In the first posting in this series we tried to make it clear that a common currency — any currency, in fact, as well as money in all its forms — must be based solidly on the foundation of private property in the means of production if it is to be financially sound . . . and honest. As we have discovered, if the money supply is also to be economically and politically sound (and honest), direct ownership of the means of production must be broadly distributed throughout society.
If widespread ownership of the means of production — whether labor or capital — is not a determinant characteristic of an economy, there is no just and effective means to distribute income equitably throughout society. Consequently, in the short term the State will be forced to intrude more and more in the economy to maintain political stability. In the long term, of course, the inroads the State will be forced to make on private property will eventually lead to economic disorder and, finally, to the collapse of the political order.
The current economic downturn is a graphic illustration and proof of these basic principles. The solution is to develop a realistic program of economic recovery that will end with widespread ownership of the means of production. Only in this way can the foundation be laid for the implementation of a sound currency that can then be extended throughout the world without increasing the power of the State over individuals, families, and institutions.
Depression the Only Result
This is not the place to make the case that economic downturns have increased in severity as ownership of the means of production has become increasingly concentrated, and ordinary people have lost control over their own lives. We state it here as an established fact, and leave the discussion and proof for future writings.
The effect of concentrated ownership of the means of production is nowhere more evident than in the increasing demands that the State take responsibility for everyone's individual good as well as the common good. Since the first "Great Depression" that followed the Panic of 1893, more and more people have insisted that the government do something. Nevertheless, despite the spectacle of Coxey's Army, the more persuasive populism of the New Deal, or the latest stimulus or bailout, government programs have proven increasingly ineffectual, even counterproductive of the desired results.
In spite of that, while the pundits and powers-that-be have been announcing the end of the recession on a regular basis, no one in a position of authority seems to be aware that the basic problems are not only not being solved, they are getting worse. A recent Wall Street Journal article observed that cash levels in U.S. companies were at their highest levels in the past half century. Despite the positive sound of "high cash balances," this is not a good thing.
A business with "excess" cash on hand exhibits a high degree of inefficiency — or fear, which leads to inefficiency. As Aristotle and Aquinas observed, the proper use of money is to be spent, i.e., "consumed." A company that has more cash on hand than it absolutely needs to meet its projected transactions demand is using its resources inefficiently. That cash should either be invested in productive capital or paid out to the shareholders.
Thus, large cash balances in U.S. businesses tell us two things. 1) Businesses are not financing new or replacement capital, and 2) businesses are not paying out dividends that can be used to stimulate consumer demand and thus increase the demand for new capital. Retaining cash in a business is a self-defeating strategy, if not suicidal. In an ironic twist, if businesses hold on to cash out of a conservative impulse to maintain the value of their asset holdings, the State ensures that the asset holdings become worth less by inducing inflation to stimulate effective demand — eventually (carried to its logical extreme) worthless.
With businesses holding on to cash instead of spending it into circulation in the form of new capital investment or distribution of dividends, the only recourse within the current Keynesian framework is for the State to redistribute purchasing power and create effective demand by inflating the currency. This was what the Populists demanded in the 1890s with the cry of "Free Silver," was accomplished in the 1930s with massive increases in the federal debt and official devaluation of the dollar, and is now greasing the skids as the country slides rapidly into bankruptcy.
The basic problem here is the assumption that new capital formation can only be financed out of existing accumulations of savings. As Dr. Harold G. Moulton demonstrated in 1935, however, that assumption is utterly false. If businesses paid out their "excess" cash over and above their projected need for working capital as dividends to their shareholders, and financed new and replacement capital formation by discounting bills of exchange drawn on the present value of the projected future stream of income to be realized from the sale of marketable goods and services produced by the capital financed (as Moulton recommended), the economy would receive a tremendous boost in the form of an increase in effective demand.
As Kelso and Adler proposed, to ensure that the dividends would not be reinvested and to make certain that effective demand is kept up, all new capital financed by the extension of bank credit must be broadly and directly owned. This will increase effective demand in two ways: 1) Existing shareholders will not be able to reinvest their dividends simply because the new capital is financed with credit; they won't be able to do anything with their capital income except spend it on consumption. 2) New and future shareholders will necessarily spend their dividends first on debt service to retire the loans that financed the new capital (an increase in effective demand for capital goods, as Moulton pointed out, which is a type of consumption, although from the seller's perspective, not the buyer's) and, once the acquisition loans are repaid, use the dividends for (more) consumption income.
Thus, the necessary kick-start to the economy can be provided immediately by paying out accumulated cash in the form of dividends. To maintain the necessary level of effective demand, all new capital formation should be financed using "pure credit" without the use of existing accumulations of savings. The increased demand for capital goods will create jobs and increase consumption income. Further, ownership of the new capital must be spread out among people who will spend the income on consumption instead of reinvesting in new capital once the initial acquisition loan is repaid — a "triple threat" for additional sources of production-backed consumption income instead of government inflation-induced redistribution.
Modern Corporate Finance
The issue, then, is not ownership of the means of production, whether labor or capital, but concentrated ownership of the means of production. Is concentrated ownership of the means of production as necessary as the major schools of economics would have us believe? Obviously not, as we have already seen.
