entails surfacing you. That means you should be prepared to show up at the annual peaceful rally outside the Federal Reserve in Washington, DC, on April 15, 2010. We stress peaceful, because (possibly due to frustration) some people anticipate the "Tea Party" demonstrations planned for the same day might get out of hand. Of course, we believe that this is due primarily to the fact that the Tea Party movement, unlike the independence movement in colonial America from which it takes its inspiration, lacks a coherent and comprehensive goal and means to that goal. In part for that reason, the annual rally at the Federal Reserve will assemble near the main Tea Party demonstration in an effort to suggest a financially sound and politically feasible proposal — Capital Homesteading — with the goal of making every citizen an owner as a way out of the current financial and economic mess.

• The problem of rebuilding an economy almost from the ground up is one that has been faced many times in history. The key, of course, is production — production in which everyone participates both as an owner of both labor and capital. This was brought home by a recent re-reading of the novel, The Teahouse of the August Moon (1951) by Vern Sneider (1916-1981). Sneider, whose output consisted of four novels and a collection of short stories, covered the same theme in The King from Ashtabula (1960). Both of these novels appear to be out of print (although the play version of The Teahouse of the August Moon, 1953, is available — don't confuse it with the novel), but can be obtained at very reasonable prices at abebooks.com. In both novels the protagonist (the American military commander of a village in Okinawa during the occupation in Teahouse, a college student who unexpectedly finds himself the hereditary ruler of a Pacific island in King) is faced with an economy in ruins. Both find that to make life bearable for the people in their charge they have to increase production of basic goods and services — food, clothing, and shelter — and at the same time establish new industries to replace what was destroyed in the war or to produce goods formerly imported and that are necessary for the people to produce more food, clothing, and shelter. For example, to make tatami (floor mats) in Teahouse, Captain Fisby, the American commander, has to carry a work crew to another part of the island where the special reeds for the mats grow, trade non-existent salt for the special loom to weave the mats, promise fish that haven't been caught with nets that don't exist to lure a salt maker to relocate to the village (and then "a white coat like the mayor's" to get the salt maker to start work), locate people with the special knowledge to make fishing nets and the material to make the nets, and promise future tatami to the naval engineer in charge of constructing a new officer's club to obtain the cloth necessary to provide the white coats everyone suddenly wants — and all this on the same morning trip. In order to make these exchanges of existing and future production much easier, Fisby "invents" money, currency, and then foreign exchange in commodities because nobody outside the village will accept the local currency that consists principally of oral promises backed by Fisby's personal word. The theme running through both books is how, once they are released from the artificial constraints imposed by other people's assumptions about the way things have to work (symbolized in Teahouse by Colonel Purdy's insistence that every village build a pentagon-shaped schoolhouse and institute a curriculum that has nothing but recreational activities — the schoolhouse materials are used in Fisby's village to start construction of a teahouse, which spurs all the ancillary industries and increased production that rebuilds the local economy) people will become productive and provide for themselves instead of sitting around waiting for the State (e.g., Captain Fisby) to hand out the daily distribution of sweet potatoes.

• Invitations to the Second Social Justice Collaborative on April 16, 2010 will be going out soon. If you want to receive an invitation (receiving an invitation or even requesting it does not commit you to attend), send an e-mail to dbrohawn [at] cesj [dot] org in the extremely near future (as in "before March 1, 2010"). There are rumors that pizza and soft drinks (a.k.a. "soda" and "pop" to easterners and midwesterners) will be provided for lunch.

• As of this morning, we have had visitors from 43 different countries and 43 states and provinces in the United States and Canada to this blog over the past two months — there must be something about the number 43. Most visitors are from the United States, the UK, Canada, Ireland (Éire) and Brazil. People in Egypt, Poland, Barbados, India and the United States spent the most average time on the blog. The most popular postings are Guy Stevenson's "Expanded Capital Ownership Now," Part I of the Restoration of Property series, "Ride the Pig," Part XX of the Political Animal series and "Waiting for the Penny" are the most popular postings.

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

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The Restoration of Property, Part VII: The Money and Credit System

In the Virginia Declaration of Rights, adopted June 12, 1776, George Mason of Gunston Hall, who had been charged with drafting the piece, detailed those natural rights he considered most essential to enhancing and preserving the dignity of the human person. To paraphrase, these are life, freedom of association ("liberty"), access to the means of acquiring and possessing private property in the means of production, and acquiring and developing virtue ("pursuing happiness and safety"). Probably due to his discomfort with human chattel slavery (although another view is possible . . . and will not be discussed here), Thomas Jefferson omitted access to the means of acquiring and possessing private property in the means of production when he "borrowed" Mason's list for the Declaration of Independence of July 4, 1776, limiting himself to life, liberty, and the pursuit of happiness.

The only slavery with which we are concerned in this series of postings, however, is the slavery of savings. We are not, of course, hostile to savings, any more than we are excusing human chattel slavery. Savings are absolutely essential to the financing of capital formation. What we object to (and to which, if you insist, we are irrevocably "hostile") are the fixed and erroneous beliefs that 1) "saving" can only be understood as "reducing current consumption," and 2) existing accumulations of savings are the sole source of financing for new capital formation, that is, the sole means of acquiring and possessing private property in the means of production.

Both of these beliefs are based on the wrong definition of money, a definition promulgated by the British Currency School and accepted as absolute dogma ever since, even by people who reject all other absolutes, and others who elevate it to the status of religious revelation. While it would probably be a much clearer presentation to refute one or the other of these erroneous beliefs individually, they are so intertwined that we are going to have to take them both on at once — and we can only do that by coming to a correct understanding of money.

John Maynard Keynes presented the most widespread — and incorrect — understanding of money in his Treatise on Money (1930). As he declared (without bothering to present any evidence to support his assertions),

It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of Money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)

We can reject this understanding of money without too much trouble. It is an unwarranted intrusion on freedom of association as well as the rights to and of private property to claim that people may not engage in contracts for any lawful or moral purpose without the explicit sanction of the State. Worse, there is no connection whatsoever between money and production in Keynes's analysis, much less the essential direct private property link between money and production. Keynes's explanation is directly contrary to the natural moral law and constitutes a direct attack on human dignity.

The correct understanding of money is at once easier to grasp and much more useful.

Money is anything that can be used in settlement of a debt. Anything. If two people agree, of their own free will, to enter into a contract to exchange items or claims on those items to which they attach value, why should the State have anything at all to say about the matter? As long as the matter is lawful, all parties to the contract are satisfied, and there has been no deception or fraud of any kind, there is no need for the State to be concerned.

This, of course, assumes that the parties to the contract have a direct private property stake in whatever good or service they choose to exchange — that is, they have the private property right to dispose of the good or service as they will. As we have already seen, the State's role is to keep order and maintain (though not necessarily provide) a "level playing field" so that everyone's rights are equally respected. As long as parties to a contract keep the peace and do not infringe on anyone's rights, the matter ends there without the State becoming involved.

The conveyance of value or a claim on the present value of production (the property right) is the essence of money. The understanding of money employed by the Currency School confuses the vehicle, the form of the thing, with the substantial nature of the thing. The definition of the Currency School embodies a triumph of form over substance, serving only to disconnect money from production. If this were an anthropological discussion of myth and belief, we would point out that the Currency School has fallen victim to "magical thinking," that is, mistaking appearance (form) for substance (the "law of similarity"), and believing that knowing something's "true name" allows you to manipulate that thing and control it absolutely (positivism). Thus, if the all-powerful, absolutist State declares that a thing is "money," than nothing else can be money . . . right?

Wrong. We've mentioned the work of Jean-Baptiste Say in previous postings, usually in reference to his "Law of Markets," which is that supply generates its own demand, and demand its own supply, and his theoretical support for the real bills doctrine. The real bills doctrine is the basis for Dr. Harold Moulton's claim that capital formation can be financed without recourse to existing accumulations of savings. It is Say's explanation of the real bills doctrine that concerns us at this point, although the real bills doctrine is also an integral part of his Law of Markets.

To begin, the real bills doctrine is the basic tenet of the British Banking School. In sharp contrast to the Currency School, the Banking School claims that "money" is anything by means of which two or more people convey value or the property right, and thereby settle a debt or obligation. This understanding of money is embodied in the common law of England, as a glance at the definition of money in Black's Law Dictionary will reveal, and as any lawyer who took a course in bills and notes should be able to confirm.

