As regular readers of this blog are aware (and, if they're not, they should be), binary economics, in contrast to the three mainstream schools of economics (Keynesian, Monetarist/Chicago and Austrian) and virtually all of the not-so-mainstream schools, adheres to the Banking Principle.
Briefly (hear, hear!), the Currency Principle is that "money" consists solely of coin, currency, demand deposits and some time deposits, and that "saving" is defined strictly as cutting consumption. This means that all other means of carrying out exchange, i.e., bills of exchange, are not considered, Say's Law of Markets is redefined or negated, and its application in the real bills doctrine is rejected.
The Banking Principle is that "money" is anything that can be used to settle a debt, and "saving" equals investment. Stretching a point almost to the breaking and including speculation — gains realized from holding an asset rather than putting it to productive use — under "investment," yes, cash stuffed in a sock and hidden in a mattress for security is, technically, an "investment" in hoarding or, at least, working capital. It's a dumb investment if carried to extremes, but still an investment, albeit one that doesn't of its nature generate a stream of income.
Under the Banking Principle Say's Law of Markets is defined in its fullness, and its application in the real bills doctrine validated. "Investment" (real investment, that is, that generates a stream of income) can thus be financed not by cutting consumption, but by drawing a bill on the present value of a future capital project, and redeeming the bill when the capital is up and running and generates profits sufficient to pay for itself.
Dr. Furstenberg's article accurately detailed the problems that occurred in the United States as ownership of industrial and commercial capital became increasingly concentrated following the Civil War. The Homestead Act staved off concentrated ownership of landed capital for a few decades, but by 1893 Frederick Jackson Turner could claim that the end of "free" land meant the end of democracy by ending easy access to capital ownership.
The Panic of 1893 and the resulting Great Depression of 1893-1898 were a graphic demonstration of the dangers to both political and economic democracy inherent in concentrated capital ownership. When most people have only their labor to sell and labor is being displaced by advancing technology, power concentrates in owners of capital, not labor. The Panic of 1893 also exposed the serious weaknesses of the financial system . . . and the concentrated control of money and credit dictated by widespread acceptance of the Currency Principle that was congealed into law in Great Britain with the Bank Charter Act of 1844, and in the United States with the National Bank Act of 1863.
As we've said a number of times on this blog, however, we adhere to the Banking Principle. Thus, one of our Faithful Readers sent us a link to Dr. Furstenberg's article with the comment,
Here is an historical perspective on our current financial downturn, from an apologist for the welfare state. Furstenberg views the rise of the welfare state as the natural and necessary response to the Great Depression/s of the late 1800s, brought on by the same kind of monopolist and speculative activities in the banking and securities industries as brought on our present day global financial meltdown. Just curious, how does his analysis jibe with Harold Moulton's study?
I think we've also commented several times on how much we like it when we don't have to think up a topic for the daily blog posting. Another thing we like is when we can answer pretty much off the top of our collective head. Here goes.
Moulton did not address this issue directly. In his discussion of the Panic of 1893 and the resultant Great Depression in Financial Organization and the Economic System (1938), he only noted that Populist focus on the "silver question" during William Jennings Bryan's 1896 campaign for president derailed any efforts toward genuine reform of the financial system, while the recovery of 1897-1898 seemed to make the issue irrelevant. The failure of reform also made the Panic of 1907 seemingly inevitable as a result of the growing concentration of control over money and credit, mostly in the hands of J. P. Morgan.
Moulton did, however, address the issue of the loss of the frontier, and hinted that, contrary to Turner's thesis, it did not have to mean the end of democracy. Probably not coincidentally, Turner's thesis was seemingly confirmed by the Great Depression of the 1890s. Similarly, the Great Depression of the 1930s apparently validated the idea of the "mature economy" that sprung up after the Crash of 1929. Now, the current "Great Depression III" seems to confirm Furstenberg's claim that the Welfare State is a necessary adjunct to the growing wealth gap and the increasing disconnect of the financial markets from the productive sector. From the perspective of binary economics, of course, the real problem is lack of democratic access to capital credit to finance widespread ownership of capital.
Responding to the late 19th century claim (probably inspired by Turner) that the loss of geographical expansion meant the end of expanding markets, and the idea in the 1930s that the developed nations of the world had "mature economies" and must accept lower rates of growth unless subsidized by government, Moulton countered,
"These observers, like the present-day adherents of the mature economy philosophy, overlooked the vast continuing potentialities for intensive capital development. In the great new era of expansion which followed, intensive industrialization, together with some new industries, offered larger outlets for investment than had been furnished by the previous period of geographical expansion across wide continental areas.
