Friday, March 30, 2012

News from the Network, Vol. 5, No. 13

Everyone seems to be obsessed with the gigantic Lotto jackpot. After all, how would you like to come into half a billion dollars suddenly? Naturally, in addition to all the hoopla, there are also a multitude of stories in the media about how miserable sudden wealth can make you.

Well, we have a solution to both winning and losing the Lotto, even one with such a big payout. If you lose, it proves that you wasted your time and should have been working on bringing Capital Homesteading to the attention of prime movers and door openers who can get us to prime movers. That way, it won't matter if you didn't win. You'll be able to accumulate enough capital assets to provide you with a reasonable income without winning the lottery. And you could send the money you would have spent on lottery tickets to CESJ as a donation to support the advancement and adoption of Capital Homesteading. (You knew that was coming.)

If you win? Support the Coalition for Capital Homesteading by using your new access to other people of wealth and power to sway them to support Capital Homesteading and cut the rest of us in on a good thing without taking anything away from you. Imagine: future lottery winners wouldn't have to hide or change their phone numbers or anything, because there'd be nothing to envy them for. Isn't that worth a little of you effort?

What if you don't play the lottery? Well, then join the rest of us in working for Capital Homesteading, anyway (such as joining us at the Federal Reserve Building in Washington, DC, on Friday, April 20, 2012 from 11:30 am to 1:00 pm) and participate in initiatives such as the following news items:

• "Catholic Teaching and the Elections," by CESJ's Director of Research, Michael D. Greaney, will appear in the April 2012 issue of Inside the Vatican magazine. The editor/publisher has assured us that subscriptions ordered before April 1, 2012 will include this issue. That gives you two days (today and tomorrow) to subscribe by visiting the Inside the Vatican website (and tell them why you're subscribing, which will encourage them to accept future articles). We don't know if you can order just a single issue, but you can always ask. As you might expect, the article mentions the fact that none of the candidates are pushing an economic agenda consistent with either reality or Capital Homesteading.

• PJ and Eileen in the U.K. are back in action, and sending e-mails and letters to key people in government and the House of Commons about the potential of Capital Homesteading for turning around the economy. He has so far received a response from Ed Miliband, who heads the opposition Labour Party, and whose representative has encouraged PJ in his endeavor.

• Guy S. in Iowa has been taking extreme advantage of the new "gadgets" on this blog, especially the Facebook "share" gadget that allows you to send a link to a posting or even the homepage of the blog to all your friends. This appears to be better than the "e-mail follower" gadget, because if you sign up for that, you only get the daily updates, whereas if you actually visit the blog, you can "share" and "tweet" the posting to you friends, increasing the number of visitors to the blog and making it come up more often in internet searches (we think).

• We have been asked to contribute some articles on military history to the revived Catholic Men's Quarterly. We'll keep you posted as to when/if they appear, and to what degree we manage to work in the Just Third Way perspective.

• We recently submitted an article to Social Justice Review, the official journal of the Central Bureau of the Catholic Central Union of America in St. Louis, Missouri. The article is based on the "Blind Leading the Blind" postings from earlier this week.  And, yes, you can subscribe to the Social Justice Review, too.

• Despite the fact that at present three Catholic magazines are publishing Just Third Way material, CESJ is not a Catholic organization, nor is the Just Third Way a Catholic movement. It is open to everyone who shares the basic natural law orientation found in the philosophy of Aristotle, Aquinas, Maimonides and Ibn Khaldûn. If you'd like to see the Just Third Way in other venues, feel free to open the door and introduce an editor or publisher to the CESJ website and this blog.  You can also help arrange for interviews of Norman Kurland on local radio stations, many of which are always in need of interesting guests.

• As of this morning, we have had visitors from 54 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, Canada, the UK, India, and the Philippines. People in Argentina, the Netherlands Antilles, the United Kingdom, the United States, and Ireland spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Crimes of Mitt Romney," "How I Would Lead the World Bank," and "Why Did Nixon Take the Dollar Off the Gold Standard?"

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, March 29, 2012

Blind Leading the Blind, II: Banking and Income

When Pippi Långstrump took up residence at Villa Villekulla with her monkey (Mister Nilsson) and her horse (Lilla Gubben — "Little Buddy," "Old Man" in some translations), she also brought with her a modicum of financial security in the form of a suitcase full of gold coins. Despite her sometimes lavish spending habits and attempts by the unscrupulous and thieving to deprive Pippi of her wealth, the suitcase always seemed full.

Not too many of us have bottomless suitcases of gold — and even if we did, gold would cease to be worth much. (Sorry, Ron, there's nothing magical about a gold standard . . . or silver, either.) Gold isn't automatically money, any more than money has to be gold. Before the flood of silver that lowered the price of that metal throughout the world in the latter half of the 19th century, most of the world was on a silver standard, not gold. There simply wasn't — and isn't — enough gold to meet the needs of commerce.

With the spread of commercial and central banking, however, the amount of gold (or silver) became, to all intents and purposes, irrelevant. The only time the precious metals became important for monetary purposes was when a country insisted on pegging its currency to a specific weight of metal and permitted "convertibility" to give the public confidence in the currency.

The ability to convert a paper currency into gold or silver does not, however, mean that the paper currency is backed by gold or silver. Convertibility simply gives the public confidence that those pieces of paper are worth what it says on the face. What backs the currency are the bills and notes "accepted" by the issuing bank or State treasury. If the bills and notes represent the present value of existing or future marketable goods and services, the currency is asset-backed. If the bills and notes represent the present value of future tax collections by the State, the currency is debt-backed.

The problem that faces us today is, how do we shift from an ubiquitous and wildly fluctuating debt-backed currency, to a stable and uniform asset-backed currency?

Reform of the Banking System. As we noted yesterday, the Federal Reserve was established in part to provide the private sector — not government — with adequate liquidity to finance capital formation whenever existing accumulations of savings or other private resources failed or were inadequate. As Dr. Harold Moulton pointed out in The Formation of Capital (1935), using existing savings to finance new capital formation actually militates against economic growth as it decreases effective demand, making new capital investment less feasible. It is far better to monetize existing and future marketable goods and services by discounting qualified paper at commercial banks and rediscounting the paper at the Federal Reserve. This would ensure an adequate supply of loanable funds by tying the money supply directly to production, and back the currency with the present value of hard assets to which it would be bound by the institution of private property.

Current projections published recently in the Wall Street Journal reveal that by the end of the current fiscal year (09/30/12), the U.S. national debt will be 72-1/2% of GDP. This means that the money supply will consist mostly of instruments backed by government debt, and less than a third in the form of instruments backed by private sector hard assets. In 1913, government debt accounted for less than 20% of GDP. (We don't have time to do the actual calculation, and most sources today hide figures by giving past data in adjusted 1990 "international dollars," so we're using the statement found in Moulton's in Principles of Money and Banking, 1916, that private sector bills of exchange at that time accounted for 80% or more of all transactions.)

One of the goals of the Federal Reserve was to replace the National Bank Notes of 1863-1913 and the Treasury Notes of 1890 — all backed by government debt — with Federal Reserve Bank Notes backed by government debt purchased from the National Banks. The Federal Reserve Bank Notes would be replaced in turn with indistinguishable Federal Reserve Notes backed by the present value of private sector hard assets as private sector asset paper replaced government debt paper as the backing of the currency.

Ignoring the confusing distinction between the identical Federal Reserve Bank Notes and Federal Reserve Notes, a similar program could be carried out today simply by prohibiting the Federal Reserve from either discounting or rediscounting of primary or secondary government securities, or engaging in open market operations in secondary government securities. The only Federal Reserve transactions permitted with respect to government securities would be to sell — not buy — its holdings.

To restore confidence in the currency and the economy, it might be advisable to retire debt held outside the United States first, followed by government debt held by commercial banks, then the Federal Reserve. Any domestic holdings by institutions and individual investors could be left outstanding for a time, as these were purchased with existing savings, and were therefore not inflationary. This, of course, requires that all efforts be focused on increasing production of actual marketable goods and services, not pumping more inflationary government debt into the system.

According to the "National Debt Clock" (accessed today, 03/29/12), more than $5 trillion in U.S. debt is held outside the United States. Assuming all exports are purchased with U.S. dollars, that means that the U.S. has to export $5 trillion more than it imports to transfer the debt "in house." Note, however, that doesn't retire the debt. It simply shifts the holders of the debt from foreign companies and countries, to U.S. producers of exported goods.

Looking again at the National Debt Clock, we see that the total national debt is a little short of $16 trillion. (Half a trillion dollars or so is an immense amount of money, but it can get spent very quickly with little or no result, as we have seen, so we'll use $16 trillion.) We remember reading somewhere or other that no government can exact more than 20% of GDP as taxes without triggering a financial meltdown. That 20% is not the tax rate. It's the percentage of GDP that can be diverted into taxation, a different thing.

