Friday, April 29, 2011

News from the Network, Vol. 4, No. 17

This has, as usual, been a busy week, what with meetings, discussions, conversations, conferences, and not-so-idle chatter. Obviously, we do a lot of talking. Unlike most movements, however, in which it seems as if you schedule meetings to determine what the next meeting should be about, we actually get things accomplished (such as figuring out ways to get door openers to open doors) — or there would be no sense in having the meeting. Occasionally, of course, we get other things done, as well:

• As a result of the previous week's meeting with Mr. Reese Neader, Policy Director with the Roosevelt Institute Campus Network, the RICN has asked to be added as an organizational sponsor for the Coalition for Capital Homesteading, for which it has already indicated "strong support."

• As you know from reading the daily postings, we had a lively discussion this past week on money. We finally realized something that we've known for some time: that the Just Third Way uses a fundamentally different definition of money than most people: anything that can be used to settle a debt. This makes communication difficult at times as we are really speaking two different "languages."

• Pollant Mpofu in the U.K. has been reaching out not only locally (meaning London), but also to South Africa and Nigeria. He sponsored a gathering in London at which around 150 people showed up, a number being from the London School of Economics, which those who adhere to Banking School principles (i.e., money is anything that can be used to settle a debt, Say's Law of Markets, and the real bills doctrine) might be tempted to view as "the belly of the Beast." It might not be so beastly, after all, if so many showed up to hear a talk on the Just Third Way and afterwards enquired where they might be able to obtain copies of Capital Homesteading for Every Citizen (answer: it's on Amazon, U.K.), things can't be that bad.

• Not that we can match Pollant's energy, but we have been making outreach efforts to a number of domestic U.S. politicians. The recess around Easter, however, seems to have slowed responses. We're hoping things pick up next week.

• Today CESJ had a strategic planning meeting to follow up on the rally at the Federal Reserve and CESJ's own celebration. Effective door opening was the focus, with a great deal of lively discussion.

• Michael D. Greaney has submitted his qualifications to become a "credentialed expert" on the Helium Writers' Cooperative, opening up another venue for presenting information about the Just Third Way.

• Plans are afoot to revise Capital Homesteading for Every Citizen, as some of the facts and figures have become a little dated.

• As of this morning, we have had visitors from 48 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Australia. People in Kenya, Belgium, Ireland, Nepal, and Germany spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "Was the Federal Reserve a Conspiracy?" "Why Own the Fed Not End the Fed?" and Part I of "The Slavery of Past Savings."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, April 28, 2011

In the Blink of an Eye, Part IV: Word Games

This will (we hope) be the final posting in this series about repaying the national debt by changing one form of money into another. To recap, the idea was put forth to convert all interest-bearing government obligations of the United States, currently totaling somewhere in the rather exclusive neighborhood of $14.3 trillion, to non-interest-bearing "cash."

Also to recap, this would in no way reduce the national debt. It would simply change it from an obligation on which interest is paid, and thus presumably attractive to investors, to an obligation on which interest is not paid, and thus presumably unattractive to investors. The instruments would remain obligations, and the national debt would remain the same — that $14.3 trillion, after all, includes Federal Reserve Notes and government demand deposits at the Federal Reserve.

What seems to be behind the proposal is the fixed idea that government somehow "creates money," and that money "created" by the government does not have to be repaid or redeemed. As monetary theorist Gertrude Coogan claimed — erroneously — money is an unrepayable debt owed by the nation to itself.

On the contrary. "Money" is anything that can be used to settle a debt. That being the case, the issuer of money has to have some kind of property or other right in whatever backs the money so that the issuer can make good on the promise conveyed by the money. When private individuals and companies create money by drawing bills of exchange, they have to own the present value of whatever will be used to redeem the bill. When a government creates money by emitting bills of credit (the "constitutional version" of private sector bills of exchange), it must back the bills with its power to collect taxes and redeem the money in the future. Neither private individuals nor a government can draw bills of exchange or credit that are unredeemable, or there is no basis for accepting the money in exchange; the "faith and credit" of the issuer has been compromised, and the money is worthless.

The idea that a fiat currency is unredeemable by anything is called in logic a "fallacy of equivocation." True, a fiat currency is unredeemable in specie, that is, gold and silver. If issued by a private sector individual or business (including a bank), however, the original issuer of the money — the drawer of the bill of exchange — must deliver either the goods or services promised on the maturity date, or the value thereof in other goods or services, or other negotiable instruments, depending on the specific terms of the contract (bill), thereby redeeming the original promise. If a government emits a bill of credit, the government must eventually collect sufficient taxes to redeem the bill, or go bankrupt when people realize that the money is worthless and refuse to accept it as something that cannot be exchanged for what ultimately backs it. No one, whether private individual, business, or the State, has the power to make a promise he doesn't have to keep. Thus, we can see the weakness in the proposal as explained in the final posting in the discussion:

When the Fed creates money by fiat, they call it "quantitative easing" or "money market operations" and the journalists call it "printing money." Printing money is the better metaphor, although hardly a precise description. "Quantitative easing" is obfuscation, pure and simple. What they are doing is creating money with key strokes on a computer. I am perfectly happy for a sovereign government to have that ability. Somebody has to do it. But since we know they can do it, why don't they do it on a scale sufficient to eliminate the national debt? They bailed out banks, insurance companies, hedge funds, government sponsored entities, such as Freddie Mac and Fannie Mae. Why don't they just bail out the United States Government?

If we accept the explanations in this brief blog series, we can see that the Federal Reserve (according to Harold Moulton under the direct control of the federal government; the "independence" of the Federal Reserve is a transparent fiction, Moulton, Financial Organization and the Economic System. Washington, DC: The Brookings Institution, 1938, 416-417) doesn't create money at all, whether by printing or "with key strokes on a computer." Nor does "a sovereign government . . . have that ability."

What happens when the Federal Reserve (or the federal government) manufactures some form of negotiable instrument backed by future tax collections instead of existing savings is to transfer wealth from the private sector to the State via the "hidden tax" of inflation. The only acceptable means to retire the national debt is not to repudiate it by transforming it into unredeemable fiat currency with no backing of any kind, but to rebuild the tax base, increase tax revenues, and pay down the debt with money created by the private sector. This can be done by drawing bills on the present value of existing and future marketable goods and services. These bills are discounted and rediscounted with individuals, enterprises, or banking institutions. They can then be rediscounted at the Federal Reserve (or purchased through open market operations) to provide an asset-backed currency with which to carry out day-to-day transactions, such as making consumer purchases and paying taxes.

Rebuilding the tax base and restoring a sound money supply, while critical, is not the focus of this series. Suffice to say that implementing the monetary and tax reforms embodied in Capital Homesteading would, we believe, fix the problems and put things back on a solid footing.

We do not think that repudiating the national debt (whatever the means or sleight-of-hand), printing more money, or "going back to gold" is the answer. The currency was never 100% gold and silver, anyway. Congressman George Tucker gave statistics in 1839 that estimated that gold and silver were less than 5% of the money supply at that time. In 1912, the year before the enactment of the Federal Reserve Act, U.S. GDP was $37.4 billion — and total estimated WORLD production of gold and silver from 1492 to 1912 was $29.1 billion. (Harold Moulton, Principles of Money and Banking. Chicago, Illinois: University of Chicago Press, 1916, 74.)

Capital Homesteading is the only answer.


Wednesday, April 27, 2011

In the Blink of an Eye, Part III: Inflation

As we've seen so far in this series, a proposal to change government securities into cash — that is, currency — by simple fiat would, in theory, change nothing. There would be no elimination of the national debt, for regardless what form the obligation takes, the issuer still has to make good on it. Whether you call a piece of paper a "Treasury Note," or a "Federal Reserve Note" ultimately makes no difference. Recall in 1963 when all Silver Certificates were changed by fiat into Federal Reserve Notes. The notes still read "One Dollar (or Five) In Silver, Payable To The Bearer On Demand," but the promise had been negated, reduced to "legal tender for all debts public and private." The backing was changed from silver, to government debt.

The difference between what happened in 1963 and the proposal to transform all government securities from investments to currency should be obvious. Silver Certificates and Federal Reserve Notes were/are both forms of "current money," that is, "currency." They are, in fact, small denomination government securities — promissory notes — used to facilitate day-to-day transactions. As one of the participants in the original discussion that started this series responded,

Eliminating interest payments on the national debt would not eliminate the debt, though it should deter persons, corporations, and other governments from buying Treasuries and increasing the debt. This would be true especially now that the prospective downgrading of the U.S. government's creditworthiness would reduce the demand simply to park money in government notes and bonds.

