Friday, September 30, 2011

News from the Network, Vol. 4, No. 39

Big surprise: as the news from Europe gets worse, the stock market is up . . . no, it's down . . . up . . . down. Rinse, repeat. Actually, we're getting pretty good at guessing which way the market is going to go in the last few minutes of trading each day. If the trend has been downward, there will generally be a spurt upwards as the short sellers in the morning buy back shares in the afternoon. (This seems to have backfired yesterday, when a bunch of them seem to have taken a bath at day's end when the recovery spurt wiped out any of the short sale gains, but it usually works if you have a few million to gamble with.) If the trend has been upward, there will generally be a drop downwards in the last few moments of trading as the profit takers try to lock in their gains.

One word of caution, even after reading this brilliant analysis: Don't try this at home. You're better off engaging in some productive activity, or owning shares that pay dividends based on profitability, not on the perceived need to retain earnings or look good to the gamblers.

What seems to have caused today's downward trend was a double whammy: the unexpectedly large rise in the last part of the day that seems to have hit the short sellers between the eyes, and the announcement by the Economic Cycle Research Institute that a "new" recession is unavoidable. (This is news. We thought we were still in the old recession . . .) Following Harold Moulton's prediction in 1936 that a second dip was coming in the Great Depression, we've been saying this for over a year, ever since the Powers-that-Be announced the "official" end of the recession.

Still, nobody seems to be catching on that the old tried-and-failed Keynesian solutions are no longer not working as well as they used not to work. Anyway, the story's here: "'It's Going to Get a Lot Worse': ECRI's Achuthan Says New Recession Unavoidable." At least it gives us a couple of quotes for the memory book: "Weakness in leading economic indicators has become so pervasive the Economic Cycle Research Institute now predicts a new recession is unavoidable." And "The vicious cycle is starting where lower sales, lower production, lower employment and lower income [leads] back to lower sales." The only real question is why they think this is "news."

Here's the real news:

• Joe Recinos, visiting home from Central America, a member of the Advisory Board of Solidarista in Guatemala, managed to get to both presidential candidates and present them with materials on the Just Third Way. The runoff election is coming in November, at which time we'll be able to see how seriously the candidates took the possibilities for economic recovery inherent in the Just Third Way.

• Joe also has reconnected with the family of Alberto Martén Chavarría, the renowned founder of Solidarism in Costa Rica. Señor Martén corresponded at length with Louis Kelso in the 1940s, and worked with Joe and Norman Kurland in the 1970s. One of Señor Martén's biggest disappointments (if that's not putting it too strong) was the lack of emphasis that the solidarista movement put on the importance of worker ownership, and the need to extend the "ownership revolution" to as many people as possible.

• Joe also told us that the family of Señor Martén is founding a library with the goal of preserving and promoting his work. Joe will be exploring the possibility of having CESJ's "Economic Justice Media" participate in this endeavor, and possibly arrange for the translation into English of some of Señor Martén's more important books.

• CESJ's Director of Research, Michael D. Greaney, was interviewed this past Wednesday on the Skip Mahaffey Show out of Tampa Bay, Florida. The informal conversation, which covered the growing problem of personal debt and the need for systemic change for a lasting solution, went very well, and Skip has expressed interest in having Mike back for another talk. Guy Stevenson found a link to an archived record of the show. The interview begins at "11:30" if you want to jump right to it instead of listening to the whole show.

• Michael Greaney was also quoted in the Wall Street Journal Digital Network MarketWatch in an article about bullion coins as an investment. The article is here. Be careful — this is copyrighted material, so do not do anything more than send the link around. We mean that.

• There was a meeting of the Coalition for Capital Homesteading today. A number of people from across the country participated, and plans were firmed up for an Economic Justice Summit to discuss applications of the Just Third Way, i.e., Capital Homesteading. The location might be in Hartford, CT, the insurance capital of the world, where these ideas should resonate particularly well.

• On Monday of this week we dutifully sent in our suggestion on how to get the economy running again and sustainable job creation to William Conway, one of the founders of the Carlyle Group. Most of the suggestions we saw reported in the Washington Post centered on simply giving away more money or creating jobs without really saying how they were to be sustained. At the top of our list was a meeting with Norman Kurland, followed by a list of Conway's contacts. Since neither of these cost any money, we don't know how seriously they have been received.

• The "Thornton Frenzy" we've been experiencing on this blog over the last two weeks seems to have achieved a life of its own. We've uncovered a number of "long lost" works by this neglected 19th century economist, even two that aren't listed in any of the admittedly meager bibliographies. It's not hard to see why Thornton has been ignored. He was for worker ownership at a time when all the economic elite knew for an absolute fact that you simply can't have universal capital ownership. You just can't, and that's that. Thornton believed that the conflict between "labor" and "capital" would not be resolved until workers became owners, a claim presaged by Charles Morrison fifteen years before Thornton wrote his book On Labor (1869), and echoed by Pope Leo XIII in 1891 in Rerum Novarum: "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (§ 46.) Take that, Keynes. You and your "The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably. (The Economic Consequences of the Peace, Chapter 2, Section III.) Bologna.

• One of the books by Thornton we discovered that nobody mentions is Life's Mystery, a long poem published in Philadelphia in 1875 or so. It turns out there's a good reason why nobody mentions it. It really was going from bad to verse. (You know we couldn't resist that line.) We'll forgive him, though, for the good, non-poetry work he did.

• The two novels by Blessed John Henry Newman have been sent to the printer by Universal Values Media, Inc., which is in a co-publishing arrangement with CESJ.

• We have made two more submissions to Mesa Verde Publishing's upcoming Encyclopedia of Politics in the American West. One was on the "Boone and Crockett Club, an institution founded by Theodore "Don't Call Me Teddy" Roosevelt in 1887 to promote conservation. They really should be better known than they are; pay their website a visit. Interestingly, CESJ's chief volunteer, Miss Jean, worked for the B and C Club for a while before they moved to Montana. The other article is on banking, a subject on which we are probably, thanks to the work of Louis Kelso and Harold Moulton, uniquely qualified to write. (N.B., unlike William Thornton's article on "Agriculture" in the 1875 edition of the Encyclopedia Britannica, our contributions will not be in excess of 166,000 words.)

• We continue to reach out to candidates for public office. So far, despite the fact that "The Great Recession" appears to be starting a new phase, there seems to be very little interest in doing anything that will benefit ordinary people, other than more talk about redistribution and phony job creation instead of lifting barriers to capital ownership so that everyone can participate in the production of wealth.

• Even more strange is the fact that more Pro-Choice people are starting to pick up on the potential of Capital Homesteading as a the Pro-Life economic agenda, but hold back because they depend on the State to support their position, while Pro-Life people hold back because they seem to think it "concedes" too much to "the opposition" to admit that abortion exists, but here's a way to minimize it by removing all economic justification.

• Norman Kurland is meeting with two Chinese journalists next week to discuss the possibilities of implementing the Just Third Way in the East, which is west of here, in addition to the West . . . which is east of here.

• As of this morning, we have had visitors from 53 different countries and 52 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 Poland, the United States, the United Kingdom, Nigeria and the Netherlands Antilles spent the most average time on the blog. The most popular postings this past week were "The National Infrastructure Bank Proposal," "News from the Network, Vol. 4, No. 36," "A Plea for Peasant Proprietors, Part I," "Thomas Hobbes on Private Property," and Aristotle on Private Property."

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, September 29, 2011

“The Perils of Ignoring History”

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

The horrifying thing is that it is not satire.

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

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

Anyway . . . .

September 29, 2011

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

Dear Sir(s):

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

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

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

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

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

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

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

Blah, blah, blah.


Wednesday, September 28, 2011

William Thomas Thornton and Distributism, Part II

Given all that we said in yesterday's posting, there still seems to be a strong affinity between Thornton's goal and that of distributism. That makes it all the more baffling as to why neither Chesterton nor Belloc, nor any of their latter day followers have done any serious investigation of Thornton's proposal or, especially in light of the current economic problems and the general failure to advance the goal of establishing "the Distributist State," of the Just Third Way as applied in Capital Homesteading.

One possibility presents itself. It appears that Chesterton and Belloc accepted without question the disproved dogma that you can't finance new capital formation without first cutting consumption. Under that assumption most people are permanently cut off from ownership if they rely on existing financial tools and institutions that depend on past savings.

To their credit, Chesterton and Belloc refused to consider the dishonest Keynesian expedient of "re-editing the dictionary," that is, changing the definition of natural rights such as life, liberty, and property. Consequently they may have felt they had no choice but to retreat into a romantic Never-Could-Be Land and hope things would get better after the inevitable crash.