The Banking School is called by that name because it recognizes that commercial banks are designed and intended to create money as needed in order to facilitate transfers of value among people as conveniently and as safely as possible. A commercial bank has the capacity to turn anything that has a present value — a produced good or service — into money, which can then be exchanged among individuals or groups until presented to the issuer for redemption.

To explain further, there are two basic kinds of banks, the bank of deposit, and the bank of issue (also called the "bank of circulation"). Most economists and virtually all policymakers do not understand banks of issue, and frequently assume that all banks are banks of deposit. That is, a "bank" to them is something that takes deposits and makes loans. Period.

Given this definition of "bank" — which is absolutely correct as the definition of the bank of deposit — it is impossible to make any loan for any purpose unless a saver has cut consumption, saved, and deposited his or her savings in the bank. The bank then lends out the savings, taking a fee for the purpose, and turning over the balance to the saver as his or her interest on savings. Common types of banks of deposit are savings and loans, credit unions, and investment banks. These institutions function exclusively as intermediaries between savers and borrowers.

A bank of issue, however, is a different type of institution. A bank of issue also takes deposits and makes loans . . . and issues promissory notes. A bank of issue thereby has the power not only to lend out what a saver has deposited, but also create a promissory note drawn on a "real bill," that is, a bill or note backed by the present value of something, which bill a borrower brings to the bank of issue and temporarily "sells" (pledges) to the bank in return for a general promissory note drawn against the bank's ability to pay.

The borrower exchanges the promissory note for goods and services needed to complete the process of capital formation. Once the new capital becomes profitable, the borrower takes a portion of the profits generated by the capital, and uses it to buy back the lien from the bank, paying back the amount loaned plus a fee to compensate the bank for the use of its good credit. The bank accepts the money, returns the lien, and cancels the amount of money equal to the original amount of the loan. The excess — the fee the bank received (usually called "interest") — is the bank's profit, which it uses to meet its own expenses and pay out dividends.

This is where something called "future savings" comes in. Previously we have been in the habit of using the terms "future" and "forced" savings interchangeably, but "forced savings" has a special meaning in Keynesian, Monetarist, and Austrian economics, so we will try and restrict ourselves to "future savings." (We will not get into the special meaning of "forced savings" here; our goal is to explain how the system should and, to a limited degree, does work, not to waste our time analyzing untenable theories from other economic systems.)

Even with respect to future savings we need only note that the necessary equation of investment and savings is preserved by saving out of future income generated by the investment itself and used to repay the bank loan extended by a commercial bank, not in cutting current consumption, saving, then investing. This is a process that Keynes and others declared was impossible, but which, nevertheless, happens every day.

To counter the theory — fact, rather — of future savings on which the real bills doctrine is based, economic schools of thought based on the tenets of the British Currency School developed the theory of the "multiplier effect." The primary purpose of the multiplier theory is to discredit the real bills doctrine and Say's Law of Markets. It does neither.

The multiplier effect presumably 1) explains away the power of a commercial bank to create money by issuing promissory notes in exchange for a lien on the present value of existing or future production of marketable goods and services, and thereby 2) undermines the real bills doctrine and Say's Law of Markets. Under the real bills doctrine, of course, which ties into Say's Law of Markets, a commercial bank can create any amount of money, as long as the money is backed by the present value of existing or future marketable goods and services. If the agency granting the bank's charter imposes a reserve requirement, the amount of money that can be created is limited by the reserve requirement.

For example, if a bank has $1,000 in reserves, and is subject to a 10% reserve requirement, it can create money by issuing promissory notes up to the amount of $10,000. Most authorities today, however, claim that this is either possible but too dangerous (risky), or simply is not or cannot be done. Instead, the explanation for the potential expansion of the money supply under fractional reserve banking is asserted to be the result of the bank with $1,000 lending out $900, and retaining $100 in reserves, and $900 in cash to back the demand deposits.

The borrower spends the proceeds of the loan with a check, which is deposited in another bank. This increases the reserves of the second bank by $900. The second bank then loans out $810, retains $90 in reserves, and $810 in cash to back the demand deposits. The $810 is spent in the form of checks and deposited in yet a third bank. This process continues until the original $1,000 plus the $900 plus the $810, and so on, equals $10,000.

While this explanation of the multiplier theory is in all the textbooks, it is completely wrong. It requires counting every unit of currency in the form of checks multiple times, relying essentially on the creation of "fictitious bills." The explanation ignores one glaringly obvious fact: that the $900 in the second bank, the $810 in the third bank, and so on, are not in the form of cash, but checks. Checks do not remain in the bank in which they are deposited, but instead are taken and presented to the bank on which the checks are drawn for payment. The bank on which the checks are drawn does not retain the reserves, but turns over the cash behind the demand deposit. The amount of money in the system does not increase at all, but regardless how many banks it passes through, remains at $1,000. As Dr. Harold Moulton points out, giving the example of an original loan in the amount of $100,000 discounted at 2% (a net of $98,000),

If all the people receiving such checks in turn present them to this bank for deposit to their respective accounts, it is obvious that, while there would be an ever shifting personnel among depositors, the total deposits would remain at $98,000. (The Formation of Capital, op. cit., 80.)

Just as obvious from Moulton's full explanation (found in Chapter VI of The Formation of Capital, "Commercial Banks and the Supply of Funds") is that it makes no difference whether one bank is involved in the process, or hundreds, even thousands of banks. The result is the same.

The bottom line is that a bank of issue performs the invaluable service of creating money by allowing a borrower to substitute the bank's presumably good credit, accepted throughout the community, for the borrower's individual credit, which is generally not known or accepted beyond the borrower's limited circle. The bank's promissory notes can take the form of banknotes, demand deposits, commercial paper, or any other vehicle that is readily acceptable in trade and commerce ("bankers' acceptances"). These are, to all intents and purposes, "money," for they all convey a private property right, and can all be used in settlement of a debt. The money is created, used to form capital, and the capital generates the future savings necessary to repay the loan that created the money to finance the capital formation in the first place.

The most common type of bank of issue today is the commercial bank. Few if any banks of issue actually print their own banknotes any more. Instead, they create demand deposits. The end result is the same: an expansion of bank credit.

A recent development is the modern "non-bank bank," or "non-banking financial institution," of which finance companies and consumer credit card companies are the most common examples. While this is not universal (the category is only vaguely defined by government banking regulations) non-bank banks typically do not take deposits, but only create money for consumption purposes, backing the new money not with the present value of existing or future production, but with the borrower's presumed ability to repay the loan out of other income (production) not linked directly or indirectly to the new money. (Again, there are exceptions. A number of non-banking financial institutions such as factoring houses and leasing companies, serve legitimate commercial purposes. These, however, are — relative to the economic impact of consumer finance companies and consumer credit card companies — of minor importance.)

Credit extended by a bank of deposit is therefore sound, or "good credit" in the sense that even if all loans made by the bank go bad and are not repaid, no holder in due course of a check or other obligation drawn on the bank will receive less than the face value of the obligation; all demand deposits are — in theory — backed 100% by cash deposits (or, more accurately, cash and cash-equivalent securities). Credit extended by a bank of deposit has the potential to be "bad credit" in the sense that, in the case of credit unions and savings and loans, the proceeds of the loans are usually for consumption. Loans by banks of deposit are not usually intended to finance capital formation, which capital can then be put into production, thereby generating the income necessary to repay the loan.

Credit extended by a bank of issue is (at least in theory) good credit in both senses. All loans made by a commercial bank (again in theory) are backed 100% by liens on hard assets with a present value, and again with collateral — assets that can be seized to settle the debt if the assets which the loan financed prove to be worthless or otherwise fail to generate sufficient production to repay the loan. If a commercial bank is part of a central banking system, the loan is triply backed by the central bank's power to "discount" — that is, create money and purchase loans from commercial banks, thereby increasing the cash reserves of the commercial bank, preventing "runs" and stabilizing the currency.

Credit extended by non-bank banks is, as a general rule, bad credit on all counts. (Again, we state this as a general thing, given the overwhelming character of the non-bank bank as focused on consumer credit, and excepting those non-banking financial institutions that fill legitimate industrial, commercial, and agricultural needs, linking their transactions directly to production.) To be good credit, a loan must 1) be extended only for properly vetted productive projects, thereby carrying within itself the capacity to repay the loan out of future production of marketable goods and services, and 2) be directly linked to that production by right of private property.