Interest payments should be eliminated only on money created for investment in productive wealth by discounting and rediscounting, and, in fact, it would be good to permit money creation only for this purpose, because creating money for consumption or for speculation would be inflationary. One third of the wealth in America (as part of our GDP) consists of buying and selling money, mostly speculative, which has no real value at all. A two-tier system to differentiate productive wealth from non-productive (and therefore counter-productive wealth) would be a good compromise.

Naturally, we could go on for pages (and we have) explaining the statements in the above response in greater detail, pointing out how we would have used a slightly different word because the one used might give the wrong impression, blah, blah, and showing how much more intelligent we are than any mere commentator, and so on. It's more important, however, to get at the truth and clarify possible misunderstandings — like the ones expressed in the response to the response:

You misunderstood me. When the Federal Reserve and Treasury Department denote all outstanding treasury bills and notes as cash, but no longer bearing interest past the date of the conversion, all bond holders have been paid in full for their bonds in cash, with any additional payment necessary to bring the interest due current to the date of conversion. Thus the federal debt is eliminated — by fiat, yes, but that is how money is created. There is no default, because every bondholder is paid in full, 100 cents on the dollar, plus all accrued interest.

I am not suggesting that the Federal Reserve and Treasury Department could (or should) do this without explicit legislation. But I would much rather hear Congress debating such a bill than worrying about cutting necessary government services in a hopeless effort to pay off the national debt. We need to stop worrying about false economic issues and focus, as you suggest, on a more equitable economy, and one that operates within the limits of our natural environment in a way that is sustainable over the next thousand years.

There are a number of misconceptions in this rebuttal, some of which we've already covered. What we need to focus on right now, however, is the claim in the original proposal that repaying the debt by changing one form of money into another would not be inflationary. We disagree.

"Treasuries," while as fully "money" as any other type of negotiable instrument, whether issued by the State or a private person, are not usually current money, that is, they do not ordinarily circulate as currency in day-to-day transactions. They may very well be (and frequently are) used in large transactions, but not as a medium of exchange you typically carry around in your wallet. The holders in due course of government securities view the instruments more often as investments than as "money," per se, holding them for the interest income, not as media of exchange.

If, then, the interest provision was taken away, the character of the instruments as investments would be removed, and they would be construed as mere "cash," useful only as a store of value and medium of exchange. That being the case, all holders in due course who viewed the instruments as investments would immediately exchange them for interest-bearing securities or dividend-paying equity shares on the secondary market in order to maintain their incomes.

The effect of pouring an estimated $14.3 trillion (the size of the national debt according to the "National Debt Clock" as of this morning, 04/27/11) into the stock market can only be imagined. Prices of debt and equity instruments would skyrocket. Seeing greater speculative "returns" in the stock market than could be realized by engaging in productive activity, businesses and private individuals would put their money into the stock market instead of into the production of marketable goods and services, just as happened to a much lesser degree in 1929 — why work when all you have to do is borrow money to purchase secondary debt and equity instruments that are sure to go up in value? — a self-fulfilling prophecy . . . up to a point.

As production of marketable goods and services declined in response to the flight of capital from the productive sector to the secondary markets, prices to the consumer would begin to rise rapidly. As happened in Germany and Austria-Hungary following the First World War, hyperinflation would very likely kick in — hyperinflation being a condition in which the price level rises faster than money can be created. This would be due to the backing of the currency (the general wealth of the economy under Currency School assumptions) being transformed from the present value of existing marketable goods and services, to the speculative value of secondary debt and equity. The only difference would be that, following World War I, Germany's and Austria-Hungary's productive capacity was taken away in "reparations," while under this scenario the productive capacity of the United States would be starved for credit and simply unable to function — the difference between murder and suicide.

Ironically, the situation in Central Europe after the Great War is substantially no different from the situation today — or eighty years ago. This is a result of the shift in focus from productive activity (which, naturally, takes a relatively long time to realize adequate gains in return for producing marketable goods and services) to gambling in the stock market that embodies a "get rich quick" approach to "investment." (Cf. George Randolph Chester's "hero" of Get-Rich-Quick Wallingford: The Cheerful Account of the Rise and Fall of an American Business Buccaneer. New York: A. L. Burt Co., 1908.) The value of the currency falls, and real money income deteriorates rapidly. As Harold Moulton observed back in the 1930s,

The abundance of funds for investment in short-term liquid securities, and its scarcity for uses which involve loss of liquidity, point to a weakness in the financial structure of modern society; namely, the dissociation of the saving process from the productive utilization of funds. This difficulty is only accentuated, not created, by the depression. The unwillingness of many investors to part with their money except on the basis of a maximum assurance that they can get it back on demand, coupled with inability on the part of borrowers to make any productive use of purchasing power without immobilizing it, creates a perpetual problem. For, unless a connection is maintained between these savings and the growth of real capital, the saving process will exercise a perpetual downward pull on the money income of the community. (Harold G. Moulton, The Recovery Problem in the United States. Washington, DC: The Brookings Institution, 1936, 384.)

That is, diversion of funds — existing accumulations of savings or new money backed only by the State's promise to pay — from either consumption or investment and into speculation, as provided the trigger for the Great Depression of the 1930s (so distinguished from the Great Depression of 1893-1898, and the current "recession"), causes a decline in real income. Paradoxically, the decline in real income accelerates as the rate of inflation increases.

What then happens is the baffling phenomenon of "stagflation." Stagflation is a weird combination of a decline in real income (effective deflation) due to lack of productive investment, at the same time the price level is rising in response to an increase in the volume of currency (inflation). This results from the conviction on the part of politicians that you can spend your way out of a deficit by creating massive amounts of effective demand in the form of currency ("cash") and pumping it into the economy, whether by "Quantitative Easing," or transforming money held as an investment into effective demand for secondary debt and equity.


Tuesday, April 26, 2011

In the Blink of an Eye, Part II: What Do You Mean by "Cash"?

Yesterday we started looking at a proposal to convert interest-bearing government obligations, to non-interest-bearing government obligations. As the question was phrased, it was whether it would be feasible to change government securities ("Treasuries") to "cash." Our quick answer was that it wouldn't make any difference. The obligation would remain the same. Whether the obligation is in the form of a Federal Reserve Note, a government demand deposit, or a T-Bill, the government still has to "make good" on the promise it conveyed when issuing the obligation.

As things are now, of course, the government has been satisfying (not exactly the right word) its old obligations with new obligations. Would it, then, make any difference whether the outward form of the obligation changed, or whether or not interest was paid? Let's look at those questions.

At one time (and depending on which country you were in), the "Ms" — the definition of money — went up to M7 and possibly beyond. The 1964 (6th) edition of Paul Samuelson's economics textbook mentions government securities as "near-money" (p. 275-277), a meaningless distinction outside the Currency School. This writer vaguely recalls a professor in college far too many years ago saying something about "M14," but the professor may have been joking — we were using a later edition of Samuelson's economics text, but the professor may have been Chicago School.

At present in Great Britain, "M5" represents the total money supply, which includes all debt instruments, such as government securities ("Treasuries"). In the United States, the Federal Reserve has been eliminating various Ms for decades. The latest round got rid of "M3." This restricted the definition of money to the point of absurdity in an effort to impose more State control on the financial system to attain desired results, such as low inflation and full employment. (This may be analogous to the way the Bureau of Labor Statistics keeps changing the definition of "unemployment" so that the level of unemployment doesn't scare people too badly, or how the definition of inflation is tailored to exclude food and oil prices.)

The fact that government securities are already money was noted in the original question . . . which we haven't posted yet, so let's look at the original proposal, numbering the paragraphs for convenience:

1. Why don't we pay off the national debt by "monetizing the debt," that is, by declaring that all Treasury bonds and bills are now non-interest-bearing cash accounts? This would stop the drain on national resources of on-going interest payments, and relieve concerns that the debt will destroy our economic vitality, or impose an undue burden on our grandchildren.

2. Some would object that it would be grossly inflationary, because it creates such a huge amount of new money. But, in fact, the Treasury bills and bonds are already "money" (M3) for all practical purposes, so it's just converting interest-bearing money to non-interest bearing money. Those who wish to may use that cash to start buying other interest bearing bonds, probably from Blue Chip corporations and states and municipalities, thus driving down the interest that state and municipalities and corporations have to pay for such bonds, because of increased demand for them.