Chesterton, Belloc and their followers could — and do — assuage their frustrations by poking feathers at the obvious fallacies on which the Powers-that-Be rely. The most obvious, of course, is the belief in the necessity of concentrated ownership of capital. The latter day distributist, however, continues to ignore the most obvious fallacy of all that makes concentrated ownership seemingly inevitable: the slavery of past savings.

The presumed necessity of past savings to finance new capital formation can excuse the lack of action and general ineffectiveness of the distributist movement. Failure of the rich to open their purses for the benefit of others can be blamed on the personal greed and lack of virtue on the part of the capitalist or politician. The necessity of organizing in social justice for the common good and restructuring such basic institutions as money and credit can then be ignored, trivialized, or set aside as impracticable in light of the presumed lack of virtue on the part of the people in power.

Another possibility is that the very specificity of Thornton's proposal and Capital Homesteading might strike the modern distributist as just a little . . . unclean. Thornton's continual references to manure are . . . well, perhaps just a little too . . . earthy, if you know what I mean. As for Capital Homesteading, all that talk about natural rights and duties and rigid insistence on the right definition and what it means . . . so judgmental . . . money and credit, and all those complicated financial transactions and institutions . . . isn't money the root of all evil? People should just share what they have, right? and everyone would have enough, right?

As a matter of fact, that is right — and what people should be sharing are viable ideas like Thornton's proposal and Capital Homesteading that have the promise of turning things around.


Tuesday, September 27, 2011

William Thomas Thornton and Distributism, Part I

The response to "All Things Thornton" is mildly astounding. It's not every day that an obscure 19th century economist experiences a revival . . . especially when much of what he says runs directly counter to everything they've been teaching in the colleges and universities about economics and finance since 1844. So, to satisfy the growing Thorntonist Movement(tm) (you got the pun there, we hope), here's a short series on Thornton and distributism.

At first glance, William Thornton's proposal for vesting the people of Ireland with direct ownership of at least a part of the arable land of the country seems to be a virtual blueprint for an arrangement of society that in the early 20th century G. K. Chesterton and Hilaire Belloc would call "distributist." As described by Chesterton, the chief spokesman for the duo that George Bernard Shaw ruefully termed the two-headed "Chesterbelloc" beast, distributism is the economic arrangement of society into a system where a sufficiently large number of people directly own the means of production. This approach posits ownership of capital as the primary means of generating income. There is a preference, socially and legally, for the small, family-owned enterprise. As Chesterton put it, distributism is "a policy of small distributed property." (G. K. Chesterton, "The Beginning of the Quarrel," The Outline of Sanity. Collected Works, Volume V (San Francisco, California: Ignatius Press, 1987), 45.)

Given this definition, Thornton's A Plea for Peasant Proprietors reads like a distributist manifesto put together by someone with practical experience in the "real world." One of the flaws of distributism, however (admitted by its founders), is that it is rather vague both as to specifics and on how to achieve the desired results. Reading one of Chesterton's romantic fantasies or clever essays, we are struck with the unreality of his realism. There are a number of profound insights into human nature, but very little about the "grunt work" that occupies most of the time of the happy villagers and carefree cottiers who will presumably inhabit the distributist idyll once (by some unspecified miracle) it is established.

It becomes obvious that, for all the similarity of language and goals, Thornton's homely practicality is in sharp contrast to Chesterton's idealistic flights. Where Chesterton has suppositions and reasonable-sounding if unproved hypotheses, Thornton has statistics and hard data to back up a careful analysis. Chesterton continually matches wits with ideologues and ridicules the practicality of the worldly; Thornton matches the experts fact for fact, meeting them on their own ground and beating them on it.

For all his talk about commons and cows, there is very little in Chesterton about such mundane subjects as drainage and that inevitable, unpleasant, but extraordinarily necessary and valuable byproduct of livestock: manure . . . which Thornton mentions more than thirty times in this single work. Thornton might give in to the temptation to use a little overblown language once in a while. This was, after all, expected when writing of the Irish, those masters of the English language, as Carlos Fuentes reminded us. Thornton might, for example, refer to the contents of the farm urine tank as "libations to the Sterculine Saturn." This cleverness, however, seems to be presented as a bit of comic relief while making an important point. It is never itself the point of a passage as it so often seems to be with Chesterton.

Chesterton rambles on about how it should be possible to lead the simple life and enjoy one's self on a small bit of land. Thornton explains exactly how much land there should be, how long it should take to develop and get into full production, what crops to plant, and how to maintain fertility of the soil — and even the amount of backbreaking toil to be expected and how many hours of it per day can be expected. Where Chesterton hints that simple technology is to be preferred, Thornton states precisely why the spade is often preferred to the plow on small plots of ground, and duly acknowledges the beneficial effects of advanced machinery, even railroads — when appropriate. Chesterton might rhapsodize over a pint and a pipe. Thornton would tell you how to grow and cure tobacco and brew beer. It is difficult to imagine Thornton sending a telegram from a distant town to his wife asking where he was supposed to be.

With respect to the "small is beautiful" aspect of distributism, Thornton would have had little sympathy for the idea that "big business" or anything beyond a vague "human scale" or not produced on a small farm or in the village workshop is somehow anti-human. As he made clear in the article he contributed to the Encyclopedia Britannica,

"The extended use of iron and steel in the construction of agricultural implements is materially adding to their durability, and generally to their efficiency, and is thus a source of considerable savings. While great improvement has taken place in this department, it too commonly happens that the village mechanics, by whom a large portion of this class of implements is made and repaired, are exceedingly unskilled, and lamentably ignorant of the principles of their art. They usually furnished good materials and substantial workmanship, but by their unconscious violation of mechanical laws, enormous waste of motive power is continually incurred and poor results are attained. This can probably be remedied only by the construction of the more costly and complex machines being carried on in extensive factories, where, under the combined operation of scientific superintendence, ample capital, and skilled labor, aided by steam power, the work can be so performed as to combine the maximum of excellence with the minimum of cost." (William Thomas Thornton, "Agriculture," Encyclopedia Britannica, 7th Edition (1875).)


Monday, September 26, 2011

Who Was William Thomas Thornton (and Why Should We Care?)

For two weeks now we've been telling you about some Dead White European Male by the name of William Thomas Thornton, and the book he wrote in 1847 during the worst year of the Great Famine in Ireland, and published in 1848: A Plea for Peasant Proprietors. Joseph Schumpeter mentioned Thornton briefly in his monumental History of Economic Analysis (which you should have purchased years ago when the "trade paperback" could be had for around $20 instead of the $90 they're charging now for the same thing, and, oh, gee, the Kindle is $81, but you can rent it for $36.14 . . . better renew your library card; it's free most places) in connection with the "wage fund doctrine" of Nassau W. Senior (there's a name for you; English economist, 1790-1864; won't be on the test) and that's about it. So why should we get all worked up over somebody who wrote about something that is ancient history, and who wasn't even Irish?

Because Thornton focused on the need for systemic change in light of the growth of industrial capitalism and the continuation of agricultural capitalism, especially in Ireland, Britain's "Elder Sister." As Charlotte Brooke said in the introduction to her 1789 anthology, Reliques of Irish Poetry, "The productions of our Irish bards exhibit a glow of cultivated genius. The British muse is not yet informed that she has an elder sister in this isle." Thornton evidently felt some respect and consideration was overdue.

Thornton saw that a "one crop economy," such as had been inflicted on the Irish, was a certain recipe for disaster, and (like Harold G. Moulton in the 1930s and the shift to Keynesian economics), had the misfortune to see his predictions come true in the same year in which he originally published his solution in Over-Population and Its Remedy (1846). The system in Ireland badly needed change, and (within certain limitations), the solution Thornton proposed would have gone a long way toward establishing a more just system based on the private property and free markets to which the Powers-that-Be of 19th century Great Britain paid so much lip-service and from which they kept the great mass of people from sharing in the benefits.

So, although "Thornton" isn't uncommon in Ireland — remember John Ford's The Quiet Man, the greatest movie ever made? (Unless you're from the South, in which case we'll spot you GWTW . . . and there was a bit of the Irish there, too) — William Thomas Thornton was an English (gasp) economist. He was born at Burnham, Buckinghamshire, on February 14, 1813. In 1836 he became a clerk in the London office of the Honourable East India Company, "John Company." In 1858, after the British Crown assumed direct rule of India following the Great Mutiny (one of these days we'll tell the economic story of that and its aftereffects), he became secretary for public works in the India office, a post that he held until his death, a servin' of 'Er Majesty the Queen. In 1873 Thornton was created a C.B., not "Crunchberry Beast," but a "Companion of the Most Honourable Order of the Bath," a title and order conferred on British and Commonwealth citizens in recognition of conspicuous service to the Crown.