Assuming that's true, the United States is going to have to produce $80 trillion in marketable goods and services to generate the $16 trillion in tax revenues necessary to retire the debt — and that's on top of the $5 trillion trade surplus required to shift the foreign debt to domestic debt. That's $85 trillion of production that we're already on the hook for . . . plus whatever is needed to keep the government running in the meantime.

Assuming that government spending gets reduced and the total government budget is maintained at around $4 trillion for all government, local, state, and federal, annual GDP must increase — without inflationary distortion — to $25 trillion every year (a 66.67% rate of growth) in order to retire the debt at a rate of $1 trillion each year, or sixteen years. Reducing the debt at a rate of $500 billion a year gives us a target GDP of $22.5 trillion (50% growth rate) and a 32-year timetable. Debt reduction at the rate of $250 billion per year would give us a target GDP of $20.625 trillion (37.5% growth) and a 64-year timetable . . . but why go on? — and we're not even counting all the promises that have been made for Social Security and Medicare and (if the administration has its druthers) Obamacare.

At current rates of growth of around 1%, these targets for growth are more than unrealistic. They're in Fantasyland. If, however, we maintain the current rate of (non) growth, but reduce the entitlements that currently take up two-thirds of the federal budget by half, or approximately $1 trillion, we can apply those savings to debt reduction, and come up with the same 16- to 32-year timetable — you know a target of $1 trillion each year simply couldn't be met without a revolt, so cut it in half and double the time needed to pay down the debt.

Plus, you can't just cut people off. By phasing out entitlements instead of going cold turkey, however, replacing Social Security, Medicare and welfare gradually with Capital Homestead Accounts, we can get a reasonable 64-year timetable (call it 65, to tie in to a lifetime's capital accumulation under Capital Homesteading), reducing the debt by $250 billion each year, starting with zero debt reduction the first year and assuming that CHA income replaces entitlements dollar-for-dollar at an even rate as people start building toward capital self-sufficiency until entitlements are eliminated and the annual savings reach the full $2 trillion annually in year 65.

That's still painful, of course, but it can be done — if we get a Capital Homestead Act . . . and control spending and eliminate all monetization of government deficits that would add to existing debt. First, all credit extended for speculation, consumption and government expenditures would have to come out of existing accumulations of savings. The market should set the interest rate. This would at one and the same time be a boon to pension plans, retirees who invested in government bonds, and others, and discourage speculation, unnecessary consumption and government spending as the true cost became evident.

The primary business of the commercial banking system and the Federal Reserve, however, would be to provide the private sector with sufficient money and credit to finance capital formation. This would mean reinstituting measures similar to Glass-Steagall to separate financial institutions by function, such as all forms of issue banking from all forms of deposit banking (e.g., commercial banking from investment banking, and both from insurance). There should also be specialization within both issue and deposit banking to avoid conflicts of interest and getting outside the institution's area of competence.

Reform of the "Income System." Most people today are trapped within the wage and welfare system as their sole source of income. Only a few are able to take advantage of the "ownership system," in which all or most of their income comes from capital ownership.

To institute a viable and sustainable economy that works for everyone, it is essential that every child, woman and man be able to participate in the economy to the best of their individual abilities and capacity. Most people would agree that anyone who is willing and able to contribute his or her labor should have the opportunity. That is not the problem. Lack of capital ownership is the problem. Most production today comes from capital, not labor — yet only those who currently own existing capital have, in general, both the opportunity and the means of owning future capital.

As capital replaces labor in the production process, the situation becomes critical. Because the rich and the State currently control the means of acquiring and possessing private property in capital, people remain dependent on wages and welfare for their subsistence. More and more people must own capital if the economy is to survive and thrive, but fewer and fewer people are able to.

Louis Kelso and Mortimer Adler advocated that the money creation powers of commercial banks backed up by the Federal Reserve be used to extend credit so that people who currently own little or no capital be able to purchase it in the form of new equity issues of corporations. The shares could be paid for using dividends paid on the shares themselves. Traditional collateral would be replaced with capital credit insurance and reinsurance, the premiums being paid with the risk premium charged on all private sector loans.

In this way people without savings could purchase capital and pay for the capital with the profits generated by the capital, just as the rich have done for centuries. The price of labor could fall (or, more likely, rise as prospective employers had to compete with ownership income to hire enough workers) to its true market value. Government manipulation of the currency to stimulate demand would become unnecessary as people met their own wants and needs through their own efforts. This would also decrease government expenditures for welfare, and shrink the federal and state budgets.

The wage and welfare system would be abolished (but obviously not wages and welfare!). Workers with ownership income would have the option of turning down a wage they did not consider adequate, thereby making wages rise naturally. If wages became too high, of course, human labor would be replaced with technology — but since the workers themselves would own the technology, it would increase income rather than eliminate it. As the tax base was rebuilt, those unfortunates unable to find work and whose investments were either failures or insufficient to meet their needs could receive welfare if private charity was unable to assist — and there would be a much larger funding pool.

These are some of the critical features of Capital Homesteading, which should be examined seriously by the current crop of political contenders. After all, few of us are able to dip into a suitcase full of gold coins to meet our needs as Pippi could.


Wednesday, March 28, 2012

Blind Leading the Blind, I: Taxation

In Astrid Lindgren's now classic Pippi Långstrump (Longstocking to non-Swedish speakers), Pippilotta Viktualia Rullgardina Krusmynta Efraimsdotter Långstrump — "Pippi" to her friends — while on a walk with her friends Tommy and Annika finds a large rusty tin can. Being Pippi, she immediately puts the can on over her head, then trips and falls because she can't see where she is going.

Pippi's first words on being helped up are how fortunate she has been in having the can on her head to prevent serious injury as a result of the fall. Annika points out that Pippi wouldn't have fallen if she hadn't put the can over her head in the first place. Pippi ignores this obviously silly comment.

The world's strongest nine-year-old girl is fictional, and can be excused for carrying out such antics. We, however, live in the real world. When Benjamin Bernanke announces that action by the Federal Reserve "prevented 'total meltdown'" following the 2008 financial crisis, and staved off "a more severe recession" ("Fed Prevented 'Total Meltdown,' Bernanke Says," Wall Street Journal, 03/28/12, A5), we are entitled to do a little more than point out the incongruity of the claim that the Federal Reserve saved the country from a situation it was largely responsible for creating in the first place.

Shades of J. P. Morgan being credited with saving the world during the Panic of 1907 . . . a panic he caused by denying an emergency loan to the Knickerbocker Bank and Trust when that institution got into trouble speculating in the stock market. Morgan's goal was to force a rival out of business. The Federal Reserve was established in part to prevent such antics from ever again taking place by breaking up the concentrated control over money and credit enjoyed by Morgan's integrated financial empire.

As the original language in the enabling legislation stated, the Federal Reserve was instituted to break up Morgan's virtual monopoly over money and credit. The idea was to "provide for the establishment of federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." (Ch. 6, 38 Stat. 251, December 23, 1913, 12 U.S.C. ch. 3)

We haven't been able to find this language in the current amended version of the Federal Reserve Act of 1913. We don't know whether that's because it's been removed, or the Federal Reserve just doesn't want it spread around how far it's departed from its original purpose.

The "why" doesn't really matter. What's important here is that, contrary to its stated purpose of providing adequate liquidity for private sector needs and overseeing the financial system, the Federal Reserve has since 1916 been instrumental in diverting credit away from productive uses and into non-productive uses, and, following the repeal of Glass-Steagall and the removal of internal controls to the financial system, in encouraging the formation of financial institutions "too big to fail." Either move alone would have been sufficient to put the economy into deep trouble. Together they virtually ensured disaster.

Worse, the basic problem has not been corrected, only covered up with some very expensive whitewash. The rot is spreading even faster than before. In order to correct the underlying problem, two steps have become absolutely essential in the short run, and a third in the mid- to long-run if the correction is to be maintained. All three need to be instituted at the earliest possible date to avoid the looming meltdown that Bernanke has only delayed, not prevented. These are:

Reform of the tax system. No, not abolish the income tax, but return it to its original purpose of raising revenue so that government can carry out its legitimate functions. When instituted in 1913, a 1% tax was levied on all incomes, across the board. A progressive rate was added for incomes above $20,000. There was a $3,000 exemption for single adults, and $4,000 for married couples.

In today's terms, the $3,000 exemption translates into more than $66,000, while the $4,000 exemption is the equivalent of more than $88,000. Considering that $750 per year was an exceptionally high rate of pay in 1913 (Henry Ford paid a generous base wage of $2.34 per day for a six-day week) most people didn't pay income taxes.

We advocate eliminating virtually all deductions at the personal level, but increasing the exemption to $30,000 per non-dependent and $20,000 per dependent. True, this is not as generous as the original exemption, but government is a lot more expensive today, and there's a rather large debt to pay off. Under these assumptions, a "typical" family of two adults and two children would pay no income tax until aggregate income exceeds $100,000. At that point a single rate would be levied on all income, whether from wages, dividends, gambling, inheritance — whatever.

