Monday, April 26, 2010

Own the Fed — the Program, Part VIII: Reform the Fed

In the previous posting in this series we concluded that if a central bank does not adequately serve the purpose for which it was invented, it must be reformed. This is obviously plain common sense. If an institution works so as to inhibit or prevent people from realizing their fullest potential as human beings, the natural course of action is to repair or reform that institution so that it carries out its purposes adequately. Naturally enough, this raises the question as to the special role of a central bank — or any bank, for that matter.

Bank credit is the primary means by which people acquire ownership of the means of production. The need for reform of the central bank must therefore be judged by how well the central bank and the commercial banking system assist every individual in becoming a direct owner of a meaningful private property stake in income-generating assets. As should be obvious, not only is the right to be an owner (the right to property) inherent, that is natural or absolute, in every human being by definition, ownership of the means of production is the chief means by which each person secures the right to life and liberty, and carries out the task of acquiring and developing virtue — pursuing happiness and safety.

As one authority put it, "It is precisely the object of the positive law to render the citizen virtuous." (Heinrich Rommen, The Natural Law. Indianapolis, Indiana: Liberty Fund, Inc., 1998, 48.) Thus, "The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Pope Leo XIII, Rerum Novarum ("On Labor and Capital"), 1891, § 46.)

The fact that the right to private property — the right to be an owner — is absolute in every human being, of course, does not change the fact that the exercise of property must be limited. Limitations are generally imposed by the needs of the owner and other individuals, as well as the common good as a whole. As Rommen explains, continuing the passage quoted above,
It is not merely a question of maintaining order, or external peace; the law should rather act as a medium of popular education to transform those who live under common legal institutions into perfect citizens. For this very reason positive norms, determinate coercive measures, and a more exact definition of the circumstances in which the general principle shall be applied, are imperative. Thus the definition of what theft consists in is given with the lawfulness of private property. But the punishment which should follow theft, if arbitrariness is to be avoided, requires, with respect to the sentence and its execution, exact legal provisions which vary with times, cultures, and individual peoples.

Here, in connection with the positive law which is therefore always "something pertaining to reason," St. Thomas arrives at the nature of law. It has to do essentially with community life. On the other hand, it is distinguished from and contrasted with social ethics through its being directed to external order. The law wills that man conduct himself in such and such a manner; it concerns the external forum (vis directiva). It is the norm to be enforced: compulsion (vis coactiva) is proper to law, not to morality. (Rommen, The Natural Law, op. cit., 48-49.)
Unfortunately, what with today's general inability to think in any logical fashion, many people confuse what pertains to both the law and morality, with what pertains to the law alone, and to morality alone. The paradoxical belief grows up that what is legal must, ipso facto, be moral, but that what is moral must not be subjected to enforcement by the law. In reaction, those who dimly perceive that there are matters that pertain to both law and morality begin asserting that the State has the job of enforcing all that is moral, whether or not the matter is truly enforceable by human law, or even properly comes under human law at all.

The "trick" (if you insist on so terming it) is to balance what people are willing to accept at any stage of development of their culture or civilization, with what is necessary for the full development as human persons within that society. Thus, at various times in history, moral authorities have "allowed" such things as polygamy, slavery, capital punishment, capitalism, divorce, war, and the wage system not because such things are inherently good or the proper way to organize the social order, but because of the "hardness of people's hearts" and the fact that society was not yet ready to move to something higher.

There are even instances in which society must tolerate something that is objectively evil in and of itself, if the unintended result of attempting to abolish it would result in the destruction of the social order. Where something objectively evil exists in society and is widely accepted, the proper response is not to coerce people by means of the law to stop the evil act or acts, but to organize with an eye toward the common good, changing our institutional environment and people's attitudes and beliefs to conform more closely with the demands of the natural law.

