A Blog of the Global Justice Movement

Thursday, July 15, 2010

Common Cause, Part XVII: Principles for Common Currencies

Clearly the problems associated with implementing and maintaining a common currency, especially at the global level, are not something that can easily be resolved. Furthermore, the stakes are extremely high. How we understand and implement these institutions can make them either extraordinarily beneficial to the advancement of humanity and of individuals . . . or the deadliest and most evil tyranny ever established.

Restructuring the Social Order

The first step is to "clean up" the existing system. It makes no sense to dismantle a bad system if all we end up with is something worse. Any reform must start at the most basic level. For a currency, this is at the level of the individuals who transact business, incur debts, and who, by doing so, create money. All transactions involve money, although the form of the money can vary widely. The vast amount of money even within a currency union is far from common currency. Money often circulates between two individuals or a very limited group in the form of bills of exchange. A personal IOU, even a handshake, has the substance, if not the usual form, of a bill of exchange.

Given the fact that the bulk of the money supply never goes near a bank or receives the official sanction of the State, the Just Third Way requires a "strong juridical order" as an absolute necessity within a system that recognizes and protects personal sovereignty and individual human dignity. The institutional and cultural environment within which people carry on the business of life, what the Germans call Volkswirtschaft, must be such that the essential principles of justice are understood, established, and maintained within acceptable parameters.

When a culture or civilization takes the wrong principles for granted, any reform — especially a reform imposed by the State or some other authority (recall our earlier discussion of internal v. external controls) — will necessarily be ineffective, even counterproductive of the desired end. Virtuous acts (and justice is a virtue) become virtually impossible. (Vide Albert Venn Dicey, Lectures on the Relation Between Law and Public Opinion in England During the Nineteenth Century, 1905.) As Ferree explained,
Suppose for instance, that John Jones' and Bill Smith's society have a long tradition of not paying debts. As a result . . . everybody is suspicious of everybody else, and no one will let out money or goods. . . .

Suppose that John Jones notices this condition, and sees what the cause of it is: the whole group is not honest. He sets out, then, to change the group — to reorganize it into an honest community.

The question is: What can John Jones do as an individual? He might, for instance, decide to give the community "a good example" of honesty. That is, he might lend out all his money to others, thus showing that he trusts them, and undertake always to pay his debts exactly on time. It sounds good; but, remembering that what is wrong with that community is that everyone considers it normal to be dishonest, we might readily calculate the chances that John Jones' heroic honesty and trust would have of reforming the community. When he starts handing out his money freely, it is rather obvious that most of his neighbors will try to grab off as much of it as they can while the grabbing is good. When he is finally reduced to poverty, it is unlikely that his example will attract many followers. (Ferree, op. cit., 44-45.)
It's not too great a stretch — or any stretch at all, for that matter — to see in John Jones's efforts to impose honesty on the group externally an analog of efforts by the modern Nation State to impose desired results by fiat, especially in the financial services industry. The inevitable result of individual efforts is poverty and ruin, while the State's labors end in financial chaos and economic depression. Based on the false assumptions of Keynesian economics, today's financial system is almost custom-designed to fail and to disrupt the social order at the most basic level.

With its emphasis on having the State "create" effective demand by manipulating the currency, Keynesian economics attempts to impose results. Just as John Jones necessarily failed by attempting to impose results individually, however, the State inevitably throws society into complete chaos. As an individual, Jones' failure affects at most only him, his dependents, and a few other people. As the guardian of the common good, however — the common good being that vast network of institutions within which we as individuals and as members of society engage in Volkswirtschaft (the business of living) — the State's failure affects everyone and everything in society, sometimes fatally.

The Right Approach

In social terms, Jones as an individual can afford to fail — or, at least, society can afford his failure (his wife and his children might have a different view of the subject). Still, Jones's failure will not drag the entire social order down with it. The State does not have that luxury. The State's efforts to guide the restructuring of the social order must therefore be based on sound principles to begin with and — paradoxically — not be directed at imposing desired results or a preferred condition of society. Rather, the State's job is more difficult and at the same time more subtle: to provide a safe and coherent environment within which people, both as individuals and as members of groups, can work to gain the ends they desire and prefer.