The problem is that many people in power believe implicitly in the disproved dogma that existing accumulations of savings are absolutely necessary in order to finance new capital formation. This requires a class of people (the fewer, the better) who cannot consume all of their income, and necessarily reinvest the excess in additional capital.
Concentrated ownership of the means of production throws a monkey wrench into Say's Law of Markets. Concentrated ownership distorts the "production equals income" equation by diverting income that should be expended on consumption into reinvestment. Paradoxically, as Moulton pointed out in The Formation of Capital, purchase of capital goods is consumption from the point of view of the supplier, but investment from the point of view of the buyer. The problem is that under the false assumption that only existing accumulations of savings can be used to finance capital formation, the income that should be used in aggregate to purchase the production generated by the new capital is instead used to finance the new capital. Aggregate effective demand is thereby decreased, rendering the new capital investment less feasible.
The irony is that existing accumulations are not used directly to finance new capital investment. The fact is that retained earnings (the most common form of savings today) are income that has already been reinvested. Existing accumulations of savings are, instead, typically used as collateral to insure the money creators that they will be repaid. The potential demand for consumption goods is transformed into realized demand for capital goods — after the existing accumulations of savings have in most cases already been reinvested in businesses by retaining earnings.
The end result is that a single dollar "saved" by failing to pay out dividends has two effects. One, effective consumption demand is reduced by the dividends that are not paid. Two, the capitalist not only enjoys the increased wealth resulting from retaining earnings and reinvesting income into the business, but can use those same savings in the form of retained earnings as collateral for additional capital formation.
Thus, as effective consumption demand is reduced by one dollar, reinvestment and new investment increase by at least two dollars. This concentrates ownership of the means of production at an accelerating rate, diverting ever greater amounts of consumption income directly into reinvestment by retaining earnings, and indirectly by using retained earnings — equal to existing investment in excess of the original capitalization of the firm — as collateral for yet more capital formation.
Relative Decline in the Value of Labor
When discussing the relative value of labor and capital as inputs to production we are, of course, looking at "labor" and "capital" purely as factors of production. We are not taking into account the infinite value of a single human being as a human being, but separating the person from what the person owns, whether labor or capital, purely for the purposes of analysis.
As technology advances, capital rather than labor takes over as the predominant factor of production. Again, this says nothing about the purpose of production that, as Adam Smith pointed out in the opening pages of The Wealth of Nations, is consumption — not reinvestment. Not surprisingly, Smith was a pioneer in setting forth the principles of the real bills doctrine and Say's Law of Markets, which led eventually to the realization that, by backing money with the present value of existing or future marketable goods and services instead of accumulations of existing wealth, humanity could be freed from dependency on past savings.
The profits generated by capital go by natural right of private property to the owner of capital, just as the profits generated by labor go by natural right of private property to the owner of labor. With labor decreasing in value relative to capital, however, labor's income decreases. When that is the case, as Charles Morrison argued in An Essay on the Relations Between Labour and Capital (1854), workers must become owners, or see the share of income that goes to labor fall to below what is needed to maintain people in a manner befitting the demands of human dignity. The problem is how workers without savings or adequate income can become owners of the means of production when existing political, tax, and financial policies assume as a given that new capital formation can only be financed out of existing accumulations of savings.
A Sound Program of Broadened Ownership
The answer is Capital Homesteading. Widespread direct ownership of the means of production can be achieved virtually overnight by implementing Capital Homesteading. Businesses will find it profitable to pay out dividends by making dividends tax deductible at the corporate level, while providing each citizen with a credit allocation would broaden ownership of the new capital. Inflation would be avoided because, contrary to the Keynesian assumption, no money is created until and unless a financially feasible capital project is located and presented for financing. Deflation is avoided by creating money as needed, not artificially holding back economic growth by imposing politically motivated quotas or requirements. The question that might occur to many people, however, is whether direct ownership of the means of production can truly be as important as all that. The answer is, "Absolutely."
This is because the chief principle for a global common currency, or any currency, common or otherwise, for that matter, is to link all money creation to the present value of existing and future marketable goods and services in an economy in which the means of producing those goods and services is broadly owned. Unless all money creation is tied directly to the present value of existing and future marketable goods and services through a broadly distributed private property right, and all State power derives only from people who secure their personal sovereignty by means of an adequate private property stake in the means of production, the State — and the money creators who finance the State — become all-powerful, and can accurately be described as a "despotic economic dictatorship." (Quadragesimo Anno, loc cit.)
A self-evident corollary to the necessity of linking all money creation directly to the present value of existing and future marketable goods and services via the institution of private property is to restrict the involvement of the State, especially in the economy. If anything is to be learned from the various accounts of common currencies related in this series, it is that once the State manages to seize control of the machinery of money creation, personal sovereignty and individual human dignity soon drop by the wayside.
This is not to say that the State does not have the responsibility of setting standards and enforcing contracts when disagreements arise. Setting and regulating the value of the currency and ensuring that all issuers of monetary instruments adhere materially to the terms of the contract is not the same as carrying out the task of creating money, any more than when the State declares that any other unit of measure is the official standard.