Consequently, and consistent with the principles of the Just Third Way, we believe that there are seven reforms essential to restoring money, credit, and banking to their organic roots and bring these unique institutions back into conformity with the roles they are designed to fill, with special focus on the central bank. Obviously, any reforms must be carried out in a manner consistent with human nature and the demands of the common good, and with ends in view that are equally consistent with nature. The necessary reforms are:
• Immediate cessation of monetizing government deficits.

• Establishment of capital credit insurance and reinsurance to serve as collateral.

• Establishment of a "two tier" interest rate to separate "good" (i.e., productive) credit from "bad" credit for consumption, speculation, and government spending.

• A 100% reserve requirement to ensure full asset backing of the currency.


• Restoration of the autonomy of regional Federal Reserve banks.

• Extend the term of qualified paper discountable at the central bank to allow for financing of long-term capital projects.

• Direct ownership of the Federal Reserve by every citizen.
Obviously the framework within which such reforms are required or even comprehended is substantially different from the general paradigm within which most policymakers and academic economists currently operate. Since the American Civil War, there has been a fundamental shift in our perception of the State and the role the State is supposed to fill. From a country in which "society governs itself for itself" (Alexis de Tocqueville, ("The Principle of the Sovereignty of the People of America," Democracy in America, Volume I), the United States has become, by and large and by degrees, a country in which "the supreme power, the determining efficacy in matters political, resides in the people — not necessarily or commonly in the whole people, in the numerical majority, but in a chosen people, a picked and selected people." (Walter Bagehot, The English Constitution. Portland, Oregon: Sussex Academic Press, 1997, 17.) Bagehot's emphasis on the word "chosen" was clearly intended to denote some form of election by a divinity, e.g., the Jews described as the "Chosen People," not by the electorate.

What confuses many people is that the outward forms of political democracy have been preserved, even extended to great numbers and classes of people, as well as into areas in which "politics" in the narrow sense does not even belong. As a case in point, we need merely mention the oddity of asserting same-sex marriage as a civil right. On the contrary, marriage is a domestic institution, not a civil institution. Marriage is thus a domestic, not a civil right. The State has no competence to define marriage, and no power other than to protect the civil rights of persons in a marriage and the common good as a whole — not to define the institution itself. Asserting that the State does, in fact, have the power to "re-edit the dictionary" with respect to marriage or anything else is to give the State totalitarian control over the whole of society and over every person. Every person and every thing becomes a "mere creature of the State." (Pierce v. Society of Sisters of the Holy Names of Jesus and Mary, 268 U.S. 510 (1925).)

The only protection ordinary people have against the intrusion of the State into areas beyond the competence of the State are the inherent rights of each human person embedded in the ordinary laws of society. These, however, have become effectively meaningless with the economic disenfranchisement of ordinary people. Sovereignty of the people is replaced by the sovereignty of a presumed "chosen" elite. Most often and most effectively, this is through the establishment of what Pope Pius XI termed a "despotic economic dictatorship." This "is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure." (Quadragesimo Anno, op. cit., § 105.)

The establishment and maintenance of an economic dictatorship has given rise to a political despotism that people of previous generations could not even imagine. Largely this has been because the presumably divine statutes that govern the regulation and creation of money and credit under the tenets of the Currency School have obscured the loss of liberty, or rendered it more or less palatable as a tradeoff to gain material security or other presumed or anticipated advantages. The ownership-concentrating and property-destroying operation of the money, credit, and banking systems under these assumptions are taken as a given.

The political system, in tacit acknowledgment of Daniel Webster's dictum that "power naturally and necessarily follows property," has been modified imperceptibly over the years, keeping pace with popular economic disenfranchisement. The political system, while leaders necessarily pay lip service to popular sovereignty, has become increasingly despotic, matching the economic despotism that results from unquestioning acceptance of flawed principles of economics and finance.