3. Paying off the national debt does not produce more natural resources. But it may result in a more equitable distribution of claims against products and services, and mobilize national resources to provide more goods and services, stimulating job-creation.

4. It is a feature of sovereign governments that they can create money. Since our Federal Reserve System operates to allow most creation of money by private banks, we need to restructure the Reserve System to make it a truly national bank. Private banks create money to advantage bankers. The money that a government-owned central bank creates can and should benefit all Americans, and not just the rich.

Let's deal with the "easy" questions first. We agree that government securities — and all private securities that take the general form of mortgages and bills of exchange (both real and fictitious) — are "money" as that term is understood in the Banking School of finance. The Federal Reserve no longer uses M3, for the reasons above, but that's just "word games" being played to try and fool people into thinking an unworkable system can be made to work, even when based on bad or false assumptions.

It's the issue of interest that interests us here. First, there is no effective interest rate on government securities held by the Federal Reserve. After subtracting administrative fees to offset costs of running the system, all Federal Reserve profits are turned over to the federal government . . . that paid the interest in the first place, not to the member banks that are the ostensible "owners" of the Federal Reserve, and that receive no benefit, and cannot even vote their shares. (The shares are actually an interest-bearing membership deposit, and do not represent real ownership.)

As for converting interest-bearing government obligations held by members of the public (including foreign countries and individuals) into non-interest-bearing obligations, that might violate the Fifth Amendment: "No person shall be . . . deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation."

It might be argued that the proposal is simply to convert the face value of an interest-bearing security into a non-interest-bearing obligation, but consider the possibility that you would thereby deprive the holder of that security of the anticipated future stream of interest payments, in expectation of which the security was purchased in the first place, often by a retiree who needs that income to meet living expenses, or a pension plan or mutual fund with the same goal. You would, in short, be depriving someone of the present value of the future stream of income, and not compensating him or her for it. The holder in due course of any obligation is entitled to both the principal and the interest, and the proposal deprives the holder in due course of the interest, to say nothing of making it more difficult to locate an affordable alternative with the same degree of security as a government bond.

Inflation is another issue, but we'll look at that tomorrow.


Monday, April 25, 2011

In the Blink of an Eye, Part I: The "Brief" Answer

As you know if you've been reading this blog, we've been a little taken up with extra and curricular activities. These include the annual Rally at the Fed, the CESJ annual meeting, the CESJ annual celebration, preparation of a paper for possible submission to a law journal, "Income Tax Day" burdens, County and Commonwealth tax filings, Easter/Spring musical preparation (belonging to two groups, one connected with a church, tends to have its downside around Christmas and Easter, although the incidence of goodies during rehearsal break increases — kudos to Lynnette for the Easter cupcakes with jelly beans and green coconut "sprinkles," BTW), and a few other things, like Spring Cleaning.

That being the case, we weren't paying too much attention to our e-mails. We tended to rush through them just to get them out of the way. We almost missed the thread in the Kelso Binary Economics Group about retiring the (U.S.) national debt in the twinkling of an eye. (We headed this series of postings "In the Blink of an Eye" purely as a matter of personal preference, not out of any dislike of Hostess confections or anything else.)

Thus we were pleasantly surprised early this morning opening our neglected e-mails to discover that we could escape from doing too much work while resting up from the rigors of the recent holiday weekend. (If you don't think it's rigorous being in the choir and having to stand for hours at a time when you can't find your special concert shoes, and listening to what amounts to substantially the same sermon four times in a row . . . try it sometime.)

In short, we received the following query from a long-time Just Third Way supporter. Names are deleted to protect the guilty and to make the series generic; also we did some editing and corrected some spelling that we don't think changes the substance any:

We need some expertise here. If we can bail out insurance companies and banks, one argument is that we can bail out the U.S. government by converting U.S. government securities ("Treasuries") to cash and thereby eliminate the national debt. This gimmick would be better than merely declaring national bankruptcy as Brazil and Argentine did in order to start their economic miracles. Our present policies are self-destructive, so almost anything would be better than repeating what we do over and over again without any effect, which is a behavior that is normal only in insane asylums.

Although this is now all theoretical, it might offer an opportunity to restrict all money creation to productive investment through rediscounting eligible commercial paper, as envisaged in Section 13 of the Federal Reserve Act of 1913 but rarely if ever used, or at least to create a two-tier interest rate whereby money available for consumption would carry high interest rates in order to steer money to productive uses. This could double our gross national product and through broadened capital ownership triple the money available for consumption.

This sounds like something that the Tea Party would love and could thereby introduce Capital Homesteading via the backdoor as an add-on. In my comments below as a pragmatist I've suggested some possible boomerang effects, but how could either the liberals or the conservatives object on principle?

Have we mentioned how much we love it when others do our work for us? Anyway, we'll give the brief answer today, and follow it up the rest of this week (and possibly beyond) to give the explanation(s) behind the quickie answer. Also, as we've noted a couple of times in the News from the Network (posted each Friday on this blog, free plug), we've been working on a paper covering the subject of money, credit, banking and finance from the perspective of binary economics in more depth, and the first draft is finished. Right now we're adding footnotes and cites, and refining the language, but we hope to have it ready "soon" (whatever that means), largely because we're trying to schedule a meeting with a potential publisher for next week . . . or whenever we can get it.

Now to the "quick answer."

From within the "Banking School" principles of the Just Third Way, the proposed conversion of existing government securities into "cash" is not a viable option.

[N.B., 19th and 20th century writers frequently used the terms "Banking School" and "Banking Principle(s)" interchangeably. That is, when they weren't confusing the elasticity of currency that occurs "naturally" with the application of Banking School principles, with the elasticity of currency that results from State manipulation of the currency under some applications of Currency School principles. (We'll discuss the "convertibility" issue and its relation to the two schools of finance, that is, a paper currency redeemable in gold and silver, some other day.)]

Here's why (briefly):

From a Just Third Way perspective, the proposal does nothing to meet government obligations and retire outstanding debt. It would simply transform one outward appearance of money into another by modifying the definition without changing the thing's substantial nature.

This is because all money is, in a sense, debt — just as all debt is money, as Henry Dunning Macleod explained — "money" and "credit" being simply two different forms of the same thing. A debt is a contract that requires the delivery of something of value in order to be satisfied, either on demand, or on the occurrence of some specified future event, such as a maturity date.

To oversimplify a little, the key to a sound currency is whether the "money debt" is backed by the present value of marketable goods and services in which the issuer of the money has a property stake (ownership), or whether the debt is backed by a promise to pay out of future tax revenues.

Under the theory of government held by the Founding Fathers of the United States, the government does not have a property stake in the tax base. That is, the State does not own the general wealth of the economy, usually cited as the backing of the currency under the present system. In the U.S. system, taxes are construed as a grant from the citizens, not an exercise of property by the State.

Thus, in effect, under the present system, the federal government is making promises for other persons (yes, the government is a "person") to keep. The "other persons" are the future generations who are going to get stuck paying the bill for today's deficit spending, assuming we avoid national bankruptcy.

Can we, then, bail out the U.S. government by converting U.S. government securities ("Treasuries") to cash and thereby eliminate the national debt?



Assuming that by "cash" we mean "M1" and "M2," i.e., the Federal Reserve's (current) definition of "money" — coin, banknotes, demand deposits (checking accounts), and selected time deposits (savings accounts) — adding "Treasuries" to the Federal Reserve definition of "money" would do absolutely nothing. All that would be accomplished is a change in definition, a verbal sleight-of-hand. The reality — a gigantic pile of debt owed by the federal government to holders of its instruments — would remain unchanged.

This is because there is no legal difference as money between the token coinage, Federal Reserve Notes (direct obligations of the federal government, not the Federal Reserve, thanks to William Jennings Bryan . . . long story), or any other negotiable instruments issued by the government. They are already "money," and can all be used to settle debts by holders in due course until redemption — assuming that people still have faith in the "faith and credit" of the U.S. government, and will accept the instruments in the expectation that the government will (eventually) make good on them.

That isn't much of an answer, so we'll explain ourselves starting tomorrow. Remember: even at over 1,000 words, that's the short answer.