As we mentioned above, Thornton's first major work was Over-Population and its Remedy (1846), a counter to Thomas Malthus's 1798 Essay on Population. It was in this book that Thornton first proposed a plan by means of which propertyless Irish peasants could "homestead" waste (unused) land in Ireland after a fashion by having the government purchase undeveloped land at a low price and allocate it to people who would develop the land and repay the government out of future profits, becoming freeholders in the process.

In 1848 Thornton published A Plea for Peasant Proprietors, in which his proposal was developed in greater detail and urgency in light of the Great Famine. This was followed by On Labour (1869) in which he engaged in a friendly dispute with John Stuart Mill over the latter's adherence to the "wage fund doctrine"; and Old-Fashioned Ethics and Commonsense Metaphysics, a volume of essays, published in 1873. The following year, in response to the reoccurrence of famine and an upsurge in discontent in Ireland over the ineffectiveness of the various land reform acts, Thornton published a revision of A Plea for Peasant Proprietors.

William Thornton died in 1880.

Now you know.


Friday, September 23, 2011

News from the Network, Vol. 4, No. 38

This has been an extraordinarily busy week — as you might expect from the lateness in getting these news items posted today! That's actually a good thing, although it doesn't seem so when you have to add yet one more task onto an already full day. In any event, soothe your feelings lacerated by the performance of the stock market with these signs of hope:

• Mark your calendar: Michael D. Greaney, CPA, MBA, CESJ's Director of Research and famous author (In Defense of Human Dignity, 2008, Supporting Life: The Case for a Pro-Life Economic Agenda, 2010, and a raft of others waiting in the queue), is being interviewed regarding the plague of personal debt (a symptom of our dysfunctional monetary, tax and ownership systems) on the Skip Mahaffey Show out of the Tampa Bay area, on Wednesday, September 28, 2011, between 3:00 and 4:00 PM (most likely around 3:30). Skip's show broadcasts Monday through Friday, 3-5 PM (Eastern Time). We've listened to some of his recorded interviews, and it should be interesting, informative, and even fun (those whacky accountants . . .). Skip is nationally known as one of America's top Country Radio Air Personalities. His award-winning "Skip Mahaffey Morning Show" was a staple of Tampa Radio for over a decade. He is now on the TanTalk Radio Network. Skip has been very active in raising money for some very worthy causes — far too many to list here; the list is long — and is very community-minded. He's also an author, and we wish that the current Blogger/Amazon affiliate difficulty was ironed out so we could list his book here more easily (and get the fee for referring people to it), but here goes: Adventures With My Father (2009). Skip has also done a number of audio books, all science fiction as far as we know, and which will pop up if you plug in his name on Amazon search.

• Don't forget to check out the English language originals of the books translated by CESJ friend Misako Hida, a free-lance journalist in New York City. We listed these a few weeks ago in the news items, but with the Blogger/Amazon difficulties at the moment, you might as well go back to that issue since we can't list them again. Of course, if you're fluent in Japanese, you can get the translations by Misa on Amazon Japan. Misa expressed interest a few weeks ago in a way to finance rebuilding in the northeast after the earthquake, tsunami, and nuclear accident without raising taxes or increasing government debt. We'll try to start addressing that within the next couple of weeks on the blog. (This writer is still glorying in his new "Sumo Name" of "Earthquake Man," from Misa's article in the Japan edition of the Wall Street Journal.)

• Speaking of radio interviews, Norman Kurland's interview with Rick Tormala of Tuesdays with Tormala out of Grand Rapids, Michigan, went so well that Rick wants Norm back soon, but has not yet set a date.

• CESJ's monthly Executive Committee meeting was this past Wednesday. Before the meeting Norman Kurland gave a brief talk on the importance of building networks within your community before forming a CESJ chapter.

• During the meeting, Guy Stevenson of Iowa moved to explore the possibility of holding an "Economic Justice Summit" in Waterbury or Hartford, Connecticut. After discussion with Jimmie Griffin, active in Waterbury politics, and Russell Williams, a radio show host ("The Challenge") in Hartford, it was decided to work for something in Hartford, bringing in the Connecticut University system, with which Russell has been working.

• CESJ friend John Dondanville, a fellow Notre Dame graduate, put Norman Kurland in touch with an entrepreneur interested in rebuilding Detroit, Michigan, in a program that could integrate brownfield redevelopment and vertical farming. This ties in with a telephone call Norman got recently from a CESJ friend in the St. Louis area, who is exploring the possibility of implementing something along similar lines in Missouri.

• We received a telephone call today from another Notre Dame graduate in California, who had come across the blog postings on William Thomas Thornton's A Plea for Peasant Proprietorship. He found the historical aspect of the economics particularly interesting, and wants to explore doing business to bring Just Third Way ideas into the "real world."

• Norman Kurland is attending a meeting of the Association of Muslim Social Scientists today in New York City. He hopes to interest their new leadership in joining the Coalition for Capital Homesteading.

• Guy Stevenson has been using the social networking technology to help spread the word about the Just Third Way. Guy says he has found the quotes from Thornton's book particularly helpful in getting people's attention.

• Dan Moore has been positioning himself to present Just Third Way ideas to the United Steel Workers. He has attended one meeting in which he laid the groundwork, and is preparing for another meeting in October.

• Joe Recinos is on one of his trips "back home" and is visiting CESJ headquarters while he's in town. He reported that a security-minded, "somewhat right of center" candidate in Guatemala came in first in the recent election, and stands a good chance of being elected president in the run-off election in November. Joe has spoken to a number of the candidate's people, and reports that they are open to Just Third Way ideas as well as trying to clamp down on the drug lords.

• Norman Kurland will be meeting with two Chinese journalists on October 6 regarding the publication of the Chinese translation of Curing World Poverty, and possible future collaborations.

• Preliminary calculations have been made for the new figures for the revision of Capital Homesteading for Every Citizen. The new figures are very close to the old figures, adjusted for the increase in capital credit allocation, demonstrating the soundness of the assumptions in the "old" version.

• As a result of the interest expressed in William Thornton's A Plea for Peasant Proprietors, we have completed the first steps in the publication of a critical, annotated edition, possibly to be published before the end of the year.

• As of this morning, we have had visitors from 47 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, the UK, India, Canada, and the Philippines. People in Poland, Zambia, the United States, the United Kingdom, and Nigeria spent the most average time on the blog. The most popular postings this past week were "The National Infrastructure Bank Proposal," "News from the Network, Vol. 4, No. 36," "A Plea for Peasant Proprietors, Parts I, III, and IV."

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, September 22, 2011

Back to Our Story

Any of you who managed to work through the posting on the theory of pure credit yesterday deserve to be commended. And rewarded. So here is your reward: the reason for droning on and on (and on) about banks of issue, banks of deposit, past savings, future savings, forced savings, and everything else.

Following the suspension of convertibility of Bank of England banknotes into gold in 1797, the economists shifted into high gear. Based on the work of Adam Smith in The Wealth of Nations a quarter century before, bankers like Henry Thornton (no relation to William Thornton, as far as we know) and economists like Jean-Baptiste Say worked out the basic theory we just presented above. This was summarized in "Say's Law of Markets" and the "real bills doctrine."

Very briefly, Say's Law (he didn't develop it, just gave what is probably the clearest explanation of it . . . before we got to work, that is) is that we don't really purchase what others produce with this thing we call "money." No, money is just a symbol of what we produce with our labor and capital. Money is the "medium of exchange." By means of money, we can trade our surplus goods and services for the surplus goods and services others produce.

The real bills doctrine (again, briefly) is that, as long as the money we create by issuing bills of exchange and having them accepted does not exceed the present value of existing and future marketable goods and services in the economy, there will be no inflation. Together, Say's Law and the real bills doctrine sum up the essence of the "Banking Principle."

The trouble was that you also had the "Currency Principle." In contrast to the Banking Principle, the Currency Principle is simplicity itself. The idea is that "money" consists exclusively of coin and State-issued or authorized banknotes backed by gold or government debt. The only way to have money, and thus finance new capital ventures such as land acquisition by peasants, is to cut consumption and accumulate savings in the form of money.

Obviously, this means that the only people who can own future capital are, in general, those who already own present capital. Nobody else — especially people who were going through one of the most horrific famines in history and who couldn't possibly cut consumption — has the ability to save enough to purchase capital, particularly as technology advances and capital becomes increasingly expensive.

