Thursday, May 6, 2010

Own the Fed — the Program, Part XV: Own the Fed

We have seen in previous postings in this series that by means of some relatively straightforward reforms, the Federal Reserve System can be returned to its original purpose of providing adequate liquidity for the private sector without inflation or deflation. We have also seen that some additional reforms, such as the 100% reserve requirement, the two-tiered interest rate and extending the term of qualified paper would broaden application of the spirit and the original intent, if not necessarily the strict letter of the Federal Reserve Act of 1913.

Without a doubt, however, the most important reform that could be implemented is the proposal to use the money creation powers of the commercial banking system backed up by the Federal Reserve to expand the base of capital ownership in the United States. This would be done by requiring that all credit extended for new capital formation by commercial banks and rediscounted at the regional Federal Reserve banks creates money only in ways that creates new owners. To qualify for rediscounting, all paper presented at a Federal Reserve bank must include a feature that broadens the base of direct capital ownership in the United States.

Widespread direct ownership of the means of production, individually or in free association with others, is essential to the establishment and maintenance of a just economy, and thus a just and stable political order. To explain why this is so, it is appropriate at this point to reiterate the basic philosophy of the Just Third Way and thus Capital Homesteading, especially as it relates to the natural right to own the means of production as the ordinary and normal way of making a living.

The Just Third Way is based on the dignity of the human person, which — obviously — begins with the human person and puts him or her at the center of things. As an application of the principles of personalism, the Just Third Way recognizes that dignity — and thus personal sovereignty, natural rights, the acquisition and development of virtue, and so on — is inherent in every human being. None of these things are received as a grant from another individual, group, institution, or even an all-powerful State. They are part of human nature and are therefore inalienable from the human person.

Further, in recognition of our political nature we are obligated as individual members of the human race to act in accordance with our political nature. It is therefore our responsibility to organize with others to perfect the social order to support the dignity and empowerment of every human being. We necessarily recognize the fact that every human being at whatever stage of physical, mental, spiritual, cultural, political, economic, or anything else, development is as fully human, and thus as fully a person, as everyone else.

The Just Third Way integrates the principles of "binary economics." In binary economics, which can thus be described as "economic personalism," there are two interdependent factors of production: 1) "labor," or all human inputs, and 2) "capital," or all non-human inputs. The two legitimate ways to engage in the production of marketable goods and services and to be entitled thereby to the income generated are 1) to contribute one's labor, and 2) contribute one's capital. A free and open market that operates within a simple and clear, if strong juridical order can determine the relative value of each of these inputs, and thus the basis for distribution. A market that is truly free therefore requires equal access to the means of acquiring and possessing private property in the means of production.

The Just Third Way embodies three essential principles of economic justice. These are 1) participation, 2) distribution, and 3) harmony. The principle of participation — participative justice — is that everyone necessarily has the right to participate fully in all institutions of the common good, including a right of access to the means to participate. This principle requires that every person have access to the means and opportunity to contribute economic value through both labor and capital inputs. In economic justice, distribution follows participation. What each person is entitled to receive is determined by his or her relative contribution/participation. As advancing technology begins to contribute a proportionately greater share than human labor to the production of marketable goods and services, participative justice demands the elimination of barriers to capital ownership. Participative justice also requires the universalization of access to such social goods as capital credit through a well-organized banking and legal system.

The principle of distribution — distributive justice — is the outtake principle that holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or "just wage") for each particular type of human contribution to the production of marketable wealth. This principle dictates that the contribution of capital should be compensated by the "just profit" generated by the project or enterprise. Profit is determined by the market-based rental value of contributed capital assets, or by the gross revenues resulting from market-determined "just prices" less the market-based cost of the factors of production, including labor.

Harmony — social justice — is the feedback principle that balances and restores participation and distribution within the economic system. Kelso and Adler called this the "principle of limitation" as it calls for the restructuring of the economic system to restore participative and distributive justice.

Finally, the Just Third Way also incorporates the four pillars of an economically just society:
• A limited economic role for the State,

• Free and open markets as the best means for determining just wages, just prices, and just profits,

• Restoration of the full rights of private property, particularly in corporate equity, and (the "fatal omission" in all economic systems today),

• Widespread direct ownership of the means of production, individually, or in free association with others.
This last is generally considered the distinguishing characteristic of the Just Third Way, although it must always be understood within the context of, and the exercise limited imposed by the other three pillars. For example, while everyone has the natural right to own, we may never use what we own to harm ourselves, other individuals, groups, or the common good as a whole. Understanding that "property in everyday life, is the right of control," (Louis Kelso, "Karl Marx: The Almost Capitalist," American Bar Association Journal, March 1957) Kelso and Adler best illustrate the importance of private property in the means of production by their analysis in The Capitalist Manifesto (op. cit.).

