Tuesday, May 21, 2013

Binary Banking Theory, IV: The Real Bills Doctrine

If Say’s Law of Markets confuses most of today’s “Currency School” economists, its application in the “real bills doctrine utterly baffles them.  It’s not that hard to understand why.  If you’re convinced that “money” is and can only be coin, banknotes, and (sometimes) demand deposits and some time deposits (M2), you’re not going to be able to grasp the intricacies of a system based on the common sense understanding of money as “anything that can be accepted in settlement of a debt.”

According to Say’s Law, we don’t purchase what others produce with “money,” but with what we produce by means of our labor and capital.  Say’s Law is applied in the real bills doctrine.  The real bills doctrine is that as long as the present value of contracts (mortgages and bills of exchange) used as money, whether directly or as backing for currency and demand deposits, is equal to the present value of existing and future marketable goods and services in the economy, there will be neither inflation nor deflation.

As anything with a present value can be used as money, a contract conveying the present value of future marketable goods or services to be produced by new, unformed capital (a bill of exchange) can be used to finance that same capital.  The contract can be redeemed as the new capital becomes productive and generates a profit.  In this way new capital can be financed using the present value of future increases in production as well as past reductions in consumption.

Say’s Law will not operate when people do not have equal access to ownership of both labor and capital, especially in an economy in which technology is advancing rapidly and displacing labor at an increasing rate.  Similarly (and for the same reasons), the real bills doctrine will not operate when private individuals, businesses, or financial institutions issue bills of exchange with no present value, in which they do not have a property stake, or of which the present value has been inflated by speculation.  If people cannot own, they cannot produce; if they cannot produce, they cannot create money to exchange for what others produce.

Bills that have no present value, in which the issuer has no property stake, or that have inflated present values are called “fictitious bills.” (Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802).  London: George Allen & Unwin, Ltd., 1939, 81-89; also, Harold G. Moulton, Principles of Money and Banking.  Chicago, Illinois: University of Chicago Press, 1916, II.234.) A government bill of credit must therefore be classified as a fictitious bill, for the emitter does not at the time the bill is issued own that which the emitter promises to deliver in the future.



Steve Nieman said...

Mike, Some inquiring minds would, yes, like to know how we get from here to there by perhaps allowing to slide some fundamentals of binary economics. In the name of populism, I guess. Or a way to get more of the masses behind ownership and sharing the fruits therefrom. I have called it building a bridge. How do we bridge between monopoly corp/govt capitalism and the "radical" dual-income way of citizen owners fueling participatory finance of the world economy? I look forward to your upcoming analysis-- Steve Nieman

Michael D. Greaney said...

Since the fundamentals of binary economics are based on the Aristotelian understanding of the natural law (see Chapter V of "The Capitalist Manifesto"), they are not subject to being allowed to "slide." We are stuck with "Iron-fisted, brain-based reasoning," or we are not being consistent with binary economics.

The way to get the masses behind expanded capital ownership is to follow the prescription detailed in CESJ co-founder Father William Ferree's pamphlet, "Introduction to Social Justice" (1948), http://www.cesj.org/publications/ferree/introtosocialjustice.pdf, and correlate with Norman Kurland's paper, "How to Win a Revolution": http://www.cesj.org/about/4prongstrategy/howtowinarevolution.html.

Both Father Ferree (a world-renowned expert in the social doctrine of Pius XI) and Norman Kurland (a close associate of Louis Kelso who was instrumental in getting the initial enabling legislation for the ESOP passed) have been successful in bringing about effective social change, where others are content to denigrate and sneer, accomplishing nothing except to erect barriers to effective communication and shutting doors instead of opening them. Bridges are not built by burning them, any more than relationships are restored by manufacturing false accusations.

My analysis is the same as it has always been, and which can be found in detail in "Capital Homesteading for Every Citizen" http://www.cesj.org/homestead/capitalhomesteading-s.pdf, and in outline in a number of my books, such as "In Defense of Human Dignity," "Supporting Life: The Case for a Pro-Life Economic Agenda," and "The Restoration of Property."

Expanded ownership will not be achieved by giving the State total power by allowing it to control money and credit, nor by redefining fundamental natural rights such as life, liberty, and private property.