Wednesday, October 5, 2011

Halloween Horror Special III: The Jekyll from Creature Island

Today we have a real horror story to relate. A while back Norman Kurland spent a great deal of time with a film producer, carefully filling him in on the Just Third Way and Capital Homesteading, with special attention to the proposed monetary and tax reforms that constitute an essential part of the package.

The film is set to be released within a month. We've seen the trailer, and there was no mention of anything that Norm said. We found out that Norm's four hours or so of interviews ended up on the cutting room floor.

Okay — given that, with half a chance, Norm has a lot to say, we still have to admit that, all things considered, it's got substance. Frequently, it's a problem that he doesn't get a chance to say enough, and trying to cover everything within limited time constraints can result in a less than superficial presentation.

That was not the case in this case. Norm specifically asked, not once, but several times, if the producer had any questions. No, he had none.

Now for the horror story. It's bad enough having four hours or more of valuable insights tossed in the trash. It's suppression of the ideas by ignoring them. It's worse when what ends up presented to the public is filled with half-truths, distortions, and outright errors of fact. Not only is the truth ignored, serious damage is done and true reform efforts are derailed. There's now a promotional website up for the movie that is so filled with quarter-baked, rehashed conspiracy theory as to be unbelievable.

Fortunately, despite the massive amounts of money poured into the film, it shouldn't have any more effect on public policy than anything else that starts off by claiming space aliens hand-delivered the solution to us millennia ago. The problem is that, conditioned by this sort of thing as presenting an "alternative" to today's system, policymakers tend to think of any alternative as coming from outer space.

Anyway, here's our list of comments on just one point listed on the promotional website under the year 1913:

1. "The Federal Reserve Act is passed, creating the Central banking system we have today."

The Federal Reserve System bears only superficial resemblance to the institution established in 1913. Today it is used as the lender of first resort to the State for political purposes. It was set up as the lender of last resort for the private sector, to provide adequate liquidity for qualified industrial, commercial, and agricultural projects by rediscounting bills of exchange originally discounted by member commercial banks, supplemented with limited open market operations in private sector securities issued by individuals, businesses, and non-member commercial banks. The rediscounting of eligible paper would provide an asset-backed, "elastic" currency to avoid both inflation and deflation, and ensure that there was adequate liquidity in the system. The power to engage in open market operations in government securities was intended to retire the debt-backed National Bank Notes (1863-1913) and the Treasury Notes of 1890, and regulate the reserve requirements of member banks. The program to retire the National Bank Notes was terminated in 1938, while the 100% reserve requirement mandated under Capital Homesteading would eliminate the necessity for adjusting reserve requirements.

2. "This allows a private organization to create money out of nothing, loan it out at interest, make decisions without government approval and control the amount of money in circulation."

One, going by William Crosskey's analysis and statements by various framers of the Constitution, such as George Mason, the federal government does not have the power to emit bills of credit, that is, "create money." The understanding of the Founding Fathers was that it is the private sector's role to create money, of which the State can tax a portion to defray legitimate expenses of government. This is what Alexander Hamilton argued in his "Opinion as to the Constitutionality of the Bank of the United States" (1791), and in which Secretary of State Thomas Jefferson reluctantly agreed. To prevent the money power from becoming a pawn of political interests as is the case today, it was always intended that a central bank be a privately owned and independent institution, a fiction that the Federal Reserve maintains to this day, and was the case with the four previous central banks and central banking systems in the United States, i.e., the Bank of North America under the Articles of Confederation, the Bank of the United States under the Constitution, the Second Bank of the United States, and the National Bank system. All were privately owned and operated, filling a role that, given the control over lives and property that the money power conveys, should never be vested in the State.

Two, banks, including central banks, do not create money "out of nothing." A bank of deposit cannot create money at all. A bank of issue — and a central bank is a type of bank of issue — creates money by "accepting," that is, discounting or rediscounting private sector bills of exchange drawn on the present value of existing or future marketable goods and services. These are called "banker's acceptances." This value is real, it can be conveyed by contract, and the instrument(s) conveying the property right in the present value of existing or future marketable goods and services can and does serve as the medium of exchange. It is not "nothing."