In "Elementary Economics" (ibid., 33-51), Kelso and Adler explain that "property" means primarily the right to control what we own, use it, derive benefits, or dispose of it in any lawful manner. (Ibid., 43.) There are two important points with regard to property. The first is that "property" can be subdivided into "innate" and "acquired" property. Innate property is that which the human person possesses as part of his or her nature, that is, by natural right. Economically speaking, innate property is limited to labor, whether physical or mental. (Ibid.) Acquired property is everything external to the human person to which he or she has established his or her right to control. (Ibid., 44.) The second point is that ownership of productive assets can be put into three broad categories: 1) property in natural resources, 2) property in capital, and 3) property in labor. (Ibid., 44-45.)

Private property in the means of production is thus the normal and legitimate way to connect the human person to the means of production. Private property thereby conveys to the owner all of the benefits of ownership, including enjoyment of the fruits (income), control, and disposal, albeit within the constraints of the common good. Anything other than private property in the means of production as the source of income is at best an expedient. Given certain conditions of society (see John A. Ryan, A Living Wage, 1906), it may be necessary at times to pay wages at a level necessary to meet common domestic needs adequately without regard to the economic value of the labor input supplied. Such measures, however, should not be tolerated any longer than it takes for people to organize and restore harmony by restructuring the relevant institutions of the common good, thereby making it possible for people to become owners of a capital stake sufficient to generate an adequate and secure income.

Private property in the means of production is implicit in Say's Law of Markets and the real bills doctrine. These are cornerstones of binary economics and the basis for the original conception of the Federal Reserve. In relevant part, Say's Law states that we do not purchase the marketable goods and services produced by others with "money," but with the goods and services that we produce. This thing we call "money" is merely the medium through which we exchange our production of goods and services, for the goods and services produced by others. (Say, Letters to Malthus, loc. cit.) For this medium of exchange to be legitimate and honest, the present value of existing or future inventories of marketable goods and services must stand behind or "back" all money.

The real bills doctrine is, essentially, a restatement of Say's Law, or vice versa, depending on how you approach the matter. That is, "money" can be created as needed or canceled without inflation or deflation, as long as all money created or cancelled corresponds to the increase or decrease in the present value of existing and future marketable goods and services, and all money created or cancelled is linked directly to the present value of marketable goods and services through the institution of private property.

Thus, in binary economics (and therefore the Just Third Way) all factors of production — everything that can be owned as private property — are put into two sweeping categories, the human, and the non-human. All human factors of production, normally separated into labor and entrepreneurship — and possibly others — are grouped under "labor." All non-human factors of production, whether natural resources, human artifacts such as machinery, tools, management systems, and so on, are grouped under "capital." This is the most useful and practical way of looking at the factors of production for the purposes of economic analysis.

When structuring how things are to be owned, however, we find it convenient, possibly even essential, to separate not only the human factors of production from the non-human factors, but to subdivide the non-human factors into artifacts and non-artifacts. (This terminology appears to be new, as this writer has not seen anyone use it before in the context of binary economics, but it seems to be the most descriptive, and thus most accurate way of dividing the two types of non-human factors of production.) "Artifacts" consist of everything that is the fruit of human ingenuity. "Non-artifacts" consist of everything that humanity did not make. Non-artifacts are things like land, natural resources, air, water, and so on.

Non-artifacts are often subdivided even further into "economic goods" and "non-economic goods." In binary economics, however, the concept of "non-economic good" is not truly descriptive. The term denotes a factor of production that is presumably "cost free." A factor of production, however, is never "cost free." The cost may be indirect, as in the sums expended by government or private groups to clean up polluted air and water. The cost may even be intangible, as in the lessened quality of life enjoyed by people living in an environmentally degraded area. In no case, however, is anything ever "cost free" as a factor of production. It may be difficult and even seem virtually impossible to assign the cost to those who enjoyed the benefits, but the cost does not thereby disappear.

The important point here, however, is to reaffirm the dictum of Roman law that "all things have their proper owner." This does not mean that owners may use what they own in any way that harms themselves, other individuals, groups, or the common good as a whole. Private property is absolute in that every human being has the right to be an owner, but the right to be an owner necessarily implies limitations on the exercise of the rights of property. Different types of things may be owned, but, depending on the type of thing, social conditions, limitations of physical existence, and so on, different kinds of things may be owned in different ways, even within the same society. For example, the right to keep and bear arms in the United States is generally interpreted as not including weapons of mass destruction, atomic bombs, or automatic rifles and machine guns.

