One, low interest rates will presumably encourage banks to make more loans before the threatened rate increase harms their ability to extend credit. This reasoning fails to address the reason why banks aren't lending: qualified borrowers are not presenting themselves. Bottom line: to increase lending, banks would need to lower standards at a time when they are being told to tighten up standards. Making bad loans to poor prospects, however, is what caused the present problem in the first place, or at least provided the trigger. Corrective action: provide a mechanism — such as a private sector capital credit insurance and reinsurance corporation (or, better, a number of them to ensure competition) — by means of which otherwise qualified borrowers who lack adequate collateral can obtain loans on reasonable terms. Do not lower standards, raise them — but also provide the means by which people can meet those raised standards.
Two, low interest rates will presumably encourage job creation. No — lower rates on loans for which borrowers (meaning borrowers for productive purposes) qualify by having adequate capital in the form of capital credit insurance and reinsurance mean more capital investment. This increases the demand for labor and creates jobs naturally, not as an end in itself, which is wasteful and pointless. Better: permitting businesses to finance capital expansion on credit and cutting workers in on a share of the ownership so that they receive dividends to supplement their wage incomes increases both aggregate consumption power in the economy and individual purchasing power. Using future savings instead of existing accumulations of savings — as the real bills doctrine and Say's Law of Markets allows — frees the economy from the unnatural reliance on the accumulations of the wealthy and nonsensical decisions by politicians, speculators, and academic economists.
Three, fixing interest rates is pure socialism, whether you view money and credit as a commodity that responds to the laws of supply and demand, or whether you take the correct view in binary economics that "interest" is a lender's share of profits based on the natural right of private property. Whether you are fixing the price of a commodity or setting the rate of return due an owner, you are violating free market principles, the rights of private property, and plain common sense.
Four . . . we really could go on at great length, but let's cut to the chase. Mr. Bernanke's inability to formulate any coherent policy in the face of the financial meltdown — both the one that caused the present malaise, and the one that is coming — ("'The key point . . . is that the Fed is no closer to implementing its exit strategy,' said Paul Dales, an economist at Capital Economics.") is based on his lack of understanding of money, credit, and banking. Mr. Bernanke clearly is a devoted follower of Keynes, believing absolutely in the disproved Keynesian (and Monetarist and Austrian) dogma that the only way to finance new capital formation is through the use of existing accumulations of savings, with "savings" always defined as cutting consumption — always: the "paradox of thrift."
If savings equals investment, of course — another Keynesian dogma, although a correct one, for a change — the obvious conclusion within the false constraints imposed by accepting the tenets of the mercantilist Currency School is that no new capital formation can ever take place. This is because you must first liquidate an existing investment before financing new investment. Consequently the amount of investment in the system as a whole cannot increase. Presumably the "multiplier effect" takes care of this . . . except that, because Keynes rejected the real bills doctrine, the numbers in the Keynesian explanation of the multiplier effect don't add up — he evidently didn't realize that checks drawn on one bank and deposited in another bank do not stay in the second bank, but are presented to the first bank on which they are drawn for payment, leaving the amount of money in the system the same.
The bottom line is that Mr. Bernanke firmly believes that money is first created, thereby inflating the currency. This inflation causes "forced" or "involuntary" saving by reducing the purchasing power of the ordinary consumer: "saving." These savings are transferred — redistributed — to producers by means of the higher price level induced by the creation of money, and invested in new capital formation.
As a good Keynesian, Mr. Bernanke rejects the real bills doctrine and Say's Law of Markets. The real bills doctrine is that money can be created without inflation IF the money creation is tied directly to the present value of existing or future marketable goods and services through the institution of private property.
A borrower can draw a "real bill" on this present value, and take the bill to a commercial bank. The bank issues a promissory note — "creates money" — and hands the note over to the borrower, taking a lien on the present value of the existing or future marketable goods and services in exchange. The borrower takes the promissory note (which the bank usually replaces with banknotes or, more often, demand deposits), invests in a capital project, and begins making profits. Out of the profits the borrower repays the loan — redeems the promissory note — and "buys back" the lien on the present value of his or her existing or future marketable goods and services.
As Jean-Baptiste Say pointed out in response to complaints about his theories by the Reverend Thomas Malthus, we do not, therefore, purchase the productions of others with "money," but with what we ourselves produce. If goods remain unsold, it is because other goods are not produced. Money is merely the mechanism by means of which we facilitate the exchange of what we produce for what others produce.
As Harold Moulton pointed out in his recommendations for recovery from the Great Depression, the key is production, not redistribution. (Income and Economic Progress. Washington, DC: The Brookings Institution, 1935.) Kelso and Adler add that everyone must share in the production through ownership as well as labor, thereby ensuring the broadest and fastest increase in mass purchasing power, stimulating sound recovery, not relying on inflation and artificial government intervention. In pursuit of these goals, we have made some progress over the past week:
• Last week a couple from Kenya with some interesting government connections visited CESJ co-founder Rev. Robert Brantley in Maryland. Bob quickly made contact with Norman Kurland, who traveled immediately for an extended meeting, staying overnight and participating in a series of important discussions. The Kenyans agreed — counter to a basic assumption of Keynesian economics that production is not a problem (but over-production is) — that production, as Dr. Harold Moulton reminded us in the 1930s, is key to restoring health to an economy. What Moulton left out, however, Kelso and Adler added: that everyone must have an equal opportunity to participate in production, both as a supplier of labor and as an owner of capital. The Kenyans were quite enthusiastic, and promised to study the material on the CESJ website.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.
• This week members of the CESJ core group met with a group from Johns Hopkins University. They had come across CESJ when searching for community development proposals in which young people could participate in a meaningful way. They found the Citizens Land Cooperative concept intriguing, and met with CESJ to discuss possible collaboration. Of course, while CESJ provides the theory, practical applications would be provided by Equity Expansion International, Inc., a for-profit enterprise in the Just Third Way network.
• One of the basic reforms we believe are necessary in order to implement Capital Homesteading effectively is to extend the term of paper that qualifies for rediscounting at the Federal Reserve. Traditionally, the term of loan paper rediscounted at a commercial or central bank has been ninety days — from the 17th century the maximum length of time anyone was willing to wait for the drawer of a bill to redeem or make good on the promise conveyed by the instrument. Because Capital Homesteading is not looking at financing short term working capital needs, but all capital needs of the economy, the term of qualified paper will have to be extended. We have been viewing this as a potential problem . . . until we discovered that on June 19, 1934, Congress passed a law as an emergency measure during the Great Depression permitting the term of qualified paper to be extended for up to five years. Further, contrary to accepted practice of central banking, businesses that could not find accommodation with a regular commercial bank could, under certain restrictive circumstances, go directly to the Federal Reserve banks for financing.
• As of this morning, we have had visitors from 45 different countries and 46 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 India. People in Venezuela, France, Rwanda, Ghana and Belgium spent the most average time on the blog. The most popular postings are "Thomas Hobbes on Private Property." "The Crash of 1929" in the "Own the Fed" series, Guy Stevenson's "Expanded Capital Ownership Now" and "Every Citizen an Owner" (tie), and "Henry Ford and John Maynard Keynes," also in the "Own the Fed" series. Evidently a more or less straightforward presentation of how the Federal Reserve transformed from a necessary provider of liquidity to the private sector, to an indispensable funding source for politically motivated government spending is striking a chord — and all without blaming anything on a hidden conspiracy, an effort that goes against every American's innate sense of fairness and justice, anyway.