Setting the value of the dollar, and defining the dollar as the official currency in no way prevents private individuals from making any just bargain they want, on any terms they want. If the parties to a contract wish to settle the debt with paper dollars, bars of gold, or a few head of cattle, the State — Keynes's declaration to the contrary — has no business interfering, as long as the matter of the contract is not illegal.
If, however, the State begins manipulating the currency to achieve an end, regardless how worthy that end might seem in the short run, the country (and, in our day, the world) in effect surrenders private property, personal sovereignty, and individual human dignity to total State control. Destruction of private property through manipulation of money and credit is less obvious (and thus more insidious) than other forms of socialism, but the end is the same. Private property is almost always the first natural right to be taken away, but it is never the last. Liberty — freedom of association — follows hard on the heels of the abolition of private property, while life itself is under continual assault these days by the "economic dictatorship."
Obviously a common currency is a good thing. Unfortunately, when discussing a common currency, it seems that everything is tossed on the table except the all-important design of the financial structures by means of which a just money and credit system is implemented and maintained. Far more time is spent on political issues that should have been settled long since, or even on the specific design of the coin and currency.
Design considerations of the currency are, of course, important, especially as they can make or break the effort. All we have to do is recall the lack of success with the U.S. Twenty Cent Piece and the Susan B. Anthony Dollar. We cannot, however, ignore the design of the system. Like any other good thing, the system must be carefully structured so as not to raise barriers against full participation in the economic common good by everyone. The system must not be used for the advantage of an individual, a group, or nation over others. This is a significant danger when recognizing the potential abuses that result from concentrated economic power — and economic power is concentrated most effectively by controlling the means of creating money and credit.
The real issue lies in how money and credit are created, and the control that is exercised over the process. The original idea behind creating money and extending credit was that people and businesses in the community had productive potential. There was land, labor, natural resources, technology, and the demand for goods and services. Unfortunately, there was frequently not enough gold or silver coin available to finance development.
British efforts to develop India economically in the nineteenth century, for example, were seriously hampered by the fact that the currency was the silver Rupee. Massive amounts of silver were imported each year, sometimes more than total world production. (Helfferich, op. cit., 134.) This caused a shortage everywhere else, particularly in Europe with its traditionally silver-based currency. Simply purchasing the material for the currency represented a substantial economic drain. The very activity carried out to spur economic development thus acted as a brake on it, a phenomenon that modern central bankers have yet to acknowledge.
Without an adequate supply of sound currency, productive projects remain ideas. Then someone discovered that productive potential could be turned into money through the extension of "pure credit." That is, someone realized that instead of using credit and creating money based on existing accumulations of savings achieved by cutting consumption, credit could (and, in fact, invariably is) based on the present value of existing and future marketable goods and services. Having a definable present value, this can be turned into "money" and used to finance the formation of the very capital used to generate the future savings needed to repay the loan.
To replace existing accumulations of savings as collateral (which, as we have observed, is what past savings are generally used for, not direct capital investment), the risk premium typically charged on all loans except those made to the presumably "risk free" government can be used as an actual premium on capital credit insurance and reinsurance policies.
Reform of the Banking System
At least one more thing is needed to ensure that the State — whether local, regional, national, or even global — does not manage to seize control of money and credit and put or maintain itself as an economic dictatorship. The commercial and central banks of the world must be independent of the State, or, if the central bank is construed as a "fourth branch of government," that the executive, judicial, and legislative branches do not have any means of taking it over and subverting it to their own purposes.
Taking the United States Federal Reserve System as an exemplar, there are certain measures that could be implemented almost immediately to restore the independence of the Federal Reserve. One, restrict the Fed to rediscounting qualified private sector paper of member banks supplemented with limited open market operations involving private sector paper issued by businesses and non-member banks. Two, make the prohibition against monetizing government deficits more than a dead letter by forbidding the Federal Reserve to deal in either primary or secondary government issues. Three, institute a 100% reserve requirement by rediscounting all qualified loans for industrial, commercial, and agricultural purposes at the regional Federal Reserve banks.
Existing savings can be used to make loans to government and consumers, or for speculative investment. Any "new money" created by the extension of bank credit and discounting of bills of exchange must be restricted to properly vetted and financially feasible loans made for commercial purposes. These measures would go a long way toward restoring some sanity to the financial system, but one thing more is needed: a program to encourage widespread direct ownership of the means of production. One possibility is outlined in the two books co-authored by Louis O. Kelso and Mortimer J. Adler, The Capitalist Manifesto (1958) and The New Capitalists (1961). The subtitle of the latter is revealing, and illustrative of the incoherent mess into which a dogmatic faith in Keynesian economics has trapped the global economy: "A Proposal to Free Economic Growth from the Slavery of Savings."
Instituted in a way that conforms to the original intent of central banking, and adding a program of expanded capital ownership so as to ensure the broadest possible participation in the economy and economic and political empowerment of everyone, common currencies can be of great benefit to everyone. Even a global common currency, hedged about with such safeguards as independence from government and widespread direct ownership of the means of production, would be of great benefit to humanity.