We got a little busy today, so I did not finish the next posting in the series on Say's Law of Markets. I'd tell you what we were busy with — it's important — but then I'd have nothing to write about in the weekly news roundup on Friday. In any event, this is related to Say's Law and the real bills doctrine.
For years we tried off and on to get through to people stuck in the Currency School paradigm. Inevitably they manage to conclude that we're talking about somehow getting propertyless workers to save out of an inadequate wage income and throw their money away in the stock market. The stock market is irrelevant to what we are talking about. We regard the secondary market for debt and equity as nothing more than an extremely high stakes gambling casino. This does, however, touch on what we believe may be the real issue: the slavery of past savings.
Most people are stuck in a paradigm dictated by something called the "British Currency School" of finance. They are in good company. The assumptions of the Currency School underpin all three mainstream schools of economics, Keynesian, Monetarist, and Austrian, as well as distributism, social credit, and georgism, and are largely responsible for the insane financial arrangement under which we currently suffer. The basic tenet, virtually a religious dogma, of the Currency School is that it is impossible to finance new capital formation, whether or not the ownership of the new capital is concentrated or widespread, without first cutting consumption, accumulating money savings, then investing. A bank is defined solely as a financial institution that takes deposits and makes loans, i.e., a "bank of deposit."
The problem is that this assumption is completely wrong, and is opposed by something called the "British Banking School" of finance, the basic principles of which are Say's Law of Markets, and the application of Say's Law called "the real bills doctrine." The key difference with the Currency School is that the Banking School recognizes two types of banks, not just the bank of deposit. The other is the "bank of issue," defined as a financial institution that takes deposits, makes loans — and issues promissory notes.
To explain as briefly as possible, Say's Law is usually grossly oversimplified as "production equals income, therefore, supply generates its own demand, and demand its own supply." It's a bit more than that, as Say explained to Malthus in his response to Malthus's rather flabby criticisms of Say's Treatise on Political Economy (1821). As Say put it, we do not really purchase what others produce with this thing called "money." Money is a symbol, an abstraction representing the present value of existing and future marketable goods and services in which the issuer of the money has a private property stake. Money is thus the (not a) medium of exchange and is the means by which people convey private property rights in the creation and settlement of debts.
Instead, we purchase the productions of others with what we ourselves produce by means of our labor, capital, and land. Thus, if some goods remain unsold, it is because other goods are not produced. Kelso and Adler's contribution to this was to point out that Say didn't consider the case in which someone is prevented from becoming an owner of capital once his or her labor declines in value in the production process, and he or she can no longer produce enough by labor alone to exchange for the productions of others.
The answer to the question as to where people without capital or existing savings are to obtain financing to acquire ownership of capital is found in the real bills doctrine, the main point of contention between the Currency School and the Banking School. If we assume that only existing accumulations of savings can be used to finance new capital formation — the position of the Currency School — then we are dependent on the rich to be generous to redistribute their wealth. Since human nature cannot be changed, we can expect to wait a very long time for this to happen. Given that, I have found that many people think they can redefine the basis of the natural law from Intellect to Will, and then proceed to redefine the entire spectrum of natural rights — this evidently being the only way they see that property is no longer sacred and can be violated "because Jesus (or Moses or Allah or Fred Down the Street) said so."
The real bills doctrine gets around this difficulty. The doctrine, regarded as nonsense by Currency School adherents, is that it is possible to create money at will by "drawing bills" ("bills of exchange") on the present value of existing and future marketable goods and services in which the drawer of the bill has a private property stake. This bill is money; money, in fact, had this form 5,000 or more years ago, thousands of years before the invention of coined money. The drawer can use this bill to pay a debt, as can each holder in due course upon indorsement (for some reason that's spelled that way instead of "endorsement"), until the bill reaches maturity and is presented to the original issuer for redemption, either in goods, services, or currency to the face value of the bill.
This is called a "merchant's acceptance," and each transaction is called, "discounting" and "rediscounting" the bill. When taken to a bank of issue for discounting or rediscounting, it is called a "banker's acceptance." The bank trades its general credit in the form of newly issued promissory notes (today usually demand deposits rather than banknotes) for the individual credit of the drawer of the bill. On maturity, the drawer redeems the bill from the bank, and the bank cancels the promissory note. The discount represents the bank's fee for this service. When the bills represent "real" assets, that is, the present value of actual existing and future marketable goods and services, it is called a "real bill." If there is no definable present value behind the bill, or the drawer does not have a private property stake in that present value, it is called a "fictitious bill." If all bills are real bills, and all are redeemed on maturity, there will be neither inflation nor deflation.
The validity and proof of this process can be found in The Formation of Capital (1935) by Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, the third volume in a series that presented an alternative to the Currency School-based Keynesian New Deal. Our new edition of The Formation of Capital includes a foreword tying together the principles of the Banking School with the expanded ownership ideas of Kelso and Adler as applied in The New Capitalists (1961).