Capital gains should probably be inflation indexed. For the sake of expedience (and to prevent tax collectors from being lynched), capital gains realized from appreciation of the currency as it shifts from debt to asset backing (below) should be ignored. Try explaining to an outraged voter that taxes are due because he or she sold a house for less than the purchase price due to a rise in the value of the dollar!

A critical tax reform is to make dividends tax deductible at the corporate level, but treat them as ordinary income at the personal level. This would encourage corporations to pay out earnings instead of accumulating cash or leveraging to finance growth, and to finance growth by issuing new equity shares carrying an automatic "full payout" feature as well as the vote.

By adding a lifetime tax deferral of, say, $1 million for the purchase of qualified income-generating assets, ordinary people could accumulate dividend-paying equity shares using "pre-tax" dollars. Allowing everyone to purchase qualified shares on credit (below) and pay for the shares with the dividends on the shares would provide both a source of capital financing for corporations and a means for currently propertyless citizens to build wealth and participate in economic growth based on the production of marketable goods and services in the private sector, not illusory growth through non-productive government spending and other inflationary measures.

Tomorrow we will look at the banking and income system. If we don't have cans over our heads, we might even see something.


Tuesday, March 27, 2012

Welfare Blackmail, Part V: Capital Homesteading

As we have seen in this series, the main issue in the HHS contraception mandate controversy is who is in charge of what, and who is the ultimate sovereign. It is a fundamental principle of natural law that the State was made for man, not man for the State. The State's proper role is to help people help themselves, not to provide for every conceivable want and need. The State's job is care of the common good, not every individual good. This is so that the individual may exercise his or her natural rights, thereby acquiring and developing virtue.

The normal means by which citizens acquire and develop virtue is ownership of capital. This not only empowers them economically, removing all justification for State control of the economy, it empowers them with the political power to resist growing State intrusion into their daily lives, whether domestic, through State bureaucrats dictating to parents, or religious, through dictating to organized religion. As one commentator opined,

"No Gulag, evidently, can deter the advocates of state power from believing in their own virtue and in the morality of the power they exercise. We are all Hobbesians now. Virtue is presumed to reside in the state. Its reliance on compulsion is seen as fulfilling, no undermining, morality. Our communicators, oddly employed in the private sector, work tirelessly to ensure that state control is maintained, our taxes stay high, the official message is promoted. The people know, and can only know, a tiny fraction of what Leviathan does, and what they know is what these partisans tell them." (Tom Bethel, "Freedom and Its Enemies," American Spectator, June, 1999, p. 19.)

The issue boils down to whether the State is the guarantor of all individual goods. If so — and the American Bishops seem to have conceded this point — then what constitutes an individual good is a matter of opinion to be decided by whoever has the power to force others to comply. In order to secure the other benefits the State presumably guarantees, the good must be taken with the bad if the majority so decides.

The bishops need to regain the high ground, demanding that the State confine itself to its proper role as guardian of the common good. Unfortunately, they are in a very weak position because, having accepted the idea that the State should provide all individual goods in theory, they can't complain when the State does so in practice.

Nevertheless, the State, because it has a monopoly over the instruments of coercion — the police power — must necessarily be limited to maintaining the institutions of the common good and correcting abuses, regulating but not controlling individuals and institutions. Care for the common good does not, except in cases of extreme need, mean supplying individual wants and needs.

The problem with making it possible for every child, woman and man to have the opportunity to become a capital owner, however, is that liberals typically recognize barriers to ownership, but assume nothing can be done to remove them. Conservatives do not generally recognize barriers to ownership, but assume that restoring the free market will by itself reestablish a just social order.

The single most important barrier to widespread ownership is the fixed belief that it is essential to reduce consumption and accumulate savings before new capital can be financed. Advancing technology, however, both replaces human labor in the production process and, by its high cost, shuts out most people from ownership of capital instruments. This is because only the rich or the State have the capacity to save or create enough money to finance new capital.

Fortunately, the belief that new capital can only be financed out of existing accumulations is utterly false, as Dr. Harold Moulton, president of the Brookings Institution from 1916 to 1952, proved in The Formation of Capital, published in 1935 as the third volume in a four-part series presenting an alternative to the Keynesian New Deal. The vast bulk of new capital is not financed out of past reductions in consumption, but by future increases in production. The present value of future marketable goods and services is monetized and used to finance new capital that pays for itself out of future profits.

Because this method of finance does not rely on the ability to reduce consumption, but on the capacity to own capital, anyone can become an owner of capital without first reducing consumption and accumulating savings. One proposal that embodies this method of finance is "Capital Homesteading."

Capital Homesteading is a national economic policy based on the growth model of binary economics. It is designed to lift barriers to capital ownership in the present financial and economic system and universalize access to the means of acquiring and possessing capital assets. A Capital Homestead Act would allow every child, woman and man to accumulate capital in a tax-sheltered Capital Homestead Account. There would be a target level of assets sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.

Under "Capital Homesteading," a citizen would have a tax-sheltered capital asset accumulation account, similar to an Individual Retirement Account (IRA). Each capital homesteader's account would be the "vehicle" to accumulate annual allocations of interest-free, productive credit and new asset-backed money issued by the central bank and administered by local commercial banks. This new money and credit would then be invested in feasible private sector capital formation and expansion projects of businesses that would issue new shares to be purchased and sheltered in the citizen's Capital Homestead Account. After the "future savings" (future profits) generated by the productive assets paid off each year's Capital Homestead investment (loan), the citizen would continue to receive in the form of dividends the incomes generated by those capital assets.

By vesting each citizen with power over his or her own life through ownership of capital, both the means by which the State controls people's lives and the justification for such control in the first place would be removed. Issues such as the HHS mandate — the whole of the health care bill, in fact — would be moot.

By insisting that the State provide for people's individual goods instead of caring for the common good, the Catholic bishops are simply going to have to accept whatever the State chooses to dish out. By demanding empowerment of people with direct ownership of capital, however, the bishops can achieve the desired end — a decent material life for everyone — but without giving in to State coercion or control.


Monday, March 26, 2012

The Situation in Greece

Since the last solution, people's attention has shifted away from Greece. This does not, however, mean that things are any better. It just means that the powers-that-be aren't thinking about Greece as the rest of the world implodes economically and the nations of the world try to get out of debt by spending more money. As soon as the next riot breaks out or Greece can't pay the refinanced debt, the media will be full of baffled confusion and amazed consternation that the latest fix didn't work.

Thoughtful ordinary people, however, are still wondering how it is possible to spend your way out of debt. As one Faithful Reader asked last week, "Where does the money that is initially loaned come from? Is it truly the result of capital accumulation? Or is it somehow an accounting trick, an entry in a ledger?

"In other words, are the Greeks being asked to pay back funds which were truly loaned to it from the accumulated capital of other nations and workers, or, is it being asked to pay back funds that were created out of nothing by banking institutions that will be able to create similar amounts again even if Greece defaults? Or is my question a silly one?"

The question is not a silly one. Understanding the Greek (and the U.S.) situation, however, requires a better definition of money than the powers-that-be are using, and a better understanding of banking, both deposit banking and issue banking. Currently, following the "currency school" of finance, "money" is construed almost exclusively as coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts), and defined by its function, i.e., medium of exchange, store of value, etc., that is, by whatever is accepted as money does or can be made to do. The legal and accounting definition of money — "anything that can be accepted in settlement of a debt" — is disregarded or ignored.

Viewing money, as Keynes put it, as "a peculiar creation of the State," allows governments to create money at will by emitting bills of credit, and force its acceptance on the economy by fiat (hence "fiat money"). Keynes, however, failed to realize that money is not limited to State-emitted bills of credit, whether in the form of token coinage, banknotes or demand deposits, nor does the mere issuance of a currency or creation of a demand deposit "create money." Money is not created by issuing an instrument, but by accepting it.

This is consistent with the "banking school" understanding money as a promise. All money is a contract, just as (in a sense) all contracts are money. A contract consists, in relevant part, of an offer, an acceptance, and consideration. A government can make offers — issue currency or create demand deposits — and force the public to accept it as money, but the State cannot thereby give consideration (something of value that induces someone to enter into or "accept" a contract), for the State as a State produces nothing in the way of marketable goods and services. The State can only redeem its bills if the citizens grant it taxes and actually pay the taxes.

Further, people cannot pay taxes unless they have something to pay them with, and they will only have the wherewithal if they can produce marketable goods and services with their labor or capital, preferably both. The State's ability to make good on its fiat money is therefore backed only by the present value of future tax collections. If nothing is produced, or if the State isn't granted taxes or lacks the power to collect the taxes, the currency becomes worthless, and no one will accept it.

This is what has been happening in Greece. The government has been spending the present value of future tax collections like a drunken sailor on leave, and, at the same time, discouraging investment in productive activity with a vengeance. It has been bailed out by having other countries pledge the present value of their future tax collections to pay for Greece's past expenditures in the ephemeral hope that Greece will, contrary to its recent history, actually start producing marketable goods and services, the income from which can be taxed and used to redeem the promises that have been made so lavishly.