Friday, April 22, 2011

News from the Network, Vol. 4, No. 16

Although the volatility of the stock market suggests a very shaky economic position to anyone familiar with the gyrations that took place in the months preceding the 1929 Crash, the powers-that-be seem convinced that over-inflated values on the stock market are a Sure Sign Of Economic Recovery. Of course, that little matter of a weak currency, high unemployment, low production, mounting government debt, etc., etc., etc. . . . picky, picky, picky. Despite our morose-colored glasses (or, actually, because of them), we continue to work toward introducing the Just Third Way and implementing a Capital Homestead Act by the end of 2012 (note that we didn't say where we would try and implement it . . .):

• Principally as a result of the informal discussions following the Rally at the Federal Reserve by the Coalition for Capital Homesteading and CESJ's annual meeting and celebration (two discrete organizations and events, in case you're in any danger of getting them confused), a number of key and potentially key politicians have been targeted for outreach initiatives.

• Efforts were also initiated for regular follow-up with Federal Reserve Chairman Benjamin Bernanke to persuade him to read the letter hand-delivered to him every year after the rally outside the Federal Reserve.

• Pollant Mpofu is making continuing efforts to put spokesmen of the Just Third Way in touch with the governor of the Bank of England and the head of the central bank of South Africa. Pollant's efforts in this initiative have been untiring. As a result, key figures in British and African political circles are becoming aware of the possibilities offered by Just Third Way reforms.

• The first draft of CESJ's paper on the legal and accounting understanding of money and credit, and how it relates to the need to reform our money and credit systems to open up democratic access to the means of acquiring and possessing capital, is finished. At over 100,000 words it might seem a bit verbose for a mere article, but the subject is burdened with so many misconceptions and misunderstandings that it would be fatal to treat the subject in less depth. The paper provides the essential backup to the projected revision of Capital Homesteading for Every Citizen which, while the current edition is still valuable, contains information that requires updating. The principles remain unchanged. Fear not, however — while the paper goes into great depth on a very limited topic, we anticipate that what appears in the revised Capital Homesteading for Every Citizen will be no more than a paragraph or two at most as a brief summary . . . assertions, really, but fully supported in the paper.

• Sales of In Defense of Human Dignity increased significantly in April, possibly as a result of "Income Tax Day," or perhaps as a measure of the increased introspection accompanying the "High Holy Days" of a number of different religions. The compendium is written from a Catholic orientation, but from a natural law perspective that makes it applicable to Aristotelians of any faith (with a little mental editing for language and terminology, of course).

• As of this morning, we have had visitors from 44 different countries and 46 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Australia. People in Kenya Venezuela, Germany, Ireland and Saudi Arabia spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "De Tocqueville on Wage Slavery in America," "The New Manifest Destiny," and "Why Own the Fed Not End the Fed?"

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, April 21, 2011

The Slavery of Past Savings, Part IV: Get Real

Let's suppose (just for the sake of argument) that we have the right, on our own authority, to punish those whom we believe are guilty of breaking God's law. Yeah, we know — we should have enough to keep us busy just trying to get human law to reflect some modicum of justice, even reason, but this guy God, you know, He's getting on in years, and He clearly needs our help in running the universe — or so those who want to punish others for every infraction of God's law, real or (more often) imagined, seem to believe. Didn't that Chesterton chap (to insert a little alliteration) put together a collection of stories, Four Faultless Felons (1930) about people whom others believed to be guilty of particularly heinous offenses, but who were, in reality, exercising heroic virtue?

Yes, yes, don't confuse us with common sense.

Let's get down to the issue here. Be realistic. No, really. Use your brain. Even if "the rich" stole every cent from the workers and consumers for the past two hundred years, there would not have been sufficient savings to finance a fraction of a hundredth part of today's vast accumulation of capital, regardless of the Keynesian delusion. As Harold Moulton pointed out in The Formation of Capital, as long as the financing for new capital formation relied on cutting consumption and accumulating money savings, new capital could only be formed at an agonizingly slow rate.

The rebirth of the science of finance in the 16th and 17th centuries and the invention of commercial banking, however, freed capital formation from the necessity of having to accumulate savings before financing capital. By drawing bills of exchange and either discounting and rediscounting the bills with other merchants or at the new commercial (mercantile) banks, new capital formation could be financed out of future savings instead of past savings.

To oversimplify, the old way of investing was first to cut consumption, accumulate money savings, and then invest. The restoration of bills of exchange to an important role in the economy was revolutionary. It was now possible first to create money by drawing a bill on the present value of a project, then invest, and redeem the bill out of profits generated by the new capital itself: "future savings." The sequence for investing became, 1) develop a plan for a financially feasible capital investment, 2) draw a bill on the present value of the proposed investment, 3) either use the bill itself as money, or exchange it at one of the new commercial banks for another form of money, 4) invest in the new capital, 5) make the capital profitable by increasing consumption of the marketable goods and services produced by the capital, and 6) redeem the bill out of the profits realized (saving), thereafter taking the profits as income. In other words, instead of cutting consumption to accumulate savings, the savings were now realized by increasing consumption, thereby generating profits.

As should be obvious, past savings are not only unnecessary as anything other than collateral to secure the creditworthiness of the bills drawn (and which function can be filled by capital credit insurance, thereby removing the necessity for past savings completely from the system), the belief that capital can only be financed by cutting consumption and accumulating money savings actually inhibits, and in many cases prevents financially feasible capital from being formed.

For "financial feasibility" is the key to understanding how to free humanity from the slavery of past savings — and to do away with all the doubtful fun of hating others and blaming them for flaws in the system. In theory — and often in practice — it is not necessary for someone to own anything at all before investing in new capital. It is only necessary that the reasonable projections of future profitability equal or exceed the cost of the capital. When that is the case, the investor can draw up a contract — "draw a bill" — on the present value of the future projected profits, use the contract as money (either directly or by exchanging it for money in another form at a bank), buy the capital, make it profitable, and then make good on the promise in the contract by taking some of the profits and redeeming the bill.

It doesn't matter if the capital costs a thousand dollars, or a thousand trillion dollars. It is only necessary that the capital generate sufficient profits to redeem the bill and provide the owner with enough income to make the whole endeavor worthwhile. It thereby becomes possible to accumulate — and accumulate honestly, without taking one cent from anyone else that isn't earned by providing a marketable good or service at a fair price — incredible amounts of wealth.

If there's any "crime" being committed, it's the maintenance of barriers that exist the prevent everyone else from doing the same thing. That is something for which the rich can justly be condemned, not the fact of their wealth. Even the wealthy and powerful have to admit the justice of the demand to allow others to do what they've been doing for generations. They don't have to admit the claims of the poor and needy to the wealth of the rich.

Except in cases of extreme need, redistribution doesn't come under human law in any event (Rerum Novarum, § 22) — and it's a dangerous precedent to set even then — see the Summa: "Human law cannot punish or forbid all evil deeds: since while aiming at doing away with all evils, it would do away with many good things, and would hinder the advance of the common good, which is necessary for human intercourse." (Ia IIae q. 91, a. 4.)

The evils of coercive redistribution of existing wealth are too well-known to go into at any length here, although the "entitlement mentality" and a permanent condition of dependency — welfare slavery — forced on recipients come immediately to mind, as well as the vitriol and hate directed at anyone attempting to defend natural rights such as liberty (contract/freedom of association) and property. As Heinrich Rommen, the noted student of Father Heinrich Pesch, S.J., explained,

A person may "debunk" the freedom of property and of contract as a detestable device for capitalist exploitation and think he must do away with both, but that does not destroy the meaning of these freedoms, that they are the outgrowth and, as far as they are working principles, the guaranty of the dignity of the human person. The essential element of democracy, that is, government by open discussion, persuasion, and consent, rests on the moral idea of solidarity and loyalty to one another. Thus it is these essentially moral ideas that are meant with democracy. (Heinrich Rommen, The State in Catholic Thought. St. Louis, Missouri: B. Herder Book Company, 1947, 479)

No, the right response to today's great disparities in wealth is not redistribution, except in emergencies (and be careful even then), but to make it possible for everyone to acquire wealth using the same techniques. It's also far more politically feasible, since the currently wealthy stand only to lose their virtual monopoly on future wealth that doesn't even exist yet, leaving them with their current accumulations intact, or nearly so.

Thus we have the rather obvious response to those who waste their time hating the rich because the rich have evidently done something that seems impossible: used future savings generated by capital, rather than past savings generated by human labor to accumulate astonishingly huge amounts of capital.

That's how things stand now, and why, in this 50th anniversary year of the publication of Kelso and Adler's The New Capitalists we need to take a closer look at and start understanding the subtitle: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

Of course, if you still insist on going after the rich and prosecuting them for Crimes Against Humanity (as determined by you), and Breaking God's Law (as enforced by you), may we see your credentials, please? And that little matter of proof? Not your hysterical opinion — proof. Otherwise you're in the "Caiaphas Club," in which the principal membership criterion is to believe that one person or small group, guilty or innocent, should be sacrificed so that (your vision of) the nation might survive or come to pass.