That is, people must be free to associate and organize to achieve whatever they (not some State bureaucrat or ivory tower academic) want and have determined for themselves what they need, as long as it is in conformity with the essential precepts of the natural moral law. The first step in this process of reforming the social order to conform to the natural law — the most basic of which is, "good is to be done and evil avoided" — is to establish a clear set of parameters. We can call these 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 rights of private property, particularly in corporate equity, and (the "fatal omission" from virtually all modern economic systems)

• Widespread direct ownership of the means of production.
We've gone over these pillars in some depth in previous writings, but we need to apply them to the specific case of reforming the social order to the point where a common currency ceases to be a threat, and becomes a benefit to all humanity.

The Role of the State

By "a limited role for the State" we do not mean that there is no role for government. Rather, because it has a monopoly on the instruments of coercion, the State must carefully refrain from trying to impose desired results. It is irrelevant how good some people or even a majority might believe those results to be, if they come into conflict with anyone's natural rights. The State's role must therefore be limited to policing abuses when they occur, enforcing contracts when some dispute arises, and, in general, providing a "level playing field" on which citizens are free to pursue their private interests as long as those interests do not come into material conflict with the natural moral law or the demands of the common good.

There are certain circumstances under which the State can and should take a greater role. These, however, are exceptions to the general rule that the role of the State must be limited economically and, in many respects, politically. (Vide Alexis de Tocqueville, "The Principle of Sovereignty of the People of America," Democracy in America, I.iv.) In an emergency, such as war or famine, even (to a limited extent) times of economic disruption — especially those caused by adherence of those in power to the discredited principles of Keynesian economics — a redistribution of existing wealth may be necessary as an expedient.

To conform to the precepts of the natural law, this redistribution should be made through the tax system. The wealth should first be taken from those with a "superabundance," and then from those with a great surplus, and so on, down the line. At no point should anyone be taxed on what he or she needs to maintain him- or herself or his or her dependents in a manner befitting the demands of human dignity and consistent with his or her station in life. Logically, this can be done most easily and justly by setting the total exemption and deduction level for everyone at the same amount. Total income exempted from taxation would necessarily be sufficient to provide for normal living expenses. Everything above that would be taxed at the same rate, thereby “naturally” taking more from those with a “superabundance,” and progressively less from those with a mere abundance, then a surplus, and so on. Thus, everyone with the means to pay the extra tax would pay according to his or her means, with no one bearing a greater proportional burden.

Under the “principle of double effect,” widespread emergency has been used to rationalize a progressive tax system. The reasoning is that, because taxation itself is not “objectively evil,” taxing unjustly is permitted (although hardly recommended!) as an expedient. This is because the “intended good” of having sufficient revenue to meet the emergency outweighs the “unintended evil” of treating some people unfairly — temporarily. To implement a progressive tax or any other form of redistribution as a normal thing, however, is to “justify injustice.” Justifying injustice is an oxymoron. Progressive taxation also relies on creating a continuing state of emergency, and the creation of a class permanently dependent on the State. Absent any better line of reasoning than has yet come to light, there is no justification for any tax other than a single rate above what is needed to meet common domestic needs adequately.

At no time should the currency be manipulated in any way, whether to ease the presumed pains of emergency redistribution, the costs of war, to achieve "full employment," equality of economic condition, or anything else. Inflation is a "hidden tax" on people with money holdings, while deflation is similarly a charge on debtors. When induced artificially by the State via manipulation of the currency, both inflation and deflation are profoundly unjust, and strike at the very foundation of the social order. Both inflation and deflation undermine the natural right of private property by vesting control over what is private wealth in the hands of the State. "Property," as Louis Kelso pointed out, "in everyday life, is the right of control." (Louis O. Kelso, "Karl Marx: The Almost Capitalist," American Bar Association Journal, March 1957.)