There is no accounting trick involved, only a serious conceptual problem about where money comes from and how it is created. Greece got into trouble by funding social programs with bills of credit, also known as "anticipation notes" from the fact that they are floated in anticipation of being able to collect taxes in the future to redeem the promises. If an economy is strong and the government secure, a country can get away with this for quite some time, but there must be a growing economy in which the bulk of citizens participate, or the tax base will erode to the point where the State simply cannot collect enough in taxes to pay for its past expenditures. At that point, it either has to devalue its currency (steal from current holders of its obligations) get bailed out (effectively surrender its sovereignty), or declare bankruptcy and refuse to honor all obligations.

Greece has not been loaned existing financial capital, that is, instruments representing the present value of existing marketable goods and services. Instead, it has been loaned the present value of future tax collections of other countries. This gives the illusion that money can be created out of thin air, but that is deceptive. What it's really being created out of is people's faith in the ability of the issuer of the loans to obtain repayment from the borrower, or pick up the tab by expending their own future taxes. Where the borrower — Greece — is going to obtain the funds for repayment is anybody's guess at this point, since the economy is in a shambles. Until, however, people realize that there will probably be no repayment under the current system, and that the countries who backed up the loans with their own faith and credit probably will be very reluctant to guarantee more loans, everything will be fine. When they do realize that Greece probably won't be able to repay as things now stand, the collapse will come.

There is, however, hope. After the Franco-Prussian War, an indemnity was imposed on France that was specifically intended to destroy France economically. By taking advantage of Pasteur's discoveries and the surge in demand for French products, and producing their heads off, however, France repaid the indemnity in less than three years. In some respects, France entered a "golden age" in the latter quarter of the 19th century, thanks in large measure to the rapid expansion of productive capacity and new markets (and the flood of silver on the world market that depressed the price, Bismarck having unwisely agreed to accept silver French Five Franc pieces in payment as well as gold).

Greece could do something similar by reforming its monetary and tax systems, and aggressively promoting a program of expanded capital ownership, financed not with the present value of other countries' tax collections, but by monetizing the present value of future marketable goods and services to be produced in Greece by discounting and rediscounting private sector bills of exchange, not public sector bills of credit. This would increase both production and effective demand, and at the same time rebuild the tax base and lessen the pressure on social welfare expenditures by helping people help themselves, not remaining what Heinrich Rommen called "passive State serfs" and "insolent bureaucrats," trapped by their dependency on the State for their subsistence.

Further, there is no need in the short- to mid-term to rely on increased exports. As Harold Moulton pointed out decades ago, there is enough unrealized demand present in all economies to absorb virtually all new production in the foreseeable future — if, as Kelso and Adler added, ownership of the new capital instruments financed with future increases in production instead of past reductions in consumption is spread out among people who will use the income first to pay for the capital that generated the income, then for consumption instead of reinvestment.

The injustice of the current system is in the maintenance of barriers that inhibit or prevent full participation of everyone in the economy through ownership of both labor and capital. Justice can be restored by acts of social justice directed at reform of our institutions — in this case tax and monetary policies that have concentrated ownership or control in the hands of a private elite or State bureaucracy (Pius XI's "dictators of money") — and in establishing and maintaining the "four pillars of an economically just society":

1. A limited economic role for the State. As Leo XIII observed, "There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.) The State must be confined to regulation, not ownership or control.

2. Free and open markets within an understandable and fair system of laws as the best means of determining just wages, just prices, and just profits.

3. Restoration of the rights of private property, especially in corporate equity and other forms of business enterprise.

4. Widespread direct ownership of capital, individually or in free association with others.

Adding the three principles of economic justice (Participation, Distribution and Harmony), would mean a quantum leap in how we address the situation in Greece — and in other countries.


Friday, March 23, 2012

News from the Network, Vol. 5, No. 12

This has been a very busy week. A great deal has been happening to get word out about how the Just Third Way as applied in Capital Homesteading has the potential to resolve the current economic — and political — crises that seem to be popping up with increasing frequency. To that end, here's what's been happening:

• This past Wednesday saw the 336th consecutive CESJ meeting. Many people were able to attend in person. The CESJ monthly meetings are important not only for conducting business, but also as educational sessions and to report on how initiatives are moving forward. If you have an initiative you want to report on, let the Secretary know ahead of time so it can appear on the agenda, and have your report ready to go at the appropriate time (a written report that you submit and give a brief summary is most useful and informative). Also note that, due to the special needs attached to having people attend via telephone, we are making a greater effort to adhere to some basics of "parliamentary procedure," e.g., only one speaker at one time, discussion of motions only after being seconded, "yea" votes before "nay" votes, and so on.

• Plans for the annual "Rally at the Fed," scheduled for Friday, April 20, 2012 at 11:30 am outside the Federal Reserve Board of Governors building in Washington, DC, are starting to gel. The Rally is shaping up to be a significant event this year. If you are planning to attend from out of town, we have negotiated a special price at a local hotel if we can guarantee a minimum number of rooms. Let us know as soon as possible if you want to reserve a room.

• The National Field Secretaries are moving forward with clarifying their role and in what areas they should be focusing their efforts.

• Monica W. has been cultivating contacts in Ohio, participating in various community meetings and groups concerned with how to reverse the downward trend in the American economy. She is also investigating the possibility of integrating her concern for social justice with a professional outreach with Equity Expansion International, Inc., to surface working models of broadened ownership combined with Justice-Based Management.

• Everyone should visit the Coalition for Capital Homesteading website and sign the Declaration of Monetary Justice.

• Norman Kurland and Joe Recinos attended an Occupy event in Washington, DC, and met with a number of people who might be key to moving the monetary and fiscal ideas of the Just Third Way forward.

• A number of "gadgets" have been added to the blog (to your right) that will make it easy to receive updates by e-mail, "share" with your Facebook friends, and "tweet" people in your network. This should help us market our ideas to a broader audience.

• Speaking of marketing, Joy Alamgir has ordered another two cases of the CESJ edition of his father's book, Notes from a Prison: Bangladesh. Consider ordering a copy or two from Amazon or Barnes and Noble (please — we don't sell retail; CESJ can only handle wholesale), and post a review. The book is worth it.

• Also consider purchasing and reviewing other CESJ publications (links to your right) and, of course, sending the links around to your network. (And please keep in mind that we can only handle wholesale orders here.)

• As of this morning, we have had visitors from 52 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, Canada, the UK, India, and the Philippines. People in Argentina, Poland, the United States, French Polynesia, and Ireland spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Crimes of Rick Santorum," "Toward a False Equality," and "The Crimes of Mitt Romney."

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, March 22, 2012

Why Did Nixon Take the Dollar Off the Gold Standard?

Every once in a while we get a question that we answer, and then realize that our answer was just so brilliant that we can use it for the daily blog posting. Or maybe we realize that, no matter how obscure our ramblings are, we're in no shape to pound out another piece of writing just to be able to post something.

Whatever the reason, today's posting is a response to something a Faithful Reader sent in, asking "To what extent is this true? Is there a systemic crisis brewing in our system? Could it collapse in the next two years? If so, how and why? If not, why not?", "this" being the following comment on the internet:

"Why did Nixon take the Dollar off the gold standard?

"Because the bankers needed to increase the money supply in order to keep paying for the massive military buildup during the Cold War.

"America 'won' the Cold War because America's Dollar had reserve currency status which afforded America to keep their high cost of living AND to run the most expensive war machine ever. All because the rest of the world was forced to accept the US paper or else.

"Cold War is long over. A few more banking machinations since then and a few stock market crashes. Things are coming to a dead stop now because EVERYONE knows America is lying about it's financial health and EVERYONE knows the DOLLAR IS NOT BACKED BY ANYTHING. Certainly not the trillions in Dollars that are sloshing around the globe.

"Give it a few months, 2 years TOPS."

We responded that the comment appears to be correct in substance (at least as far as the conclusion goes), if somewhat surreal, and gives some wrong impressions. For example, the U.S. dollar has never, except for gold certificates and a legally mandated amount of United States Notes, been backed by gold. Rather, until 1933 (with a hiatus during the Civil War and until the 1870s) the dollar was convertible into gold (or silver) on demand.

Prior to the New Deal, the dollar was backed by private sector bills of exchange representing the present value of existing and future marketable goods and services, and a limited amount of government bills of credit representing the present value of future tax collections — the "faith and credit of the United States." Claiming it was a move against currency speculators (how that is possible with a fixed exchange rate was not clear), Nixon took the United States off the gold standard internationally. Roosevelt had already taken the U.S. off the gold standard domestically in 1933. What Nixon's move meant was that the ability of foreign central banks to convert their dollars into gold at a fixed price ($35.00 per ounce) was suspended — allegedly temporarily.