The bottom line is that a commercial bank is established on the assumption that the real bills doctrine is valid. That is (as the real bills doctrine states), it is possible to issue money in any amount without inflation or deflation — as long as the amount of money so issued is 1) directly linked to the present value of a productive project or existing inventories of marketable goods and services, 2) issued in an amount that does not exceed the present value of a productive project or existing inventories of marketable goods and services, and 3) repaid out of income generated by the capital investment itself — future savings.

The real bills doctrine is based on the nature of money. Jean-Baptiste Say described this best in his exchange with the Reverend Thomas Malthus, who took the view of the Currency School as an absolute dogma. As Say explained the nature of money (and note the essential direct private property link between money and production),

Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own. To the proprietor of the mines whence this money is obtained, it is a production with which he purchases such commodities as he may have occasion for: to all those into whose hands this money afterwards passes, it is only the price of the productions which they have themselves created by means of their lands, capital, or industry. In selling these, they exchange first their productions for money; and they afterwards exchange this money for objects of consumption. It is then in strict reality with their productions that they make their purchases; it is impossible for them to buy any articles whatever to a greater amount than that which they have produced either by themselves, or by means of their capitals and lands. (Jean-Baptiste Say, Letters to Mr. Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce. London: Sherwood, Neely & Jones, 1821, 2.)

The key concept in Say's analysis is that "It is then in strict reality with their productions that they make their purchases; it is impossible for them to buy any articles whatever to a greater amount than that which they have produced either by themselves, or by means of their capitals and lands." Money is the vehicle by means of which my productions are exchanged for yours. As Louis Kelso clarified,

Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. (Louis O. Kelso, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54.)

At this point some people might complain that we have inserted these particular quotes in a singularly large number of our writings. This is true. They then add that they heard us the first time, and there is no need to repeat ourselves. This is not true. People, especially academics and public policymakers, continue to act as if the tenets of the Currency School are absolute dogmas of whatever faith they hold. They seem insistent on the utterly unbelievable idea that consumers and the State can continue creating money backed by debt instead of production, and go on spending forever without having to produce anything. We therefore have no choice but to say the same things over again, try to explain them in new ways, and hope the message finally begins to sink in.

The problem, of course, becomes what to do about this situation. First, of course, we have to reeducate the public, academia, and policymakers to understand and accept a correct understanding of money. We must then implement reforms necessary to change the present debt-backed currency to an asset-backed currency. Finally, we must put money directly at the service of people (not the collectivist "the people," which always means "the State"), instead of maintaining the current arrangement that forces people to be at the service of money.

This requires that we make a close examination of the role of the central bank, the institution charged with regulating the currency in most countries.

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The Restoration of Property, Part VI: The Myth of Savings

This morning's Wall Street Journal carried the panic-stricken headline, "Lending Falls at Epic Pace" (Wednesday, February 24, 2010, A1). In other words, despite the continually trumpeted "recovery," there is an "epic" drop in the rate at which new capital is being formed and old capital replaced. As a result, "The struggling U.S. banking industry remains a problem for policy makers eager for banks to lend again. Lawmakers on Capitol Hill and administration officials have pushed banks to lend, particularly in light of the billions in taxpayer aid injected into the financial industry over the past two years. Banking groups and their members counter that they are under pressure from regulators to be more prudent and that demand from struggling consumers and businesses isn't there." (Ibid.) Evidently, not only have policymakers made money, credit, and banking into a political issue in the worst sense of the term, they evidently firmly believe that they can order banks to start lending without bothering to make the necessary changes in our institutions that would make it possible for banks to start lending.

Given such bizarre approaches to something that begs for the application of a little common sense, no wonder hopes for a true recovery dwindle by the day. As we concluded our discussion of the four pillars of an economically just society, we observe that, despite the obvious benefits to be obtained from a rapid expansion of direct ownership of the means of production, many people — Belloc among them — simply assumed and continue to assume that the task is hopeless, or nearly so. In consequence, they either throw in the towel, or redefine reality in order to try and get what they think they want, an activity in which the current crop of leadership seems to excel.

We can understand Belloc's pessimism, and even appreciate it to some extent. The problem is that Belloc made the same mistake as Chesterton in formulating the principles of distributism. Ironically, this is also the mistake made by the Keynesians, the Monetarists, the Austrians, and virtually every academic and policymaker for the past two hundred years and more. The mistake is twofold: 1) using the wrong definition of money (one that implicitly destroys the direct private property link between money and production), and 2) not recognizing the act of social justice. We have already covered the act of social justice in the posting on the limited economic role for the State. Our concern in this posting is the wrong definition of money and the conclusions that flow from it.

Using the wrong definition of money forces the inevitable — and incorrect — assumption that capital formation can only be financed out of existing accumulations of savings. This assumption is what we can call "the myth of savings," and which Kelso and Adler referred to as "the slavery of savings."

From the wrong definition of money flows all the bad assumptions that have destroyed private property for the great mass of people and convinced them that the only way to advance technologically is to have concentrated ownership of the means of production, whether that ownership is concentrated in a small group of private owners, or (preferably) the State. This, in turn, has further convinced many people that technological progress is evil, or is at least contrary to human nature. That being the case, everything beyond "human scale" must be broken up or destroyed in order to reestablish a more human society — and all because the financing of new or replacement capital is assumed to be tied irrevocably to the slavery of existing accumulations of savings.

This sounds as if the Just Third Way has an animus against savings, or even against humanity. Nothing could be further from the truth. What we oppose is the wrong definition of savings, a definition rooted in the wrong definition of money derived from the British Currency School, a definition that raises almost insurmountable barriers against most people participating in the productive process in any meaningful or material way. As we have already seen, the Currency School's definition of money assumes an absolutist State, and denies essential human dignity by putting people at the service of money, rather than the other way around. In the same way, the Currency School assumes that production is a derivative of money and that "money" consists solely of coin, currency, and demand deposits (M1), which completely reverses the natural order of things in which money is a derivative of production, and M1 is a derivative of money.

It is something of a toss-up whether we address the issue of savings or that of money first. Because savings seems to be better understood — or, at least, there seem to be fewer misconceptions about savings, we will begin with savings, even though the myths about savings are rooted in the wrong definition of money.

Nowhere is the damage done by the wrong definition of money — and thus of savings — more evident than in the belief that capital formation can only be financed by cutting consumption, saving, then investing. This has led to the adoption of what can only be called nonsensical and self-defeating principles by all the major schools of economics, and most of the minor ones as well, especially distributism. Belloc clearly — and unconsciously — presents this contradiction at the beginning of Chapter II of The Restoration of Property. As he declares,

As we approach the problem of the restoration of property there are two main principles to be kept in mind: —

(i) The first is that any effort to restore the institution of property (that is, re-establish a good distribution of property in a proletarian society such as ours has become) can only be successful through a deliberate reversal of natural economic tendencies.

(ii) The second is that our effort will fail unless it be accompanied by regulation making for the preservation of private property, so much of it as shall have been restored.

Both these principles are essential to success. (The Restoration of Property, op. cit., 37.)

The italics are Belloc's. We dealt with principle (ii) at some length in the "Introduction" to this blog series, so we only need to repeat the fact that Belloc got things backwards. You don't correct an injustice by committing an equal and opposite injustice, or, worse, out of revenge exacting more than you consider your due. Instead, you organize with others in social justice and work to eliminate the injustice by removing whatever unnecessary barriers exist to democratic and full participation in the common good. This is obvious once we look at the issue objectively.

Principle (i) is a horse of a different color. Believing that we "can only be successful through a deliberate reversal of natural economic tendencies" reveals an orientation directly at odds with reality — so much so that, unless we can get out of the cage this orientation builds around us (with, oftentimes, our enthusiastic consent and support), we will not be able to restore property . . . or anything else, for that matter. Boiled down to its essence, Belloc's statement is an astounding rejection of reality and so contrary to common sense that it almost takes a miracle to overcome.

Why do we say this? The statement, after all, seems innocuous enough. Economics has certain "tendencies" — laws — that in the current condition of society operate in a manner contrary to many people's individual good and the demands of the common good as a whole. The solution sounds equally innocuous: reverse these tendencies, and all will be well.

To his credit, Belloc did not take the "out" that if people would just be personally virtuous and think or believe in the "right" way, all would be well. Belloc specifically rejected the idea that "We must convert England to a right religion before we can make Englishmen free." (The Restoration of Property, op. cit., 62.) As he stated in no uncertain terms: "This obvious and radical attitude, at the risk of paradox, I beg leave to challenge." (Ibid.) Instead, he pointed out that practical corrective measures must be implemented, and the work of "conversion" could go on at the same time. This, however, still leaves the problem of Belloc's belief that reversing economic tendencies could correct the situation. (Ibid., 63.)