The common sense of the Banking Principle shows up the flaws in the Currency Principle immediately. That didn't matter, however, in early 19th century England and Ireland. The people who backed the Banking Principle had sound theory and practice on their side. The people who backed the Currency Principle had the self-interest of the already wealthy and the desire of politicians to spend money without raising taxes on theirs. It's obvious who won — and why. Here's the story in brief.

David Ricardo (1772-1823) set out to correct the theories of Adam Smith. The theory that we're interested in, of course, is the Banking Principle found in Book II of The Wealth of Nations. Smith adhered to the real bills doctrine, although he didn't call it that. The term wasn't current until Henry Thornton, a banker, wrote a book in 1802 with the ponderous title, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Thornton, too, set out, in part, to correct a few mistakes he believed Smith had made.

Thornton, however, thought that Smith had a good grasp of the basic theory. As a practicing banker, though, Thornton realized that Smith had gotten some technical details wrong. Consequently, Thornton's corrections of Smith took up, at most, a couple of paragraphs in The Paper Credit of Great Britain.

Ricardo, on the other hand, decided that Smith didn't know what he was talking about in several critical areas. This was not just a matter of correcting a few technical details. Ricardo believed that Smith was 'way off base on basic theory.

On a number of theories, actually — the labor theory of value, the theory of rent, and so on. The theory that concerns us, however, was Ricardo's understanding of money and credit. Ricardo believed that it is impossible to finance new capital formation until and unless consumption is reduced and money savings accumulated. Further, "money" is not anything that can be used to settle a debt, as Smith believed, but coin and banknotes. (The fight within the Currency School over whether demand deposits are money would wait another century.)

The bottom line to this is that, where Smith maintained that the purpose of production is consumption, Ricardo had to include "and reinvestment to finance new capital" as an increasingly important purpose of production. This created a paradox that in the 1930s Dr. Harold G. Moulton of the Brookings Institution would call "the economic dilemma." That is, if new capital can only be financed by cutting consumption, no sane businessman will ever finance new capital because the demand will no longer exist to make the new capital financially feasible.

Resolving this paradox requires that we realize that we shouldn't rely on past savings for financing, but on pure credit future savings. Ricardo, however, couldn't make that leap because he was locked into a flawed definition of money.

Ricardo passed this flawed understanding of money on to John Ramsay Muculloch (1789-1864), a Scottish economist, author and editor whom William Thornton referenced approximately a dozen times in his Plea — and not in a very complimentary way, either.

This makes sense. Thornton was all in favor of widespread ownership of landed capital. Macculloch, as the inheritor of Ricardo's mantle (Macculloch was considered the head of the "Ricardian" school of classical economics), believed that concentrated ownership of capital, whether land or machinery, was essential. This was so the rich could afford to save and buy more capital in order to create jobs for the rest of us.

A proposal such as Thornton made would have sounded like rank socialism to Macculloch. Macculloch necessarily believed that the rich are a special breed to be nurtured and protected with privileges and benefits to ensure that they will be ready, willing and able to finance new capital to create jobs. Never mind the fact that Macculloch's theories also justified backing banknotes with debt-backed State-issued bills of credit and rejected private sector asset-backed bills of exchange as the backing for the currency.

Macculloch was thus able to tell the wealthy and political elite of early-19th century Great Britain exactly what they wanted to hear. Being rich and powerful was not only God's Will, but the way a sound economy and financial system had to run if the sun was never to set on the British Empire, predestined for all time to rule the world. The fact that, as Walter Bagehot maintained in mid-century in The English Constitution (1867), the real rulers of the Empire were members of the wealthy commercial class, not the Widow of Windsor or her unemployed son, simply corroborated this belief.

Consequently, Macculloch's views had enormous influence on the financial and political elite of the British Empire. This was of critical importance when the charter of the Bank of England came up for renewal in 1844. Lord Overstone, a banker in real life, was a fervent believer in Ricardo's — and thus Macculloch's — theories. It didn't help any that he inherited Macculloch's library.

Further, as the owner of an investment bank and not a commercial or mercantile establishment, Lord Overstone did not appreciate the difference between the kind of bank he ran, and the special function of commercial banks and the Bank of England, generally considered the first true central bank. Lord Overstone understood deposit banking, not issue banking, and was thus the worst person to frame the legislation for the British Bank Charter Act of 1844. Naturally he got the job. With the assistance of Sir Robert Peel, Lord Overstone got the Act passed, and locked the British Empire into unsound principles of money, credit, banking and finance that have persisted — and continued to spread — down to the present day.

Thus, it is no wonder that, even if the British government had been in any way inclined to adopt Thornton's proposal to build ownership of Ireland at least partly into the people of Ireland, it would have deemed the idea impossible. Trapped by bad ideas and assumptions, they would have tossed it aside without further consideration.


Wednesday, September 21, 2011

The Theory of Pure Credit

As we saw yesterday, the most reasonable explanation of why the British government ignored William Thornton's proposal in A Plea for Peasant Proprietors in both 1848 and 1874 is that the authorities simply didn't understand the financing of new capital. They were stuck in what Louis Kelso and Mortimer Adler called the slavery of past savings. There was no consideration or even understanding of the principles of pure credit.

The basic theory of pure credit is simple. First, however, let's define what we mean by "pure credit": money created by extending credit based not on the present value of existing accumulations of savings, but on the present value of marketable goods and services to be produced in the future. The credit is "pure," that is, not dependent on what has been done in the past, only what can be done in the future. This is, in fact, how most money has been created throughout human history.

For thousands of years before the invention of currency, that is, "current money" of a uniform and standard value that circulates within an economy, money contracts existed. "Money contract" is, in fact, redundant. In a sense, all contracts are money, and all money is a contract, a promise to deliver something of value, a marketable good or service, thereby settling a debt.

A money contract is, technically, a "bill of exchange." Bills of exchange are further divided into mortgages and bills of exchange proper. A mortgage differs from a bill of exchange proper (which we shall refer to from here on simply as a "bill of exchange") in that a mortgage is backed by or represents the present value of an existing marketable good or service, while a bill of exchange is backed by the general creditworthiness of the issuer.

Usually the issuer's creditworthiness is a measure of other people's faith that the issuer will deliver the stated value in marketable goods or services, or their equivalent, at some future date or on the occurrence of some event. Most simply put, a bill of exchange is backed by the present value of the future marketable goods and services that the issuer of the bill promises to deliver to the holder in due course of the contract.

Here we have to insert a complication. What we've just described is the way private sector bills of exchange work. Governments also issue bills of exchange, except that they call it "emitting" instead of "issuing" or "drawing," and a "bill of credit" instead of a "bill of exchange."

There's one more difference between a private sector-issued bill of exchange and a government-emitted bill of credit. As we said, a bill of exchange is backed by the issuer's creditworthiness, measured by the opinion that others have of the issuer's ability to deliver the promised marketable goods or services or the value thereof on maturity: the present value of the issuer's future stream of income or production out of which the issuer will make good on the promise conveyed by the bill of exchange.

A bill of credit is also backed by the issuer's creditworthiness. In the case of a bill of credit, however, the issuing government's creditworthiness is measured by the opinion that others have of the government's ability to collect taxes in the future in order to be able to make good on the promise conveyed by the bill of credit.

In other words, the issuer of a bill of exchange has to make good on it him- or herself. The issuer of a bill of credit — always a government; "bill of credit" is a specialized "constitutional" term — on the other hand, has to be able to tax what other people produce in order to make good on the promise. The emitter of a bill of credit is, in effect, making promises for other people to keep, and relying on its power to tax them to make good on those promises. If a government loses its power to tax, or if there is nothing to tax, then the bills of credit — and the currency backed by the bills of credit — become worthless.

One more thing before we go on. A bill that is issued or emitted for no more than the present value of the expected future stream of revenue to result from production or taxation is called a "real bill," that is, it has real value. A bill that is issued for more than the present value of the expected future stream of revenue to result from production or taxation, or that has no present value behind it at all, is called a "fictitious bill," that is, a fake or a phony bill. Real bills are non-inflationary. Fictitious bills are inflationary to the extent they exceed the present value that the issuer reasonably expects to produce or collect.

The issuer of a bill can use the bill as money in one of two ways. The first, and most common, is to use the bill as money directly. An issuer or "drawer" of a bill can pay for marketable goods and services produced by others with the issuer's promise to pay in the future. Because a bill only becomes money when accepted in payment of a debt, a bill used directly as money is called a "merchant's" or "trade acceptance."