Three, the proper function of a central bank is not to loan money, at interest or no interest. A central bank is designed to discount and rediscount bills of exchange, that is, transform one type of money into another type of money. This is done at the present value of the existing or future marketable goods or services that stand behind the money being exchanged. The discount rate is not an interest rate, that is, a sharing in profits. The discount rate is the difference between what the promise is worth today, and the amount at which the promise is redeemed on maturity. A risk premium is usually built into the discount rate, and does not constitute "interest" either. True, interest is received by a central bank on the securities purchased on the open market, but in the case of the questionably legal government bills of credit, the "profits" are turned back to the government after deducting operating costs. In effect, the government is getting "free money" to carry out politically motivated spending without being accountable to the taxpayer. The Federal Reserve does not make loans to private individuals or companies. That is not its function, and thus the statement "loan it out at interest" is incorrect. Interest is charged by banks of deposit on loans extended out of their capitalization and deposits. When, as is the case today, commercial banks assume far too many functions outside their proper role, they charge interest on consumer loans and other non-commercial loans. If the loans are made out of capitalization or deposits, the interest is legitimate. When money is created by discounting and the charges are in excess of the discount rate and a risk premium as if the loan were made out of existing savings, it is illegitimate. This, however, is a moot point in this discussion, because the Federal Reserve does not make consumer or any other loans. Nor does it currently fill its proper role by rediscounting qualified paper for member banks, but provides financing for government and government projects, such as the bailouts.

Four, "make decisions without government approval." Since the head of the Federal Reserve is removable by the president, all decisions are, ipso facto, made with "government approval." This was not supposed to be the case. Dr. Harold Moulton implied that the effective takeover of the Federal Reserve by the federal government in the 1930s to ensure financing of the New Deal was fascist.

Five, the Federal Reserve does not control the amount of money in circulation. That is the belief, but it assumes that "money" consists solely of coin, banknotes, demand deposits and some time deposits, i.e., "M2." In reality, even today, when the federal government exercises more control over the economy than at any time previous in history, private sector bills of exchange, i.e., privately issued money discounted and rediscounted between individuals and businesses, accounts for an estimated 60% of GDP. These are called "merchant's" or "trade acceptances."

3. "In the same year, Income Tax is established through ratification of the 16th Amendment, stating, "Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

This implies that the 16th Amendment made the income tax constitutional. Not so. The income tax has always been constitutional, as the Constitution clearly states, otherwise the power to levy taxes is meaningless, as was explained by the United States Court of Appeals for the Third Circuit in Penn Mutual Indemnity Co. v. Commissioner (32 T.C. 653 at 659 (1959)). The issue addressed in the 16th Amendment was not the constitutionality of the income tax per se. Again, the income tax has always been constitutional. The issue was whether an income tax is a direct or indirect tax on persons. Under the Constitution, prior to the 16th Amendment, no direct tax on persons could be levied without apportionment among the various states on the basis of population.

There was an income tax levied during the Civil War. At the time, there was discussion in Congress as to whether an income tax is a direct tax on persons, or a tax on property, and thus indirect on the property owner. As most people still derived income from capital ownership, it was decided, for the sake of expedience, that an income tax would be regarded as an indirect tax, and thus could be levied without apportionment, but the question was never settled, and the income tax was removed in the 1870s.

In 1894, following the Panic of 1893 and the start of the first "Great Depression," Congress again passed an income tax, largely in response to Populist and socialist pressure. The tax was challenged in 1895, and the Supreme Court ruled that an income tax is a direct tax on persons, and thus unconstitutional without apportionment among the various states on the basis of population. (Pollock v. Farmers' Loan and Trust Co., 157 U.S. 429, 158 U.S. 601 (1895).) This was reasonable, as by 1893 and the effective end of the "free" land available under the Homestead Act a determinant number of people subsisted on wages alone, not property income. As income in that case is thus generated by persons and not property, an income tax is obviously a direct tax on persons, not a direct tax on property (and thus indirect on persons), and clearly unconstitutional without apportionment among the various states on the basis of population.

As you could see if we gave you the link to the website (which we have no intention of doing, as you might actually look at it), this briefly corrects just the misinformation in only one of the listed points. The real problem appears to be a fundamental misunderstanding of money, credit, banking and finance, combined with an uncritical acceptance of historical "facts" that have been asserted for generations without verification or examination of their reasonableness.

"Plan Nine from Outer Space" is more believable.

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