Thus, non-human factors of production that fall into the non-artifact category, such as land and natural resources, should ideally be directly owned by everyone, rather than monopolized by a few private individuals or the State. This can be through something like a "natural resource bank," or "Citizens Land Cooperative" ("CLC") in which every resident of a region (even, conceptually, the entire world), directly owns a pro rata share of all non-human non-artifacts through the medium of a single, no-cost, non-transferable lifetime share in the resource bank or CLC.

There is another type of non-human factor of production that, while created by human beings, is not susceptible to ownership, at least, not in a well-ordered society. This category includes such things as government services (police services, administering justice, defense, etc.), as well as voting and other civic rights and duties. While people providing such services must frequently be paid, no one properly speaks of purchasing or controlling as owners police services, justice, or defense. These are uniquely social goods.

Nor can anyone speak of owning other human artifacts in the category of social goods such as systems of weights and measures. No one can have a monopoly on the number of inches we are permitted to use, or the quantity of pounds and tons allowed to circulate in society. These are means of measuring what exists; they are symbols without an independent existence of their own. In a very real sense, systems of measurement are derivatives of what they measure, having no true value of their own, relying absolutely on the value of whatever stands behind the symbol. Finally, in the category of uniquely social goods we have the money creation powers of a commercial banking system, especially when supported and backed up by a properly run central bank.

This does not mean that banks and money cannot be owned as private property. While banks, especially central banks, can be owned by the State, there is nothing to prevent financial institutions being controlled by private citizens — just as the State itself is presumably accountable to its citizens. State ownership of anything that can be privately owned is, in fact, an extremely dubious arrangement. It is a mode of organization fraught with peril for any society with pretensions of respect for human dignity and personal sovereignty.

What cannot be owned is the ability to create money, for that is inherent in the human person as a natural derivative of the rights of private property and the human capacity to make and keep promises. As we have seen with Say's Law and the real bills doctrine, however, what can — and must — be owned, and privately owned, is what money represents, as well as the institution(s) that create(s) the money. As George Mason pointed out in the first paragraph of the Virginia Declaration of Rights, the natural ("inherent") right to be an owner necessarily includes the right to use all legitimate means of becoming an owner.

The problem today, however, is that what is known as the financial services industry is controlled by a relatively small number of very large companies. The problem is complicated by the fact that many, if not all of these companies combine functions that are incompatible with sound principles of internal control. This comes into direct conflict with the principle of subsidiarity, and thus impinges on personal sovereignty and respect for individual human dignity.

Further, the fact of concentration of control over money and credit itself militates against democratic access to the means of acquiring and possessing an ownership stake in the means of production. It becomes obvious that control over money and credit cannot be monopolized or even concentrated to any degree if a society is to have any hope of maintaining any semblance of democracy — and control, remember, is synonymous with property. The best means of securing control over anything is through the institution of private property.

Breaking up the concentrations of control over money and credit in today's financial services industry is thus an absolute necessity if we are to establish and maintain an economically just society. The first step in that process is, as we have seen, to reinstitute legislation similar to the Banking Act of 1933 — Glass-Steagall. No financial institution can be permitted to carry out incompatible functions, of which the most obvious are commercial banking, investment banking, and insurance. All three must be independent in fact as well as in appearance.

Some might be tempted to protest that requiring the financial services industry to separate functions in accordance with the principles of sound internal control violates the rights of private property. Not so. Recall that while the right to be an owner — the right to property — is inherent in every single human being, the exercise of the rights of property is necessarily limited. Most simply put, no one may use what he or she owns to harm anyone. It becomes common sense, then, to structure our institutions in such a way that it is no longer advantageous to harm others — even if inadvertently by removing checks and balances and structuring our institutions so that errors and even honest mistakes are not caught in time.

The concentrated ownership of existing financial services companies is another issue in and of itself. While it would be ideal if all commercial and investment banks as well as insurance companies were broadly owned, it is not, strictly speaking, necessary that existing accumulations be broken up any further than required by principles of sound internal control. Taking away what some people already own for the benefit of others, even if presumably fair compensation is offered, when not demanded by the common good is more than a limitation on the exercise of private property. It is a violation of private property, and unjust by its nature. Limiting the exercise of private property to the extent demanded by the common good is one thing. Violating private property to satisfy a preference of even a great many people is quite another.