Wednesday, April 20, 2011

The Slavery of Past Savings, Part III: Now Hear This!

One of the most common complaints about implementing the Just Third Way is that "they" won't let "us." "They" usually refers to those who own or control existing accumulations of savings (those whom Pope Pius XI called a "despotic economic dictatorship," Quadragesimo Anno, § 105), while "us" is, well, the rest of us.

There's just one, tiny problem with the "us v. them" mentality (aside from the fact that you spend so much time hating that you never seem to get anything done). It's that you don't need past savings or current reductions in consumption to finance new capital formation.

How many times do we have to say this? Existing accumulations of savings are NOT required to be able to finance new capital formation.

No, really, they aren't. We mean that. There's a reason we keep putting up links to Harold Moulton's The Formation of Capital and Louis Kelso and Mortimer Adler's The New Capitalists. The "secret" is in the subtitle of the latter: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

Does that mean our time would be better spent in studying how money is really created (i.e., discounting bills of exchange, albeit in many, many, many different forms, including coins of gold and silver), than in trying to find and punish those whom we have decided are guilty, guilty, guilty?

Absolutely. Not only is it consistent with basic precepts of justice and charity as applied in human society — forget about any authority you think you have to enforce God's law just because you think the Poor Old Duffer needs your help to run the universe — but it makes much more sense to work to fix things so that the system runs the right way, rather than let the system continue to go to hell as long as you find out who (you think) is responsible.

What? You mean messes don't correct themselves just because you found the allegedly guilty party and punished him or her? Horrors! "Oohh, I've wasted my life," as Comic Book Guy said in The Simpsons Episode 9.4, "Treehouse of Horror VIII" when he saw a missile with a nuclear warhead coming down the street towards him.

There's hope, however. First, do a little reading — although before you delve into Just Third Way materials, take a refresher course in Mortimer Adler's How to Read a Book. It wasn't a best seller just because it looks good on a coffee table.

After that, you might try (in this order) The Capitalist Manifesto, The New Capitalists, and Capital Homesteading for Every Citizen . . . all of which are available free in .pdf, especially if you can't find one of the semi-rare print copies of The Capitalist Manifesto and The New Capitalists, and are too cheap to spring for the $18 plus shipping for Capital Homesteading for Every Citizen.

One more thing: for those of you into superstition and luck, this is a particularly auspicious time to (re) read The New Capitalists — 2011 marks the fiftieth anniversary of its publication. If you're feeling particularly adventurous, maybe ask the Kelso Institute what plans they have for a celebration.


Tuesday, April 19, 2011

The Slavery of Past Savings, Part II: Bad Assumptions Make Bad Problems Worse

Yesterday we posted a few thoughts on how the slavery of past savings keeps many people locked into a "condition of dependency," as one of the euphemisms for slavery in the Antebellum South had it. The trouble is that just putting down thoughts seldom makes things "real" to people. It's too easy to say that the writer means somebody else, or doesn't really understand your specific situation, and reject it out of hand.

Case in point: the condemnation of slavery issued by Pope Gregory XVI in the Bull In Supremo Apostolatus (1839) was almost immediately stripped of all meaning by some southern Catholic bishops anxious to keep Catholic slave owners in the Church — and contributing. The centuries of prior condemnations of slavery were simply ignored, and the faithful assured that the Bull didn't apply to chattel slavery as practiced in the American south.

We see something similar today in the way that academic economists hasten to assure their own faithful followers that papal condemnations of unjust social, economic, and financial institutions don't apply to them — usually due to the alleged absolute necessity of past savings to finance capital formation. The rather flabby rationalizations usually go something like this:

Worker ownership? Must be prudential. Why? Because if ownership is widespread, then nobody can save enough to finance new capital, and the economy will disintegrate.

Private property? Must be prudential. Why? Because if the State can't redefine private property, then it can't justify confiscation and redistribution to keep the economy running by increasing effective demand, instead of only on an emergency and temporary basis in cases of extreme need.

Liberty? Must be prudential. Why? Because if the State cannot direct every individual action, people just won't do what the State wants them to do, especially if a determinant number of people have direct, personal, and effective ownership of the means of production.

And so on. Ultimately, the past savings dogma means that all rights come from the State, and that humanity was created for the State, not the State for humanity.

The tragedy is that the slavery of past savings is no longer a mere catch phrase to inspire people to organize to change the system. In a graphic example of the utter dependency that the past savings dogma forces on people, we need look no further than the floundering that characterizes the effort to start rebuilding Japan after the triple horror of an earthquake, tsunami, and nuclear emergency. The people of Japan are now threatened with a fourth disaster: mishandling of the financing of the rebuilding effort.

Are either the people of Japan or their officials incompetent or motivated by anything other than good will? No sane person could make that argument and be able to support it with any credible evidence. Are they, however, effective?

That's a different issue. Evidence strongly supports the contention that the Japanese, like the rest of the world, are trapped in a flawed system dictated by the disproved past savings dogma.

Consequently, the same officials who reacted to the immediate aftermath of the disasters with competence and efficiency, even heroism, are now facing serious consequences for their "failure" to take effective subsequent action. As today's Wall Street Journal reported, "Government officials who drew praise for early disaster-relief efforts . . . could face growing criticism from disaster survivors if more progress isn't seen soon." ("Hard Choices Slow Rebuilding in Japan," Wall Street Journal, 04/19/11, A12.)

Japanese officials cannot be blamed for the lack of progress. It's "the system" within which they are forced to operate. The slavery of past savings dictates that rebuilding cannot take place until and unless consumption is cut and sufficient money savings accumulated. That means 1) using whatever savings have been accumulated in the country by cutting consumption in the past (mostly invested in government debt), 2) inflating the currency to shift "forced savings" from consumers to producers through involuntary reductions in current consumption, 3) borrowing from other countries, or 4) some combination thereof — none of which is politically feasible or financially sound, and in combination are a recipe for economic suicide.

Consequently, you have many cases similar to that reported for Mr. Jun Koisumi and his family, proprietors of an eyeglass shop in Kesennuma for more than eighty years, and which was completely destroyed in the earthquake and tsunami. Mr. Koisumi has stated he wants to start all over again, but "he doesn't really know how because he doesn't have the money." (Ibid.) While there are major concerns expressed about clearing away rubble and locating the bodies of those still missing, the real issue is always finding the financing. As the article related, "many are hitting a wall as they wait for more guidance from government officials about how and where to rebuild, and how to pay for it." (Ibid.)

This is how a single bad assumption (and the subsequent bad assumptions built on it) makes bad problems even worse. With sufficient financing, the cleanup and recovery of the bodies of the missing could be factored into the cost of rebuilding specific enterprises, such as that belonging to the Kesennuma family. Bringing a site into condition to be used in a productive enterprise is always capitalized, at least in theory. With financing extended as described in Harold Moulton's The Formation of Capital, and incorporating the refinements added by Louis Kelso and Mortimer Adler in The Capitalist Manifesto and The New Capitalists, the only question should be whether the present value of the projected future stream of income to be generated by the capital (the new or rebuilt business) exceeds the cost of cleanup plus whatever it takes to make the enterprise profitable.

Financing is thus not the problem that virtually all the "experts" presume it to be. It is only a question of marshalling non-financial resources, such as labor, equipment, and raw materials, sufficient to clean up the sites and get the enterprises into production as fast as possible. As happened in the United States at the outbreak of World War II, Japan would immediately reach full employment.

Nor would the benefits be limited to Japan. In wartime, a country is limited to what it has inside the country, or can obtain from its allies. That need not be a concern in Japan, which — potentially — has the resources of the entire world on which to draw . . . if the financing can be found (and re-read the above paragraph). If there are not enough workers, equipment, or raw materials in Japan, they can be imported.

With the high levels of unemployment in the U.S., for example, it would be very easy to find temporary workers for, say, a six- to eighteen-month assignment in Japan, along with construction companies ready, willing and able to supply all the necessary equipment, even if only on a rental basis. By the time the workers returned to the U.S., this country would have learned a lesson from the Japanese recovery, and implemented its own rebuilding program (have you seen some of our cities, to say nothing of our heavy industry?), with a vastly increased demand for labor. (There would also be the added benefit of greater understanding and cooperation between two of the major Pacific Rim countries, to the benefit of all.)

Centuries of enslavement to bad ideas is long enough. It's time to start taking some effective action.