The reason was not, however, because "the bankers needed to increase the money supply in order to keep paying for the massive military buildup during the Cold War." The exact opposite was the problem. The costs of the Vietnam War and Johnson's "Great Society" had finally caught up with America. Financing both with debt-backed credit instead of taxes had resulted in the U.S. Treasury emitting massive amounts of bills of credit: public sector bills of exchange backed by the present value of future tax collections.

Both welfare and war are government expenditures, not investment in new capital formation, and are thus purely inflationary. Instead of being backed with the present value of private sector hard assets, as intended in the "Indianapolis Plan" of 1900 and the original Federal Reserve Act of 1913, the new money was backed only by the "faith and credit" of the United States government — that is, what the government could be granted and collect in taxes in the future. Debt-backed U.S. dollars were consequently flooding the channels of commerce throughout the world. The problem was not insufficient money to keep the military industrial complex going, but far more money than was needed for private sector uses, and created in the wrong way.

Since the New Deal, the Federal Reserve had virtually ceased rediscounting private sector bills of exchange backed by the present value of future marketable goods and services to supply agriculture, commerce and industry with an "elastic currency" sufficient for the needs of commerce and private sector development. Instead, the country relied then and now on government bills of credit backed only by the government's promise to pay, a promise that has grown increasingly shaky over time.

The Bretton Woods agreement had imposed fixed exchange rates, which required that a world reserve currency such as the U.S. dollar had become, replacing the British pound, be pegged to and convertible into something (such as gold) with a legally fixed price. The massive increase in the money supply, however, put a heavy strain on maintaining the fixed exchange rate. Consequently, various European central banks began intervening in the market, purchasing dollars at a tremendous rate to relieve the pressure by decreasing — not increasing — the supply of dollars. Naturally, not being able to afford holding such vast amounts of dollars, they traded them in for gold, and the U.S. suffered a heavy drain on its gold reserves. In essence and in a very roundabout way, the U.S. was paying for the Vietnam War and the Great Society with undervalued gold exchanged for overvalued paper dollars.

This could not be maintained, and Nixon effectively terminated the Bretton Woods agreement by allowing the U.S. dollar to have a "floating" exchange rate, i.e., be set by the market. The bankers were able to stop purchasing massive quantities of dollars — which could not have been sustained in any event as U.S. gold reserves plummeted — but the stage was set for currency instability that contributed to the "stagflation" of the 1970s. Without the debt-backed dollar being maintained at an artificially high value by being pegged at a fixed rate to gold, foreign goods (such as oil) rose dramatically in price.

The situation could have been corrected by halting monetization of government debt and returning the Federal Reserve to its original purpose of providing liquidity to the private sector and supplying the country with an elastic and asset-backed currency. Investment in new capital would have been financed not by restricting consumption, as the Keynesians, Monetarists and Austrians erroneously assume is essential (see Moulton, The Formation of Capital, 1935, especially the CESJ foreword), but by increasing production, that is, by monetizing the present value of marketable goods and services to be produced in the future by discounting and rediscounting bills of exchange.

There would have been an adequate supply of money, and the dollar would have had a stable value naturally, instead of being imposed or manipulated by State fiat. Because of the increase in production that would have resulted in increasing private sector investment and decreasing non-productive government spending, "supply" (production) would have increased, lowering the prices of American goods overseas. Had Nixon adopted a program of widespread capital ownership at the same time, effective demand would have increased domestically as well, optimizing the chance that the new capital formed would be financially feasible.

While the analysis in the passage is thus somewhat superficial, we agree with the conclusion. The present system cannot be sustained, and is almost custom designed to collapse. The repeal of Glass-Steagall removed even the minimal internal (systemic) controls needed to restrain private sector greed and monopolizing tendencies, and tried to substitute external, government control through increasing regulation — misusing the State's monopoly over the instruments of coercion to maintain a private sector monopoly over the instruments of greed and corruption. (This is contrary to sound principles of system design, as a regulatory agency can only enforce, not replace internal controls.) This has allowed the financial services industry to "reset" the economy to 1929 with a vengeance, when, e.g., the private sector was creating massive amounts of money for both capital investment and speculation.

The situation is worse today, because not only has the industrial base eroded (almost fully intact in 1929 — even having excess capacity), and increasing numbers of jobs eliminated by advancing technology and shifts to lower wage areas, money creation has shifted from the private sector to government. Virtually ensuring disaster is the fact that the new money creation is not tied in any way directly to increased production — government produces nothing — and when it enters the economy is channeled into the stock market, inflating speculative prices, not being invested in new plant and equipment or jobs. The so-called "recovery" is almost pure illusion, fueled by debt and speculation, not production of marketable goods and services in which every child, woman and man can participate through ownership of labor, capital, or (preferably) both.

The situation could be reversed virtually overnight, and the economy restored to a modicum of sanity within 12 to 18 months by implementing "Capital Homesteading." The announcement that Capital Homesteading would be implemented would itself help restore confidence and bridge the gap between the current situation and full implementation, much as the Federal Reserve averted a threatened financial panic in 1919/1920 merely by announcing that it stood ready to supply credit if needed. It wasn't necessary, because the announcement itself restored confidence in the system. Obviously something more than a mere restoration of confidence is needed today, but that is essential, or the economy will continue to flounder.


Wednesday, March 21, 2012

Why Pay Dividends?

The Ides of March is come, but not yet passed. Wait a minute, you say. Isn't March 15 the Ides, that is, the middle of the month? Yes and no. You see, under the old Roman calendar before Julius Caesar's reforms (for which he hired a subcontractor), all the months, including February, had 30 days, and you had the Saturnalia, which was five days not counted in the calendar, making the year 360 days long, not 365 (the Romans liked numbers that could be divided evenly by 12, making for easier mental calculations . . . you try doing the math: CCCLXV/XII = uh, Magister, can I get back to you on that?). This put the Spring Equinox and thus the Roman New Year — the Ides of March — on what we now call March 21, but that the Romans called March 15.

Why bring this up? It shows how easily not knowing some critical information can lead to something "everybody knows" being wrong. True, the whole calendar issue is something of a "so what?" but what about the almost dogmatic faith that most people and virtually all economists have in the belief that the only way to finance new capital formation is to cut consumption and accumulate savings?

As you know, in Capital Homesteading we advocate making dividends tax deductible at the corporate level, but fully taxable as regular income at the personal level, unless used to make debt service payments on capital assets put into a tax deferred Capital Homestead Account. If, at the same time, we raise the corporate tax rate and make it possible for companies to float new equity to finance expansion and growth, corporations would be encouraged (in theory, at least) to pay out all earnings as dividends to shareholders. Assuming that corporate equity is broadly owned, and people use the dividends first to pay for their shares and then for consumption instead of reinvestment, Say's Law of Markets would be restored and the business cycle of "boom and bust" eliminated naturally, without government control of the economy or manipulation of the currency.

Still, old habits and assumptions die hard. Earlier today we got the question, "Wouldn't paying out all profits in dividends ostensibly destabilize a company, especially in a contracting market?"

The quick answer is, "No."

The longer answer is that paying out all profits and financing operations and expansion by issuing new equity shares would not destabilize a company. It would, on the contrary, generate the effective demand essential to creating or expanding a market for the company's product. In accordance with Say's Law of Markets (ignoring Keynes's oversimplification), we don't purchase what others produce with "money," but with what we ourselves produce.

Dividends are an owner's share of profits — that is, the result of his or her production of marketable goods and services by means of his or her labor and capital. If profits are not paid out but reinvested in the company, overall effective demand declines and all companies produce less. It's a vicious circle. If you don't consume, then goods produced by others pile up, and they have no income to purchase what you produce. If no one buys your product(s), you have no income, you don't consume, and the cycle keeps going downward.

Some people maintain that you must retain earnings in the company in order to finance new capital instead of paying profits out as dividends. On the contrary —

First, retained earnings are never expended for new capital. The only regular charge against retained earnings is dividends. When cash is accumulated, it is an asset, not retained earnings; the company has invested in cash: liquidity. Cash by itself is not normally a good investment, so most companies "park" their cash in commercial paper, the stock market, and so on. They don't keep it in sacks in the office. Savings always equals in investment, whether in the form of productive or financial capital.

Second, most new capital is financed not directly by retained earnings (as we have seen), or even with accumulated cash, but by issuing new equity or taking on debt. If debt, the company draws bills of exchange or mortgages and discounts (sells) them to other merchants or a bank which, assuming the drawer's credit is good, accepts it at the present value of the note less a "risk premium" for self insurance. This is why bills of exchange are known as "merchant's" or "trade acceptances" if used directly as money in commerce, and "banker's acceptances" if discounted or rediscounted at a commercial or central bank, which issues a promissory note and uses it to back token coinage, banknotes, or demand deposits.

If the company uses equity financing, the company floats new shares, and the ultimate purchaser pays for the shares out of his or her own resources, either by exchanging other assets, such as accumulated savings, or by drawing a bill (margin purchase).