Since a bill will typically be accepted by a holder in due course at less than its face value due to the time value of money and the risk associated with the issuer's creditworthiness, an initial transaction involving a bill is called "discounting." Subsequent transactions are called "rediscounting" until the bill is presented by the holder in due course to the issuer for redemption on maturity.

Despite the fact that the greater part of the money supply in any economy has always consisted of various forms of bills of exchange used in transactions between individuals and businesses, it is sometimes more convenient to have an individual or institution of recognized creditworthiness substitute his, her or its name for that of a possibly unknown or untrustworthy issuer. This institution is called a bank — specifically, a "bank of issue" or "bank of circulation." A bill discounted or rediscounted at a bank of issue is called a "banker's acceptance."

A bank of issue is a specialized financial institution that takes deposits, makes loans, and issues promissory notes. A promissory note is a special type of bill of exchange that a bank of issue trades for a private issuer's bill of exchange. A bank's promissory note can be used to back smaller denomination promissory notes called "banknotes," or a demand deposit (checking account) created in the name of the original issuer of the bill of exchange for which the bank of issue traded its promissory note. The most common type of bank of issue today is the commercial or mercantile bank.

Another type of bank is the "bank of deposit." A bank of deposit is more limited than a bank of issue, because a bank of deposit cannot create money by accepting bills. A bank of deposit is limited to taking deposits and making loans. It cannot issue promissory notes to trade for bills of exchange, and thus cannot deal in pure credit. Common types of banks of deposit are savings and loans, credit unions, and investment banks.

A "central bank" is a "bank of issue for banks of issue." Its special function is to rediscount bills of exchange originally discounted by commercial banks and coordinate the activities of its member banks to ensure a uniform, stable, asset-backed "elastic" currency so that there is always enough liquidity in the system to keep it running. "Open market operations" are a means where by a central bank purchases paper issued by non-member banks, businesses, and individuals. In the modern world, open market operations have generally been diverted away from the private sector and used to finance government.

That's an extremely condensed version of the theory. To try and explain practice would take several volumes, and isn't relevant to our goal. All we need to understand is how a financial system can be run without relying on existing accumulations of savings — "pure credit," that is, credit that is not tied down by whatever has been accumulated in the past, but instead is tied to what can be produced in the future.


Tuesday, September 20, 2011

And More Again . . .

Looking at the common sense of William Thornton's proposal to deal with the Great Famine in Ireland from 1848 to 1852, we have a hard time trying to understand why the British government completely ignored it. The only thing we can figure out is that, as with many otherwise feasible plans, it came to grief over the financing.

The fact is that if private individuals or, especially, the government have inadequate or flawed ideas about money, credit, banking and finance, serious economic problems are going to crop up, just as they have in our day. Money, like the State itself, is a very powerful social tool. A well-regulated and sound financial system is invaluable for a just social order.

Unfortunately, when the financial system is not well-regulated, or the principles on which the system is based are not sound, then disaster is never but a short step away. Fortunately, getting a grasp of sound principle isn't too difficult, if we don't allow ourselves to be blinded by the mistakes and preconceptions of the past.

Even more fortunately, anyone who can understand the convolutions of 19th century Irish politics that provided the context of Thornton's proposal should have little or no trouble with the theory of "pure credit." This is not surprising. The modern struggle between economic development based on what Louis Kelso and Mortimer Adler called the slavery of past savings, and that based on pure credit and "future savings," is the direct result of something related to the event that set the tone for relations between Great Britain and Ireland for the whole of the 19th century.

The story is almost comic in an ironic fashion. In 1797 the news that the French had landed an invasion force in Wales swept through England. This was an event that came to be known as "the last invasion of England."

As invasions go, it wasn't much. Four French warships carrying 1,400 men landed at Carregwastad Head near Fishguard on February 22. This was supposed to be coordinated with Theobald Wolfe Tone's planned rising in Ireland.

Originally intended as a diversion, on February 23 the French force got drunk on some looted casks of wine, fought a few engagements with local militia and one of the local housewives — no, really! — got drunker, and surrendered on February 24. The British captured two of the French vessels, a frigate and a corvette (a vessel smaller than a frigate), and the other two French warships returned home. After waiting for additional French aid, the Irish rose in 1798, the "Wexford Rebellion."

Word of the "invasion" spread through Wales and England, panic hard on its heels. People rushed to their banks to withdraw all their funds in gold. Reserves got so low that Sir William Pitt's government permitted (or ordered, depending on your source) the Bank of England temporarily to suspend convertibility of its banknotes into gold. This temporary measure lasted for more than two decades. Convertibility of the paper pound into gold was not restored until 1821.

Trying to figure out why England didn't immediately go into a financial meltdown when the paper currency wasn't convertible into gold was productive of a knockdown, drag-out political and economic fight for the next half century. This was between people who thought that money consists of coin and State-issued banknotes, and people who thought that money is anything that you can use to settle a debt. What we need to understand the situation — and William Thornton's financing proposal — is the theory of pure credit, and some economic history.


Monday, September 19, 2011

More on William Thornton's "Plea"

For some reason last week's series on William Thornton's 1848 A Plea for Peasant Proprietors seems to have fired the imagination of a number of people. Maybe we'll have to come out with a "Just Third Way edition" or something. In the meantime, we thought we'd post an extract from the Appendix that Thornton added to his 1874 revision.

This appendix consists of some remarks made by Émile Louis Victor de Laveleye (1822-1892), a Belgian economist in favor of "primitive property." (It's not entirely clear, but "primitive property" might mean capital that the owner uses him- or herself in production, without being an "absentee owner.")

Anyway, here are the remarks by M. de Laveleye on "the Anti-Revolutionary Influence of Peasant Proprietorship" that appeared in the 1874 revision of A Plea for Peasant Proprietors:

It may be thought a matter for surprise that, in Flanders, feelings hostile to social order nevertheless do not manifest themselves, and that agrarian outrages are never perpetrated as in Ireland, although I think it certain that, in consequence of excessive competition, the Flemish farmer is much more ground down by his landlord than the Irish tenant. The fact that in Flanders, as in all countries in which landed property is distributed among a large number of owners, the ideas called socialist in the bad sense of the word do not obtain, is to be accounted for as follows:

"The Flemish tenant, although ground down by the constant rise of rents, lives among his equals, peasants like himself, who have tenants whom they use just as the large landowner does his. His father, his brother, perhaps the man himself, possesses something like an acre of land, which he lets at as high a rent as he can get. In the public house, peasant proprietors will boast of the high rents they get for their lands, just as they might boast of having sold their pigs or potatoes very dear. Letting at as high a rent as possible comes thus to seem to him to be quite a matter of course, and he never dreams of finding fault with either the landowners as a class, or with property in land. His mind is not likely to dwell on the notion of a caste of domineering landlords, of "bloodthirsty tyrants," fattening on the sweat of impoverished tenants, and doing no work themselves; for those who drive the hardest bargains are not the great landowners, but his own fellows. Thus the distribution of a number of small properties among the peasantry forms a kind of rampart and safeguard for the holders of large estates; and peasant property may, without exaggeration, be called the lightning conductor that averts from society dangers which might otherwise lead to violent catastrophes.

"The concentration of land in large estates among a small number of families is a sort of provocation of leveling legislative measures. The position of England, so enviable in many respects, seems to me to be in this respect full of danger for the future." (Cobden Club Essays, First Series, pp. 273 and 274.)


Friday, September 16, 2011

News from the Network, Vol. 4, No. 37

The "big" news this week is President Obama's "jobs plan." We say "big" advisedly. The only thing big about it is the price tag — half a trillion dollars to throw away on boondoggling fake work and increased government expenditures. Neither the boondoggling nor the increase in State power would be necessary if Capital Homesteading were enacted. Instead of raising taxes and running up debt even further, the tax burden could be spread out more equitably, possibly even reduced over time, the deficit eliminated, and the debt reduced and finally paid off.

Oh, yes — and jobs would be created and full employment of both labor and capital achieved for the first time since World War II. So, what have we been doing besides hounding you to start opening doors so that benighted souls like Mr. Obama can a) learn about the Just Third Way, and b) do something about it? How about this:

• Out in Ohio, Monica W. is giving an example of Just Third Way networking. She has linked up with a local politician with national connections, and who is scheduled to be going to Japan (where this writer is known as "Earthquake Man," even though he's never even been near a Sumo ring) in the near future to attend a conference on alternative energy. There are several tie-ins here. One, of course, we have a bit of knowledge about alternative energy systems based on hydrogen rather than wind or biofuels. (When we say "a bit," we mean that. We have no technical expertise in this area, but we "know people.") Wind and biofuels have some potentially significant problems, but where our special Just Third Way approach comes in is in the financing, and the social impact of the financing. By using "future savings" and pure credit, there is no need to raise taxes or inflate the currency to finance either advanced energy systems or the rebuilding after the earthquake and tsunami. By vesting direct ownership of the new energy system in the people who are served by the system, the social impact is immense — in a very good way. Another tie-in is that we've been interacting with a businessman in Tokyo who has expressed interest in the Just Third Way approach, and with a Chinese journalist who will be attending the Japanese-American Institute in Hawaii soon, and is scheduled to drop by Washington some time in October.