Monday, April 18, 2011

The Slavery of Past Savings, Part I: Introductory Thoughts

On Friday of last week the Coalition for Capital Homesteading staged its seventh annual Rally at the Federal Reserve. The security guards, as usual, seemed glad to see us. Evidently the annual demonstration by the Coalition is a refreshing change from individuals and groups screaming hate at an institution they don't understand, that fills a role they don't grasp, within a system based on principles they fail to comprehend.

No, the Coalition doesn't have the time or other resources to waste in preparing "Enemies Lists," as seems to be the most popular pastime of people who insist that the most important thing in the world is to find the guilty and punish them, even if you have to invent charges or change the natural law to do it. In practicable terms, why waste all the effort hating others in the Name of Love when it's much easier (and certainly more consistent with real concern for the poor — as opposed to The Poor) to organize, make the necessary changes in the system, and make it possible for the non-rich to achieve a reasonable degree of affluence?

Yes, it is, admittedly, much simpler just to blame "them." This excuses you from actually having to do anything constructive — and it's certainly a lot more fun. Mindless hate justifies itself as you amuse yourself thinking up all the dirty, rotten things the rich or others must have done (and that you're going to do to them) or they wouldn't be rich, right? No honest person can possibly work enough to accumulate the amount of savings necessary to purchase such vast amounts of capital, so they must be thieves, right?

No, only half right. It's absolutely correct to claim that no person, honest or otherwise, could possibly produce enough using human labor alone or even capital to accumulate sufficient savings to purchase the vast amount of capital, the ownership of which is concentrated in the hands of a very few people today.

If something is half right, however, it necessarily implies that it's half wrong. And there is clearly something seriously wrong with the analysis that causes people to rant and rave endlessly (and fruitlessly) against the greed of (other) people, their (alleged) violations of God's Law (which, although the law is God's, they can't seem to leave it to God to enforce), their presumed oppression of others, so on, so forth.

The most obvious wrongness we see in that orientation is found in the Christian saying, "By their fruits you shall know them." The people who endlessly condemn the rich (and, seemingly, everyone else who doesn't agree with them), appear to be convinced that the best way to demonstrate their love for the poor is to hate the rich as much as possible. The hate becomes all the more hysterical if they don't have anything specific to go on other than the fixed belief, itself based on the assumption that no honest person can accumulate sufficient savings to purchase the incredible amounts of capital that characterize developed economies, that existing accumulations of capital must have been obtained dishonestly.

Proof? Who needs proof? The suspicion alone is sufficient to condemn anyone — the dhurty basset — who has more than I have, or that I think justified. Hate and envy are enough. We don't have to show you no stinkin' badges.

Is it, however, an absolute certainty that anyone who has more than others obtained it dishonestly by stealing from workers and consumers?

Yes — IF you are a slave of past savings, that is. Of course, once you realize that very little capital is actually financed out of existing accumulations of savings, the analysis — and the reason for the hate (Oh, what a feeling!) — disappears.

That is why the subtitle of Louis Kelso and Mortimer Adler's second collaboration, published half a century ago this year, is so important. The title doesn't really say much, and isn't accurate in any event: "The New Capitalists." It's the subtitle that tells you what you need to know: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

The sesquicentennial of the American Civil War, fought to free the chattel slaves, began just last week. Also last week was the 7th annual Rally at the Federal Reserve, another "shot" in the battle to free the wage slaves from dependency on past savings as the source of all economic good. Perhaps it's time for another look at Kelso and Adler's work.


Friday, April 15, 2011

News from the Network, Vol. 4, No. 15

Today was the annual rally outside the Federal Reserve in Washington DC, which accounts for the truncated news items this week — both because virtually all the activity was geared toward preparing for the rally and tomorrow's anniversary celebration, and it is itself the biggest news item of the week:

• The list of speakers, while somewhat reduced due to last minute emergencies, was impressive. The agenda started off with an invocation from the Rev. Robert Brantley, calling on everyone to work for justice to achieve peace.

• Following Rev. Brantley's opening, Norman Kurland gave the keynote talk, emphasizing the reasons for "targeting" the Federal Reserve and calling on Chairman Bernanke to take some effective action and start working to reform the Federal Reserve and work for the passage of a Capital Homestead Act by 2012..

• Right after Norm's talk, Eileen Mpofu of London gave an insightful commentary about the need for all people of the world to unite peacefully to gain the power that property confers on owners. She reported that she and her husband, Pollant, have been making tremendous efforts to bring the ideas of the Just Third Way to the attention of politicians and central banking authorities in the U.K. and in South Africa.

• Wendy Willibanks Wiesner then gave a talk on the importance of everyone coming together to advance the Just Third Way. Ms. Wiesner's talk was especially interesting as she comes from a "typical" capitalist environment, and has studied conventional economics.

• Michael D. Greaney spoke briefly on the turning points in Federal Reserve history, and how now we are at another one.

• Dawn Brohawn read a statement sent in by Barbara "Belle" Olson of Nevada, giving the perspective of the necessity for Capital Homesteading for older people on a limited income. Dawn then gave her own talk on the importance of Capital Homesteading as the only feasible way of which we know to achieve Capital Homesteading.

• Harriet Epstein spoke briefly on the importance of Capital Homesteading as a supplement, and even a replacement for Social Security from the perspective of someone who has worked with the elderly.

• As of this morning, we have had visitors from 47 different countries and 44 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Poland. People in Kenya Venezuela, Germany, Ireland and Guatemala spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "The Wrath of Keynes, or, The Fall of the House of Hayek," "The New Manifest Destiny," and "De Tocqueville on Wage Slavery in America."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, April 14, 2011

Is the Federal Reserve Usurping the Power of the Federal Government?

As we've been noting on this blog this week, many people think that the Federal Reserve should be shut down and the money power turned back to the government. The grounds for this is usually that the Federal Reserve has usurped the exclusive power of the government to create money, that private interests should not have the power to create money, and the only legal way to create money is to put everything in the hands of the State.

Not surprisingly, Harold Moulton disagreed — which may account for his unpopularity in many circles . . . at least those circles that don't understand money and credit. As the president of the Brookings Institution and author of The Formation of Capital observed,

In the view of many the transfer of the control of credit from private to public hands seems a natural and a desirable step. Since the interest of the public is paramount — why should the granting of life-giving credit not be vested in government hands? Others, equally interested in the welfare of the people fear that such a transfer of power will result, not in life and health for the economic organism, but in persistent decay. They point to a long history of government credit-granting in this and other countries, which revealed the baneful influence of political pressure, and to a long and eventually successful struggle in the nineteenth century to remove the extension of credit and the creation of currency from political control — to the end that credit, and in consequence productive activity, might be allocated on the basis of economic merit, thereby promoting productive efficiency and the expansion of the wealth and income of the nation. Recent trends suggest that we may have traversed a cycle of time and may be returning to the conceptions which dominated the political and economic philosophy of the eighteenth century. (Harold G. Moulton, The Financial Organization of Society. New York: McGraw-Hill Book Company, 1938, 483.)

Not surprisingly we've heard this before, and posted it a number of times on this blog. Nevertheless, it bears repeating, especially in view of the increasing level of demands to "End the Fed!" (see the comment to yesterday's posting) . . . and vest the federal government with even more power than it has at present:

As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account. (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)

if you're really interested in doing something constructive — and effective — about the Federal Reserve, come down to the Federal Reserve building in Washington, DC, this Friday, April 15, 2011. The rally starts on the front sidewalk of the White House (1600 Pennsylvania Avenue) at 10:15 am, then there is a walk to the Federal Reserve at 11:00 and a regrouping at the Federal Reserve at noon, with the festivities going to 1:30 pm.

Unless you'd rather just sit around and complain.


Wednesday, April 13, 2011

Was the Federal Reserve Act a Conspiracy? (No)

We've been hearing for decades about how the Federal Reserve Act of 1913 was somehow passed in "secret session," with only a few Senators voting on the bill on December 23, 1913 as the culmination of a grand conspiracy against the American people. That being the case, why are we demonstrating on Friday, April 15, 2011 outside the Federal Reserve building in Washington, DC to reform the Federal Reserve? Why not just shut it down, and let the government take over control of money and credit?

First of all, do you really want the government in charge of money and credit, seeing how well it's done with the economy? Be honest, now . . . is that really what you want?