Third, the chief use of assets already owned by the company in finance (the chief use in operations is to produce marketable goods and services, of course), of which retained earnings represent an ownership stake, is as collateral to secure borrowings for new capital, not for the direct purchase of new capital.

Finally, the right side of the accounting equation, Assets = Liabilities + Owners Equity (where Owners Equity = Retained Earnings + Contributed Capital) is a statement of ownership, i.e., who owns or has a claim on what is on the left side of the equation, "Assets." Profits — retained earnings — belong by natural right to the shareholders of the corporation. Withholding them without their explicit consent deprives them of the exercise of their property — their rights — without just cause or due process.

Well, Hail, Caesar, isn't that a little complicated?

Hail, yes — but you ought to see how Keynes thought the system operated, achieving its reductio ad absurdum in "Modern Monetary Theory" (a.k.a., "chartalism") that has resulted in a devastating global depression, gargantuan national indebtedness, and a virtual takeover by governments of every economy on earth.

If you think it's worthwhile trying to alert the powers-that-be to the need to correct the problem — and how to correct it — you might want to show up at the annual Rally at the Federal Reserve in Washington, DC, on Friday, April 20, 2012 at 11:30 am to 1:30 pm. Togas optional.


Tuesday, March 20, 2012

"The Insolence of Bureaucrats"

Once again the press of business (you knew we had to do something other than tell everybody else how to fix What's Wrong with the World) has prevented completing our series on Welfare Blackmail. You can probably guess where we're headed with it, but that's not the same as actually telling you.

In any event, we came across a couple of passages in our research for a shorter article on Welfare Blackmail that show our concern with the whole HHS contraception mandate is neither sectarian nor trivial. It is, in fact, a symptom of a much deeper problem, one that has been sending its roots deep into American culture ever since the effective closing of the frontier with the end of the "free" land under Abraham Lincoln's 1862 Homestead Act.

A lot of people think that the issue is one of religious liberty. That is, admittedly, an important aspect of the problem. Limiting the discussion to religious liberty, however, is a little like saying that the problem with chattel slavery is that slaves are generally treated badly. Treat the slaves well, and there's no problem . . . right?

Wrong. Just as the problem with wages is not the wage contract, but the wage system, the problem with slavery is the entire slave system, not how the slaves are treated within it. Similarly, it's not just one right — religious liberty — that is threatened, and not just of Catholics and members of other faiths opposed to being forced to violate their consciences in this matter. All liberty of all types and all forms is threatened by the State's assumption that it can legislate morality and force people to go against what they believe is right in any matter, not just religion.

When the State undertakes to be the guarantor of every individual good, it also undertakes to define what "good" is, and enforces it by making the citizens economically dependent on the State. When the State says "frog," you'd better start hopping — or else.

Ironically, not only Catholic, but Jewish, Islamic and even pagan social teaching is very clear on the dangers of letting the State have so much power, especially over our subsistence. Even Leo XIII, often erroneously cited along with subsequent pontiffs to justify ever-increasing State control of the economy to ensure material benefits, warned in the beginning of Rerum Novarum, "There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (§ 7.)

Dr. Heinrich Rommen, one of Germany's leading jurists before escaping from the Nazis, made the dangers of State control explicit. He knew what he was talking about. Not only did he experience the Nazi tyranny first hand, he was also a member of the renowned Königswinterkreis discussion group composed of students of the great Father Heinrich Pesch, S.J., and headed by Father Oswald von Nel Breuning, S.J., who drafted Quadragesimo Anno under the direction of Pius XI. As Rommen explained,

"Economic society with its innumerable free associations and groups rests upon initiative and self-responsibility and an ethical code of just equalization of interests which is absolutely necessary for the good functioning of production and distribution of material wealth. In this realm the State may regulate but not command; . . . If instead of this initiative and self-responsibility, of trusteeship and liberality, the command of the bureaucratic State is heard, then these virtues wane while the passivity of State serfs and the insolence of bureaucrats triumph in the emergence of the Slave State." (The State in Catholic Thought. St. Louis, MO: B. Herder, 1947, 357.)

Shades of Hilaire Belloc's The Servile State, first published 100 years ago this year.

How, then, can citizens regain the power they have surrendered to the State in their quest for material security? Do we continue to protest and demonstrate against those laws that we believe to be unjust, hoping thereby to change the hearts and minds of our leaders?

Protests and demonstrations are very useful and sometimes productive of much good. The civil rights movement is a case in point. The problem is that once you've organized and gained "people power," you had better make certain you demand the right things — and that what you demand can be delivered without material harm or even inconvenience to others. The civil rights movement, by and large, gained great power . . . and then frittered it away by demanding jobs and welfare rather than access to the means of becoming — and remaining — owners of capital.

Jobs and welfare do not empower anyone except employers and the State. They do not empower people — or the whole issue of the HHS contraception mandate would be moot. If people had power instead of the State, the "insolent" State bureaucrats could make all the demands they wanted, but would lack the means of enforcing them.

"Power," as Daniel Webster observed in the Massachusetts constitutional convention of 1820, "naturally and necessarily follows property." If people are to have the power to resist "the insolence of bureaucrats" and "the emergence of the Slave State," they must demand the right that was presumably guaranteed in the first section of the Virginia Declaration of Rights in 1776: access to the means of acquiring and possessing private property.

If those who are opposed to the HHS contraception mandate want to take quick and effective action against the intrusive power of the State and restore liberty to the American people, they should join the annual Rally at the Federal Reserve in Washington, DC, on Friday, April 20, 2012, and demand reform of the tax system and the central bank to open up access to the means for every child, woman and man to become a capital owner.

Otherwise, you had better start limbering up.



Monday, March 19, 2012

Early Retirement

It's a trifle heartwarming . . . or maybe "heartburning." A story on Yahoo! news today, "Early Retirement Without a Fortune," gave sketches of four people who retired early without having accumulated "a fortune," as the report put it.

All four people had a couple of things in common. They all managed to save enough out of wage income to invest prudently in assets that would generate sufficient income to meet modest retirement needs.

The article focused on how, if you keep your desires within limits, you can be quite happy with a relatively modest income, even $7,000 per year, as one 36-year-old who retired at 33 enjoys.

That is, of course, one key to a financially secure retirement. Don't expect to be able to spend like you did when you were making a lot of money. Another is the discipline to be able to live within your means. Yet another is not to speculate in the market, but to select sound and prudent investments that generate dividend income, not speculative changes in share value.

All of that is very good advice, and people would do well to follow it. From the Just Third Way perspective, however, there is one big problem. The writer of the article and the four people profiled all assumed as a given that the only way to accumulate enough money to invest is to cut consumption and accumulate money savings. For that, you need a wage system job. As jobs continue to disappear, how are people supposed to save for retirement?

Capital Homesteading addresses that problem by shifting the financing of new capital from past reductions in consumption, to future increases in production. This would mean that people who cannot find wage system jobs could save for retirement, too — and decrease the welfare and entitlement burden on the government at all levels dramatically.

We don't regard Capital Homesteading as a panacea for all the world's ills. Refusing to implement it because it won't do everything you want done immediately, however, is a little like not having a cut attended to because the antiseptic that will prevent gangrene won't cure your headache.

Consider showing up at the annual Rally outside the Federal Reserve on Friday, 11:30 am to 1:30 pm April 20, 2012 to demonstrate your support for a return to monetary and fiscal sanity — and prosperity.


Friday, March 16, 2012

News from the Network, Vol. 5, No. 11

This has, as usual, been a busy week. A great deal has been happening to get word out about how the Just Third Way as applied in Capital Homesteading has the potential to resolve the current economic — and political — crises that seem to be popping up with increasing frequency. To that end, here's what's been happening this week:

• Guy S. in Iowa has developed a video that many of our readers should find both entertaining and informative. Titled, "Promise of Participation: Own or Be Owned," the 20-minute show takes us on a brief journey stressing the need for modern society to rebuild a culture of ownership through Capital Homesteading at the earliest possible opportunity. There are a few rough spots, but you'll hardly notice them:

• Monica W. came in last Friday and stayed the weekend with her husband Jim. A number of important issues were discussed, especially how to apply Just Third Way ideas in Ohio within the existing legal framework. Ohio is not only a center of employee ownership, but is also moving forward on many other fronts with a number of innovative initiatives, including the home foreclosure crisis. A number of people involved in that have indicated serious interest in the Homeowners Equity Corporation.

• Our series on "Welfare Blackmail" seems to have excited a little interest outside of our ordinary readership. One commentator remarked that it was overly pessimistic about the possibility of the American bishops, lay Catholics, and other people of faith coming together and adopting Capital Homesteading as a Pro-Life economic agenda to build a strong political and economic coalition to counter the Culture of Death. We'll see — there are a few positive indications that people may be starting to wake up. It's important that we start to open doors to prime movers to acquaint them with the possibilities inherent in the Just Third Way, and not take any of the usual equivocations for an answer.

