THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Friday, July 29, 2011

News from the Network, Vol. 4, No. 30

The outreach continues. Particularly in light of the ongoing deadlock in the debt ceiling discussions — and the seeming inability of anyone in or out of power to consider the merits of Capital Homesteading as a possible solution that would not simply contain the D&D (Debt 'n Deficit) controversy — we probably need to redouble our efforts to bring Capital Homesteading to the attention of anyone who will listen. You might even try your local newspapers. It's a bit easier to get something in to them than into the Wall Street Journal, the New York Times, or the Washington Post. That being the case, here's what we've been doing:

• CESJ's publication, Supporting Life: The Case for a Pro-Life Economic Agenda, is, as we mentioned a couple of weeks ago, now available on Kindle in a special 99¢ edition. It's beginning to sell, but we need more reviews. If you can't do anything else, you can at least go to Amazon, sign in, and post a review of a CESJ publication. As Bluto blabbered in Animal House, "Don't cost nothin'." If 99¢ is too much for an e-book, you can always get the hardcopy trade paperback for $10.00.  (Okay, $9.00.  Amazon is adjusting the price again.  They must see some sales potential there or something.)

• Universal Values Media, Inc., a for-profit CESJ supporter, has published three works (two "novellas" or short novels and a collection of short stories) in Kindle and that are currently available on Amazon, all three for 99¢ each. The author, Matt Gray, is donating all royalties from the sale of these books to CESJ. They are The Missteps of Melanie: A Chapter Play (novella), There's One Reborn Every Minute (novella), and Diamonds in the Sky with Lucy and Other Stories (short stories). They now have cover images up. CESJ will receive approximately 35¢ for every sale. These are not available in hardcopy, and you'll have to settle for the e-book.

• This week Norman Kurland has been attending the Caux International Roundtable on Ethical Capitalism. As Just Third Wayers (is that a word?) know, we're all for ethics. We don't like the word "capitalism," signifying as it does a system in which ownership of capital is concentrated in private hands. The only thing worse than capitalism, of course, is socialism, in which the necessary, if limited tool of the State is expanded far beyond its legitimate scope and tries to ensure equality of results. Anyway, Norm has been making a number of interesting contacts with businessmen and social leaders from all over the world. Especially interesting are the meetings he's been having with people from Japan, the U.K., and Turkey. We've been discussing ways to follow up on these contacts, and persuade participants in the Roundtable to join the Coalition for Capital Homesteading to, one, get us out of the current economic malaise, and, two, to build a sound and sustainable economic order for everyone.

• On Monday we sent a letter to the "Lancaster [Pennsylvania] Newspapers," as the combined "left" and "right" journals are now called, attempting to present both conservative and liberal opinions at the same time. The point of the letter was to alert people to the possibility of something that could break the stalemate over the debt ceiling: Capital Homesteading. The letter was not published. We will publish it in this blog next week.

• Today we sent out a letter to Anthony Flood, a "Catholic libertarian" who leans toward the Austrian school in economics. We just happened to come across one of his websites, and — since he asked for comments and questions as well as criticism (constructive, presumably) — we suggested that he take a look at the CESJ website and, if he liked what he saw, to get in touch with Norman Kurland. Of the three mainstream schools of economics adhering to the Currency Principle, we're probably closest to the Austrians, so we suggested that there might be a chance for some interesting dialog. Mr. Flood replied, and in a polite note explained that he's pretty much up to his ears in alligators, but thanked us for the invitation.

• Also today (and, yes, believe it or not, we have other things to do besides sending out letters to people who have never heard of us), we sent a missive to George Melloan, c/o the Wall Street Journal, in response to his comment in an article in today's Journal that "The U.S. is busted . . . . because America's political leaders have overburdened the productive sector with social obligations that cannot be fulfilled." We agreed, but pointed out that this is only part of the problem. If we don't hear from him (we're holding our breath, of course), we'll publish that letter, too, next week.

• As of this morning, we have had visitors from 43 different countries and 45 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the Philippines, the UK, Canada, and India. People in Slovenia, Mauritius, Canada, the United State and Serbia spent the most average time on the blog. The most popular posting this past week was "Aristotle on Private Property." "Why the Old Jobs Aren't Coming Back," was next, followed by "Nader Kindles Fires of Revolt," "History of Binary Economics . . . Sort Of" and "I'm Against It."

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, July 28, 2011

Faith and Credit of the United States

The specter haunting Washington (and the United States) these days is not communism — at least, not outright abolition of private property, as Karl Marx summed up the theory of the communists in his Communist Manifesto. Rather, the politicians are worrying about whether the deteriorating situation over the spending of our children's future faster than it can be produced will have a detrimental effect on the credit rating of the United States. As reported in "It's Not the Default, It's the Downgrade," Carrie Budoff Brown and Ben White of Politico on the Yahoo! News Service give one view of the looming disaster. The analysis increases the fright factor by stating that the faith and credit of the United States have never been questioned, and never downgraded.

That's not exactly true. During and following the Revolution, for example, the credit of the new country couldn't have been lower. You've heard the old joke about somebody whose credit was so bad even his money wasn't accepted? It wasn't a joke. You actually had debtors chasing creditors down the street trying to pay off their debts with the badly inflated Continental Currency instead of hard money or negotiable instruments backed with the present value of existing or future marketable goods and services.

During "Hard Times" of the late 1830s, after Andrew Jackson issued the Specie Circular (and left it for Martin van Buren to enforce) that forbade the federal government from accepting payment for land (the chief source of revenue) and duties and taxes in any form other than gold or silver coin, nobody wanted U.S. government bonds. Why accept government paper when the government wouldn't accept yours?

What about following the Civil War? Treasury Secretary Salmon P. Chase had financed the Union war effort using debt-backed greenbacks. As a result, gold, silver, even copper money disappeared from circulation and commanded a substantial premium over the inflated paper. By 1863 Chase found he could no longer issue substantial amounts of debt and was forced to use direct taxation rather than the indirect tax of inflation. Following the war, the government's credit was so low that Andrew Johnson instituted an official policy of deflation to try and restore parity of the paper money (and U.S. government debt) with gold.

The policy was officially a failure and abandoned in 1868. Unofficially the policy continued through two financial panics (1873 and 1893) and the ensuing depressions. Restoring parity of gold, silver and paper drained the country of circulating media in the form of coin and currency for consumers at the same time that credit was easily available in the form of bills of exchange for the corporations to finance new capital formation. This decreased consumer power at critical times and made the new capital being formed at an incredible rate less financially feasible. This inspired the demand for increased federal debt and "free silver" to inflate the currency, raise prices, and erode the faith and credit of the United States. Government bureaucrats, many of whom had served in the war, remembered the inflation and the harm it had done. Consequently, nothing was done until the Panic of 1907 revealed to even the most intransigent that there were serious flaws in the financial system.

The problem was that supply and demand were out of sync. Money creation for new capital formation on a large scale — "supply" — was readily available by drawing and discounting and rediscounting private sector bills of exchange. Money for ordinary consumer demand (which drives the economy), however, was not only not being created, it was disappearing as a result of the unofficial policy of deflation. With the inelastic National Bank Note, United States Note and Treasury Note currencies with the amount fixed by law, supplemented by inadequate gold and silver coin, there wasn't enough money in circulation to sustain demand and, worse, it was not tied in any way to supply. Bureaucrats made decisions as to how much currency they thought should be in circulation to maintain the full faith and credit of the United States and, at the same time, provide sufficient effective demand to ensure the financial feasibility of new and existing capital investment.  As you might expect, that worked about as well as every other means of centrally controlling a market.

In response to the Panic of 1907 and the demand for reform the Federal Reserve System was established in conjunction with the Internal Revenue Service. Seen as a Populist triumph — Secretary of State William Jennings Bryan and Representative Carter Glass of Virginia congratulated each other on the difficult feat they had accomplished — the Federal Reserve was viewed (in the words of one financial historian) as combining "Jacksonian hopes" with "financial responsibility." A balance had finally been achieved between a circulating currency for consumption, and financing for new capital formation by discounting and rediscounting bills of exchange. The solution? Use private sector bills of exchange to back the currency, thereby tying effective demand directly to productive capacity instead of relying on bureaucratic guessing games, phase out all debt-backed National Bank Notes and Treasury Notes, replace them with asset-backed Federal Reserve Notes, and limit the government to borrowing out of existing accumulations of savings instead of emitting bills of credit.