"The capital requirements over the next generation loom fully as large as those of any preceding period. On the basis of projected population trends, some authorities estimate that the United States may have by 1980 as many as 187 million inhabitants [227 million, actually — Moulton used the lower rates of growth during the Great Depression for his projection]. To supply the primary needs of the additional population, and at the same time to raise the standards of living of the entire population, say, 100 per cent, would require a much larger annual capital expansion than we have had during any comparable period in the past. In making this statement allowance is made for the usual rate of increase in man-hour productivity resulting from technical progress. The realization of the production program involved in this expansion would necessitate the employment (on a 40-hour week basis) of a larger proportion of the total population than was employed in 1929." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 27-28.)
Addressing the disconnect between productive activity and the financial markets that seems inevitable within the Currency Principle framework dictated by Walter Bagehot (that is, the growth of speculation as opposed to true investment) and described in Lombard Street (1873) — and thus the presumed "independence" of private sector corporations from the capital markets — Moulton noted, "It may possibly be that dependence upon the capital market for expansion money is decreasing — that an ever-larger proportion is being obtained from undistributed earnings; but there is no evidence to support this conclusion." (Ibid., 38.)
As Moulton pointed out in The Formation of Capital (1935), it's not a question of a fixed "supply of loanable funds" determined by reductions in consumption being allocated among consumption, investment, and speculation. Rather, the problem — especially today — is that savings are being hoarded (according to a Reuters report a few months ago, nearly $2 trillion in cash is sitting idle in U.S. corporations), at the same time that new money is being created at a tremendous rate to finance consumption and speculation, while new capital formation goes begging. Within the binary framework, consistent with the Banking Principle, both consumption and speculation should be financed out of existing savings and current income, while new capital formation is financed by the expansion of commercial bank credit, discounting of bills among merchants, and the rediscounting of merchant's and banker's acceptances at the central bank.
Still, from the perspective of binary economics, there are a few things wrong with Moulton's analysis, or at least a few things are left out. We would dispute, for example, his implicit assumption that most people necessarily gain their income by selling their labor in the wage system, and the idea that technological progress increases "man-hour productivity."
There is, however, no quarrel with Moulton's conclusions: that expansion in industrial and commercial capital has the potential to more than make up for the loss of free access to landed capital, and there is no reason to finance either speculation or consumption through the creation of new money — such as provided the trigger for the Panic of 1873, the Panic of 1893, the Panic of 1907, the Crash of 1929, and the home mortgage crisis of 2007.
Evidently trapped by the wage system assumption (instead of the past savings assumption), Moulton did not make the leap that Louis Kelso did and observe that, if land was no longer freely available . . . why not open up equally free access to the means of acquiring and possessing private property in industrial and commercial capital — financed by expansion of commercial bank credit? In this, the analysis of Goetz Briefs is more useful, and more consistent, both with Kelso and with Pope Pius XI. Briefs was a labor economist who was a student of Father Heinrich Pesch, S.J., and a member of the Königswinterkreis discussion group headed by Father Oswald von Nel Breuning, S.J., who ended up as chairman of the economics department of Georgetown University.
In The Proletariat: A Challenge to Western Civilization (1937), Briefs's contention was that the operation of laissez faire capitalism stripped workers of ownership, making them dependents of their employers. To try to maintain the status quo, the Welfare State came into being, forcing the great mass of people into a condition of wage slavery and dependency on the State, at the same time gradually eroding standard of living as the State tried to make up for the loss of the value of labor by redistribution and manipulating the currency.
Moulton's analysis did not take into account the effect of the loss of small ownership of capital. He viewed the economy in aggregate as a macro-economist and, in common with every other Banking Principle adherent with the exception of Kelso (e.g., Law, Smith, Thornton, Say, Fullarton), apparently didn't see the importance of widespread ownership, even though he described in detail the means to finance it.
On the other hand, Briefs, like von Thünen, Cobbett, Morrison, Leo XIII and Pius XI saw the importance of widespread ownership of capital . . . but had no idea how to finance it except by cutting consumption and accumulating money savings.
The Keynesians, like Alvin H. Hansen, "the American Keynes" who helped engineer the New Deal, see no problem with increasing public debt in order to finance welfare and entitlements. For their part, both Moulton and Briefs saw ultimate disaster in spending without producing — but never came together to come up with a sound and lasting solution.
Kelso's genius, in part, lay in combining two strains of thought that seem almost unbelievably obvious to any binary economist . . . once Kelso pointed it out.
#30#