Thursday, September 29, 2011

“The Perils of Ignoring History”

It’s completely insane; utterly irrational. A column in today’s Wall Street Journal, “The Perils of Ignoring History” by David Wessel, is so filled with historical errors and misrepresentations that anyone even remotely familiar with the principles of binary economics, to say nothing of the school of classical economics based on the Banking Principle (e.g., Adam Smith, Henry Thornton, Jean-Baptiste Say, etc.) can only be tempted to take the column as satire.

The horrifying thing is that it is not satire.

This is not to say that Mr. Wessel is satanic, evil, or even socially unacceptable. He’s probably kind to children, dogs, and might even go to mosque, temple, or church on Friday, Saturday, or Sunday, respectively, whichever is appropriate. He may even be fun at parties, have great lyrics, and a beat you can dance to. It does, however, show the damage that the best-intentioned people can do when they get hold of some really, really bad ideas.

Since we exceeded by a country mile the limit of what the Wall Street Journal will even consider in the way of letters and wild-eyed raving (a.k.a., “op-ed” pieces), we figure they’re not going to publish it. Besides, we needed to come up with something topical for today’s posting as we bask in the glow of our guest appearance on the Skip Mahaffey Show yesterday. If you didn’t take advantage of the links with which we provided you last week to listen in, you missed a good time . . . ours, if not yours. Your penance is to listen to Russell Williams’s “The Challenge” this Saturday . . . which, come to think of it, is a reward, not a penance. So send a honking big contribution to CESJ, instead. Believe it or not, we take postage stamps, even beads (if they’re a minimum of 14k gold).

Anyway . . . .

September 29, 2011

Letters, The Wall Street Journal
200 Liberty Street
New York, NY 10281

Dear Sir(s):

David Wessel's "Capital" column, "The Perils of Ignoring History" (WSJ, 09/29/11, A4) displays an egregious ignorance of history. By commenting favorably on Liaquat Ahamed's claim that "the Federal Reserve's failure to understand its role as lender of last resort" exacerbated the Great Depression of the 1930s, Wessel completely ignored the fact that the Federal Reserve was intended to be the "lender of last resort" for private sector needs, not government.

As clearly stated in the original Federal Reserve Act of 1913 — carefully ignored by politicians since the 1930s anxious to embrace what Dr. Harold G. Moulton, president of the Brookings Institution in 1943 called "the new philosophy of public debt" and growing State control of the economy required by mindless adherence to Keynesian dogma — the purpose of the Federal Reserve System was to provide an "elastic currency" for the private sector by rediscounting eligible industrial, commercial, and agricultural paper when liquidity in the private sector ran low.

Federal Reserve open market operations were to be confined to supplementing rediscounting by buying and selling securities issued by non-member banks, companies and individuals. Dealing in secondary issues of government securities was permitted to 1) regulate reserve requirements of commercial banks, and 2) provide for the retirement of the government debt-backed National Bank Notes (1863-1913) and their eventual replacement with private sector asset-backed Federal Reserve Notes — a program that ended in the late 1930s. Instituting a 100% reserve requirement for commercial banks by mandatory rediscounting of all qualified paper would remove the remaining legitimate justification for dealing in government securities in any form.

As Moulton pointed out in 1936, when he accurately predicted the "depression within the depression," the keys to sustainable economic recovery are, 1) production, and 2) employment. In the late 1950s and early 1960s, Louis Kelso and Mortimer Adler refined Moulton's analysis, explaining that for sustainable economic growth, it is essential that "full employment" be construed as full employment of both labor and capital in the production of private sector marketable goods and services, not boondoggling or government "make work," and that universal ownership of an adequate capital stake is essential to sustain non-inflationary growth supported by private sector consumer demand, not government spending.

Wessel failed to take into account the substantial difference between good uses of asset-backed credit for investment in broadly owned new capital to finance private sector production of marketable goods and services, and bad uses of debt-backed credit to finance consumption, speculation, and government expenditures. In 1929, just prior to the Crash, the "experts" who didn't understand that commercial and central banks can create money as needed for private sector growth and development by discounting and rediscounting bills drawn on the present value of existing and future marketable goods and services, and assumed that all money is backed by the present value of unconsumed marketable goods and services on which the State has asserted a claim by emitting bills of credit were baffled by the fact that there seemed to be enough money for both speculation and investment in new capital formation. After the Crash, when commercial banks stopped creating money by discounting and rediscounting, the "experts" were again baffled by the dearth of money.

The answer is that before the Crash of 1929 and our current downturn, both bad and good uses of credit were widespread, and afterwards both bad uses and good uses of credit dried up. Temporary over-capacity was exacerbated by the drop in the value of collateral and the panic that resulted when the speculative bubble collapsed. The only way to correct this situation and implement a sustainable program of economic recovery is to limit all new money creation to the financing of feasible new capital that is broadly owned by people who will use the income generated by the production of marketable goods and services first to repay the acquisition loan and afterwards for consumption, with the discount rate set by the administrative costs of the system plus a just profit for the commercial banks, plus a risk premium to purchase capital credit insurance in lieu of traditional collateral. All consumption, speculation, and government expenditures should be financed out of existing accumulations of savings, with the interest rate set by the market. This will provide adequate financing for new capital formation, and thus job creation that can be sustained without government manipulation.

No more money should be created by discounting, rediscounting, or open market purchases of primary or secondary government securities. Since financing for feasible private sector capital can be created at will by commercial bank discounting and central bank rediscounting, dividends should be made tax deductible at the corporate level, and taxed as regular income at the individual level. This would provide sustainable consumer demand to match the production of marketable goods and services, and restore the functioning of Say's Law of Markets.

Blah, blah, blah.


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