• Outreach efforts continue in other areas. We are still sifting through people in the Washington, DC metro area to find the one critical individual who turns out to be the "key log" in the logjam that seems to be preventing word from getting out. Once you free the "key log," all the rest start moving. Part of the problem, of course, is that far too many people today are paralyzed by fear, and are consequently holding back to see which way the wind is blowing (or public opinion is flowing) before they commit themselves to anything. True leaders are scarce . . . but even scarcer, it seems, are people who recognize their own limitations, but are confident enough to open doors — just as Monica is doing in Cleveland.

• Guy "[Don't] Call Me Potato Head Capitalist" Stevenson has been getting an astonishing response to his sending around the links to this week's short series on William Thornton's A Plea for Peasant Proprietors from 1848, revised 1874. Blog readership has tripled this week (no, not to "me, myself, and I"), demonstrating that, if presented in a way that shows its relevance to today, a proposal from the middle of the 19th century for Irish famine relief can fire the imagination, even if you aren't Irish or don't care for potatoes. Guy has been using social media very effectively, particularly sending around links from the blog via the "share" button on Facebook.

• It's not too early to start thinking about the annual Rally at the Fed to take place in April, as close to "Income Tax Day" as we can make it.

• Inspired by the reception we've received from the postings on Thornton's Plea, we're considering a "critical edition" of the book, the first edition to come out since 1874. Thornton's proposal not only illustrates graphically the principle of "binary growth," but presents a practicable plan that, with a little updating and applied to the current world economic situation, has a great deal of potential for solving the crisis. Maybe we should call it something like, "Capital Homesteading for Every Citizen" . . . .

• Work continues on the revised and updated edition of Capital Homesteading for Every Citizen. You can, of course, still use the current edition, but just note that some of the figures will be updated, and a few additions and corrections made in the glossary. Otherwise, it will be the same book.

• As of this morning, we have had visitors from 40 different countries and 49 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 UK, Canada, India and the Philippines. People in Poland, Uganda, Zambia, the United States, and the Philippines spent the most average time on the blog. The most popular postings this past week were "The National Infrastructure Bank Proposal," "News from the Network, Vol. 4, No. 36" (i.e., last week's), "A Plea for Peasant Proprietors, Part I," "The Stimulus, Part II," and "The Keynesian Paradox of Thrift."

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, September 15, 2011

A Plea for Peasant Proprietors, Part IV: The Citizens Land Bank

While things are not yet as bad in the world today as they were in Ireland in the 1840s, most people are as dependent on wage system jobs as the Irish were on the potato. Not surprisingly, however, Thornton's observations and remedies can readily be applied to the current situation. If we understand that both land and technology are capital, and that we don't have to confiscate, condemn, or redistribute existing capital for people to become owners of capital, then it is possible for everyone on earth to become an owner of a capital stake that has the capacity to generate an income sufficient to meet common domestic needs adequately. The new capital would not come from existing productive assets, whether land or technology, but from capital that has not yet been formed, that is, financed.

Due to the disproved belief that it is impossible to finance new capital formation without first cutting consumption and accumulating money savings (and being careful to realize that "increases in production" and "decreases in consumption" are two different things), new capital has remained a virtual monopoly of the already wealthy. By returning to the Banking Principle and rejecting the Currency Principle, however, it is possible to finance the acquisition of as-yet unformed capital out of "future savings" instead of past savings, thereby making it possible for everyone to become an owner of capital.

There is also the problem of giving the State a broader role than it really should have. Thornton's amended proposal from 1874 does make sense when we take the nature of land and natural resources into account. There's only so much there. How do you ensure equality of opportunity to all and, at the same time, respect the natural right of private property . . . without redefining the substantial nature of private property, thereby abolishing it? As Thornton commented,

"To insist upon the immense benefit to the entire peasantry of these transformations, immediate and prospective, would be but to repeat once again what has already been repeatedly urged throughout this volume. What rather I feel to be incumbent upon me is to admit that completest realization of the benefit anticipated would still fall far short of what I conceive would result from a really perfect land system. According to my ideal on that subject, there should be no property in land save that of the whole nation in its corporate capacity; and those Asiatic countries in which the State, as trustee for the nation, is sole landed proprietor, would, in my opinion, be infinitely to be congratulated, were there but adequate security that the rights involved in the trust would be duly appreciated and judiciously exercised by those who have to administer it."

First things first: keep the government out whenever possible. The government is a very powerful and very specialized tool essential to a well-run social order. That does not mean, however, that the government can do anything and everything better than the private sector. As Thornton himself admitted, unconsciously undermining his amended proposal, "Really, it does look as if private energy were unable to survive the torpedo-like touch of governmental support. Certainly, from Indian railways downwards, every private enterprise languishes which government guarantees." (William T. Thornton, A Plea for Peasant Proprietors. London: Macmillan and Company, 1874, 255.)

In other words, if you want to guarantee failure, get the government involved in what should be private enterprise. The problem is, can the private sector do what it appears that only the State can do?

That raises the question of the State's proper role, which is to ensure that everyone has equal opportunity (not results), and that abuses are corrected and the malefactors punished. The solution is that, instead of vesting corporate ownership of the land, natural resources and infrastructure in the State, why not vest corporate ownership of such capital in . . . a private, for-profit corporation? If owned by every citizen as a right of citizenship by granting each citizen a single no-cost, non-transferable, voting, fully participating share in the corporation, we could achieve Thornton's "corporate ownership" of land without vesting it in the State. Everyone would thereby become an owner of the land.

Tenants who are also shareholders of the land-owning corporation would take leases. As tenants, of course, their rights would be defined by the lease — into which, as owners, they would have some say-so. Having clearly defined rights of property as actual owners and a just leasehold is much more secure than having the State protect the sometimes vague "beneficial ownership" conferred by statute, and infinitely better than the tenancy-at-will that afflicted Irish agriculture throughout the 19th century.

We've embedded these principles in CESJ's proposed "Citizens Land Bank" (CLB) that is a private sector alternative to State ownership of land and infrastructure. A CLB would be a for-profit, professionally-managed, citizen-owned-and-governed community land planning and development enterprise, designed to enable every citizen of a community of any size to acquire a direct ownership stake in local land, natural resources and basic infrastructure.

• A social vehicle for every man, woman and child to gain, as a fundamental right of citizenship, a single lifetime, non-transferable ownership interest in all the Bank's assets, share equally in property incomes from rentals and user fees from leases or use of the Bank's assets, accumulate appreciated equity values from enhanced land values, and gain an owner's voice in the governance of future land development.

• An innovative legal and financing tool empowered to borrow on behalf of all citizen-shareholders and service the debt with pre-tax dollars to meet the land acquisition, capitalization and operational needs of the Bank. The CLB shelters from taxation the equity accumulations of citizen-shareholders and protects the outside assets of the citizens in the event of loan default or if the enterprise fails.

• A social tool designed to encourage a just, free and non-monopolistic market economy. It applies the democratic principles of equal opportunity and equal access to the means to participate as an owner as well as a worker. It demonstrates that anything that can be owned by government can and should be owned, individually and jointly, by the citizens.

• A major feature in a proposed national economic agenda known as "Capital Homesteading for Every Citizen," which is designed to reform existing monetary, credit and tax barriers to provide every American an equal opportunity to share in the governing powers and profits from new entrepreneurial ventures, new technologies, new structures, and new rentable space built upon the land. Capital Homesteading offers a "Just Third Way" of reversing unsustainable federal deficits and debt, and revitalizing and growing the American free enterprise system in a sustainable and environmentally sound way.

What a CLB is Not:

It is not socialism or communism (which are systems based on the abolition of private property in the means of production). It does not take away property rights from present owners, nor does it redistribute current accumulations of wealth or income.

It is not the Wall Street model of capitalism (where ownership of the means of production and ownership power are concentrated in the top 1% of society and artificial barriers exclude non-owners from equal ownership opportunities).