Rather than back the currency with a fixed amount of government debt on deposit in the individual National Banks and raise funds for government by emitting bills of credit backed by future tax collections, the country now had the possibility of backing not just the private sector money supply (around 80% of the total money supply at that time), but the official government currency with private sector bills of exchange drawn on hard assets representing the present value of existing and future marketable goods and services — not future tax collections that might or might not materialize. This had the potential to balance supply and demand (restoring Say's Law of Markets), provide the country with a non-inflationary yet "elastic" currency sufficient to meet the needs of agriculture, commerce and industry, rebuild the tax base, and replace the possibly unconstitutional bills of credit as well as property taxes as the main source of government revenue, with a direct tax on income.

As a side note, it is important to realize that an income tax was never unconstitutional. The Congress has always had the power to levy taxes in any form. The question was whether an income tax is a direct tax, or an indirect tax on persons. If indirect, then an income tax could be levied without regard to apportionment. If direct, however, the tax must, under the Constitution, be apportioned among the states on the basis of population. A state with few people, most of whom were rich, would pay far less in taxes than a state with a large number of people, most of whom were poor. That would, obviously, not be fair. The 16th Amendment did not make the income tax constitutional — it had always been that — but (if you read it carefully) made a direct tax constitutional without apportionment to accommodate the decision by the U.S. Supreme Court in the Pollack case in 1895.

Unfortunately for the new system, the United States entered the First World War — and made the same mistake that had been made in the Civil War. Politicians decided to finance the war using debt instead of taxes, and figured out a way to circumvent the intent of the Federal Reserve Act of 1913 to prevent the government from using the system to finance its deficits. Rediscounting of private sector bills of exchange decreased in favor of government bills of credit purchased on the "open market," and to all intents and purposes ceased entirely by the mid-1930s.

Keynesian economic policies dictated that the currency be backed exclusively by government debt instead of private sector assets. The only effective change from the old National Bank system was to change the debt-backed currency from a carefully regulated fixed amount, to an elastic, debt-backed currency that responded to the government's increasing demands for cash provided in a way that rendered the government unaccountable to the citizens through the tax system. In consequence, the effective systemic check on money creation provided by only using private sector bills of exchange representing the present value of existing and future marketable goods and services to back the currency was removed. In its place was government debt backed by a bureaucratic guess as to how much could be borrowed before creditors finally got fed up and started demanding repayment, causing a default or a lowering of the national credit rating.

This, then, is the problem we face today. The amount of currency that can be created backed by the present value of existing and future marketable goods and services is strictly limited by the properly vetted present value of those marketable goods and services. The amount of currency that can be created backed by a politician's optimism or desperation is, effectively, limited only by what he or she can get away with, and has no discernible link to the ability of the private sector to produce enough marketable goods and services to tax to make good on the promises the government has made with a lavish hand.

The only feasible way for the United States to restore its full faith and credit — again — and (at the same time) provide the country with sufficient liquidity for the needs of agriculture, industry and commerce, is to implement the reforms detailed in Capital Homesteading at the earliest possible date.


Wednesday, July 27, 2011

A History of Binary Economics . . . Sort Of

For a while now we've been struggling with developing an adequate encyclopedia article for binary economics. We've been warming up and cutting our teeth on entries for Mesa Verde's encyclopedias of the Great Depression (the second one in the 1930s, not the first one in the 1890s) and the upcoming Politics in the American West, and we had contributed a couple of entries to the Encyclopedia of Catholic Social Thought (although they messed up a few facts on Father Ferree in the editing), so we're starting to figure out how to put these things together.

Binary economics is a bit tougher than these other subjects, though. Particularly we have to work on trying to condense about five thousand years of history into a couple of short paragraphs as one section of a possible entry . . . and make it understandable to people locked into the slavery of past savings paradigm. It ain't easy, but here's what we've got so far. Is it complete, even as a history? Hardly, but we've got to start somewhere.

* * * * * * * *

The first step in any history, of course, is to define what the heck you're talking about. Many people have either never heard of "binary economics," or have a distorted or partial understanding of what it's all about. So, to begin . . . .

Binary economics is a "post-scarcity" theory developed by lawyer-economist Louis O. Kelso in the 1950s and presented primarily in two collaborations with the Aristotelian philosopher Mortimer J. Adler, The Capitalist Manifesto (1958) and The New Capitalists (1961). The term "binary economics" comes from the fact that Kelso divided the factors of production into two all-inclusive categories: the human, "labor," and the non-human, "capital." "Labor" includes all human activity. "Capital" or "things" includes all forms of productive assets whether preexisting in nature, "land," or created by human action, "productive capital" as traditionally understood, as distinct from "financial capital," i.e., "money," "credit" and other means for engaging in market-based economic transactions.

Binary economics thus limits the components to productive inputs and to distributed income to two: (1) that generated by human labor, and (2) that generated by capital. Binary economics rejects terms like "human capital" and "human resources" as oxymorons and dehumanizing to most of humanity. The central tenet of binary economics is that, through the property (or ownership) principle, these two "independent variables" in the economic equation can link marketable outputs from the labor-capital mix directly to incomes distributed according to market-quantified values of all "labor" and all "capital" inputs.

Of course, as far as most people are concerned, "Kelso" and "binary economics" relates exclusively to "worker ownership," and they think Kelso's work began and ended with the ESOP. Some even think that Kelso first invented the ESOP, and then came up with binary economics to explain it. (No, it was the other way around — Kelso developed the theory, then invented the ESOP to apply the theory.)

Of course, that's only the smallest tip of a very large iceberg, as (perhaps) this extremely brief history of some of the background that led to binary economics will reveal.

The expanded ownership movement has a long history, including the "vine and fig tree" injunctions in the Bible, the Gracchi Brothers in the late Roman Republic, the Byzantine "Farmer's Law" of the 6th century, and Abraham Lincoln's Homestead Act of 1862. Commentators such as John Locke, George Mason, William Cobbett, Daniel Webster, and Benjamin Watkins Leigh recognized the political necessity of widespread ownership. What inhibited widespread direct ownership of capital was the perceived necessity of either cutting consumption in order to accumulate sufficient money savings to invest, or coerced redistribution of what already belonged to others.

The economic necessity of widespread ownership was treated by Charles Morrison, whose 1854 Essay on the Relations Between Labour and Capital was instrumental in reform of the Law of Partnership in Great Britain and the extension of limited liability to all corporations. This lowering of an institutional barrier removed one serious obstacle to worker ownership and participatory management. Morrison's contention was that because wages were being forced down as a result of a growing population, workers could not depend on wages alone for an adequate income. Workers must, therefore, become owners in order to share in profits. While based on the discredited "wage fund doctrine" and Morrison did not take into account the displacement of labor from the production process by advancing technology, his conclusion appears to be valid. The problem was that Morrison assumed as a matter of course that worker ownership would have to be limited to higher wage workers, as these were the only ones who could afford to cut consumption and accumulate money savings.

At the same time that ownership of both landed and the new industrial and commercial capital was becoming concentrated — its nascence satirized in Sir Thomas More's Utopia when his "narrator" Raphael Hythloday (whose name signifies "Lying Traveler Who Tells Outrageous Stories") claimed that, as a result of clearing small tenants and owners off the land, "'The increase of pasture,' said I, 'by which your sheep, which are naturally mild, and easily kept in order, may be said now to devour men and unpeople, not only villages, but towns'." — financial institutions were re-evolving to meet the needs of the expanding commercial and industrial economy.

By the late 17th century mercantile (commercial) banking was sufficiently well-established to require the formation of central banking and, later, clearinghouses to facilitate the discounting, rediscounting, and transfer and redemption of bills and notes. It became possible to finance new capital formation and commercial enterprises by drawing a bill and pledging repayment out of the present value of future marketable goods and services to be produced, instead of cutting consumption and accumulating money savings to finance the capital. As a result, existing accumulations of savings could be used as collateral instead of direct investment in new capital, and the actual capital formation financed without using existing savings.