• Norman Kurland and Joseph Recinos (back home for a while during an interlude from his travels) attended "The Atlantic: The Economy Summit" this past Wednesday in Washington, DC. There were two panel discussions, 1) "Diagnosing a Sick U.S. Economy: What Happened and What Is the Fix?" and 2) "No-Nonsense Prescriptions for Jumpstarting Real Economic Growth." Joe was able to get a Capital Homesteading brochure into the hands of nearly all the panel participants. After the lunch, during which Paul Volcker, past Chairman of the Federal Reserve was the keynote speaker, there were a number of "headline interviews" with some potential prime movers, nearly all of whom received brochures from Joe.

• Michael Greaney gave a presentation on Dodge v. Ford Motor Company (1919) before a Northern Virginia Community College Business Law class. Showing the derivation of the legal reasoning from the U.S. Supreme Court's decision in the Dred Scott case in 1857 and the Slaughterhouse Cases in 1873, Mike showed how the rapid loss of natural rights through redefinition has, in part, been responsible for the current economic malaise. The presentation may be turned into a blog series in the near future.

• As of this morning, we have had visitors from 57 different countries and 51 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 the Philippines. People in Venezuela, Argentina, Australia, Ireland and the United States spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Crimes of Rick Santorum," "Toward a False Equality," and "The Crimes of Mitt Romney."

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, March 15, 2012

Welfare Blackmail, Part IV: A Social Glass-Steagall

Every couple of years or so there is a flurry of letters to the editor of the Mensa Bulletin — the national journal of American Mensa, the organization for those who test in the upper 2% of the population in a standardized IQ test — between those who believe in God, and those who don't. Inevitably, those who believe in God are labeled knaves or fools for that belief, while the other side earns for itself the opprobrium of being fools and knaves for the lack thereof.

Surprisingly for a society that prides itself on the intelligence of its members — or perhaps not, considering that a high IQ is the only common denominator — no one bothers to ask the obvious question and settle the primary issue. It is, in fact, an exercise in futility to discuss whether God does or does not exist until you have settled the issue whether God can exist.

You see the problem? If one side in the debate accepts as a given even before the debate begins that God cannot exist, and the other side accepts without question that God does exist, there can never be any real debate or argument, merely name-calling and sneering.

We've seen the same thing with respect to "debates" about binary economics and the Just Third Way. The three mainstream schools of economics, the Keynesian, the Monetarist/Chicago, and the Austrian, are firmly established on the assumption that it is impossible to finance new capital formation unless you first cut consumption and accumulate money savings.

This necessarily results in concentrated ownership or control of capital, either in the hands of a private elite (capitalism), or the State (socialism), with fundamental natural rights continually redefined in order to try and force the system to work. Anybody who says anything different is automatically a knave or a fool, usually both — which seems to present no logical problem, as the accusation comes from people who have built careers on both eating and retaining their cake.

Binary economics, on the other hand, takes as a given that new capital not only can be financed without first cutting consumption and accumulating money savings, given that the purpose of production is consumption and not reinvestment, new capital must be financed in that way if the economy is to be in equilibrium. Using "future savings" is the only feasible and just means of financing widespread capital ownership and eliminating the business cycle without using the dishonest expedient of redefining natural rights, especially freedom of association/contract (liberty) and private property. Keynes redefined both in both his Treatise on Money (1930) and his General Theory (1936) to try and make his system work. Academics have, in fact, become so accustomed to "re-editing the dictionary" (as Keynes put it), that they truly can no longer conceive of absolute standards of anything.

It becomes clear, then, that the real issue is not being addressed in the debate about the contraception mandate, or in the larger debate between those who are concerned with which individual goods the State should provide and in what manner, and those who want to limit the role of the State. Nor is it a simple "all or nothing" situation as many attempt to frame it, as there is really no "pure" position, except for those who believe that whatever the State does is necessarily right without question, and such ideologues are very rare.

Even, e.g., supporters of Roe v. Wade, who chant the mantra that the Supreme Court established abortion on demand as the law of the land and therefore all resistance or protest is [pick your pejorative], in almost the same breath declare that if abortion were to be outlawed, the law would not be obeyed! Thus, on the one hand they insist that abortion be supported with all the resources of the State and any and all protest silenced for the simple reason that it is the law, and your opinion is irrelevant. On the other, they declare that if abortion were to be outlawed, the law would be disobeyed because our opinion, not a presumably unjust law, determines what is right. At one and the same time they reject the idea of an authority higher than the State to dismiss their opponents' argument, and rely on it to clinch theirs.

So, what is the real issue here? As we have seen, it's whether the State is guardian of the common good, or guarantor of all individual goods. This is the question that confronts the American Catholic bishops, the Catholic laity, as well as Protestants, Jews, Muslims and others of faith or ethical philosophy who oppose the growing intrusion of the State into matters of personal conscience.

Many of these groups and individuals are on the horns of a dilemma they created for themselves by insisting that the State's responsibility to care for the common good means guaranteeing every individual good. By accepting gradually increasing State-funded social programs, they have been forced to accept the price: a growing dependence on the State that provides the funding and that necessarily dictates how the funds are to be used.

Nevertheless, the common good is not the aggregate of individual goods, but the network of institutions within which each individual exercises his or her natural rights and thereby acquires and develops virtue, becoming more fully human. The State is not to try and provide or guarantee individual goods, except in extreme need.

That being the case, the State (civil society) does not have the authority (at least legitimately) to set standards of morality. This provides a check against the State deciding for its own advantage or those of favored supporters or clients to change or "improve" moral standards . . . for everyone's good, of course. The State cannot, therefore, redefine natural rights such as life, liberty or property, however much it is charged with defining their legitimate exercise within the bounds of the natural law. (We won't discuss today the widespread modern confusion over the difference between having a right and exercising a right.)

Nor can the State redefine basic institutions outside its own sphere of competence, e.g., changing "marriage" (an institution in domestic society) to mean something other than what it is. The State's proper role is to regulate the social order through enforcement of moral standards, not control the social order through redefinition of those standards, despite what John Maynard Keynes said about the power of the absolutist State to "re-edit the dictionary."

Similarly, religious society, which discerns and defines virtue, and domestic society, which transmits those definitions to children, have no power outside their own purview to enforce moral standards. Parents may not punish other people's children for violating rules they have set for their own children within their own family, nor may a Presbyterian minister sue a Methodist neighbor for not contributing to the Presbyterian Church or have the State impose a fine, any more than a Rabbi can impose a penance on a Muslim for not going to Temple on Saturday or send the sheriff to arrest him and force him to attend. All of them, however, can legitimately discern the truth of the natural law and teach that murder, theft, adultery, and so on, are wrong, and demand that the State enforce these moral standards within reason and as appropriate.

We can therefore understand that the traditional separation of Church, State and Family — properly understood — operates as a kind of "social Glass-Steagall." With the repeal of Glass-Steagall, the financial services industry was able very effectively to eliminate all systemic checks and balances in pursuit of financial power. In addition, the industry itself as experts set the standards of ethical behavior and, by and large, enforced them . . . so to speak. It was, in effect, like asking a thief to define burglary and then relying on him to make certain nothing was stolen, only holding him accountable if he was dumb enough to violate his own rules and get caught. No, allowing the State both to define and enforce virtuous behavior is a very bad idea. It's just as bad as allowing a religious body to impose civil penalties and enforce them for violations of faith-based teachings.

That's not to say that authorities in all three societies — domestic, religious and civil — don't often try to extend their power far beyond their legitimate spheres. These days, of course, when the authoritarian State has managed to take over large areas formerly recognized as the purview of religious and domestic society, people have been whipped into a frenzy of fear over the dangers of too much power in the hands of parents or clergy.

This should probably make people more suspicious than it does — there is a natural tendency to condemn anything that opposes what you happen to want to do, especially if it's particularly harmful. We see, for example, chain smokers chanting about the dangers of quitting cold turkey, libertines about the unhealthiness of chastity, while alcoholics can recite at great length the benefits of a wee nip now and then — the list is endless.

All of this, of course, leads directly into the dilemma in which Catholics and members of other churches and faiths find themselves when confronted with the contraception mandate. For over a century Catholics and others have demanded and, since at least the 1930s, have received increasing levels of State intrusion into and control over the lives of individual citizens in an at best marginal — and extremely expensive — effort to guarantee everyone's individual good.

This includes even — or especially — such groups as the distributists, who (as we might expect) want to have their cake and eat it, too. They have no problem with State control — although some, admittedly, claim with Karl Marx that the State will wither away . . . and be replaced by something that is the State in all but name. One distributist enthusiast claimed that the State would largely be replaced by groups of people in free association, which, while membership would not, strictly speaking, be voluntary . . . that's when we stopped reading. "Involuntary free association" is a concept far beyond our intellectual capacity.

No, State control of every aspect of life is not the problem as far as the cake-eaters-and-keepers are concerned. The problem occurs when those in power order us to do things with which we disagree. That shows that they just aren't the right people, and they're probably evil, kicking puppies, and pinching babies in their spare time. To the guillotine! (With love, of course.) Then we can replace The Evil Ones with people who will Do The Right Thing All The Time . . . like us. Aw, what the heck. Us.