It is not a non-profit Community Investment Corporation, Land Trust, Land Bank, Land Foundation, or any other legal vehicle in which ownership of land, natural resources and basic community infrastructure are owned collectively (i.e., where no one has a property stake) or by any state monopoly.

It is not a land monopoly owned or controlled by a small elite of local or outside investors or political leaders.

It does not provide shares that can be sold, transferred, pledged to others or used as collateral to meet a citizen's consumption needs.

It is not an amateur or unstructured approach to land development or "management by committee."

It is not a vehicle for owning or financing local enterprises competing in the marketplace.

Benefits of a CLB

It would provide a private sector means by which homes, enterprises, rentable space and technologies built upon the CLB-owned land can be broadly owned by workers and other local stakeholders.

It would generate a new source of taxable incomes from new and expanded private sector jobs and ownership stakes.

It would empower each citizen and family with the means to build an adequate and secure income, and with a real voice in the development decisions of the community.

It would provide every citizen with income to contribute to the costs of running an effective local government and providing essential public services, as well as for his or her own well-being.

It would offer hope of eventually eliminating the dependency of any citizen on welfare or charity of others or fear of technological displacement.

How Could We Get the CLB?

Suggest to President Obama that he abandon his half-trillion dollar "job creation" boondoggle to rebuild infrastructure and persuade Congressional leaders to support CLBs as part of a program to accelerate rates of non-inflationary, private-sector economic growth, green jobs and energy independence.

Get your legislator(s) behind a Federal law or executive order that provides comparable tax and capital leveraging features as is presently provided under Federal laws governing employee stock ownership plans (ESOPs) for the benefit of private sector workers and the corporations and worker cooperatives in which they work.

Obtain state and federal exemptions from property taxation on assets held by a citizens land bank.

Finance the rebuilding and development with Federal Reserve monetization of loans made by local commercial banks to enable citizen land banks to acquire development land from current owners and investors.

There. Could anything except Capital Homesteading itself be easier?


Wednesday, September 14, 2011

A Plea for Peasant Proprietors, Part III: Thornton's Proposal

As we saw in yesterday's posting, the way to sustainable economic and social development lies in opening up opportunities for people without capital to own capital. In this way they can participate in the production of marketable goods and services with both their human (labor) and their non-human (capital) inputs. As technology advances and displaces human labor from the production process, it becomes critical that people without direct ownership of capital become owners of capital.

The question then becomes how people without savings are supposed to acquire capital? This was a critical issue for Thornton, because the capital with which he was concerned was landed capital, the chief form of productive asset in Ireland in his day.

Thornton proposed that the vast tracts of idle "waste land" in Ireland be purchased by the government and allotted in economic plots to Irish families, who would be supported by an allowance until they could grow their own food. After a period of time sufficient to bring the land into full production, the families would start making payments on the land, and within 20 years would own it freehold. The scheme would rely on being able to purchase the waste land at a low price — its current value as waste land — with the money provided by floating government bonds, backed by the purchase value of the land itself. (Thornton did not explicitly state this, but spoke of interest being paid on the loans, which — as the money had to come from the government — could only be the result of issuing State bonds.)

The new money created by the bonds would first be used to finance the purchase and development of the land, and then be cancelled or retired as the payments for the land were received. Thus, the money could be created as needed, as long as what the money was spent on provided the "future savings," that is, sufficient income in the future from the production of marketable goods and services, to pay back the money. There would thus be no problem with either inflation or deflation.

There was, of course, the question of maintenance during the period it took for the land to become fully productive. Thornton estimated this at three to five years, judging from the rate of improvement on land of lesser quality in Flanders and other areas in Europe. He noted, however, that the government was spending millions of pounds sterling on relief efforts and on infrastructure for which there was currently no demand. Using the same funds to maintain families relocated on to unproved land would result in an estimated immediate savings of £5 million a year for two years until the land became productive.

The plan fell through because of two factors. One, landowners simply refused to sell the unused land, and the government refused to condemn the land and force a sale for the common good under eminent domain.

Two, although he might not have realized it, Thornton's method of finance was an application of "the Banking Principle," based on Say's Law of Markets and the real bills doctrine. Unfortunately, parliament had just enacted the Bank Charter Act of 1844 that, after decades of debate, repudiated the Banking Principle of Adam Smith, Henry Thornton (no relation) and Jean-Baptiste Say that allowed for an "elastic" banknote currency backed with private sector hard assets supplemented with gold and silver coin that expands and contracts with the needs of commerce, industry and agriculture and is thus neither inflationary nor deflationary. The new Act went with the Malthusian/Ricardian Currency Principle that imposed an "inelastic" banknote currency in fixed amount, backed with government debt and supplemented with gold and silver coin.

Parliament was not going to nullify its own act barely four years after it had passed it, regardless how bad the situation was . . . for Ireland. Of course, when the government itself and the private business interests of the City of London demanded an increase in the money supply in 1847, 1857, and 1866 to meet a continuing series of currency crises, the Bank of England was instructed to inflate the currency, backing the increase with more government debt rather than private sector assets.

In the 1874 edition of A Plea for Peasant Proprietors (that's the 1848 edition over there), Thornton explained why he reiterated the proposal, even though he thought it impracticable under current conditions. One, the government had completely ignored the "plea" a quarter of a century before when it would have been to the great benefit not only of Ireland, but the entire United Kingdom.

Two, Thornton wanted the reader to compare what the situation could have been like in the 1870s had the proposal been adopted. In all likelihood, for instance, there never would have been a Fenian uprising, an 1867 revolt that led eventually to the 1916 Easter Rising and partial Irish independence. It was noted that, while many small landowners were sympathetic to the Fenians, few of them actually took part, or gave more than "moral support."

Three, the proper institutional framework was not in place, and there was no sign that the British government had any intention of taking advantage of an obvious opportunity. Even if carried out without institutional reforms supporting private enterprise, it would fail. The situation would simply duplicate the same pattern into which Ireland had been locked for centuries. As Thornton noted,

"The time for creating a numerous peasant proprietary in the summary mode suggested has, however, long gone by, and is not now to be recovered. How seldom, alas, does England, in respect of Irish reforms, take time by the forelock!" (p. 261)

What Thornton did suggest in light of changed conditions, however, was corporate ownership by the State, with rights secured to leaseholders almost as if they were freeholders. This is vaguely suggestive of Henry George's proposal in Progress and Poverty five years later.  Thornton's proposal would have the advantage of dealing with the problem of a limited form of capital, but from the Just Third Way perspective had two problems.

One, as Thornton himself admitted, it let the State in, and the State is usually the worst choice to do anything that the private sector could do. As he put it, "Really, it does look as if private energy were unable to survive the torpedo-like touch of governmental support. Certainly, from Indian railways downwards, every private enterprise languishes which government guarantees." (p. 255)

Two, State ownership is almost certainly to be administered politically, rather than economically or in accordance with market principles.

Three, it does nothing to address the problem of limited land realistically, or open up access to the means of acquiring and possessing other forms of capital.

Tomorrow we'll see how Thornton's proposal has been updated in accordance with Just Third Way principles.


Tuesday, September 13, 2011

A Plea for Peasant Proprietors, Part II: The Principle of Binary Growth

In yesterday's posting we saw that Ireland in the late 1840s was what could only be described as a disaster area. Whatever the cause, the fact remains that the country was hit with a catastrophe that could easily have been avoided, and even after it happened, could have been solved almost with ease. The baffling thing about the Famine, however, was that nothing was done except to make a bad situation worse. This was justified on the grounds that nothing should be done to interfere with the free market, and that the Great Hunger — "An Gorta Mór" — was a graphic proof of the Reverend Thomas Malthus's theories. These were first published in Malthus's 1798 Essay on Population, and discredited many times since, as Joseph Schumpeter reported in his History of Economic Analysis:

"The teaching of Malthus' Essay became firmly entrenched in the system of the economic orthodoxy of the time in spite of the fact that it should have been, and in a sense was, recognized as fundamentally untenable or worthless by 1803 and that further reasons for so considering it were speedily forthcoming. It became the 'right' view on population, just as free trade had become the 'right' policy, which only ignorance or obliquity could possibly fail to accept — part and parcel of the set of eternal truth that had been observed once for all. Objectors might be lectured, if they were worthy of the effort, but they could not be taken seriously. No wonder that some people, utterly disgusted at this intolerable presumption which had so little to back it began to loathe this 'science of economics' quite independently of class or party considerations — a feeling that has been an important factor in that science's fate ever after." (Joseph A. Schumpeter, History of Economic Analysis. New York: Oxford University Press, 1954, 581-582.)