The "universal collateralization requirement" still restricted ownership of most new capital to the already wealthy. The settlement of America provided a means whereby propertyless people could acquire capital, usually land, but the land frontier was considered "closed" by the 1890s, at which time the Panic of 1893 and the following Great Depression (1893-1898) made it clear that both the wage system and the financial system embodied serious weaknesses that tended to undermine the economy, and thus the political stability of the United States. This led to the rise of the "Welfare State."

The analysis of Goetz Briefs is useful in understanding the rise of the Welfare State. In The Proletariat: A Challenge to Western Civilization (1937), Briefs's contention was that the operation of laissez faire capitalism stripped workers of ownership, making them dependents of their employers. To try to maintain the status quo, the Welfare State came into being, forcing the great mass of people into a condition of wage slavery and dependency on the State. At the same time, redistribution of existing wealth and manipulation of the currency gradually undermined the economy and eroded standards of living as the State tried to make up for the loss of the value of labor in competition with advancing technology, causing the disappearance of both liberty and property.

Louis Kelso's unique contribution to economics was to bring together two seemingly disparate schools of thought in economics and finance: the school that adhered to Say's Law of Markets and the real bills doctrine, but ignored the importance of private property, and the school that insisted on the importance of widespread ownership of capital, but had no effective recommendation on how to finance new ownership, other than by cutting consumption and accumulating savings, or redistributing existing wealth.

Some authorities are of the opinion that Kelso first invented the Employee Stock Ownership Plan (ESOP) and then developed a theory to explain it. Kelso, however, first developed the theory, and then invented the ESOP to apply the theory. The first ESOP was installed in 1956 for Peninsula Newspapers in Monterey, California. Between 1956 and 1973 there were a couple dozen ESOPs implemented in the United States.

In 1973, as a result of a meeting between Senator Russell Long of Louisiana, Louis Kelso, and Kelso's Washington Counsel, Norman G. Kurland, the process was begun that eventually led to the initial enabling legislation for the ESOP. As a result of various tax benefits attached to implementing an ESOP, more than 10,000 companies employing more than 10 million workers have ESOPs.

The "expanded ownership revolution," as Kelso termed it, continues today through the efforts of the Kelso Institute to educate the public about Kelso's work, and the Center for Economic and Social Justice (CESJ) with its proposed "Capital Homestead Act" that embodies reforms of the tax and financial systems to extend widespread direct ownership of capital financed with "pure credit" and collateralized with capital credit insurance and reinsurance instead of existing accumulations of savings to all citizens of a country.


Tuesday, July 26, 2011

"On Redistributing Wealth"

In "On Redistributing Wealth," a column published today on "The Catholic Thing," Father James V. Schall, S.J., a professor at Georgetown University and described as "one of the most prolific writers in America," noted that "If we really want to help the poor to become not poor, the first thing we must do is stop talking of 'redistribution,' which is, at bottom, a branch of envy theory. We have to look elsewhere, at innovation, thrift, incentive, proportionate justice, virtue, markets, culture, and growth." Father Schall concluded by saying, "If we really are concerned with the poor, talk of 'redistribution' is not worthy of us."

We agree, as the well-intentioned but mathematically illiterate would say, 110%. Father Schall's analysis of the alleged ethics and necessity of redistribution are right on the mark. We also agree, possibly even (illogically) 120%, with Father Schall's prescription to "look elsewhere, at innovation, thrift, incentive, proportionate justice, virtue, markets, culture, and growth" for a solution to world poverty.

What we don't agree with is the fact that Father Schall leaves everything completely in the air as to how we are to take advantage of "innovation, thrift, incentive, proportionate justice, virtue, markets, culture, and growth." That's a much more difficult issue to deal with. This is because most modern thinking about how people are to take advantage of these things is locked into the disproved belief that the only way to do so is to cut consumption and accumulate money savings before being able to finance productive activity.

Absent the ability to practice thrift — and it is unconscionable to demand that people with little or insufficient income to meet ordinary needs cut consumption — there are only three ways for people to gain income: wages, charity and welfare. Wages, if set by the free market, are payment for labor, but the latter two are forms of redistribution. The only difference is that charity is strictly voluntary ("It is a duty, not of justice (save in extreme cases), but of Christian charity — a duty not enforced by human law." Rerum Novarum, § 22), while all forms of welfare are, by definition, coercive, being carried out by the State.

Naturally we assume that Father Schall was not denigrating almsgiving, one of the chief corporal acts of mercy. We also assume that he was not objecting (too strongly) to redistribution of existing wealth by the State in times of extreme need. No, we assume that, as a rational person, Father Schall was objecting to redistribution of existing wealth as the normal way in which the economy functions.

Under the past savings assumption and the limited understanding of money and credit that necessarily accompanies that assumption, however, there are a number of things that most people take for granted, especially in Catholic circles, that turn out to be merely redistribution and State control of individual lives in different forms. Take, for example, progressive taxation.

A basic principle of taxation is that you don't tax what people need to live on. You would otherwise be put to the necessity of taking away people's wealth, and then handing back to them as charity what was an injustice to take in the first place. This is why CESJ advocates raising the exemption level to a realistic level, say $30,000 for a non-dependent, and $20,000 for a dependent.

Obviously you should only tax people who can afford to pay the tax without thereby being put into a condition of dependency on the State, forced to supplement their remaining income with charity and State subsidy — welfare. People should be taxed on their ability to pay. Those with more in income should pay more in taxes. In justice, everyone should therefore pay the same proportion above a generous exemption level. Progressive taxation takes more than a fair share because the higher income levels pay more proportionately. It thus constitutes redistribution.

Take, for another example, the redefinition of private property that seems to pervade, e.g., distributist circles. Forgetting that private property is a natural right, one distributist maven redefined private property as a right . . . but not an absolute right. If he meant that you cannot do whatever you like with what you own, and there are some things that, for prudence's sake, you should not own (such as nuclear weapons or the complete DVD collection of Gilligan's Island), that's fine. When we asked if that was what he meant, he sneered and claimed we didn't understand him. He was right . . . we didn't understand what the heck he was saying, because the right to be an owner is inherent — absolute — in every human being, however limited its exercise might be for the common good.

Major Douglas's "social credit" is a little more creative in its redefinition of property, and ignores the fact that (as Kelso pointed out) "control" (including enjoying the income from what is owned) and "property" are the same in all codes of law. Most people confuse ownership with the thing owned, so the error in social credit is very subtle. The idea is that any private person can own capital . . . but the income above a certain level is taken away by the State in the form of a "social dividend" distributed by creating money to the value of the "excess" profits, after subtractions for State expenditures, of course. As a result, the politicians are freed from the accountability to the electorate that taxation imposes, and everyone becomes a "mere creature of the State."

The worst redistribution, however, results from the bad definition of money used nowadays, and the belief that you cannot finance new capital formation without cutting consumption and accumulating money savings. This, more than anything else, limits the opportunity and means by which ordinary people without savings who cannot afford to cut consumption to become owners of the very capital that is decreasing the value of human labor as an input to production.

What happens is that, trapped by what Louis Kelso called "the slavery of savings," people and governments attempt to manipulate definitions of natural rights in order to "allow" redistribution without calling it redistribution, and manipulation of the currency without calling it theft.

This is what was puzzling about Father Schall's article. He was very strong and to the point on not trying to run an economy through redistribution. The problem was, he stopped there. It's all very well to tell people to do the right thing . . . but you really should remember to tell people not only what the right thing is, but how to do it. The Just Third Way as applied in Capital Homesteading affords one possible means of getting out from under the near-global problem of dependency on redistribution by the State mandated by worldwide acceptance of Keynesian economics — but only if people know about it.


Monday, July 25, 2011

Thoughts on "Small is Beautiful"

Many years ago (a lot of years ago), I had a picture book titled, How Big is Big? The point of the book was to show how "bigness" and "smallness" were all relative to the observer. A dog appears big to a flea, but small to an elephant or whale. The Empire State Building is huge compared to an elephant, but is tiny compared with the size of the earth. The earth itself appears gargantuan to us, but is virtually nothing compared with the galaxy — as is the galaxy compared with the size of the universe.