The outward forms have been preserved, but the substance, once ordinary people have been stripped of the means of maintaining themselves through direct ownership of the means of production, is gone, seemingly forever. Even an otherwise astute analyst such as Albert Venn Dicey could be fooled by the maintenance of outward forms and the removal of the substance. Dicey failed to take into account the effect that loss of economic power inevitably has on the effectiveness of political power. As he commented,
Where the right to individual freedom is a result deduced from the principles of the constitution, the idea readily occurs that the right is capable of being suspended or taken away. Where, on the other hand, the right to individual freedom is part of the constitution because it is inherent in the ordinary law of the land, the right is one which can hardly be destroyed without a thorough revolution in the institutions and manners of the nation. (A. V. Dicey, Introduction to the Study of the Law of the Constitution. Indianapolis, Indiana: Liberty Fund, Inc., 1982, 119-120.)
Dicey was absolutely correct that it would take a "thorough revolution in the institutions and manners of the nation" to effect so profound a change as the shift from an orientation on natural law ("the rule of law"), to legal positivism, in which the law becomes what the judges or anyone else with enough power says it is. Nevertheless, although Dicey taught at the London School of Economics, he did not take into account the devastating effect that the loss of private property in the means of production has on ordinary people in an economy, and the degree to which political power relies on economic power.

Political democracy simply cannot survive unless built on a solid foundation of economic democracy. It is no coincidence that the rapid spread of positivism in all its forms as the prevalent philosophy always accompanies the decay and eventual disappearance of private property in the means of production for the great mass of people. Thus, economic disenfranchisement effects the "thorough revolution" in our "institutions and manners" that Dicey declared must occur before there could be a loss of liberty and the overturning of the rule of law.

Nor is this changed in any way by the delusion that wages and fixed benefits, whether guaranteed by the State or by some private agency, can secure economic (and thus political) power to the ordinary wage earner. Wages secure dependency — slavery — not sovereignty, as modern economic and political theories make clear, especially those of Keynes. Our inalienable — inherent — rights to life, liberty, property and the acquisition and development of virtue secure our sovereignty and protect our human dignity, not State fiat, welfare, high fixed wages and benefits, or increased external regulation designed to impose desired results rather than protect equality of opportunity and a level playing field.

Loss of personal sovereignty and lack of respect for essential human dignity are principally due to the presumed inexorable necessity of only financing capital formation — and thus inhibiting or preventing widespread direct ownership of the means of production — out of existing accumulations of savings. The New Deal, President Obama's "change," President Clinton and Prime Minister Blair's "Third Way," even modern capitalism and socialism, are all efforts to accommodate both our political systems and the financial markets to the presumed reality of the necessity of existing accumulations of savings to finance capital formation. This is what Kelso and Adler accurately termed, "the slavery of savings."

Thus we have a supreme irony. The Federal Reserve was established "to furnish an elastic currency, to afford means of rediscounting commercial paper, [and] to establish a more effective supervision of banking in the Unites States," or, briefly, to supplement the amount of savings in the economy plus what the commercial banks could safely create given existing reserves. With the changeover from a predominantly asset-backed currency to a predominantly debt-backed currency as a result of the New Deal — we specify "currency" because private sector money, at least 60% of the money supply, is necessarily asset-backed, or it would not be acceptable in the channels of commerce — the need to restore asset-backing becomes critical. The currency must be 100% asset-backed, not 60%-and-falling asset-backed.

Clearly we need to reform our "institutions and manners" to conform more closely to the natural moral law than they do at present. The specific techniques to achieve this end are not, however, the point of this survey. William Ferree outlines the proper and most effective approach to reforming our institutions and manner in Introduction to Social Justice (1948), which is highly recommended for study and review before starting to organize with others to carry out such a "thorough revolution." As important as the techniques of social justice are and remain, however, our concern at this point is with the specific reforms of institutions and manners to be sought, not how to achieve the desired end.

In general, the first step is to reorient people away from a misplaced faith in the State, and back to the use of reason in applying the precepts of the natural law. That is, people must relearn to use basic common sense, especially with respect to the structuring of the economic order. The law, as people of sense have known for millennia, is found in reason alone. If something that the State (or, more usually, the State's agents) or some other authority declares contradicts something established by reason, there is a good chance that the declaration is false.

