You Asked. Kelso Answered

Things do seem a little bad in economic terms these days.  A few days ago in the Washington Post, Robert J. Samuelson criticized the "Fed Bashers," i.e., people who want to shut down the Federal Reserve.  He was right in that the Federal Reserve is critical.  Unfortunately, this gives the impression that what the Federal Reserve is doing is fine and dandy — which we know is not the case.  As it is presently used, it represents a serious threat to economic growth and stability.

The problem is how to correct the problem — and that means how do we use the Federal Reserve properly to finance private sector growth, not government spending.  According to the 2001 Economic Report of the President, the U.S. economy adds an annual growth ring of about $2 trillion in new technology, plant and equipment, new rentable structures, and new infrastructure in both the private sector and in the public sector. This amounts to about $7,000 annually per man, woman, and child in America.

As things stand, these growth assets are financed in ways that create no new owners. This constitutes an exclusionary approach to financing capital and private sector growth.

As we saw in the previous posting, the question Louis Kelso answered can therefore be asked in a different way: How can we finance America’s (or any other country’s) future capital needs in an inclusionary manner? Is there a way to expand the role of the private sector and enable those who previously have been excluded to accumulate enough savings to purchase that growth capital and thereby gain the right to share in profits as owners?

It's simple.  Use credit to finance capital, not government debt.

Kelso’s answer is yes.  We need to shift from traditional means of financing to pure credit, that is, credit that does not depend on existing accumulations of savings. As we have seen, pure credit is a concept based on the nature of money itself. Pure credit is a financially advanced society’s mechanism for financing new capital formation that can be used to ease disparities in wealth.

This power already exists in the Federal Reserve system.  It is only waiting to be used for meeting our projected capital needs and for democratizing the ownership base of the U.S. economy in the process.

In this regard, the second book by Kelso and Adler, The New Capitalists (1961) has an intriguing and significant subtitle.  They introduced the key point about unnecessary reliance on past savings by describing the book as, “A Proposal to Free Economic Growth from the Slavery of Savings.” By “savings”, Kelso and Adler referred to “past” savings, as opposed to the use of “future” savings (or future profits generated by the newly added capital assets) as advocated under binary economics.

To explain, pure credit is based upon the legal concept of promise and the enforceability of contracts.  These are the two main ingredients of a free and orderly economy, as well as a just society.

Promises and contracts are sacred.

Pure credit is nothing more than the power of people (including legal associations of people, such as corporations) to contract freely with one another under a system governed by the rule of law that enables everyone affected by the contract to enforce his or her rights and claims over property under the contract. It involves elements of volition as well as control.

Pure credit is limited only by the willingness and ability of people, their associations, and government itself to keep the promises they make. Since promise is the glue that holds any society together and determines how confidently people view the future, the making and breaking of promises determines whether that society is strong or weak, orderly or disorderly, growing or disintegrating.

Credit by its very nature is a social phenomenon. Control over money and capital credit will determine in large measure the nature and quality of America’s future technological frontier as well as its future ownership distribution patterns.

Because the ownership of productive capital is so crucial to freedom and human happiness, discriminating among citizens as to who has access to capital credit constitutes as gross a violation of equal protection of the laws as discrimination in access to the ballot. Americans are beginning to discover that such a violation of our fundamental constitutional rights takes place daily under the present system.

This violation of equal opportunity is institutionalized in the present system of corporate finance, and is exacerbated by our own Federal Reserve System. Today’s financial system channels capital credit to the already rich and extends ever-more burdensome consumer credit to propertyless workers. It is not surprising that many people who misunderstand the workings of the central bank advocate the abolition of the Federal Reserve, rather than its reform.

Unconstitutional government debt-backed currency.

The United States government has no power under the Constitution to create money as many suppose.  The critical phrase “emit bills of credit” was specifically deleted from the first draft of Article I, Section 8 listing the enumerated powers of Congress.

Nevertheless, the way credit is used, the persons to whom it is made available, and the purposes for which it is used, are proper subjects of governmental policy.  It is also a primary responsibility of government to set and maintain standards — which is why regulating the currency is included with weights and measures in the Constitution.

United States Constitutional Convention, 1787.

The government’s responsibility for the common good, which includes the health of the institutions of the financial system, therefore involves maintaining the sacredness of contract that ultimately stands behind the nation’s currency and the demand deposits in our commercial banking system.  By establishing a central bank and delegating to it the powers to regulate and set the standard for the currency, the government provides the institutional environment necessary to control the total volume of currency and commercial bank credit needed to facilitate economic transactions, controls the direction of private enterprise, and provides a “lender of last resort” under the Constitution, if that becomes necessary.  Most especially, the government is required to maintain the stability and uniformity of the currency, not change it at will to achieve political ends.

When the government misuses or exceeds its power of regulating and setting the standard for the currency by emitting bills of credit and creating money, we have inflation and a breach of one of government’s most important duties to its citizens — that the value of currency will remain constant. When government does not keep this basic promise to its people, all debts are jeopardized, property is arbitrarily redistributed among debtors and creditors, and the trust that holds society together begins to deteriorate. As a nineteenth century investment banker observed:

Confidence and credit are only moral elements in society; they may be said to be, to a great extent, mere matters of opinion; yet their importance in the production and distribution of wealth is so great, that the whole machinery of material production is kept at work, disordered, or paralyzed, according as these principles act in a healthy manner, irregularly, or not at all . . . . [I]f credit and confidence should be from any cause destroyed, all these resources seem to have lost their virtue, and general distress prevails. Let confidence and credit be restored, and the whole system is immediately set in motion again, and in a very short time general prosperity returns. (Charles Morrison, An Essay on the Relations Between Labour and Capital (London: Longman, Brown, Green, and Longmans, 1854), 200.)

#30#