The problem is that these "economic tendencies" (of which the laws of supply and demand are usually singled out for special vituperation) are part of the nature of the science of economics itself. They have been observed and proved empirically time and again. Take them away or reverse them (whatever you want to call it), and what is left cannot be called "economics."

That much is obvious. You cannot change the definition of something — that is, change a thing's substantial nature — and still claim that it remains the same thing. To do so is simply to lie to yourself and others. To "reverse" the meaning or operation of the laws of economics is to shift the basis of economics from its own nature to something else, and then claim that you are not doing the very thing you are doing.

It gets worse, however. Economics is a "social science." That means that the nature of the science of economics is firmly established on observed human behavior, which within our limited human perceptions is the only thing we have on which to base our understanding of the natural moral law. This is because human behavior is based on human nature, which in turn is based on the nature of whatever ultimate reality or "first cause" created human nature. As a devout Catholic (some would say "fanatical"), Belloc defined this ultimate reality as the Christian God, and His Nature as the basis for the natural moral law . . . of which the science of economics is an application. Thus, what Belloc claimed must be done in order to succeed is the very thing that can never be done by humanity — nor by God, either, for it would involve God in a contradiction. The one thing God cannot do is contradict or reverse Himself, that is, deny His own Nature.

Correcting Belloc's errors, however, is surprisingly easy once we have the key to unlock the cage into which so many of us have willingly incarcerated ourselves. We find this key in how we understand the natural moral law. Belloc's quarrel with the laws of economics, shared by many devout people of many faiths, is quickly resolved once we realize that the general norms of the natural law are . . . general. Particular applications of the general norms of the natural law, while they necessarily reflect the essential principle involved, can take an infinite number of forms. Some of these forms may have, over time, decayed or become inadequate to meet current needs. Some of them may have been inadequate from the very beginning.

This is because applications of the natural moral law can only take form within the institutional framework of the social order — the common good. When these institutions are flawed or inadequate, humanity's particular applications of the general norms of the natural law within those institutions will necessarily reflect these flaws and inadequacies, and function to the detriment of some or all.

When that happens, the proper course to follow in social justice is not to deny, reject, or "reverse" the general norm of the natural law. Instead, we are to organize with like-minded others, and carry out acts of social justice to restructure the institutions so that the particular applications of the natural law within those institutions can once again function to the benefit of everyone within that institution.

Thus, we cannot, for example, declare that the laws of supply and demand are evil because people are harmed by their current applications, and attempt to deny, reject, or reverse them. Instead, we must examine the situation and determine why the laws of economics are not operating to the benefit of every participant in the common good. We must then take appropriate steps to correct the situation, not try and change reality.

There may, of course, be times when we must set aside the laws of economics, but only temporarily as an expedient in an emergency situation. For example, in a famine, the natural tendency is for the price of food to rise far beyond what people can afford to pay. The solution in social justice would be to arrange matters so that people can produce more food, bringing prices down naturally.

As we saw in our discussion of the characteristics of social justice, however, social justice takes time. In the interim, local authorities, even the State, can, as a temporary expedient, take over care of people's particular goods and impose rationing, price controls, and similar measures to keep people alive until the situation can be rectified. (Unfortunately, the temptation for those in authority is always to continue such measures long after they can be justified, as it gives them incredible power, but that is a different issue.)

It is not, however, all the laws of economics to which Belloc objects. He singles out one in particular as the root cause of the decay of private property as a widespread institution: the necessity of existing accumulations of savings to finance capital formation.

In a supremely ironic twist, however, this "myth of savings" is not a law of economics! The fixed belief of the absolute necessity of existing accumulations of savings is a tenet of the British Currency School, and is based on the Currency School's bad definition of money and credit. This is a definition that, as we have seen, rejects essential human dignity and assumes State absolutism as a necessary and normal thing.

Belloc's argument is straightforward, and reflects the understanding of finance embodied in all the major schools of economics. We will quote it at some length because it gets to the heart of the matter — but keep in mind at all times that it is based on a false principle, that is, the wrong definition of money. Given the wrong definition, however, Belloc draws the logical conclusion (again, the italics are Belloc's):

The larger unit of capital will automatically be accumulated for a lesser proportionate reward than the smaller one. This is an exceedingly important point which the earlier critics of Capitalism overlooked. It is a major cause in the disastrous swelling of large accumulations and corresponding disappearance of small property and economic freedom.

Capital accumulates for a certain reward. Capital is created by saving out of production for the purposes of future production, and it will not be so accumulated by anyone, the individual owner nor the Communist State, save for some standard of remuneration. A certain measure of this reward sufficient to provide an accumulation of capital, produces what John Stuart Mill called "The Effective Desire of Accumulation," and we cannot do better than adopt this conventional term. Without "an effective desire for accumulation of Capital," either in the private citizen or in the direction of the Communist State, the stores of livelihood, the maintenance of instruments, and (of course) addition thereto will dwindle and fail, and wealth will decline. Men will not forgo a present for a future good save on terms of increment. Whether as individuals, as families or as governments, men will not deprive themselves of the immediate enjoyment of a sum of wealth for the sake of a future sum of wealth, unless the second is larger than the first. . . .

It is an error, as I have just said, to imagine that this factor is only present under Capitalism. It is necessarily present under Communism, or under well-divided property, and indeed in any economic system whatsoever. . . .

Capital is accumulated with the purpose of future production in excess of its present amount, and if such addition were not expected, Capital would not be accumulated at all. (The Restoration of Property, op. cit., 53-5.)

The problem is that, insightful as Belloc's analysis may be, it is completely wrong. It assumes as a given, as an iron law of economics, of nature itself, that capital formation is impossible until and unless consumption is reduced — that production derives from money in the form of monetary savings, not that money derives from the present value of existing production or from the present value of a reasonably anticipated future stream of income from production of marketable goods and services. A brief look at the facts reveals the falsity of this basic assumption. We will not attempt to make the case against Belloc's claim — although, admittedly, we are being unfair to Belloc to put it that way; he was simply repeating what the experts told him, and what many people down to the present day believe as firmly as once they did that the sun revolves around the earth.

As we have already noted, the theoretical refutation of the claim that capital formation can only be financed out of existing accumulations of savings is found in the work of Adam Smith, Henry Thornton, Jean-Baptiste Say, and John Fullarton, among others. Let the theoreticians argue with them. What we will review — again, very briefly, for our purpose is not to prove the case itself, but to report the proof, which you may then examine for yourself — is the work of Dr. Harold G. Moulton, whose empirical findings conclusively disproved the dogma that the only way to finance capital formation is to cut consumption, save, then invest.

In 1934 and 1935, the Brookings Institution published four books detailing an alternative to the Keynesian New Deal. The New Deal, in the opinion of many, was simply a way of disguising socialism, and was probably ineffective in any event. Even some Keynesians are beginning to admit that the New Deal did not bring the United States out of the Great Depression. It was the increased demand for war material to supply the combatants in the Second World War that achieved that goal, as was also the case in 1915 (The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 65).

Of the four book set, the most important (also the shortest) is the third volume, The Formation of Capital. After recapping the situation described in the two previous volumes, America's Capacity to Produce (1934) and America's Capacity to Consume (1935), Moulton concluded that the Great Depression was not due to any inability to produce, or to consume what was produced. Instead, the problem was financing new production that, in accordance with Say's Law of Markets, would generate the income to consume what was produced. This Moulton formulated as "the economic dilemma":

THE NATURE OF THE DILEMMA

The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption. . . . Under the modern system of specialized production and exchange the pecuniary savings of individuals are in the main necessarily at the expense of consumption. If an individual with an income of $2,000 elects to save $500 he reduces his potential consumption by one-fourth. Moreover, the aggregate of individuals who make up society must in a given time period restrict aggregate consumption if funds are to be provided, out of savings, for additional capital construction. (Ibid., 28.)

Belloc — or Keynes — couldn't have said it any better. To accumulate monetary savings requires that the saver be able to afford to cut consumption. Belloc, in fact, explained the same concept in similar terms: "Another way of putting it is to repeat the obvious truth that the margin for saving in the case of poor men is narrow, while that of rich men is wide. It is easier to save $25,000 a year out of $50,000 a year than to save $2500 a year out of $5000 a year. And out of $250 a year no man could save $125 (in England to-day) and keep alive." (The Restoration of Property, op. cit., 55.)