We're afraid we have to disagree on that one. The reason that people in power can get away with such things is that the system allows it. No, we're not saying that the system forces anybody to do wrong. A badly structured system just makes it easier and more advantageous to do wrong, especially if you're one of the lucky few who have figured out how to manipulate it. What is needed is not more and more regulations to try and control every act within the system, or an unending debate over which individual goods a State should guarantee — thereby making those receiving them into permanent dependents (slaves) of the State — but a restructuring of the system to allow it to operate for the advantage of everyone.

Any such restructuring must take into account the need to implement proper internal controls. This is so that the system normally runs properly without relying on every act being dictated, or on a key person who will try to coerce virtuous behavior.

Separation of function is a primary component of proper internal control. Separation of Church, State and Family builds internal controls into the system, as does separating the common good — the vast network of institutions within which we acquire and develop virtue — from individual goods: the actual development and acquisition of virtue through the exercise of our natural rights. Some of the elements of a "social Glass-Steagall" would be:

The State limited to its proper role as guardian of the common good, not the guarantor of all individual goods. Except in cases of extreme need, and even then as the final, not first recourse, after individual and group efforts have been exhausted and private charity cannot handle it the State should not intrude into domestic or religious society, unless required to do so to protect the civil rights of individuals. This necessarily requires:

- A limited economic role for the State, especially a prohibition against money creation by emitting bills of credit,

- Free and open markets within an understandable and just legal system as the best means of determining just wages, just prices and just profits,

- Restoration of the rights of private property, especially in corporate equity and other forms of business organization, and

- Widespread direct ownership of capital, individually or in free association with others.

The individual citizen as a member of society recognized as having primary responsibility for the structuring of the common good. Ordinarily this responsibility is delegated to duly constituted political authority, but when that authority becomes flawed or corrupt, or institutions no longer serve their primary function of assisting individuals to acquire and develop virtue, citizens must organize and restructure the social order through acts of social justice.

Church (religious society), Family (domestic society) and State (civil society) recognized as discrete societies within the social order, each with its special role to play. This does not address the primary meaning or purpose of religious or domestic society, just their relations to civil society:

- The role of organized religion with respect to the social order is to discern the precepts of the natural law and guide both domestic society and civil society in applying them.

- The family's job with respect to the social order is to "rear children," that is, teach them to be fully functioning adults — non-dependents — in both religious and civil society.

- The job of the State is to maintain institutions so that the social order operates in accordance with the precepts of the natural law within acceptable parameters.

One of the most serious problems today, however (and what ties the hands of the American bishops and others of good will), is the belief that, worthy, even necessary as these elements of social internal control may be, people do not see any way that they can be implemented. This seems to justify the silence over these issues and the continuing debate not over whether Welfare Blackmail is in any degree acceptable, but how much slavery we can tolerate before the pot boils over or the country goes bankrupt.

In the next posting in this series we hope to show that there is, in point of fact, a way out — and one that can be implemented without disrupting the social order, or taking anything away from anyone except a monopoly over opportunity.


Wednesday, March 14, 2012

Welfare Blackmail, Part III: The Secret of Life

In yesterday's posting we raised the possibility that the common good over which the State exercises guardianship might — at least for the sake of argument — not be the aggregate of individual goods, but something less . . . and, in a very real sense, much more. Not surprisingly, this turns out to be the case. We don't know if Aristotle was the first person to talk about the common good, but that's not important enough to look up right now. What is important is that Aristotle knew what the common good is: that at which all things aim.

That sounds perhaps a little flip, but stop and think for a moment. Does anybody (or anything) aim at or strive for something that he knows is bad for the sake of its badness? Hardly. Even striving for something we know to be bad is done for some gain or good that we believe will accrue to us, or to avoid a greater evil. The warped and totally depraved man who does great evil for the sake of what we believe to be evil believes it to be good. A glance into Adolf Hitler's Mein Kampf reveals that he regarded himself as a benefactor of humanity.

Aristotle went on to say what this good is at which all things aim: virtue. While the word "virtue" has its roots in a Latin word, virtus, meaning "manliness," let's not let that bother us. Virtue today signifies human-ness, and is defined as "the habit of doing good." That being the case, the job of each human being on earth — the "secret of life" if you will — is to spend his or her life acquiring and developing habits of doing good, in the process becoming more fully human.

So what is the good common to the entire human race, the "common good"? Simply the capacity that each human being has to acquire and develop virtue, thereby becoming more fully human. That is, by acquiring the habit of doing good, we bring ourselves into closer conformity with our own nature.

That's important, because we acquire the habit of doing good by exercising rights. Not all rights, of course. There are a great many rights that exist only to make life easier or more livable. Since, as Aristotle said, "man is by nature a political animal" (which seems to be a unique combination of individual and social — think of it as a social being with individual identity and rights) we gather into groups to live, but without neglecting the fact that we remain individuals at the same time we are members of a group. The art of politics is to balance the needs of the individual with the demands of the group.

Those rights that help us become virtuous by their exercise are called "natural rights." This is because they help us to become more fully human, that is, conform to our own nature. Among the most important of these natural rights are life, liberty (freedom of association/contract) and private property. The common good can thus be understood as the vast network of institutions — especially natural rights — within which humanity, as political animals, acquire and develop virtue (build habits of doing good), thereby becoming more fully human.

We mentioned "Catch-22" in yesterday's posting, and now we bring it up again. It seems that there is a catch to all this. That is, if we do not do the work ourselves of building habits of doing good by exercising our rights, then we do not truly become virtuous. If we are handed or guaranteed everything we need or could reasonably want, we are no more virtuous than a student who copies all the right answers from the back of the book is learned.

We are given rights so that by their exercise we can meet our own needs and those of our dependents, and in the process develop our potential as human beings. If the State or our parents continue to take care of us when we should have learned how to "do" for ourselves, we remain children — or slaves.

Everyone, of course, needs a hand once in a while. To turn people into permanent dependents (another word for slave) as a usual thing, however, is profoundly wrong because it defeats the whole purpose of life — which is to become more fully human by acquiring and developing virtue. As should be obvious, there is no virtue developed when everything is guaranteed.

There is also the problem that distributing material goods on the basis of need, except in an emergency, comes under charity, not justice, and thus not under the purview of the State. As Leo XIII explained,

"No one is commanded to distribute to others that which is required for his own needs and those of his household; nor even to give away what is reasonably required to keep up becomingly his condition in life, 'for no one ought to live other than becomingly.' But, when what necessity demands has been supplied, and one's standing fairly taken thought for, it becomes a duty to give to the indigent out of what remains over. 'Of that which remaineth, give alms.'' It is a duty, not of justice (save in extreme cases), but of Christian charity — a duty not enforced by human law." (Rerum Novarum, § 22)

Thus, a State that attempts to supply every material need or (worse) coercively enforce what it has, on its own authority and without reference to objective moral values decided is "good," has already admitted that, as a State, it is a failure. Trying to provide for every material need or even a bare subsistence is only justified by a permanent state of emergency — or perhaps we should say, a State of Emergency that supports those in power for the sake of continuing their power.

Having failed in their job of maintaining the common, mediate good in operating condition, those in power attempt to retain power by attempting to provide for what they have decided in Procrustean fashion is immediately good for everybody. In this, too, they necessarily fail, if only because the more you attempt to provide for every individual want and need, the greater those needs and wants get, and the less incentive there is for people to go out and get it for themselves — and the faster the government goes bankrupt trying to provide for everyone without producing anything.

This is where "Obama's Choice" demonstrates its wrongness. If (as we have seen) the common good is the capacity every human being has to acquire and develop virtue, and the State has the job of caring for the common good (which must not be construed as the aggregation of individual material goods), then the State must never — except in cases of extreme need — undertake to provide for the material wants and needs of its citizens. Even more — the State cannot invent a virtue or change the definition of virtue to suit anyone, whether the individual or group in power, an oppressing majority, an oppressed minority, or a cute girl in a short skirt.

The teaching and definition of virtue must in general be left respectively to the teachers of morality, that is, to parents (domestic society) and ministers of religion (religious society). If you stop to think about it, this makes a lot of sense in systems terms. Parents have no authority over their adult children, and can be held accountable for teaching them vice instead of virtue when young, while membership in a religion is a matter of individual choice and cannot be coerced. Neither organized religion nor parents, for all they can define and teach virtue, have any power to enforce rules that punish vice outside a very narrow and limited range. Balancing this is the fact that the State, that can compel obedience to virtuous norms and punish vice within a very broad range, lacks the legitimate power to teach and define what those norms are.

In accounting we call this "internal control" or "separation of function." It provides automatic checks and balances, and protects against mistakes. In politics it's called "democracy," and prevents the concentration of power in any single society, whether civil, domestic, or religious. In daily life we call it "common sense."