This is the final portion of our second letter to Bob Marshall of the Virginia House of Delegates. We think this and the previous letter make a good case, but we’ve got a few more planned out, so we’ll be continuing this series.
Bob hasn’t had time to respond yet (and yesterday was a holiday . . . sort of), but it won’t hurt to send him a little encouragement to get in touch with Norman Kurland, president of CESJ. This is, after all, something of a critical issue. You can send Bob an e-mail at delegatebobmarshall [at] Hotmail [dot] com and let him know you support the idea of Virginia leading the country with sound and progressive ideas of money and credit.
It was, in fact, the issue of money and credit that was one of the primary factors driving the “Progressive” movement in the early 20th century, before definitions of money and credit, banking and finance, and private property and freedom of association/contract became so confused and turned progressivism into just another variety of socialism.
This was because the “Bankers’ Panic” of 1907 brought matters once again to a head. Triggered by a commercial bank speculating on the stock market in an effort to corner copper, the panic was caused by the lack of a central authority to regulate commercial banks, oversee clearinghouse operations, and provide for an elastic, asset-backed currency. This allowed financier J. P. Morgan to manipulate the situation to his own advantage, as the Pujo Report of 1913 revealed.
The Federal Reserve Act of 1913 provided for the replacement of the National Bank Notes of 1863-1913 and the Treasury Notes of 1890, both backed by government debt, with Federal Reserve Notes, to be backed by private sector hard assets. The idea was to replace the inelastic, debt-backed currency, with an elastic, asset-backed currency. Economic growth and consumer demand could then grow at the same rate. This would avoid the discontinuities between productive capacity and consumptive capacity that had caused the panics of 1873 and 1893.
The problem was that it would have been unfair to cause an enormous loss to the National Banks. That would have been the result of forcing the National Banks to divest themselves of their holdings of government debt at a reduced value — as would have occurred had the millions in government debt been dumped on the market. The Act therefore allowed for the gradual retirement of the outstanding government debt over time.
The plan was that the government debt-backed National Bank Notes and Treasury Notes of 1890 would gradually be replaced with “Federal Reserve Bank Notes.” These, too, would be backed by government debt as the Federal Reserve purchased the debt holdings of the National Banks to retire the National Bank Notes through purchases of bank-held government debt on the open market: “open market operations.”
The Federal Reserve Bank Notes would be replaced in turn with indistinguishable “Federal Reserve Notes” backed with hard assets as private sector bills of exchange were rediscounted at the Federal Reserve. Once the government debt originally backing the National Bank Notes and the Treasury Notes of 1890 was retired, the Federal Reserve would no longer have any reason to deal in government debt of any kind.
Unfortunately, the United States decided to finance entry into World War I with politically expedient debt instead of unpopular taxes. This was to happen again in World War II, over the objections even of John Maynard Keynes — although with the blessing of Alvin H. Hansen, “the American Keynes,” who saw no problem with government debt rising to twice GDP.
A loophole was found in the Federal Reserve Act that allowed the Federal Reserve — forced into an untenable position by Congress deciding to use debt instead of taxes to finance the war — to monetize government debt. The loophole was the program to retire the government debt backing the National Bank Notes and the Treasury Notes of 1890. Instead of being used to decrease outstanding debt, however, the program was used to expand government debt to finance the war effort.
The problem is thus not the Federal Reserve. It is the virtual hijacking of the institution away from its original mission. The original mission was to provide a stable and uniform, asset-backed elastic currency to finance private sector development. The intent was never to create an unstable, debt-backed currency to finance government.
The “elasticity” is still there. It is not, however, linked to private sector economic development through private property. Money creation is tied to the insatiable demands of politicians enslaved by a limited and limiting understanding of money, credit, banking and finance. This was precisely the danger against which Henry C. Adams warned in 1898 in Public Debts: An Essay in the Science of Finance, and Harold Moulton in 1943 in The New Philosophy of Public Debt.
What the Commonwealth of Virginia needs is not a new currency limited to the supply of gold and deflationary in its effects. This is a proposal virtually guaranteed to destroy what is left of the economy by starving economic development and consumption for credit. What Virginia needs is a counter-inflationary money supply backed by the present value of existing and future private sector marketable goods and services.
The commercial banking system in Virginia already has the capacity under current law to provide the Commonwealth with an asset-backed money supply. This can be done without violating the U.S. Constitution or redefining money in any way. It is only necessary to expand commercial bank credit for productive purposes. Instead of currency, banks can create demand deposits backed by promissory notes. The promissory notes can be issued to purchase (“discount” or “rediscount”) bills of exchange representing the present value of future private sector marketable goods and services.
In and of itself a capital credit insurance and reinsurance program for Virginia would get the banks lending again and provide adequate asset-backed financing for growth of the private sector. To be sustainable, however, and to ensure that the benefits of growth flow directly to all Virginians, such an insurance program should be restricted to companies that broaden the base of capital ownership. This would generate the mass consumption power essential to sustaining the economy.
Again I urge you to talk to Norman Kurland at your earliest convenience. As Louis Kelso’s Washington Counsel, Norm was instrumental in helping to persuade the late Senator Russell Long of Louisiana to champion the initial enabling legislation for the ESOP. Norm was also Deputy Chairman of the Presidential Task Force for Project Economic Justice under President Ronald Reagan.
Norm later presented the Task Force report to His Holiness, Blessed John Paul II, receiving the pope’s encouragement for the work of CESJ. We recently received a note from His Eminence, Timothy Michael Cardinal Dolan (who will be in Arlington the weekend of April 26-28), praising CESJ’s proposals for their consistency with Catholic social teaching, particularly the principle of subsidiarity.
CESJ’s proposals are also in substantial agreement with the thought of Venerable Fulton J. Sheen as expressed in such works as Philosophies at War (1944) and Communism and the Conscience of the West (1948). There is also Blessed Pauline Jaricot, foundress of the Society for the Propagation of the Faith, and Saint Robert Cardinal Bellarmine, a Doctor of the Church. As you are aware, of course, CESJ was co-founded by Father William J. Ferree, S.M., Ph.D., eulogized as “America’s greatest social philosopher” by his friend and fellow CESJ member, Father Andrew F. Morlion, O.P., Ph.D., confidential papal secretary and founder of the International University of Social Studies in Rome.
Today there are more than 11 million worker-owners in more than 10 thousand companies across the United States. This constitutes a productive counterforce to reckless and unproductive government spending. The Old Dominion now has the opportunity under the right leadership to lead the country again, and demonstrate to the world that the spirit of George Washington, Thomas Jefferson, George Mason, James Madison, Patrick Henry, and countless others, lives on.