In any event, the claim that the Federal Reserve Act was passed in secret is untrue. Financial reform was a matter of widespread public concern and a focus of both progressives and conservatives at the time. As one authority commented, "No objective stood higher on the Democratic reform schedule than banking and currency reform. In fact, there was by the beginning of 1913 complete agreement among informed circles that the most pressing economic need of the time was a fundamental reorganization of the nation's banking and money system." (Arthur S. Link, Woodrow Wilson and the Progressive Era. New York: Harper and Row, Publishers, 1954, 43.)

As a footnote to the preceding statement commented, Carter Glass of Virginia received "literally thousands of letters" from December 1912, to February 1913, begging Glass and his House committee to take swift and effective action to clean up the mess left by the Panic of 1893 and made worse by the Panic of 1907. (Ibid., 43-44.) Glass and Woodrow Wilson discussed a plan to counter the Aldrich bill even before Wilson's inauguration. (Ibid., 46.) The House of Representatives debated the bill for months before voting on the measure on September 18 and passing it on to the Senate. (Ibid., 47-50) The fight in the Senate was even more intense, as the conservative senators heaped abuse on the bill and attacked it endlessly:

With the compromises that had to be made to pass the House, bankers, business leaders and spokesmen in Congress had a field day. They denounced the bill as socialistic, theoretical, vicious, as the "preposterous offering of ignorance and unreason." The American Bankers association severely criticized the bill. . . . Surprisingly, even "liberal" bankers opposed public control of the Reserve. (Ibid., 50-51)

Hearings in the Senate lasted from September 1, 1913 to October 25, 1913. Endless lines of witnesses streamed in and out of the Capitol to testify before the committee chaired by Senator Robert Latham Owen of Oklahoma. Robert Owen, although a Senator from Oklahoma, was born in Lynchburg, Virginia in 1856, as was Carter Glass in 1858, who spearheaded the drive to get the Federal Reserve Act through the House. The record of the testimony covers more than 3,000 pages in three volumes dealing with the Banking and Currency Hearings.

The passage of the Federal Reserve Act was not done in secret, nor was it passed with just a few Senators or Congressmen present. Nor was it blind chance, luck, or a conspiracy, conservative or otherwise. As the New York Times commented more than a decade after the event in February 1924, "It has been the habit of our people to speak of the enactment of the Federal Reserve law in December, 1913, as a piece of good luck for the country. 'Luck' it certainly was, when considered in the light of the possibility that without it the United States might have been swept along with Europe into depreciated paper money." (Ray Baker, Woodrow Wilson, Life and Letters, Vol. III. New York: Charles Scribner's Sons, 1946, 201.) As one historian concluded,

The creation of the Federal Reserve System was the crowning achievement of the first Wilson administration. The system was not created to prevent industrial depressions or banish poverty. The framers of the act hoped merely that it would provide the country with an absolutely sound yet elastic currency, establish machinery for mobilizing the entire banking reserves of the country in times of financial stringency, prevent the concentration of reserves and credit in New York City, and, finally, preserve private enterprise in banking on the local level while at the same time imposing a degree of public regulation. On the whole, they succeeded remarkably well. (Link, Woodrow Wilson and the Progressive Era, op. cit., 53.)

That’s why, if you’re really interested in doing something constructive about the Federal Reserve, come down to the Federal Reserve building in Washington, DC, this Friday, April 15, 2011. The rally starts on the front sidewalk of the White House (1600 Pennsylvania Avenue) at 10:15 am, then there is a walk to the Federal Reserve at 11:00 and a regrouping at the Federal Reserve at noon, with the festivities going to 1:30 pm.


Tuesday, April 12, 2011

Why "Own the Fed," Not "End the Fed"?, Part II

Yesterday we claimed that the Federal Reserve is not acting unconstitutionally, regardless whether it is a branch of the government or a private corporation. Whether or not the federal government has the power to create money instead of simply setting the standard and regulating the value, the power to create money is not exclusive, as some people believe. The word "exclusive" is nowhere mentioned in connection with money in the Constitution.

Striking coins is specifically prohibited to the individual states, but a literal reading of Constitution is that the individual citizens retain the right to issue coins and currency, whether or not this means "creating money." In fact, in the early decades of the United States, there were a significant number of privately issued coins in circulation, some of them even accepted by the federal government in payment of taxes and customs duties. Ask any U.S. numismatist about the Bechtlers of South Carolina, for example, or Moffat and Company of California.

Today's topic is not whether the State has exclusive power to create money, however, but the role of the central bank. What is generally considered the world's first central bank, the Bank of England, was established in 1694 primarily to deal in bills of exchange as an accommodation to merchants and other banks. It became the chief financing vehicle for the English (later British) government as the result of a forced loan as a condition for receiving its charter.

As the Bank of England extended its activities (apart from government business), it helped establish a uniform and more or less stable currency throughout England. That is, a pound note issued by a "country bank" that had privileges at the Bank of England was worth the same as a Bank of England pound note. Further, as long as it was convertible into gold or silver coin or bullion, the paper currency would pass at par with the metallic currency.

The main purpose of a central bank, however, is to turn privately issued money — bills of exchange — into "current money" or currency by discounting and rediscounting. Neither a central bank nor a commercial bank can actually create money. All they do is transform one form of money into another, and charge a fee for the service.

In this way an economy always has an adequate supply of liquidity for industry, agriculture, and commerce. Discounting and rediscounting "real bills" (i.e., commercial paper backed by the present value of existing hard assets and future marketable goods and services) is the application of Say's Law of Markets, and a way of ensuring that supply equals demand, and demand equals supply, without having to worry about cutting consumption to accumulate cash.

If you think that the Federal Reserve is being used improperly, and are more interested in correcting things than in pursuing and punishing those who are guilty, guilty, guilty, consider attending the annual rally outside the Federal Reserve building in Washington, DC, this Friday, April 15, 2011. It starts on the front sidewalk of the White House (1600 Pennsylvania Avenue) at 10:15 am, then we-all walk to the Federal Reserve at 11:00 and regroup at the Federal Reserve at noon, and go to 1:30 pm.

Be there, or be . . . something.


Monday, April 11, 2011

Why "Own the Fed," Not "End the Fed"?, Part I

The movement to "End the Fed" has gained a lot of momentum in the past couple of years, moving from the demand of a minority of "conspiracy theorists" into the mainstream. While probably motivated by the egregious misuse of the central bank's powers, particularly in bailing out failed companies and the purchase of "toxic assets" to maintain prices on Wall Street and prevent losses to speculators, the demand reflects a fundamental misunderstanding of, one, the role of the State, and, two, that of the central bank.

Today let's deal with the widespread belief that only the State has the right to create money. This is easy: The State has no exclusive right to "create money." It may not even have the right to create money, frankly, but that's a different argument.  If we look at the Constitution, it's reasonable to claim that the State's authority extends to setting the standard of value for and regulating the issuance of currency. In connection with that, we could argue that the power to create money is a right of private property. Thus, if you don't own something as private property, you can't create money. Since anything owned by the State is, ipso facto, not private property, the State cannot create money.

If that's the case, the right (and thus power) of money creation would be reserved to private citizens. What we need to look at, however, is whether the State has the exclusive right to create money.  Did "the sovereign" have the sole right to "create money" during the Middle Ages? No. Anybody that had the "mint right" could strike coins. The Archbishops of York, for example, struck their own coins into the 16th century, as did others previously. As long as they met the official standard, the Archbishops could issue as many — or as few — coins as they liked.  Even counterfeiters could get away with it . . . if they put the full value of metal in their coins.  The laws were against short weight coins and "clipping."  There was no good way of determining whether a coin was official or not if it contained the full value of metal, so why bother?

This changed when the divine right of kings became the fashionable theory of government in the 16th century. Due in large measure to the antics of Henry VIII Tudor and his "discovery" that manipulating the currency could generate huge profits for whoever debased the coinage, the belief grew that the king could somehow "create money" by his private ownership of everything in sight.

Offsetting this, however, was the growing realization that "money" was anything that could be used to settle a debt. Financial institutions were springing up to deal with "non coin money," that is, to handle contracts that circulated in the channels of commerce without the need to carry around vast quantities of coin, or to accumulate stores of coin before doing business. These contracts were called "bills of exchange," and the financial institutions that dealt in them were called "commercial banks."

To regulate the trade in this "commercial paper," the Bank of England was established in 1694. Almost immediately, however, "the sovereign" managed to take over effective ownership of the Bank by forcing a loan of the Bank's reserves, replacing the gold and silver with "government stock." This put the presumably exclusive money power firmly back in the hands of the central government barely six years after the "Glorious Revolution" that was intended to curtail the power of the executive — of which the most dangerous was the power to finance government operations by borrowing rather than through taxation.