There is, however, something that neither Belloc nor Keynes (nor any other economist adhering to the tenets of the Currency School) considered. That is, if we cut consumption in order to accumulate money savings to finance capital formation, there will be no market for the goods and services we propose to produce! People will have cut consumption in order to save, thereby making new capital an unprofitable venture. The "economic dilemma" is that the very means by which the economists tell us we must finance new capital formation ensures that the capital will not be financed. As Moulton explains,

When the managers of modern business corporations contemplate the expansion of capital goods they are forced to consider whether such capital will be profitable. They must begin to pay interest upon borrowed funds immediately and they must hold out the hope of relatively early dividends on stock investments. . . .

Now the ability to earn interest or profits on new capital depends directly upon the ability to sell the goods which that new capital will produce, and this depends, in the main, upon an expansion in the aggregate demand of the people for consumption goods. . . . if the aggregate capital supply of a nation is to be steadily increased it is necessary that the demand for consumption goods expand in rough proportion to the increase in the supply of capital. (The Formation of Capital, op. cit., 29.)

To cut to the chase (and cut out several pages of Moulton's careful research and analysis), if we accept the dogma that we must cut consumption in order to finance new or replacement capital formation, every period of intense capital formation would necessarily be preceded by a period in which savings increased in roughly the same amount. . . thereby also removing the incentive for anyone to finance new capital formation!

Studying the economic history of the United States from 1830 to 1930, with special emphasis on the period from 1865 to 1930, however, Moulton discovered something astounding (at least to adherents of the Currency School). In no case between 1830 to 1930, a century that contained periods of the greatest industrial, agricultural, and commercial expansion in the history of the human race, were cycles of intense capital formation preceded by increased saving. Instead, directly contradicting the Currency School dogmatic assertion, in each and every case instances of intense capital formation were preceded by increased consumption! People were not saving, but dissaving!

The conclusion is inescapable. Financing new capital does not require cutting consumption in order to generate savings. Instead, new capital formation somehow requires that we use our savings to increase consumption, thereby creating the incentive to invest in new capital.

"But . . . but . . . but that's impossible!" the Currency School devotee splutters. "The money has to come from somewhere! And if not from cutting consumption and saving, then where?"

We agree. If we accept the definition of "money" used by the British Currency School, there is no way to finance capital formation except by cutting consumption and accumulating monetary savings before investing. Fortunately however, like Moulton, we do not accept the Currency School's limited and limiting definitions of money and savings. Released from that particular form of slavery, Moulton readily explains the source of the financing:

Funds with which to finance new capital formation may be procured from the expansion of commercial bank loans and investments. In fact, new flotations of securities are not uncommonly financed — for considerable periods of time, pending their absorption by ultimate investors — by means of an expansion of commercial bank credit. (Ibid., 104.)

Understanding how expanding commercial bank credit requires that we understand money and its necessary direct private property link to production — which is the subject of the next posting in this series.

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"Every Citizen an Owner"

We take another break in our current series on the restoration of property to refocus attention on the need to reform the institutions that govern the manner in which people can acquire and possess private property in the means of production — one of the primary "inherent" (that is, absolute or natural) rights possessed by every human being, as George Mason of Gunston Hall pointed out in the first paragraph of the Virginia Declaration of Rights. We refer, of course, to money and credit. In a modern advanced economy, money and credit are in large measure controlled by the commercial banking system and the central bank of a country. In the United States, the central bank — actually a network of a dozen regional development banks — is the Federal Reserve System.

That being the case, we need to focus attention on reform of the Federal Reserve System. It's popular right now (and has been, with varying degrees of intensity, since the Crash of 1929) to characterize the Federal Reserve as some kind of anti-American plot, and to demand that it be abolished or, at the very least, prevented from doing the very job that it was designed to do: provide adequate liquidity to the private sector for industrial, commercial, and agricultural development by supplying the country with a "flexible currency" that would expand and shrink directly with the needs of business, thereby avoiding both inflation and deflation, as well as concentrated control of the money power in private hands or the State. (How the Federal Reserve was diverted from its primary mission is a long and tedious story that we hope to relate in a future series of postings.)

In order to focus on the Federal Reserve and encourage people to show up at the peaceful demonstration outside the Federal Reserve building in Washington, DC on April 15, 2010, we need a slogan or two to grab people's attention. Today's posting is one possibility that (at least in our opinion) seems to do the job:

"EVERY CITIZEN AN OWNER"

Dawn K. Brohawn, Guest Blogger

• "Every Citizen an Owner" states the economic counterpart to "One Person, One Vote". Whereas citizenship is an expression of political empowerment, ownership is an expression of economic empowerment.

• "Every Citizen an Owner" is the economic goal of "Capital Homesteading by 2012". The Capital Homestead Act would enable every person in society to become an owner of productive capital.

• This slogan gives us a starting point for explaining how Capital Homesteading would benefit every person. ("A capital homestead would provide you, as an owner, a second income." "Ownership through capital homesteading gives you and every other citizen a personal stake in the green growth frontier.")

• Citizenship and ownership are the twin ("binary") components of human sovereignty, which is essential to justice, democracy and freedom. "Every Citizen an Owner" expresses what binary economics and the Just Third Way means to each person, in terms of power. ("Own or be Owned.")

• "Every Citizen an Owner" is another way of expressing equality of access, equality of opportunity and equality of status.

• We can relate this idea to Lincoln's vision and the Homestead Act as a national economic agenda for unifying and developing America. It expresses Lincoln's belief that we don't have to make the rich man poor in order to make the poor man rich. Our economic plan for the 21st Century can unify all members of society.

• If every citizen were able to acquire a capital homestead (financed through Fed-created money and interest-free credit for broadly owned private-sector growth), we could have "full production, full employment, full ownership and full empowerment."

• It reinforces the idea that political democracy can't function without economic democracy. Power must start with each citizen.

• We can relate this slogan to the idea of "Own the Fed" as well as "Own a Share of the Growth Frontier"

• "Every Citizen an Owner" offers a new foreign policy objective for America and global vision for peace, prosperity and justice. It provides a completely new direction for establishing just and growing economies in places like Haiti, Afghanistan, Iraq, etc.

Since we were looking for a "hook phrase" to accompany our rally's call for "Capital Homesteading by 2012!", I would like to get the support from our group to use this phrase in marketing our April Events. I think it helps pull together the objectives and themes of the three April gatherings, and I believe it offers a useful launch point for an elevator speech on Capital Homesteading and why we're rallying at the Federal Reserve.

Many thanks to a great group of independent yet united thinkers.

If we want to work peacefully to reform our institutions, we have to understand and articulate the reason why we think those institutions need reforming. The slogan, "Every Citizen an Owner," while it doesn't "say it all" (what slogan could?) does convey the essence of what we hope to accomplish — especially by 2012, the sesquicentennial of Abraham Lincoln's Homestead Act of 1862.

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The Restoration of Property, Part V: The Fourth Pillar

The fourth and final pillar of an economically just society is one that, as we have already seen, is omitted from every economic system in the world today: widespread direct ownership of the means of production, individually or in free association with others. Widespread ownership of the means of production is an absolute necessity if society is to survive economically, politically, and socially.

There are three reasons for this conclusion, all of which we will explain as briefly as possible. One, with respect to economics, as Louis Kelso and Mortimer Adler pointed out in The Capitalist Manifesto (New York: Random House, 1959), advancing technology (capital) is displacing human labor as the primary factor of production. Given that production equals income, the amount of income attributable to labor is declining relative to the amount of income attributable to capital.

The income attributable to labor and to capital goes by right of private property to the owners of labor and of capital, respectively. This results in a state of society in which most people own little or nothing in the way of capital. Lacking direct ownership of the primary means of production, most people have no natural means of generating an adequate and secure income as capital displaces their labor. This creates economic disequilibrium — instability — in society, resulting in a seemingly inevitable cycle of boom and bust.

Two, with respect to politics, an economically unstable society is inevitably a politically unstable society. When they understand that economic chaos can undermine and, ultimately, destroy their power — if not their lives and their property — the economic and political elite either join forces, or one takes over the other, and implements what the elite believes to be corrective measures, but which (as we have seen is the case with Keynesian economics) are based on erroneous beliefs and principles. The motive for these actions is rooted in the desire to maintain the wealth and power of the elite at acceptable levels. Consequently, the elite readily accedes to programs that promise (falsely) to redistribute the minimum of wealth necessary to restore economic equilibrium and retain current concentrations of ownership of the means of production relatively intact.