Get the picture?

All of that was pretty profound for a kid's book. Frankly, it's also pretty profound for an adult's book — such as E. F. Schumacher's Small is Beautiful, a virtual "bible" for "New Age economics," as it was originally touted. The difference is that the kid's book made it clear that a standard such as "big" or "small" is purely relative. Schumacher's book failed in that respect. By discarding or redefining fundamental natural rights such as liberty and property and advocating a "human standard," Small is Beautiful inadvertently slips into pure moral relativism.

This is where it gets deep, so don your hip waders.

In economics as in everything else, there is no such thing as objective bigness or smallness. It is all relative. Using bigness or smallness as a standard changes what it means for something to be a standard. A standard is supposed to be an objective absolute against which you measure something. Especially in economics, the size of something is whatever is most appropriate to its function. A standard that is relative to the observer or one doing the measuring is no standard at all.

As a case in point, I once saw a "gag gift" in the form of a "kit" for golfers. One of the items included in the kit was a tape measure to aid in replacing a ball after putting. One side had "inches" that were about a quarter inch long, while the other side had "inches" that were about three inches long. Obviously, if you were measuring how far your ball was from the cup, you used the "long inches," and replaced it using the "short inches." You did exactly the opposite for your opponent.

This wasn't as bad as Big Jule's "lucky dice" (with the pips removed) in Guys and Dolls and which thus came up whatever the person with the gun said they were, but it was close. In this way it becomes possible to enforce any "standard" simply by having sufficient coercive power. Absolutes cease to have any meaning at all. Paradoxically, by trying to base things on a human standard, we end up removing humanity from the equation.

How's that?

Those absolutes with which Schumacher played fast and loose, i.e., liberty and property, are discerned by reason and represent a consensus of the whole human race as to "right" and "wrong," "good" and "bad." We cannot simply insist on the opinion of ourselves or our small group without taking into account the rest of humanity. Nor can we simply project our opinion — our private human standard — on to everyone else and try to force others to go along with it. That's what Napoleon, Stalin and Hitler did. It's not a Good Thing.

Instead, what we do as reasoning creatures is attempt to discern those absolutes that characterize the absolute source of all creation, as inductive reasoning tells us must exist. From there we reason out the general consensus of all mankind as to what is right and wrong. For example, the universal prohibition against theft tells us that private property is part of human nature, that is, a natural law.

Does that, however, tell us how to exercise our property, or what we can or cannot own in certain circumstances? Of course not. That is left up to the wants and needs of specific individuals, cultures and circumstances — but the "absoluteness" of private property remains. As Pope Leo XIII reminded us, we must assume "as a principle that private ownership must be held sacred and inviolable." (Rerum Novarum, § 46.)

Can we be wrong about the conclusions we reach through the use of reason? Of course — but that does not invalidate the absolutes. That simply says we probably made an error in reasoning. As Pope Pius XII pointed out in the second paragraph of Humani Generis, "absolutely speaking, human reason by its own natural force and light can arrive at a true and certain knowledge of . . . the natural law."

This is similar to the functioning of the free market in which consensus about just prices, just profits and just wages reached by aggregating many individual opinions tends to approach the objective free market price, profit or wage. Do we know that for certain? Of course not — but the opinions of many in consensus have a greater chance of approaching justice than the opinion of a small group or single individual bent on controlling the market to achieve political or religious ends rather than economic.

How is using reason to decide what is right and wrong any different from just using our own opinion? That's simple . . . if not easy. Our own opinion, unsupported by argument or evidence, has a much higher chance of being wrong than anything discerned by the use of reason and obeying the rules of logic, primarily the "law of contradiction," that a thing cannot be both true and false at the same time.

Using reason is hard to do, because we naturally tend to believe something is true because we believe it, not because we can prove it. That inserts faith into things, and faith applies to things that are not "manifestly true," that is, that cannot be proved by the use of reason. As G. K. Chesterton quoted Aquinas in his short biography of "the Angelic Doctor,"

"Behold our refutation of the error. It is not based on documents of faith, but on the reasons and statements of the philosophers themselves. If then anyone there be who, boastfully taking pride in his supposed wisdom, wishes to challenge what we have written, let him not do it in some corner nor before children who are powerless to decide on such difficult matters. Let him reply openly if he dare. He shall find me there confronting him, and not only my negligible self, but many another whose study is truth. We shall do battle with his errors or bring a cure to his ignorance."


Friday, July 22, 2011

News from the Network, Vol. 4, No. 29

We are getting an interesting perspective on things during these few days away from the world inside the Washington Beltway.  What the newspapers and other media are saying about what is going on, especially in the economy, and what is really going on in places like Lancaster, Pennsylvania, make for quite a sense of unreality when it comes to things like "economic recovery."  Businesses and factories have been closing all over the county, and nothing is coming in to take the place of the lost productive enterprises . . . except for some new banks that are being built.  The problem is that the new banks are not any different from the old banks, and continue to finance anything in ways that concentrates the ownership of capital, both existing and future.  Clearly something along the lines of the Capital Homestead Act is needed, but the powers-that-be continue their peculiar deafness to viable and just solutions.  For example --

* Former Comptroller General of the United States, David Walker, is predicting disaster unless the debt ceiling is raised in the short term . . . and even greater disaster if something isn't done to reduce the deficit and pay down some of the gargantuan public debt that has been built up.  In the short run, Mr. Walker sees five immediate consequences.  One, $4 billion per day will be lost to the economy.  Two, there will be temporary layoffs of government workers and civilian military workers.  Three, Social Security payments will be delayed.  Four, there will be serious negative effects on the stock and bond markets.  Five, interest rates will rise.  Of these, the delay in Social Security payments is probably of most concern to ordinary people.  It is, after all, difficult to feel sorry for rich investors in stocks and bonds, and there is, frankly, no reason under the Banking Principle why changes in the interest rates should have any effect at all on pure credit loans for new productive capital, the ownership of which can be spread out to generate a broad base of increased consumer demand.  We agree with Mr. Walker's conclusion that the debt ceiling must be raised in the short term, and that the deficit and outstanding debt must be reduced, but simply cutting expenses isn't going to do anything except make matters worse.  Norman Kurland met with Mr. Walker and presented Capital Homesteading to him.  All Mr. Walker had to say was for Norm to return when he had more "traction."  Why not a viable solution in lieu of "traction"?

* The obvious solution to the current dilemma is to raise the debt ceiling in the short run, and make Capital Homesteading the quid pro quo in the mid- to long term.  We haven't heard anything better.

* Jimmy Griffen has scored again, and arranged a meeting this past Wednesday with an important mover-and-shaker.  Since we're on vacation and haven't heard how the meeting came out, we'll withhold any analysis until next week.

* CESJ and UVM publications are now available in Australia.

* There has been a sudden spike in sales of Capital Homesteading for Every Citizen, possibly due to people searching for some real answers to the economic mess we're in (also known as "the recovery" . . . from what we've recovered is unclear).

That is all the news we have for this week.  As you might expect, it's harder to get news when you're away from the center of things and out in the real world.


Thursday, July 21, 2011

Gettysburg, 2011

There are two more years to go before the Sesquicentennial of the single biggest battle in North or South America: Gettysburg, Pennsylvania, which took place in late June, early July 1863, approximately a year after the passage of Abraham Lincoln's Homestead Act.  We (my aunt and I) visited the park today, missing the annual reenactment (on purpose), and a few of the points of interest.  That was not on purpose; we just couldn't find them, especially the statue of Father Corby, Catholic chaplain of the 69th New York Infantry, who later became president of the University of Notre Dame in South Bend, Indiana.

I had never been to the battlefield.  Visiting it on possibly the hottest day of the year for one's initial visit gives a whole new appreciation of what the soldiers endured -- and they were in wool uniforms, carrying full packs, not light summer clothing and driving around in an air conditioned automobile.