We might compare the today's slavish reliance on similarly discredited Keynesian theory with the unquestioning acceptance of Malthusian fantasies as economic orthodoxy, but we have better things to do — for now, anyway. (Although, if you're interested, Harold Moulton's dissection of Keynesian "Multiplier Theory" in The Formation of Capital pulls the rug out from under Keynesian monetary and fiscal policy.) What we need to look at today is the validity of William Thornton's claim that capital of which the ownership is well-divided is inherently more productive than capital of which the ownership is concentrated, and that the rate of growth and development is much faster when direct ownership of capital is broadly distributed throughout an economy.

We have, of course, seen this argument before. Dr. Robert H. A. Ashford, professor of law at Syracuse University, in Binary Economics claimed that in binary theory, the concept of "binary growth" holds that economies grow steadily larger as private capital acquisition is distributed more broadly among the population on market principles. This concept also focuses on the importance of unleashing the unutilized or underutilized capacity of all economic systems to produce in greater abundance. (Robert H. A. Ashford and Rodney Shakespeare, Binary Economics: The New Paradigm. Lanham, Maryland: University Press of America, 1999, 37-41, 273-306, 320-325.)

This is substantially the same claim made by Thornton in the 1848 edition of A Plea for Peasant Proprietors, and strengthened in the second edition, published in 1874. Although Thornton's examples were limited to landed capital, the same principle applies to all other forms of capital. Thornton noted that, in areas where people owned the land they tilled, they never ceased to improve the productiveness of their capital. The same or even larger size plots of better land in other areas, when farmed by tenants or hirelings, even with better technology, invariably produced at a lower level. As Thornton reported, noting that most manufacturing in Switzerland was carried out in the 1840s by peasants who worked their land in the summer, and spent the winter producing other goods,

"Switzerland, however, notwithstanding the general happiness of her people, is not absolutely free from pauperism a disease which would almost seem to be inherent in the constitution of manufacturing communities. But even the pauperism of Switzerland furnishes additional proof of the excellence of peasant proprietorship, for paupers are most rare where landed property is most divided, and are found in the greatest number in those districts which contain the largest estates. In the whole of the Engadine, the land belongs to the peasantry, and 'in no country in Europe,' says Mr. Inglis, 'will be found so few poor as in the Engadine.' In the Valais, the land belongs to a few great proprietors, and, according to Mr. Bakewell, the peasantry are among the poorest in Switzerland. Inglis, however, assigns the 'bad pre-eminence' to the canton of Berne, in which he says the greatest landowners reside, and which, 'for this reason, contains the greatest number of poor'."

From Thornton's language on this point and his argument, we suspect that he might have been a primary source for Chesterton and the distributists.

Thornton also went on at some length about conditions he had observed in the Channel Islands, Guernsey, Jersey, and Alderney. These islands, too, were characterized by large numbers of small farms owned by those who worked them, were invariably prosperous, and there were few extremes of wealth or poverty. For the 1874 edition Thornton added several pages of historical examples of countries and empires that had grown strong and wealthy when ownership of capital was well-divided, and which fell into decay once ownership of capital became concentrated.

Of interest to both the Pro-Life and Pro-Choice camps is Thornton's observation, in common with a number of other critics of Malthus's Essay, that while poor people seem to reproduce beyond their ability to support themselves, the population of middle class small proprietors grows more slowly, and is frequently stable, matched to the productive capacity of the local economy.

John Weyland had noted the same thing in 1816. In The Principles of Population and Production, Weyland claimed that poor people tended to reproduce at great rates, the middle class tended to reproduce at replacement rates, and the rich below replacement. Weyland concluded, as did R. Buckminster Fuller a century and a half later, along with Jane Jacobs, that the level of economic development determines the rate of population growth, not the other way around, as Malthus had asserted, and as many people still affect to believe. Thus, the solution to the "population problem" is to develop economically. If you want to raise living standards and slow population growth, you encourage widespread participation in economic development through direct ownership of capital. You do not reduce population and hope that standards of living will rise.


Monday, September 12, 2011

A Plea for Peasant Proprietors, Part I: An Gorta Mór

Following "Black '47," the worst year of the Great Famine in Ireland (1846-1851), William T. Thornton proposed a solution that would, he believed, at one and the same time end the famine, eliminate widespread poverty, diminish the threat of violence and rebellion, and establish a native "middle class" in Ireland. This was A Plea for Peasant Proprietors, published in London in 1848.

Thornton's proposal was relatively simple and straightforward. From the perspective of the Just Third Way, the "plea" might almost be viewed as a precursor of Abraham Lincoln's Homestead Act and Emancipation Proclamation a decade and a half later.

The basic problem was that in Ireland most of the people did not own any capital, whether in the form of land or otherwise. The land they rented was in sub-economic plots as a result of the prevalence of "rack renting." Rack renting was a seemingly endless process of subletting that ensured plots would be as small as possible, and rents as high as possible.

Only the potato made it possible for people to survive even marginally on such small plots of land. Consequently, not only was poverty widespread, the country was subject to all the dangers of a one crop subsistence economy. In 1826 Dominic Corrigan, a Dublin physician, was warning the government of the dangers of a one-crop economy, and predicting that "a pestilence and disease of unprecedented magnitude will befall us" unless some means was found to diversify crops and provide new sources of food. These warnings increased in frequency in the early 1840s, as the reform movements sweeping through Europe, and that culminated in "the Year of Revolution" — 1848 — engendered an increasing level of protest over conditions in Ireland.

In September 1845 disaster struck. A blight that had affected the potato crop all across Europe finally reached Ireland. Where the failure of the crop had caused hardship in Europe, in Ireland it caused almost instant disaster. By 1851, a population that has been estimated as being between 6 to 12 million prior to 1845 was reduced to less than 4 million, of which approximately 1 to 2 million were believed to have emigrated. The rest died from starvation or starvation-related disease.

Ironically, there was more than enough food grown in Ireland to stave off the famine, just as in other parts of Europe where other crops were able to take up the slack when the potato crop failed. Unfortunately, most of the Irish did not own the land on which these other crops were grown, and most of the food was shipped out of the country to generate cash income for the largely absentee landlords. Consequently, the most obvious step in any famine — prohibiting the export of food — was not taken, ostensibly for fear of interfering with the free market, even though this had been one of the first steps taken in the 1780s (over the protests of the merchants) when crops failed.

As John Mitchel (1815-1875) of the "Young Ireland" movement (and mentioned in William Butler Yeats's poem, "Under Ben Bulben") commented in his pamphlet, The Last Conquest of Ireland (Perhaps) (1861), "The Almighty, indeed, sent the potato blight, but the English created the Famine." Mitchel had published similar comments during the Famine, culminating in his being charged with sedition in 1848.

Following a confused line of reasoning by the court, Mitchel was convicted of treason by a packed jury under a new "Treasonous Felony Act." This Act appears to have been rushed through parliament in order to convict Mitchel. He was sentenced to 14 years transportation to Bermuda. As Mitchel's defense Counsel, Robert Holms, reported the outcome,

"The foreman of the Grand Jury, gentlemen, having been asked if the jury had found bills against the prisoner — replied — 'Oh yes, we find him guilty of sedition.' 'Gentlemen,' said the officer of the court, 'he is not indicted for sedition.' 'Well,' said the foreman, 'we find him guilty of treason.' 'But, gentlemen,' again interrupted the officer, 'the charge against Mr. Mitchel is for felony.' 'Oh, no matter!' said the foreman, 'sedition, treason, or felony, it is all the same to us.'"

Whether or not the Famine was engineered as Mitchel and many others claimed, however, the fact remains that the so-called "free market" that allegedly justified the lack of measures taken by the government was far from free. Not unnaturally, this datum did not seem to occur to the Powers-that-Be. When the vast majority of the population was not free to own capital, whether in the form of land or technology, and the bulk of the marketable goods and services did nothing to increase the wealth or wellbeing of the country in which they were produced, the Irish could only be described as subsisting within a system in which they were burdened with "a yoke little better than that of slavery itself." (Rerum Novarum, § 3)

Mitchel, in fact, aroused fury in the United States when he came out in defense of slavery in the South. He claimed that black slaves in the United States were better treated and better fed than most of the ostensibly free Irish. In his opinion, the Northern abolitionists were hypocrites for championing the rights of slaves while ignoring the barbarism of the system the English imposed on Ireland.

It is no wonder, then, that the cause of Irish nationalism and socialism came to be so intertwined. The evils of agricultural and, later, industrial capitalism had kept the Irish in a state of complete economic subjugation. The problem was that, whether capitalism or socialism, ordinary people were powerless before the economic and political power of the elite, both private and State.