The result is that, in order to maintain their right to and rights of private property, those currently in power undermine their own position by destroying the meaning of private property, as we saw in the case of Henry Ford's dispute with the Dodge brothers. As Belloc pointed out, as the self-defeating effort to retain current levels of power in the face of economic reality continues, capitalism transforms itself into the Servile State, the Servile State transforms itself into socialism, and socialism implodes of its own faulty principles, returning to capitalism and starting the cycle all over again.

Three, the social order absolutely requires a stable economy and a strong juridical order: the rule of law. A stable economy only results from widespread direct ownership of the means of production, while the rule of law declines rapidly when economic conditions destabilize. As Belloc pointed out, "to control the production of wealth is to control human life itself. To refuse man the opportunity for the production of wealth is to refuse him the opportunity for life; and, in general, the way in which the production of wealth is by law permitted is the only way in which the citizens can legally exist." (The Servile State, op. cit., 46.) Private property, whether in labor or in capital, links the human person in the closest possible manner to the productive process, and provides the only sound basis of and sound backing for the money supply, money being a derivative of production. The natural effects and activity of private property cannot be duplicated in any meaningful or material way by artificial State programs that rely on abolishing or unjustly inhibiting private property through redistribution of existing wealth, whether directly through taxation, or through manipulation of the money supply.

The necessity for a stable political and economic order to support the overall social order creates something of a paradox. As we saw in our previous discussion on the laws and characteristics of social justice, the constantly changing environment within which people carry out the business of daily life, that incredibly diverse interaction between individuals, groups, institutions, milieux, and so on, means that the social order itself can, in a sense, be described as "radically unstable." It is for this reason that the social order must have an absolutely solid economic and political foundation, or the social order will not be able to carry out its function of providing the environment for and, when necessary, assisting people to pursue happiness (acquire and develop virtue). Our relationships and specific milieux can then change radically, even from moment to moment, for our need for underlying order and security, rooted in our nature, would be met.

In other words, as long as we can exercise control over our own lives, individually or in free association with others, our specific relationships can be as many and as varied as we like. Secure in an economically and politically stable social order, we can change these relationships — as we must — from moment to moment without harm and even with great benefit to ourselves, other individuals, groups, and the common good as a whole as we acquire and develop virtue, thereby becoming more fully human.

Private property is custom made by human nature itself to provide a foundation for a sound economic order and a stable political order. This is why the right to be an owner — the right to property — is believed to be a natural right, and thus absolute, that is, inherent in every single human being. As Dr. Heinrich Rommen explained the implication of the universal prohibition against theft, "'Thou shalt not steal' presupposes the institution of private property as pertaining to the natural law." (The Natural Law. Indianapolis, Indiana: Liberty Fund, Inc., 1998, 59.)

Similarly, what an owner can do with what he or she owns — the rights of property — can be as many and as varied as our individual wants and needs and the demands of the common good. As long as we, by custom, tradition, or positive law do not define the exercise of property in any way that negates the underlying right to be an owner in the first place, we can tailor the specific rights of property in our society to optimize the benefits we receive — the "fruits of ownership" — under specific social conditions. The right to be an owner pertains to the natural law, but, as Rommen continues,

. . . not, for example, the feudal property arrangements of the Middle Ages or the modern capitalist system. Since the natural law lays down general norms only, it is the function of the positive law to undertake the concrete, detailed regulation of real and personal property and to prescribe the formalities for conveyance of ownership. (Ibid.)

Here, then, is the reason why widespread direct ownership of the means of production is so important, and why we include expanded capital ownership as the critical "fourth pillar" of an economically just society. Private property is not the thing owned, but the natural right to be an owner, and the socially determined bundle of specific rights that define how owners can use what they own.

The right to be an owner is thus a part of human nature itself, an essential aspect of the dignity of the human person. When individuals, groups, or society as a whole prevent or inhibit any person or class of persons from exercising the right to be an owner and shut off or inhibit access to the means of acquiring and possessing private property, especially in the means of production, without just cause and without following due process, human dignity is offended at the deepest and most profound level.

The fact that the right to be an owner is part of the natural law is, in and of itself, sufficient to insist that every man, woman, and child have democratic access to the means of acquiring and possessing private property. We need no other justification. Even if the powers-that-be reject the natural law, however, there are overwhelming and irresistible "practical" reasons for implementing a program of expanded capital ownership at the earliest opportunity — and for creating the opportunity through acts of social justice if that opportunity does not occur naturally or in a timely manner.

This is because of two essential rights of property: income and control. These may be defined in different ways for different societies, depending on the wants and needs of the people who have joined together to form that society, specific conditions, and the demands of the common good. None of this changes the fact that the rights of private property in any society must include the effective right to enjoy the income generated by what is owned, and — even more critical — the right to control that which is owned. As Louis Kelso pointed out,

It may be helpful to take note of what the concept "property" means in law and economics. It is an aggregate of the rights, powers and privileges, recognized by the laws of the nation, which an individual may possess with respect to various objects. Property is not the object owned, but the sum total of the "rights" which an individual may "own" in such an object. These in general include the rights of (1) possessing, (2) excluding others, (3) disposing or transferring, (4) using, (5) enjoying the fruits, profits, product or increase, and (6) of destroying or injuring, if the owner so desires. In a civilized society, these rights are only as effective as the laws which provide for their enforcement. The English common law, adopted into the fabric of American law, recognizes that the rights of property are subject to the limitations that

(1) things owned may not be so used as to injure others or the property of others, and

(2) that they may not be used in ways contrary to the general welfare of the people as a whole. From this definition of private property, a purely functional and practical understanding of the nature of property becomes clear.

Property in everyday life, is the right of control. (Louis O. Kelso, "Karl Marx: The Almost Capitalist," American Bar Association Journal, March 1957.)

Belloc believed that the restoration of private property in our society is made difficult by the fact that people's attention has been diverted away from the importance of control over one's own life, to exaggerating the need for security, with security of income taking precedence. Of course, as Belloc did not fail to point out, the best and surest income security comes from direct ownership — control — of the means of production.

Still, many people have become convinced that, as long as the State "guarantees" an adequate level of income — regardless of the source — all will be well. Of course, the State can only guarantee a basic income for all by making serious inroads on private property, thereby undermining — attacking, really — essential human dignity. In today's society, however, only income (Keynesian "effective demand") matters, not the production that, per Say's Law of Markets, necessarily equals income.

A focus exclusively on income is the problem that Belloc sees with, e.g., Major Douglas's "social credit" scheme (The Restoration of Property, op. cit., 9). Everything becomes secondary to the need to redistribute purchasing power, including our natural rights to life, liberty, property, and, especially, the "pursuit of happiness." This last is redefined to mean not the acquisition and development of virtue as the primary duty in our ongoing task of becoming more fully human, but solely an adequate provision for humanity's material needs: security of income. Security of income becomes the sole end of society and of State policy, even if the cost is the effective surrender of those natural rights that define us as persons, thereby rendering us slaves.

What humanity requires, however, is not a narrow focus on purchasing power as the solution to society's economic and political ills. Keeping in mind that Douglas, in point of fact, redefined private property in such a way as to abolish it, Belloc explains,

Such schemes (notably the chief one, the Douglas Scheme) do not directly advance, nor are directly connected with the idea of property. They are only connected with the idea of income. They propose, especially the Douglas Scheme of credit, to restore purchasing power to the destitute masses of society ruined by industrial capitalism.

That is exactly what a good distribution of property would also do; but a credit scheme could, in theory at least, do the thing at once and universally, while the restoration of property is unlikely to be achieved, and must, however successful, be a long business, spread over at least a couple of generations. Further, no restoration of property could be universal applying to the whole of society equally. (Ibid.)