Thus, when the U.S. Constitution was adopted, a number of powers formerly reserved to the executive branch ("the sovereign") were deliberately vested in the legislature — among the most important of which were the rights to borrow money and regulate the value of the currency, especially after Henry VIII had shown how creative manipulation of the currency could finance his extravagances and remove every vestige of power from parliament, and Charles I had demonstrated that being able to borrow could keep a government afloat even when the legislature refused to grant taxes. Money creation seems to have been prohibited — which worried George Mason, who feared that, forbidden to emit bills of credit, the central government might not be able to meet emergency calls for cash.

Whether or not the federal government has the power to create money, it certainly has the right to delegate the power it does have wherever it wishes, whether to a private individual, corporation, or keep it.  The belief that the Federal Reserve, being an allegedly private corporation, is acting unconstitutionally is without foundation.  It may be problematical that the federal government has the power to create money — but, assuming it does, it can delegate it anywhere it wants . . . even back to the people from whom it presumably got it in the first place.  Thus, the Federal Reserve doesn't need to be abolished, but reformed.

If you want to participate in helping to turn this situation around, i.e., taking back the money power and returning it to the people, and at the same time reorienting the Federal Reserve to its original purpose, consider participating at the rally outside the Federal Reserve building in Washington, DC, this Friday, April 15.


Friday, April 8, 2011

News from the Network, Vol. 4, No. 14

The annual rally outside the Federal Reserve in Washington DC is next Friday, April 15, 2011. Don't worry too much about it being "Tax Day" — because it's not. The District of Columbia is celebrating "Emancipation Day," which usually falls on April 16. Thanks to government manipulation of the calendar, the time, the money supply, and your granny's recipe for apple pie, however, Emancipation Day is being celebrated on Friday the 15th instead of Saturday the 16th. As long as it gets celebrated ...

Of more concern is the potential shut down of the government. Right now we're waiting to hear what "the lawyers" say about whether the First Amendment shuts down when the government does. We have permits, but the National Park Service has declared that all permits will be canceled if the government shuts down.

This is an interesting point of constitutional law. If the government shuts down, do we lose our rights guaranteed by the Constitution? That seems to imply that those rights come from the State, and that, without the State, it is impossible to exercise them. What about from 5 pm to 9 am on weekdays, and the whole weekend? The government isn't open, so are our rights suspended until normal business hours on Monday? What about holidays?

What about the Declaration of Independence and the Constitution itself? These antedate the federal government and authorize its formation. If they cease to function because the government shuts down, then how can the government reconstitute itself, not having any authority except that which comes from the Constitution . . . which would have ceased to function, thereby making the federal government unconstitutional? It's questions like this that give most Supreme Court Justices fits.

Thorny issues, indeed. Of course, "the lawyers" might say that it's all right to go ahead, as long as the assembly is peaceful. Aside from such issues, however, we have managed to make some other headway this week:

• We already noted the annual "Fed Rally." Consider this a reminder to attend if you can.

• As of this morning, we haven't received word about Russell William's guest this week on The Challenge, but tune in anyway for a great show. Here is the station's press release so that you have the information handy: "Tune in every Saturday morning at 9 AM Eastern on WKND 1480 AM Windsor-Hartford, CT and online at Call in and let your voice be heard at 860-218-2173 or 860-218-2174."

• CESJ's Core Group met with the president of a national bar association (not the ABA) and discussed Supporting Life, Capital Homesteading as an economic agenda for the Pro-Life movement, and possible grounds for future collaboration between our two organizations. The president asked for a short piece on the need for a Pro-Life economic agenda that could appeal to both sides of the issue, to be put up on their website.

• CESJ's annual celebration is next week, the Saturday immediately following the annual Rally at the Fed. The two events are not run by the same organization, but many of the same people are involved in both. For that reason there is usually a recap of the previous day's events at the celebration.

• The first draft of a major article on money, credit, banking, and finance within the binary economics paradigm is nearly complete. The article focuses on the unique contributions to the basic theory made by William Crosskey, Harold Moulton, Rev. William Ferree, Louis Kelso, and Mortimer Adler. As Newton said of himself (quoting other people), however, these thinkers were able to see so far because they stood on the shoulders of giants.

• With the completion of the article (above), we hope very soon to begin the revision of Capital Homesteading for Every Citizen. In particular, much of the monetary and banking theory, while taking up very little space in the text of Capital Homesteading, had to be clarified, especially in light of the increasing confusion over money and credit prevalent in our society.

• Sales of In Defense of Human Dignity are picking up after a brief downturn during the first quarter of the year.

• As of this morning, we have had visitors from 45 different countries and 44 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, Poland, and Maylasia. People in Venezuela, Ireland, Saudi Arabia, Poland, and Guatemala spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "The New Manifest Destiny," "The Wrath of Keynes, or, The Fall of the House of Hayek," and "De Tocqueville on Wage Slavery in America."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, April 7, 2011

Pro-Life v. the Nation-State System

Fans of Evelyn Waugh are sometimes surprised — pleasantly or otherwise — to discover that one of their favorite authors actually indulged in science fiction, both writing and reading it. Waugh's favorite sci-fi author seems to have been Monsignor Robert Hugh Benson.

We say "seems" because 1) we haven't asked Waugh — he's not returning our calls — and 2) we don't have any explicit statement to that effect from Waugh in his writings or anywhere else. All we have is the knowledge that Waugh thought very highly of Benson's work, and a number of Waugh's stories seem to be inspired by Benson's science fiction satires.

("Does that cover us, Lawyer Pettifogger?"
("Well, let me give that a qualified maybe . . ."
("We'll take that as a 'yes'.")

Thus we have Waugh's novella Love Among the Ruins: A Romance of the Near Future (1953), probably inspired by Benson's Lord of the World (1907). Today's versions of Love Among the Ruins usually omit Waugh's unsubtly humorous illustrations ("in the classical style"), which takes away some of the satire, but that bit of editorial silliness is not the reason for bringing all this up.

In the Socialist Welfare State that Waugh saw springing up in England following the Second World War, the State is seen as the bestower of all good, and the source of everything. "Lord (or God) save us!" has been replaced by "State save us!" as a common exclamation — and that's a mild example of Waugh's black humor.

The fact is that, with the rise of the Nation-State system over the past 500 years or so (and the Welfare State is simply the logical extension of the Nation-State's ever-growing intrusion into and control over the lives of the citizens), the natural law has been abandoned as the foundation of the social order. Instead of the State recognizing, protecting, and defining the proper exercise of humanity's God-given rights, the State itself becomes viewed as the source of those rights.

If the State is the source of all rights, including life, then it can grant or revoke them at will, and define the exercise thereof in any way it chooses, regardless whether the essence of the right is maintained or abolished — it's all one to the State, which thereby attains absolute power . . . just as Keynes supposed in his Treatise on Money (1930), with his claim that the State has total power over money, liberty, and nature itself with its (alleged) power to (in Keynes's words) "re-edit the dictionary."

Those who willingly surrender themselves and their natural rights of life, liberty, and property to the State in order to secure wage and welfare benefits thereby gain only slavery. They may be well-paid and well-cared-for slaves for a time (at least until the State goes bankrupt trying to fund social welfare programs and other forms of redistribution), but in the end, they are slaves. As William Cobbett reminded us nearly two centuries ago,

Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (William Cobbett, A History of the Protestant Reformation in England and Ireland, 1827, §456.)

Obviously, anyone who thinks that giving the State such power as a means of securing his or her own safety is deluded. The State never stops where you hope or think it will, but always goes a little bit beyond . . . and then only temporarily until people have become accustomed. At that point, the boundaries can be shifted even further out as the "zone of indifference" expands. As we have seen, neither the State with its welfare system, nor the private sector with its wage system has either the potential or the capacity to provide a stable foundation for the social order.

And this, of course, rules out the chance that a job can ever be a satisfactory substitute for property as a means of security. A dynamic capitalism and a static job situation simply do not go together. Nor can there be a high wage level for the marginal worker and at the same time sufficient enterprises to absorb the available supply of labor on the market. These things are obviously incompatible. (Goetz Briefs, The Proletariat, op. cit., 250-251.)

Can anything be done? Yes. Adopt Capital Homesteading now. If you want a little "positive reinforcement," attend next Friday's rally at the Fed — or at least buy copies of Capital Homesteading for Every Citizen, The Formation of Capital, and Supporting Life . . . or at least a tee shirt.

Own or be Owned.