Thus, the continued assertion that only existing accumulations of savings can be used to finance capital formation — disproved many times through history and every day in the financial markets — must be jettisoned. There must be a restoration of Say's Law of Markets and the real bills doctrine that, taken together, are integral to the understanding of money as anything that is or can be used in settlement of a debt. In short, there must be a reorientation back to sound banking theory, in which a bank is understood as a financial institution not only takes deposits and makes loans, but issues promissory notes — "money" — and money itself is clearly understood as a derivative of production. These are the basic principle of the Banking School.

Consequently, there must be a reorientation away from the tenets of the Currency School, in which "money" is understood as accumulated savings — but only in the form so-defined by the State, which thereby claims dominion over the whole of economic life, an "economic dictatorship" to match the growth of State absolutism. As Keynes declared, both illustrating the shift from rule of law to rule of will and the insidious, even deadly reliance on accumulated savings as the only source of capital financing,
The Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account — when it claimed the right not only to enforce the dictionary but also to write the dictionary. To-day all civilised money is, beyond the possibility of dispute, chartalist. (Keynes, A Treatise on Money, Volume I, The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 5.)
We need merely draw the attention of the reader to the claim that the State has the power "to write the dictionary" to demonstrate not only the terrifying dangers inherent in adherence to the tenets of the Currency School, but to show the colossal arrogance embodied in the assertion that such a claim is "beyond the possibility of dispute"! Before the current series of bailouts and subsidies of companies "too big to fail" began, direct State control over the economy has in little over a century and a half gone from an insignificant proportion of less than 10% reported in the 1830s (see George Tucker, loc. cit.), to just under 40% in 2008 (see posting number III in this series). The current spate of bailouts and expansion of government further into the economy can reasonably be expected to expand this percentage and, with it, totalitarian control over the means by which people are permitted to exist.

The Federal Reserve was, in fact, never intended to control the money supply at all, but to regulate the currency and the banking system. Chiefly this was to ensure an adequate supply of credit for industry, commerce, and agriculture, while at the same time breaking the virtual monopoly of Wall Street over the supply of money and credit. The clear intent of the framers of the Federal Reserve Act of 1913 was that the private sector would continue to supply its own liquidity in the form of bills drawn on industrial, commercial, and agricultural assets, discounting them at commercial banks when necessary for a more liquid form of money.

If the commercial banks required more liquidity, the Federal Reserve would be there to rediscount such "qualified paper," thereby ensuring that there was always enough liquidity in the system, never too much, never an insufficiency. This would avoid the twin evils of inflation and deflation. The Federal Reserve was to supplement and regulate, not control, the money supply, which was presumed to be chiefly the purview of the private sector, over which the central bank would keep watch to prevent the kind of monopoly power over money and credit that caused the Panic of 1907. This had the potential not only to break up the concentration of control over money and credit that led to the Panic (see U.S. Congressional House Committee on Banking and Currency, Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit, February 28, 1913. Washington, DC: U.S. Government Printing Office, 1913), but also free the United States forever from the "slavery of savings."

Thus, there is a desperate need to restore banking in general, and the Federal Reserve in particular to filling the special role that banks necessarily play in any economy that isn't permanently stagnant. By reorienting the economy along the lines of the Just Third Way, that is, in a manner consistent with the needs of the common good and the demands of human dignity, we can lower barriers and restore democratic access to bank credit, the chief means by which people acquire and possess private property in the means of production.

This requires that the commercial banking system and the operation of the central bank conform as fully as possible to the natural moral law — that is, a properly regulated financial system, and a money supply backed by the present value of existing and future marketable goods and services, not government debt. It also means that the central bank and the commercial banking system must operate in such a manner as to encourage widespread direct ownership of the means of production.

The obvious place to start, then, is to begin dismantling the apparatus that the federal government has imposed on the financial system and which has resulted in a phenomenal growth in State power as well as the concentration of ownership of the means of production in the private sector. That means the immediate cessation of the ability of the federal government to have the Federal Reserve monetize its deficits by buying and selling government debt paper through open market operations.

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