We disagree with Belloc that the restoration of property can be neither universal nor accomplished with speed and facility. Very much the contrary, as this blog series will presently demonstrate. Nevertheless, we find ourselves in full agreement with Belloc's belief that we must not allow ourselves to be diverted from the ultimate goal of restoring private property by being expedient and focusing all our efforts (or even most of them) on increasing individual income directly. Legitimate and secure income results from ownership of the means of production, whether that ownership is of labor or capital (ideally of both). Schemes that focus on income to the exclusion of all else necessarily undermine private property to one degree or another. They thereby end up being self-defeating if the goal is to respect human dignity and reestablish economic freedom. This is consistent with the operation of social justice, in which the object is not to force the desired end result, but to make it possible to attain the desired end naturally. As Belloc states,

The object of those who think as I do in this matter is not to restore purchasing power but to restore economic freedom. It is true that there cannot be economic freedom without purchasing power and it is true that economic freedom varies in some degree directly with purchasing power; but it is not true that purchasing power is equivalent to economic freedom. A manager at $5000 a year who may get the sack at the caprice of his master has plenty of purchasing power, but he has not economic freedom. (Ibid., 9-10.)

The problem that we will address in the rest of this blog series is how to overcome the debilitating effect of these erroneous assumptions — especially the crippling mis-definition of money and credit and the breaking of the direct private property link between money and production — and carry out a program that will restore private property in the most efficient and just manner possible.

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News from the Network, Vol. 3, No. 7

The stock market is "soaring" again today, recovering from the PIIGS (Portugal, Ireland [Éire], Italy, Greece, and Spain) financial catastrophe . . . from which the countries most affected have yet to recover. There is somehow the feeling that even a country, despite Keynes's dogmatic beliefs to the contrary, cannot go on spending forever without producing anything, or spending more than it produces. The scuttlebutt floating around is that, because the other countries in the European Union are refusing either to let Greece continue to crank up the printing presses or obtain a bailout, the country will try to float a bond issue, possibly with an interest rate of 6%, much higher than other government bonds.

The problem is that government bonds are backed by a country's ability to produce and collect taxes on the income generated by productive activity. This is the one possibility on which there has been no discussion. If there are no takers, Greece and the other countries in trouble go back to square one. They are either going to have to be allowed to print more money (completely unacceptable), be forced out of the European Union (another "ain't gonna happen scenario) . . . or be bailed out.

The situation is remarkably similar to that which faced New York City in the 1980s, when the city was dangerously close to Chapter 9 (Chapter 9 is municipal bankruptcy). Interest rates on New York City obligations went sky high, with the financial commentators commentating that speculators were clearly purchasing the bonds not because they expected New York City to be able even to pay the interest, but because they expected either the state of New York or the federal government to bail out the city.

Just speculating, of course, but it seems reasonable to assume that Greece can expect the same thing. A high interest rate of 6% or more is all very well, but how is Greece supposed to pay it, much less the principal? It is therefore reasonable to assume that some international financial consortia and wealthy private speculators will purchase the bond issue, then start putting the pressure on the European Union for a bailout.

Another possibility is that China will take some of its now huge inventory of U.S. dollars that it has been using to purchase oil and mineral rights in Africa, and put a few billion into Greece, thereby gaining some powerful leverage in Europe. All of this was described by Henry C. Adams in 1898 in his book, Public Debts: An Essay in the Science of Finance, in which he warned that the surest way to surrender local, regional, and even national sovereignty was to get into debt. As he explained,

The facts disclosed permit one to understand how deficit financiering, carried so far as to result in an interchange of capital and credit between peoples of varying grades of political advancement, must endanger the autonomy of weaker states unable to meet their debt-payments. Provided only that the interests involved are of sufficient importance to make diplomatic interference worth the while, the claims allowed by international law will certainly be urged against the delinquent states, and the citizens of such states may regard themselves fortunate if they succeed in maintaining their political integrity. (Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 28-29.)

There is only one way out: Capital Homesteading, an application of the principles of the Just Third Way. The lesson is clear: produce, and have democratic access to the means for every citizen to become productive and thereby share in the national prosperity, or go under. The best thing you can do is to bring Capital Homesteading and the Just Third Way to the attention of a prime mover, or a door opener to a prime mover. Our efforts in that direction this week are:

• A CESJ member who lives in Las Vegas requested a formatted copy of the "Ride the Pig" blog posting to distribute as a handout to individuals and groups. We edited the posting to add a few points that were left out of the original posting and typeset it for greater legibility. We plan on turning the posting into an article for submission to a print journal. If you would like a copy of the handout version in .pdf, contact CESJ, and we'll send you a copy as an attached file.

• The Republic of Ireland (Éire) has just announced a contest to surface ideas that can be implemented to save the country from financial and economic ruin. The two top ideas will be awarded €100,000 each and given a budget of €500,000 for implementation. It appears that anyone can post an idea — at least we didn't see any restrictions during our visit to the website, and one of the contest rules is that the contest is void in countries where such contests are illegal, so we deduce that it is not void in countries where it is not illegal. A (very) brief look at some of the 400+ entries to date reveals that people appear to be stuck either in the paradigm dictated by the tenets of the British Currency School, that is, Keynesian economics, or have succumbed in whole or in part to conspiracy theory. One proposal was to increase the birth rate by offering people money to have children (the Republic already does this; the Irish entitlement bill is proportionately much higher than that of the United States, where it accounts in "normal" times to two-thirds of the annual federal budget). Another was to abolish the Seanad (Senate) and replace it with a council of elders (which is what "Senate" means). Yet another was to promote the resale of used furniture . . . and so on. There are eight categories, plus "other," which is where the Just Third Way would fall, once we condense the concept into a short proposal, register, and submit the entry.

• CESJ's monthly Executive Committee meeting was held on Wednesday, February 17, 2010. A number of important issues were discussed, notably the focus on the demonstration outside the Federal Reserve in Washington, DC, on April 15, 2010. All CESJ members, supporters, and friends, as well as everyone in the Global Justice Movement and who supports and promotes the Just Third Way should plan on attending the rally. Send an e-mail to CESJ if you want to receive an invitation to the rally or any of the subsequent events.

• This past week CESJ received the following endorsement from Mr. Chris Dorf, who at one time, we believe, worked for a period with Mark and Louise Zwick of the Houston Catholic Worker: "I have not found a group, in my 49 years, that is as honest, sincere, full of integrity, or as motivated by good will as CESJ . . . if fact, it would do well for all groups searching for a just future to exhibit the qualities that your group exhibit. I hold the integrity of your group in highest esteem; you are 'fighting the good fight' with love." This is the sort of comment that, circulated among your network(s), could help draw the attention of the public to the Just Third Way and Capital Homesteading as alternatives to current failed policies. If you think we have good ideas, tell people in your network(s) about them. If they have criticisms, refer them to us. There isn't too much we haven't heard, so a genuinely new criticism or comment is valuable, especially if it leads to sharpening our ideas or even modifying them to some degree — even, if we are presented with a better idea, abandoning the old idea and adopting the new. Don't just tell us we are wrong, tell us where we are wrong, and how to improve our proposals. Don't just say "no," say "yes" — to economic and social justice.

• Guy Stevenson, our guest blogger from a short time ago (and whose posting has taken over the number one spot in the ratings), has started his own blog (thereby drawing ratings away from the Just Third Way blog . . . ). Titled, "Expand Capital Ownership Now, ECON 1.0," the blog will cover aspects of citizen empowerment through expanded capital ownership, with emphasis on the Just Third Way.

• On Tuesday, February 16, 2010, Norman Kurland and Norman Bailey attended presentations by the Petersen-Pew Commission on Budget Reform. Both raised questions, and can be seen on the C-Span video. Briefly, the members of the Commission appear to be locked into a paradigm founded on the tenets of the British Currency School, the most important point of agreement among the Keynesian, Monetarist, and Austrian schools of economic thought — and the most damaging. This leads policymakers to look solely at either cost cutting (if you're a conservative) or more debt-backed stimulus (if you're a liberal). No one is looking at ways not to stimulate consumption or other spending or simply cut costs, but to increase production in ways that open up the opportunity for every citizen to engage in productive activity, whether through labor or through capital. Commission members, in common with the academics and policymakers with whom they allegedly find themselves in disagreement, fail to realize that 1) money, to be stable and perform the function for which it is designed must be backed 100% by the present value of existing or future production of marketable goods and services, 2) that the central bank and the commercial banking system are custom-designed to create an adequate, stable, and "flexible" currency sufficient to meet the needs of industry, agriculture, and commerce, and 3) money can — indeed, must — be created in ways that create new owners of the new capital being financed with the new money.

• As of this morning, we have had visitors from 46 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Brazil, and Ireland (Éire). People in China, Egypt, Australia, Poland, and Barbados spent the most average time on the blog. The most popular postings are Guy Stevenson's "Expanded Capital Ownership Now," "Ride the Pig," Part I of the Restoration of Property series, "Waiting for the Penny," and Part XX of the Political Animal series are the most popular postings.