Money Manipulation and Social Order

By manipulating — controlling — money and credit, by considering money somehow a special creation of the State and only the State, the State is vested with effective title of everything in the economy. Money and credit are the chief means by which property rights are conveyed. By separating money creation from the present value of existing and future marketable goods and services, and claiming the right to determine in what manner property can be conveyed, to whom, and on what terms, the State effectively claims ownership of everything. (Hobbes, loc. cit.) Private property as an institution is effectively abolished.

The outward forms of private ownership may remain unchanged for some time under a program of State control of money and credit, but they become an empty shell. The substance or essence of property — control — has been taken away. By controlling money and credit, the "despotic economic dictatorship" can decide who is permitted to live and in what manner. "No one can breathe against their will." The Servile State becomes established in all its awe-inspiring stupidity. (Vide, Hilaire Belloc, The Servile State, 1912.)

Once we truly understand that the individual, not the State, is sovereign, however, all of this changes. We realize that, far from being a special creation of the State, as "chartalism" and the various monetary theories based on or related to chartalism assume, (Vide Knapp, op. cit.) the case is far different. The State creates nothing, including money. Rather, the State's monetary role is a very restricted one. That is, the State has the responsibility to set the standard and the value of the currency, and — when necessary — police abuses when conflicts arise as to whether the parties in a transaction are adhering to the terms of the contract.

The State's role is thus to define and regulate — not create — what constitutes the common currency. Further, the State lacks the power to declare that only its common currency can be used to carry out transactions. A common currency is established as a social good to facilitate transactions, not to impose State control of the economy. Despite Keynes's assertion that the State has the power to change reality by "re-editing the dictionary" (A Treatise on Money, loc. cit.) the essential definition of money remains: anything that can be used in settlement of a debt.

The Slavery of Savings — Again

Unfortunately, trapped by the assumption that only existing accumulations of savings can be used to finance capital formation, many people assume that the State must take control of the money supply. Otherwise, the people who currently control existing accumulations of wealth — past savings — will keep humanity enslaved forever. Many economists and policymakers assume that the only way to break this monopoly of wealth, this "despotic economic dictatorship" (Quadragesimo Anno, loc. cit.), is to have the State create all money, either through the central bank engaging in open market operations in government securities, or simply by printing money (or — the same thing — creating demand deposits) and spending it into circulation.

It is beyond the scope of this series to show that both techniques are substantially the same. We hope to present our argument later when we look at "interest-free" money in a future series. Suffice it to say, then, that many otherwise intelligent people assume as a given that humanity is trapped between two extremes. The one is capitalism, in which a private elite controls the means of acquiring and possessing private property through its monopoly on existing accumulations of savings. The other is socialism, in which the State controls the means of acquiring and possessing private property through its presumed monopoly on money creation.

Not to belabor the point, but when we understand that money is anything that can be used in settlement of a debt, we realize the falsity of the premises behind both capitalism and socialism. It is outside the purview of the State allow or maintain the barriers that inhibit or prevent ordinary people from accessing money and credit in order to acquire and possess private property in the means of production as in capitalism. Similarly, it is beyond the State's competence to take control over money and credit to impose desired results, as in socialism.

The Free Market

By "free market" we do not mean a market in which "anything goes." Instead, we mean a market to which everyone has free and full access, and in which each person can participate fully insofar as it is consistent with his or her capacities and abilities. In today's society, the principle of the free market is violated most often by the assumptions underpinning both capitalism and socialism — both of which are rooted in the mistaken belief that the only source of financing for new capital formation is existing accumulations of savings: the slavery of savings.

The slavery of savings supports capitalism by declaring that because existing accumulations of savings are the only source of financing, economic growth and development absolutely require a class of persons who cannot consume all they produce, and necessarily reinvest the excess. The richer and smaller this class becomes, the more wealth becomes concentrated, the less proportionately is consumed and more saved and reinvested, and thus the faster economic growth and development can take place.