The sheer size of the battlefield is also an eye-opener.  You don't really get an appreciation of it from books or even the Ken Burns series.  Almost by accident we found the Union position where Pickett's Charge was broken.  Looking across the fields that the Army of Northern Virginia had to cross before reaching the Union forces, . . . indescribable.

We went to the Visitors Center first, of course, to pick up a free map and ask directions to Father Corby's statue (evidently a very popular point of interest, but not given a special number on the auto guide map).  We stepped into the book and gift store on the way out, just to check it out.

There was, as you might expect, a moderately large number of books and videos about the Civil War in general, and the Battle of Gettysburg in particular.  They appeared to range from the fairly decent to the excellent; we could have spent our entire budget there alone, so we spent nothing.

From a Just Third Way perspective there was, however, one book conspicuous by its absence: David Christy's 1855 Cotton is King.  If, as many authorities assert, Harriet Beecher Stowe's Uncle Tom's Cabin inspired the North to end slavery, Cotton is King convinced the South that it could not survive economically without it.  Christy's well-argued (but seriously flawed) case was that the economic prosperity of the United States and the British Empire depended absolutely on the slave cultivation of cotton and other agricultural commodities.  Consequently the Southerners, whether or not they owned slaves, were convinced that without slavery the economy would collapse.

Obviously that was wrong.  Lincoln's Homestead Act demonstrated that there was a better and more profitable way to increase production and exports, and at the same time provide a broad base of consumer demand for the rapid industrial and commercial expansion that followed the war.  This, too, came to an end with the Panic of 1893 when the growing number of people dependent on wages alone began changing the character of the economy, from an ownership system to a wage system, and the role of government began expanding at an increasing rate.

The problem, of course, was that when the "free" land made available by the Homestead Act was no longer so freely available, widespread ownership of landed capital was not replaced by widespread ownership of commercial and industrial capital.  The Currency Principle, in part that the only way to finance new capital formation was to cut consumption and save, virtually guaranteed that small ownership of commercial and industrial capital would deteriorate and, finally, disappear as a dominate force in the economy.  Ownership of the new commercial and industrial capital, and consequently the control over money and credit, became increasingly concentrated, the wage systems spread, and the Welfare State achieved dominance as the "only" possible arrangement of the economy.

The Battle of Gettysburg, put into perspective, is not only (as Lincoln said) an affirmation of what America means.  Within the Just Third Way, the passage of a Capital Homestead Act by 2012 would not only validate the sacrifice of men on both sides, but lay a solid foundation for a government of the people, by the people, and for the people.


Wednesday, July 20, 2011

The Dangers of Interpreting Keynes

Yesterday the Washington Post had a column by Ezra Klein on "The Dangers of Misinterpreting Keynes." With all due respect to Mr. Klein, from a Just Third Way perspective the problem is not misinterpreting Keynes, but interpreting him at all. The question we have to ask ourselves is, Is the Great Defunct Economist really all that relevant?

From a political perspective, yes. Keynes is very relevant politically, if only because (as Keynes himself put it), "[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas." (John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936, VI.24.v.)

From the perspective of binary economics, however, the academic scribbler Keynes is irrelevant. Why? Because the Keynesian system, "voices in the air," does not describe reality. It is based on faith, not reason, and is not supported by the facts or soundly reasoned theory. Admittedly, Keynes probably unconsciously exempted himself from the ranks of defunct economists, even though he dismissed criticism of his theories in the 1920s by flippantly remarking, "In the long run, we're all dead" — a rejoinder that, while perfectly true, has nothing to do with the case.

So, what are we to do in a Keynesian world in which the Powers-That-Be insist on implementing disproved and disastrous Keynesian economic policies, and the best that the opposition can come up with is to say, "Don't do that!"?

Well, for one, we can write letters to columnists and editors expressing our concerns whenever they say something that is not in strict accordance with objectively established facts. This, of course, is absolutely guaranteed to make you extremely popular with everyone. Like King Gama in Princess Ida, you'll be a genuine philanthropist. And probably get the same reaction, i.e., "ev'rybody says I'm such a disagreeable man . . . and I can't think why!"

With this as our guiding philosophy, we sent the following to Mr. Klein in response to his column yesterday, slightly edited for publication:

Dear Mr. Klein:

The question is not whether Keynes is being misinterpreted, but (1) whether Keynes was right, and (2) if there is any viable alternative to the present system. Keynes was wrong, and there is an alternative.

Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, presented an alternative to the New Deal. This was in the four-volume study he directed on "the Distribution of Wealth and Income in Relation to Economic Progress," 1934-1935, of which the third volume, The Formation of Capital (1935) is the most relevant to today's situation. Dr. Moulton analyzed the results of Keynesian programs in The New Philosophy of Public Debt (1943), concluding that the Keynesian belief in the efficacy of "pump priming" was misplaced, and the advice of Dr. Alvin H. Hansen, "the American Keynes," that the public debt could rise to twice GDP without danger, was unsound.

What Moulton's analysis lacked was a practical means to implement an economic recovery in which ordinary people could participate as other than mere wage-workers or welfare recipients. The work of Louis Kelso and Mortimer Adler supplied this lacuna. The principles of Kelso and Adler's "binary economics," an integral component of the "Just Third Way" of the Center for Economic and Social Justice (CESJ), were presented in The Capitalist Manifesto (1958), while the mechanics were outlined in The New Capitalists (1961), a short book with the provocative counter-Keynesian subtitle, "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

Kelso and Adler's proposals were refined in Capital Homesteading for Every Citizen (2004) by Dr. Norman Kurland, et al. Capital Homesteading offers a way out of the current dilemma by accepting a raising of the debt ceiling in the short run, with the quid pro quo being immediate enactment of a Capital Homestead Act. Capital Homesteading would empower every man, woman and child with the means of acquiring and possessing private property in capital without redistribution of existing wealth or manipulation of the currency. Capital Homesteading, if enacted in its entirety, has the potential to balance the budget and pay down the debt completely within twenty to thirty years, while still ensuring as far as possible that everyone has an income sufficient to meet ordinary needs adequately.

I invite you to visit CESJ's website,, and look over the materials on Capital Homesteading. If you have any questions, please feel free to telephone Dr. Kurland.

By the way — Nixon was quoting Milton Friedman when he said we are all Keynesians now. (Time magazine, December 31, 1965.) A month later Friedman "clarified" what he meant by saying, "In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian." (Time magazine, February 4, 1966.) Get Dr. Kurland to tell you how Dr. Friedman avoided a debate with him in 1971 over the merits of binary economics — and how two years later Dr. Kurland was able to help Kelso persuade the late Senator Russell Long of the necessity of implementing a program of widespread direct ownership of capital.


Blah, blah.


Tuesday, July 19, 2011

"What History Teaches Us About the Welfare State"

Sometimes we get a little bit behind on all the issues we need to address. Take, for example, an article by Dr. François Furstenberg that appeared in the Washington Post on July 1, 2011, "What History Teaches Us About the Welfare State." Dr. Furstenberg, an associate professor of history at the Université de Montréal, had some interesting observations to make, many of them right on the mark . . . within the paradigm dictated by adherence to the Currency Principle.

As regular readers of this blog are aware (and, if they're not, they should be), binary economics, in contrast to the three mainstream schools of economics (Keynesian, Monetarist/Chicago and Austrian) and virtually all of the not-so-mainstream schools, adheres to the Banking Principle.

Briefly (hear, hear!), the Currency Principle is that "money" consists solely of coin, currency, demand deposits and some time deposits, and that "saving" is defined strictly as cutting consumption. This means that all other means of carrying out exchange, i.e., bills of exchange, are not considered, Say's Law of Markets is redefined or negated, and its application in the real bills doctrine is rejected.

The Banking Principle is that "money" is anything that can be used to settle a debt, and "saving" equals investment. Stretching a point almost to the breaking and including speculation — gains realized from holding an asset rather than putting it to productive use — under "investment," yes, cash stuffed in a sock and hidden in a mattress for security is, technically, an "investment" in hoarding or, at least, working capital. It's a dumb investment if carried to extremes, but still an investment, albeit one that doesn't of its nature generate a stream of income.