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

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The Restoration of Property, Part IV: The Third Pillar

In the previous posting in this series, we discovered that it is not sufficient to call something a free market, and yet ignore everything that makes a market free. The institution that alone has the potential to make or keep a market free is widespread direct ownership of the means of production. From this it follows logically that, even if everyone has a legal right to be an owner, that right is meaningless unless 1) someone actually is an owner, and 2) that ownership is real ownership. This posting covers what we mean by "ownership," that is, the rights of private property.

Our task, therefore, is to define what we mean by "property." We already know that this thing we call property is somehow important, but that realization doesn't do us much good until and unless we know of what this important thing called property consists.

First off, most people assume that when you say "property," you are referring to what someone owns. That is close — but not close enough. Rather, property is the natural right every human being has to be an owner, and the socially determined bundle of rights that define how an owner may use that which he or she possesses. That is, property is the right to and the rights over a thing that is owned; it is not the thing itself.

Unfortunately, for many people in the world today, this is a meaningless distinction. With the exception of their labor, which is declining in value relative to technology as technology becomes increasingly productive, most people do not have private property in anything that could be considered productive. Those people that do possess a few equity shares representing a nominal minority ownership interest in a business enterprise frequently do not enjoy the full bundle of rights that necessarily accompany ownership.

While the opportunity to become an owner of the means of production is generally considered a hallmark of "free market capitalism" in the United States, that opportunity (as we have already seen) is as meaningless as the oxymoronic equation of the free market with capitalism. Adding insult to injury, unless a shareholder has a controlling interest in a company, the courts have decided that the only effective right that the shareholder can exercise is to sell the asset. The most important rights of private property — the rights to enjoy the income generated by and to control the disposition of what is owned — are completely subject to the whim of whoever has a controlling interest.

Ironically, the stripping of rights from minority owners — a direct, full frontal assault on the institution of private property — is due in large measure to the actions by one of the "high priests of capitalism": Henry Ford. Frankly, capitalism is only marginally palatable because, however distorted, it is based on the natural right to private property and the correlative rights of private property. By effectively taking away the principal rights of private property — the right to enjoy the income generated by and otherwise exercise control over what is owned — Henry Ford sabotaged the very system he is credited with helping to establish and maintain. How this came about is a story that is almost epic in scope.

In the first quarter of the 20th century, Henry Ford decided to finance a plant expansion using retained earnings instead of selling new equity or borrowing the money. The Dodge brothers, minority owners, protested. They wanted the dividends to which they were entitled under the traditional rights of private property. Ford refused to pay dividends. The Dodge brothers sued.

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

The court ruled, in effect, that minority shareholders are able to enjoy their full "fruits of ownership," including the right to receive any and all income generated by what is owned, only if the majority owner so agrees. That is, the majority owner(s) in the person of the Chairman of the corporate Board of Directors alone has the right to set dividend policy for a company, and does not need the consent of a minority owner or owner(s) to withhold that which belongs by right to the minority owner(s).

Henry Ford built his defense on the "business judgment rule." That is, if the individual elected by the shareholders (who happened to be Henry Ford, as he retained the majority block of shares) decided it was in the best interests of the company — and therefore the shareholders — to stop payment of dividends, the minority shareholders had no recourse other than to retain their shares and take whatever the majority owner(s) chose to dish out. The alternative was to exercise their "take-it-or-leave-it" right to sell their shares and wash their hands of the whole business — in other words, exercise their property rights solely to become non-owners.

What is also frequently ignored in analyses of the case is the fact that Henry Ford had dismissed another right of private property, that of control. He had previously blocked every effort of the minority shareholders to have input into decisions and exercise some degree of control over the business, such as design improvements and marketing strategy. This was particularly egregious with respect to the Dodge brothers, who owned the next largest block of shares (10%) after Henry Ford, and who were increasingly unhappy with Ford's dictatorial actions.

Consequently, prior to their lawsuit over Ford's restriction of dividend payments, the Dodge brothers began setting up their own automobile manufacturing company in secret, using their Ford dividends to finance the effort. Ford got wind of this and began withholding dividends. Ford was also suspected of wanting to reduce the price of Ford automobiles as a way of justifying the proposed reduction in dividend payouts and reducing the company value per share.

After the Michigan Supreme Court ruled in his favor, Ford threatened to set up another rival automobile manufacturing company, probably to be wholly-owned by Ford personally, apparently as a way to compel the Dodge brothers to sell their shares back to the Ford Motor Company at the reduced value per share that Ford had manipulated. In this he was successful — and thereby undermined another right of private property, that of disposal, by taking away the Dodge brothers' free choice in the matter of whether or not to sell their shares.

It was, however, a Pyrrhic victory. The Dodge brothers used the proceeds of the forced sale to complete setting up their own automobile manufacturing company. They soon designed and marketed an automobile that many car enthusiasts still consider one of the best popular vehicles ever built, the 1926 Dodge. This made the venerable Model T Ford, the basic design of which Henry Ford had resisted changing for almost twenty years (1908-1927), obsolete. Henry Ford was forced to invest vast sums in developing a competitor to the Dodge product, and spent millions more retooling his factories to produce the Model A in 1928. His refusal to share power and pay dividends to minority shareholders cost Henry Ford a huge fortune, and ensured that his company lost its position as the world's leading automobile manufacturer.

Aside from the personal cost to Henry Ford, the social cost of Dodge v. Ford Motor Company was enormous. It embodied the attenuation of the property rights of minority shareholders into law, economic theory, and fiscal and monetary policy — and thus into the United States Internal Revenue Code. The consequences of this action were profound and far-reaching.

An owner has the right to the profits generated by what he or she owns. Denying this right, as Henry Ford did to the Dodge brothers, abolishes private property to that degree. Common myths about how capital formation is financed provide the justification for this undermining of a natural right. There are two essential reasons for this.

One, capital isn't usually financed out of existing accumulations of savings — directly. The chief use of savings (which necessarily equals investment, as Keynes agreed, indeed, insisted on) is as collateral for debt financing. Henry Ford undermined the natural right to private property in two ways by accumulating cash to finance plant expansion: 1) he denied the Dodge brothers their fruits of ownership by withholding dividends, and 2) he violated principles of sound finance embodied in the real bills doctrine, thereby monopolizing access to the means of acquiring and possessing private property.

Two, Henry Ford's chosen method of concentrating ownership — and thus power — in his own hands guaranteed that he would be accountable to no one for any of his actions. By concentrating ownership, Ford effectively negated others' right to be an owner, and actually went so far as to work to strip others not only of the rights of ownership, but of ownership itself.

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

Fortunately, just as the traditional rights of private property were eroded by a bad court decision, they can be restored by the stroke of a pen. Since people's behavior naturally tends to follow the most advantageous course, people would soon reorient their investment strategy to conform to the restoration of the rights of property. The difficult part will be convincing lawmakers and academics that using retained earnings, either directly to finance capital formation or (more usually) as collateral to secure new money creation is contrary to sound finance and undermines the political stability of the State.

The fact is, while corporate finance is demonstrably not carried on in the manner described in academics' textbooks or by the nation's policymakers, such centers of influence and power continue to insist, contrary to absolutely certain historical and mathematical proof, that new capital formation is always, without exception, financed out of existing accumulations of savings.

Giving the lengthy proofs contradicting the dogmatic belief in the necessity of existing accumulations of savings to finance capital formation is not the intent of this blog series, and it would be a diversion in any event. The theoretical basis of financing new capital formation, the real bills doctrine, can be found in the work of Adam Smith (The Wealth of Nations, 1776), Henry Thornton (An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 1802), Jean-Baptiste Say (Treatise on Political Economy, 1821; Letters to Mr. Malthus, 1821), and John Fullarton (Regulation of Currencies of the Bank of England, 1844). Practical application and empirical proof can be found primarily in the work of Dr. Harold G. Moulton (chiefly The Formation of Capital, 1935), with corroboration and verification found in the work of Louis Kelso and Mortimer Adler (The New Capitalists, 1961). In this context, the subtitle of Kelso and Adler's book is significant: "A Proposal to Free Economic Growth from the Slavery of Savings."

The bottom line, of course, is that the mechanics of restoring the rights of private property are almost ridiculously easy, not to say straightforward and simple. The hard part is convincing academics and policymakers of the desirability of the only thing that has any hope of restoring a sound economy, and thus of maintaining a stable political order.

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