Socialism differs from capitalism only in this: that the single artificial person of the State replaces the class of natural private persons. This (at least according to Keynes) renders the process of saving and reinvestment in new capital formation most efficient and results in the maximum number of jobs created. As Keynes declared,
I conceive . . . that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society. (General Theory, op. cit., V.24.iii.)
That is, as long as the State controls the means of production and determines what "owners" are entitled to receive, actual "ownership" — legal title — is a meaningless formality. Private property is effectively abolished. Keynes's proposal, of course, is simply an expansion to all productive assets of Henry George's proposal for landed property. To understand this, we need to realize that "interest" is the return on capital other than land (it comes from "ownership interest") — that which Keynes referred in the above quote as the "rate of reward," while "rent" is the return on land. As George explained,
What I, therefore, propose, as the simple yet sovereign remedy, which will raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights, is — to appropriate rent by taxation.

In this way the State may become the universal landlord without calling herself so, and without assuming a single new function. In form, the ownership of land would remain just as now. No owner of land need be dispossessed, and no restriction need be placed upon the amount of land any one could hold. For, rent being taken by the State in taxes, land, no matter in whose name it stood, or in what parcels it was held, would be really common property, and every member of the community would participate in the advantages of its ownership. (Henry George, Progress and Poverty. New York: The Robert Schalkenbach Foundation, 1992, 405-406.
Capitalism's only saving grace — and its only difference from socialism — is that it preserves (albeit in truncated form) the natural right to be an owner. In general, capitalism limits this to an elite few, but at least the germ remains. From that tiny seed it is still possible to reform the system. With socialism, and its abolition of virtually the whole of the natural law, any restructuring of the system cannot be a mere "reform," however far-reaching. A complete dismantling and reconstruction is in order. The fact is that socialism "is based . . . on a theory of human society peculiar to itself," (Quadragesimo Anno, op. cit., § 120) and cannot be reconciled with the fundamental precepts that necessarily underpin human society: the natural moral law.

An important step in reforming capitalism is to make the allegedly "free market" truly free. This can be done most effectively by removing barriers (chiefly the dogmatic belief that only existing accumulations of savings can be used to finance new capital formation) to full and free participation in the market. The astute reader, noting that limited participation in the market, primarily limited ownership of the means of production, is the defining characteristic of capitalism may rightly observe that a capitalism reformed in this way is no longer capitalism. He or she would be absolutely correct. Neither would it be socialism, but a just, third way that transcends the mistakes and errors of the past embedded in the two failed systems.

The Restoration of Property

To be sound as well as just, all money must be linked directly to the present value of existing and future marketable goods and services in the community. Private property provides the link to sound and just money, as well as for virtually the whole of the common good. As Benjamin Watkins Leigh observed, "Power and Property can be separated for a time by force or fraud — but divorced, never. For as soon as the pang of separation is felt . . . Property will purchase Power, or Power will take over Property."

To be truly a common currency, then, the rights of property must be secure, or there is no true or sound basis for the money supply; money creation becomes a means not of facilitating legitimate transfers of property rights, but of carrying out theft on a massive scale. There must be no limitations imposed on the exercise of property except to prevent harm to the owner, other individuals and groups in society, and the common good as a whole.

Widespread Ownership of Capital

One thing more is needed for a common currency or any other currency to be sound and just. Money is a derivative of the present value of existing and future marketable goods and services. Ownership of the means of production must, therefore, be widespread, or there is no legitimate basis for the great mass of people to participate in economic life.

Before the industrial revolution, the two predominant factors — means — of production were land and human labor. Land retains its place, of course, but with the advent of industrialization, the other predominant factor of production shifted from human labor to capital. Bound by the slavery of past savings, this shift has left those with only their labor to sell without apparent recourse except socialism.

This presents us with a problem. To broaden ownership of the means of production and lay the foundation for the implementation of a global common currency, it seems necessary to engage in the paradox of destroying or abolishing private property in the means of production for some (the rich) for the benefit of others: the poor. In the next and final posting in this series, however, we will see that there is a way out of this dilemma — one that has the potential to achieve the goals of socialism, but without violating the principles of capitalism.

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