Under the Banking Principle Say's Law of Markets is defined in its fullness, and its application in the real bills doctrine validated. "Investment" (real investment, that is, that generates a stream of income) can thus be financed not by cutting consumption, but by drawing a bill on the present value of a future capital project, and redeeming the bill when the capital is up and running and generates profits sufficient to pay for itself.

Dr. Furstenberg's article accurately detailed the problems that occurred in the United States as ownership of industrial and commercial capital became increasingly concentrated following the Civil War. The Homestead Act staved off concentrated ownership of landed capital for a few decades, but by 1893 Frederick Jackson Turner could claim that the end of "free" land meant the end of democracy by ending easy access to capital ownership.

The Panic of 1893 and the resulting Great Depression of 1893-1898 were a graphic demonstration of the dangers to both political and economic democracy inherent in concentrated capital ownership. When most people have only their labor to sell and labor is being displaced by advancing technology, power concentrates in owners of capital, not labor. The Panic of 1893 also exposed the serious weaknesses of the financial system . . . and the concentrated control of money and credit dictated by widespread acceptance of the Currency Principle that was congealed into law in Great Britain with the Bank Charter Act of 1844, and in the United States with the National Bank Act of 1863.

As we've said a number of times on this blog, however, we adhere to the Banking Principle. Thus, one of our Faithful Readers sent us a link to Dr. Furstenberg's article with the comment,

Here is an historical perspective on our current financial downturn, from an apologist for the welfare state. Furstenberg views the rise of the welfare state as the natural and necessary response to the Great Depression/s of the late 1800s, brought on by the same kind of monopolist and speculative activities in the banking and securities industries as brought on our present day global financial meltdown. Just curious, how does his analysis jibe with Harold Moulton's study?

I think we've also commented several times on how much we like it when we don't have to think up a topic for the daily blog posting. Another thing we like is when we can answer pretty much off the top of our collective head.  Here goes.

Moulton did not address this issue directly. In his discussion of the Panic of 1893 and the resultant Great Depression in Financial Organization and the Economic System (1938), he only noted that Populist focus on the "silver question" during William Jennings Bryan's 1896 campaign for president derailed any efforts toward genuine reform of the financial system, while the recovery of 1897-1898 seemed to make the issue irrelevant. The failure of reform also made the Panic of 1907 seemingly inevitable as a result of the growing concentration of control over money and credit, mostly in the hands of J. P. Morgan.

Moulton did, however, address the issue of the loss of the frontier, and hinted that, contrary to Turner's thesis, it did not have to mean the end of democracy. Probably not coincidentally, Turner's thesis was seemingly confirmed by the Great Depression of the 1890s. Similarly, the Great Depression of the 1930s apparently validated the idea of the "mature economy" that sprung up after the Crash of 1929. Now, the current "Great Depression III" seems to confirm Furstenberg's claim that the Welfare State is a necessary adjunct to the growing wealth gap and the increasing disconnect of the financial markets from the productive sector. From the perspective of binary economics, of course, the real problem is lack of democratic access to capital credit to finance widespread ownership of capital.

Responding to the late 19th century claim (probably inspired by Turner) that the loss of geographical expansion meant the end of expanding markets, and the idea in the 1930s that the developed nations of the world had "mature economies" and must accept lower rates of growth unless subsidized by government, Moulton countered,

"These observers, like the present-day adherents of the mature economy philosophy, overlooked the vast continuing potentialities for intensive capital development. In the great new era of expansion which followed, intensive industrialization, together with some new industries, offered larger outlets for investment than had been furnished by the previous period of geographical expansion across wide continental areas.

"The capital requirements over the next generation loom fully as large as those of any preceding period. On the basis of projected population trends, some authorities estimate that the United States may have by 1980 as many as 187 million inhabitants [227 million, actually — Moulton used the lower rates of growth during the Great Depression for his projection]. To supply the primary needs of the additional population, and at the same time to raise the standards of living of the entire population, say, 100 per cent, would require a much larger annual capital expansion than we have had during any comparable period in the past. In making this statement allowance is made for the usual rate of increase in man-hour productivity resulting from technical progress. The realization of the production program involved in this expansion would necessitate the employment (on a 40-hour week basis) of a larger proportion of the total population than was employed in 1929." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 27-28.)

Addressing the disconnect between productive activity and the financial markets that seems inevitable within the Currency Principle framework dictated by Walter Bagehot (that is, the growth of speculation as opposed to true investment) and described in Lombard Street (1873) — and thus the presumed "independence" of private sector corporations from the capital markets — Moulton noted, "It may possibly be that dependence upon the capital market for expansion money is decreasing — that an ever-larger proportion is being obtained from undistributed earnings; but there is no evidence to support this conclusion." (Ibid., 38.)

As Moulton pointed out in The Formation of Capital (1935), it's not a question of a fixed "supply of loanable funds" determined by reductions in consumption being allocated among consumption, investment, and speculation. Rather, the problem — especially today — is that savings are being hoarded (according to a Reuters report a few months ago, nearly $2 trillion in cash is sitting idle in U.S. corporations), at the same time that new money is being created at a tremendous rate to finance consumption and speculation, while new capital formation goes begging. Within the binary framework, consistent with the Banking Principle, both consumption and speculation should be financed out of existing savings and current income, while new capital formation is financed by the expansion of commercial bank credit, discounting of bills among merchants, and the rediscounting of merchant's and banker's acceptances at the central bank.

Still, from the perspective of binary economics, there are a few things wrong with Moulton's analysis, or at least a few things are left out. We would dispute, for example, his implicit assumption that most people necessarily gain their income by selling their labor in the wage system, and the idea that technological progress increases "man-hour productivity."

There is, however, no quarrel with Moulton's conclusions: that expansion in industrial and commercial capital has the potential to more than make up for the loss of free access to landed capital, and there is no reason to finance either speculation or consumption through the creation of new money — such as provided the trigger for the Panic of 1873, the Panic of 1893, the Panic of 1907, the Crash of 1929, and the home mortgage crisis of 2007.

Evidently trapped by the wage system assumption (instead of the past savings assumption), Moulton did not make the leap that Louis Kelso did and observe that, if land was no longer freely available . . . why not open up equally free access to the means of acquiring and possessing private property in industrial and commercial capital — financed by expansion of commercial bank credit? In this, the analysis of Goetz Briefs is more useful, and more consistent, both with Kelso and with Pope Pius XI. Briefs was a labor economist who was a student of Father Heinrich Pesch, S.J., and a member of the Königswinterkreis discussion group headed by Father Oswald von Nel Breuning, S.J., who ended up as chairman of the economics department of Georgetown University.

In The Proletariat: A Challenge to Western Civilization (1937), Briefs's contention was that the operation of laissez faire capitalism stripped workers of ownership, making them dependents of their employers. To try to maintain the status quo, the Welfare State came into being, forcing the great mass of people into a condition of wage slavery and dependency on the State, at the same time gradually eroding standard of living as the State tried to make up for the loss of the value of labor by redistribution and manipulating the currency.

Moulton's analysis did not take into account the effect of the loss of small ownership of capital. He viewed the economy in aggregate as a macro-economist and, in common with every other Banking Principle adherent with the exception of Kelso (e.g., Law, Smith, Thornton, Say, Fullarton), apparently didn't see the importance of widespread ownership, even though he described in detail the means to finance it.

On the other hand, Briefs, like von Thünen, Cobbett, Morrison, Leo XIII and Pius XI saw the importance of widespread ownership of capital . . . but had no idea how to finance it except by cutting consumption and accumulating money savings.

The Keynesians, like Alvin H. Hansen, "the American Keynes" who helped engineer the New Deal, see no problem with increasing public debt in order to finance welfare and entitlements. For their part, both Moulton and Briefs saw ultimate disaster in spending without producing — but never came together to come up with a sound and lasting solution.

Kelso's genius, in part, lay in combining two strains of thought that seem almost unbelievably obvious to any binary economist . . . once Kelso pointed it out.