In any event, within a society that not only encourages widespread ownership of the means of production but provides access to the means to acquire and possess private property, the present concentrated accumulations of ownership — and thus control — in the financial services industry will be broken up naturally within a generation, if that long:
• By freeing the financing of capital formation from the slavery of past savings, entry into the financial services industry will become much easier, increasing competition.

• Replacing fractional reserves provided out of capitalization and deposits with 100% reserves supplied by rediscounting qualified paper at the Federal Reserve will mean that smaller financial institutions will be more able to serve their customers in a more cost-efficient manner than the bloated conglomerates that characterize today's financial services industry.

• Increasing specialization will result in a significant growth in efficiency as well as accountability.

• Finally, there is a natural limitation on all wealth — the lifetime of the owner. No one has yet figured out a way to take it with him.
For these and possibly other reasons, aside from imposing a necessary measure of common sense internal control, there is probably no reason to worry about the concentration of ownership in the financial services industry, any more than in any other sector of the economy. People with existing accumulations of wealth can be guaranteed that they will be secure in the enjoyment of their property — with one exception: government bureaucrats and politicians who, without having legal title (cf. the private sector "economic dictatorship" in Quadragesimo Anno, op. cit., §§ 88, 105-110), control the Federal Reserve System, the central bank of the United States.

As we have repeated endlessly, the best way to secure control over something is by means of the institution of private property, if for no other reason than property means control. The obvious answer to the problem of the virtual takeover of the central bank by private interests or the State is to vest direct ownership of the central bank in the citizens.

Direct citizen ownership of the Federal Reserve, rather than "ownership" by "the People," is the best way to establish accountability and to ensure that the money power is vested in the hands of private citizens, those who own the capital assets and inventories of marketable goods and services that necessarily back a sound and stable money supply. To put it simply, due to its special nature and its function in monetizing existing and future production to provide the medium of exchange for the economy, the Federal Reserve (any central bank, in fact) should be regarded as another, fourth branch of government — but with a difference.

The Federal Reserve is unique among government agencies in that it has the capacity (and was designed and intended) to provide a service that can be construed as marketable — the monetization of the present value of existing and future marketable goods and services. Commercial banks, of course, take fees and make a profit for providing the same service. As a branch of government, of course, the Federal Reserve may take a fee sufficient to cover the costs of creating money and administering the system, but making a profit is contrary to the whole orientation of government.

It would, of course, be entirely feasible in economic terms to implement a Capital Homesteading program without direct citizen ownership of the Federal Reserve. The issue, however, is not financial feasibility, but political feasibility. When the commercial banking system, a national bank, or a central bank is under any form of effective control by government, the temptation to divert the straightforward mission of the system or institution to advance political ends is overwhelming. This has been the case from the time of John Law and the Mississippi Bubble, down to the purchases of toxic mortgage-backed securities by the Federal Reserve, as well as the millennia of debasement of the coinage as a tool of monetary policy, whether we look to Diocletian, or Henry VIII Tudor. Government simply cannot be trusted with control over the creation of money and credit, although the State necessarily regulates the value of the currency and sets required standards. Every citizen should therefore be issued a single, no-cost, fully voting, fully participating, non-transferable share in the regional Federal Reserve as a fundamental right of citizenship.

There are, as we might expect, a great many details that need to be worked out for a reform of the Federal Reserve. The purpose of this survey is not to draft legislation or even give guidelines for legislation, but to make the case for reform of America's central bank and recommend specific correctives to return control of the money power to the people, establish and maintain a stable currency, finance widespread direct ownership of the means of production, and increase the asset-backed money supply from the current 60% to effectively 100%.

The actual structuring and implementation of the reforms is a matter for further study. Our goal has been to point out the need for reform, present the basic principles consistent with the Just Third Way and binary economics, and offer specific, if general correctives. In this way we can best advance the cause of human dignity within the framework provided by the Just Third Way and applied in Capital Homesteading for every citizen.

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1 comment:

nail-in-the-wall said...

Congratulations Michael Greaney, for what may be the best - BRIEF- on Why every Citizen should own a stake in the Federal Reserve system, if not just for the voting right, we the people should ‘OWN the FED’ or as Dr. Kurland likes to say; “it’s the fourth branch of Government (self-governance).”

You present an excellent arguement for Economic Democracy. The entire text should also be part of the Federalist Papers (Essays)and signed Publius.

Once again Thank you.

Guy c. Stevenson

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