Monday, July 18, 2011

Economic Recovery, Part XII: The Formation of Capital (7)

The current debt crisis, perhaps oversimplified somewhat as a conflict between raising the debt ceiling v. cutting costs, reveals the weakness inherent in the Currency Principle of finance. The Currency Principle defines "money" as a general claim on all the wealth in the economy. Keynesians, Monetarists and Austrians disagree on the source of money (e.g., the State or the private sector) and how or if it should be managed, but all agree that coin, currency, demand deposits and some time deposits constitute the money supply.

There are a number of problems with the Currency Principle. As regular readers of this blog are aware, we've been attempting to deal with these problems, but keep coming up against the problem of definition. Nevertheless, let's make another attempt to clarify matters.

First, let's look at the definition of money used: "a general claim on all the wealth in the economy." The most obvious error here is the evident confusion between "general" and "fungible." Currency Principle adherents mistake the fact that one unit of currency is legally indistinguishable from any other unit, with the belief that the terms of the contract that creates money does not have any specific "matter" — that the terms of the contract presumably change with circumstances surrounding a particular transaction.

We can deal with this confusion easily enough. The fact that a financial instrument can be conveyed to a holder in due course in a transaction without indorsement (as is the case with a coin or banknote) in no way negates the obligation of the original issuer of the instrument to make good on that instrument when presented for redemption by a holder in due course. Depending on the specific terms of the contract, the issuer must redeem the instrument in some way when it is presented.

Even the U.S. government pledges to accept Federal Reserve Notes, that it backs with its "full faith and credit," in payment of debts. The notes are not convertible, that is, the holder in due course does not have the right to demand the specific "assets" (government debt paper) that back the notes and demand deposits. Nevertheless, the United States government, the de facto issuer of the notes and creator of the demand deposits, must accept its own obligations to redeem debts due to it, although the specific form — i.e., Federal Reserve Note, personal check, or credit card — may vary. The form is irrelevant, as long as whatever instrument is used is redeemable (if not necessarily redeemed) in Federal Reserve Notes that are backed by government debt.

The case is slightly different under the Banking Principle, where private sector hard assets instead of government debt back the notes and demand deposits. In that case, the original issuer is obligated to "make good" on the notes by repaying the loan — redeeming the bill of exchange — that created the money in the first place. In a sound and properly run economy, the note is redeemed out of the profits realized by producing marketable goods and services with the capital that was financed with the proceeds of the loan.

Thus, currency is not "general," but "fungible" — something entirely different, but which evidently confuses a great many people. No issuer of a currency or anything else used as money can enter into the contract unilaterally — that is, impose a general obligation on persons who are not parties to the original contract. The issuer of a currency can, however, make the obligation fungible, that is, every promise, regardless who the holder in due course may be, must be redeemed by the issuer when promised.


Friday, July 15, 2011

News from the Network, Vol. 4, No. 28

Most of the attention this week has been focused on the battle over raising or not raising the debt ceiling. From a Just Third Way perspective, of course, the solution is to implement Capital Homesteading at the earliest possible date, rebuild America's (and the world's) economic base, and start getting rid of all the debt. In the interim, yes, raise the debt ceiling — but then work like the dickens to lower it again. In that direction, this is what we've been doing for the past week:

• A major CESJ publication, Supporting Life: The Case for a Pro-Life Economic Agenda, is now available on Kindle in a special 99¢ edition. It's been up only a few days, and, according to Amazon, is already beginning to sell.

• Universal Values Media, Inc., a for-profit CESJ supporter, has published three works (two "novellas" or short novels and a collection of short stories) in Kindle and that are currently available on Amazon, all three for 99¢ each. The author, Matt Gray, is donating all royalties from the sale of these books to CESJ. They are The Missteps of Melanie: A Chapter Play (novella), There's One Reborn Every Minute (novella), and Diamonds in the Sky with Lucy and Other Stories (short stories). For some reason the cover images aren't showing up for these books, but the books can still be purchased. CESJ will receive approximately 35¢ for every sale.

• Norman Kurland was up on the Hill yesterday for some meetings arranged by Jimmy Griffin, who is also working to organize a CESJ chapter in Connecticut. Norm reported that the meetings were very positive, with no negatives being expressed. One of the goals of the meetings was to get key people in Washington to realize that Capital Homesteading as a quid pro quo for raising the debt ceiling may be the most realistic solution to the current stalemate.

• CESJ friend the Reverend C. John McCloskey III is celebrating his thirtieth anniversary of his ordination next week. CESJ extends the congratulations of its core group and all members in recognition of Father McCloskey's long service.

• On Tuesday and Wednesday of this week the CESJ core group had a series of meetings with renowned cartoonist Bert Dodson and his friend David Kelly to discuss some possible projects involving the promotion of the Just Third Way and Capital Homesteading. Bert expressed great interest in the ideas and stated that he has been given a great deal to think about.

• As of this morning, we have had visitors from 46 different countries and 47 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Australia, the Philippines, Canada, and the UK. People in Portugal, India, Mauritius, Mexico and Canada spent the most average time on the blog. The most popular posting this past week was "Aristotle on Private Property." "Thomas Hobbes on Private Property" was next, followed by "Nader Kindles Fires of Revolt," "Why the Old Jobs Aren't Coming Back," and the sixth posting on "Economic Recovery."

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, July 14, 2011

Eye . . . or Nay of the Tiger?

In this morning's Wall Street Journal, David C. McCourt, Economist in Residence at the University of Southern California and who is on the board of University College in Dublin, Éire, published an op-ed relating to the recent downgrade of Irish government bonds to "junk" grade. ("Let the Celtic Tiger Roar Again," WSJ, 07/14/11, A17.)

According to Dr. McCourt, all that is necessary (okay, not all, we don't want to make his proposal sound simplistic) is for Éire "to recapitalize its banks and cut their debt burden." The idea is to emulate what was done following the savings and loan crisis in the U.S. in the 1980s . . . brought on by the partial repeal of Glass-Steagall: "require the European Central Bank — the Irish banks' largest single creditor — to work with the Irish government, maybe even accepting a debt-for-equity swap. In other words, the EU needs to bet on Ireland's future by becoming a shareholder."

This is close enough to the real solution to be credible. There are, however, two things wrong with it, both of them directly opposed to fundamental principles of sound finance and the Just Third Way. Debt for equity is a viable strategy. It's used in bankruptcy all the time, where existing shareholders lose most if not all of their ownership, and creditors take over, exchanging their debt for equity. So what's wrong with the European Union taking equity in exchange for the near-worthless debt?


First, if we understand the situation, much if not all the debt is Irish government bonds. If restricted to its proper role, government produces no marketable goods or services. A debt-for-equity swap in a bankruptcy is consistent with the goal of keeping an otherwise viable business going so that it can produce marketable goods and services in the future, hopefully turning it back into a profitable enterprise. Since a government doesn't produce anything, it cannot be construed as a "profitable enterprise," and can only repay out of future taxes levied on productive citizens. A debt for equity swap under these circumstances is illegitimate since there is no viable business to keep going.

Second, government is not in business to make a profit. Government is an expense of the citizens. That's why they pay taxes — to meet the legitimate costs of government. As John Locke reminded us in his Second Treatise on Government (1689), "'Tis true, Governments cannot be supported without great Charge, and 'tis fit every one who enjoys his share of the Protection, should pay out of his Estate his proportion for the maintenance of it." (§ 140.) The problem is that debt financing by government by means of emitting bills of credit instead of borrowing from existing private sector savings induces inflation, a "hidden tax" by means of which, as Henry C. Adams pointed out in Public Debts: An Essay in the Science of Finance (1898), politicians are able to evade their responsibilities and undermine the political foundations of the State:

"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." (22-23.)

Thus, as Locke continued § 140 in the Second Treatise, "But still it must be with his own Consent, i.e., the Consent of the Majority, given it either by themselves, or their Representatives chosen by them. For if any one shall claim a Power to lay and levy Taxes on the People, by his own Authority, and without such consent of the People, he thereby invades the Fundamental Law of Property, and subverts the end of Government. For what property have I in that which another may by right take, when he pleases to himself?" (Second Treatise, loc. cit.)

We necessarily conclude that emitting bills of credit allows a government to finance operations without resorting to taxation. This renders the government unaccountable to the people who eventually are stuck paying the bill. As a case in point, the United States government has not been out of debt since 1835 (Harold Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 51). The politicians who, during the administration of Andrew Jackson, spent the money that is still not repaid, are completely unaccountable to the taxpayer of today. True, the national debt from the 1830s is, compared to the $14 trillion plus we're faced with today is a drop in the bucket — but we still have to pay for what people long-dead spent.

Third and finally, this is not a real plan to turn things around. What is needed is something to get the government out of debt, and the citizens — not the State — put into the position of equity owners. This will allow ordinary people to produce marketable goods and services for a profit, not the State to manipulate the economy for political ends. To this end, pundits like Dr. McCourt should be investigating Capital Homesteading, not proposing even greater growth of the public sector at the expense of the private sector.


Wednesday, July 13, 2011

The Money is There . . . Maybe

Since the Social Security Administration was instituted in 1935, participants have been told that the monies collected are deposited in a trust fund. When the time comes for them to retire, the money that they have paid in, plus the earnings on that money, will be used to pay their benefits. The impression given is that your Social Security Account is similar to a bank account, into which you deposit money, the money earns interest, and then is paid out when you become eligible for benefits. Whenever some pundit or politician claims that the Social Security system is bankrupt, or might not be able to meet its future obligations, we are instantly assured that "the money is there."

When President Obama stated that Social Security checks might not be paid, he may not have realized what he said, but he burst the bubble that has been keeping the system going for the past three-quarters of a century. By saying that the checks might not go out, the president contradicted what we've been told over and over again: that the Social Security Administration couldn't possibly be in trouble. The Trust Fund is intact. The money is there.

So, Mr. Obama . . . if the money is there, why are you threatening to withhold payments until your demands are met? Your statement is blackmail, an admission that the money is not there, or a little bit of both. What's the story?

Frankly, the money is not there, despite the fact that we have reassured of the contrary for nearly three generations. Instead, what is there is a pile of government debt, which was used to replace the cash that was collected. To make a long story short, in order to pay out the Social Security benefits that have been promised — and which the government has assured the American people for decades is absolutely safe — the government is going to have to go further in to debt, start collecting taxes to redeem the debt that the Trust Fund already holds, or sell the debt to China . . . if they would buy it. As we've said on this blog before, for every dollar paid out in Social Security benefits, at least two dollars, probably more to pay the interest, have to be collected in taxes.

This is not a bargain.

Now, we're not saying that Social Security should be terminated. Promises have been made, and they must be kept. What we're saying is that Social Security isn't quite as secure as it might be. Nor is it — or has it ever been — adequate to provide more than a near-base subsistence for people who have paid into it for decades.

The real problem is that the government can no longer continue to run on debt. The bill is coming due, and the president himself, for all he doesn't seem to realize it, has admitted that the Social Security system has been bankrupt from the beginning. You don't collect money for one purpose, borrow it from yourself and spend it for something else, and then claim that the money is still there.

True, President Obama is clearly using this as a threat that he cannot make good on, but the implications of it go far beyond the usual political blackmail. The stalemate over the debt is such that anything done within the current framework can only be a temporary stopgap. The problem is not going to go away, nor will it be solved simply by continuing to do what has been done before.

So what's the real solution? If you're a regular reader of this blog, you already know the answer, and it's an answer both to the bankruptcy of Social Security and the debt crisis: Capital Homesteading by 2012.


Tuesday, July 12, 2011

An Old Philosophy of Public Debt and Taxes

One of the points stressed in Dr. Harold G. Moulton's The Formation of Capital (1935) is that the demand for capital — which presumably creates the jobs that allegedly keep the economy running . . . such as it is . . . is derived from consumer demand. In English, that means that if people like you and me aren't buying things like food, clothing and shelter, there is no incentive for other people to provide food, clothing and shelter, and thus no reason to invest in new capital formation to keep the supply of marketable goods and services coming.

The obvious conclusion to this observation is that anything that causes the real value of personal income to decline — such as inflation, job loss, debt service for past expenditures, and anything else that does not yield a direct, new benefit when the money is spent or the value held by the consumer otherwise diminished — consumption also declines. This requires either new or additional sources of income (additional production, since "production = income"), or manipulation of effective demand by inflating the currency to increase aggregate effective demand, but reducing it individually.

Thus, for example, the Keynesian concept of "forced savings" is a way that forces ordinary consumers to reduce consumption for the benefit of producers in the (false) belief that the only way to finance new capital formation. Individual wage earners and others on fixed incomes find their purchasing power reduced, but the slack is (presumably) taken up by the new jobs created as the result of the new capital formation. Thus, individual purchasing power is decreased, but in the aggregate is increased; an indirect redistribution of wealth from consumers to producers, and from producers to other consumers . . . after deductions along the way to meet costs.

In the Keynesian paradigm if insufficient new jobs are created by the process of new capital formation, the State steps in and redistributes wealth directly through the tax system, as Moulton explained in his 1943 book, The New Philosophy of Public Debt. Given that, with a permanently expanding — and non-repayable — public debt, taxation should (allegedly) not be necessary, the powers-that-be will still insist on taxing people. Why?

That a reorientation of thought with respect to tax policy would be necessary is suggested in a statement already quoted: "Once freed from the obsolete concept of the balanced budget, the larger uses of federal taxes can be creatively explored." The suggested creative purposes are: (1) To regulate the distribution of income; and (2) to prevent inflation in periods of full employment. (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 71-72.)

Were Moulton any less eminent, we might suspect him of sarcasm. Still, to make certain that the reader knows full well that he is not advocating the abolition of taxes in favor of a permanently expanded public debt and that the whole paradigm is fraught with contradictions, Moulton hastens to add, "These objectives, as we shall see, might be realized on a very low plane of taxation." (Ibid.) This tends to hint that Moulton knew very well that (1) meeting government expenditures by borrowing in anything but an emergency is a very, very bad thing, and (2) if borrowing were as sound and as good for the economy as the Keynesians made it out to be, why would it be necessary to continue to tax in order to fix everything that goes wrong because of debt financing?

The fact is that even if the whole of the money supply was made up of currency, bills and notes backed only by government debt created at will by the State, redistribution of existing wealth through the tax system is absolutely essential in the Keynesian paradigm. Keynesian economics requires concentrated ownership of the means of production in order to ensure that the rich — or the State — can accumulate sufficient savings to finance new capital formation. This, however, means that there will be insufficient demand existing in the economy unless (1) the currency is inflated, and (2) the tax system redistributes wealth. At the same time, the tax system has to be finagled to ensure that the rich retain enough wealth to finance new capital.

Nobody ever said any of this makes sense.

Anyway, all of this highlights the horror (speaking economically) of a news item that appeared in yesterday's New York Times: "Economy Faces a Jolt as Benefits Checks Run Out." As the article opens,

Close to $2 of every $10 that went into Americans' wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody's Analytics. . . . By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody's Analytics estimates $37 billion will be drained from the nation's pocketbooks this year.

Thus, right in the middle of the current "recovery" (evidently fueled by government spending), the economy is going to take it right on the chin in the form of a decrease in effective consumer demand of $37 billion.

Recall that, as Moulton pointed out in The Formation of Capital, the demand for new capital — and thus job creation — depends on consumer demand. If consumer demand takes a nosedive, then no new capital formation takes place, and there are fewer, if any, new jobs. With the release of the "net new jobs" data for June last week (18,000, or, statistically, zero, the same as for May, with 25,000 new jobs), this will likely translate into more jobs lost as workers are laid off in response to the decrease in consumer demand.

The effects could be much worse than the 1936-1937 "Depression within the Depression" that hit the country with the failure of the New Deal and before the need for war production increased demand — and employment — dramatically. War production (against Keynes's advice) was financed by borrowing (actually, printing money), but even despite the increased debt of the New Deal, the country at that time still had substantial productive capacity to back up the government debt. Now, we're borrowed to the hilt and beyond, and productive capacity has, in many cases, shifted overseas.

It may be time to do more than "eat your peas." It may be time to start growing some.

Capital Homesteading by 2012.