Monday, February 29, 2016

The Crisis That Need Not Be, II: Redeeming the Central Bank

Last Thursday we noted how central banking was diverted from its original purpose from the very beginning in 1694, away from providing liquidity and “accommodation” for the private sector, and forced into the role of government finance.  This was done to such good effect that virtually every history book that bothers to mention central banking makes the erroneous claim that central banking was invented to provide banking services for government.

Hobbes: the State is a Mortall God.
We shouldn’t be too surprised at this.  After all, we’re talking about the Bank of England that was established in a political environment formed by the thought of the totalitarian philosopher Thomas Hobbes.  According to Hobbes, the State, a “Mortall God,” is the ultimate owner of everything in the State, no ifs, ands, or buts.  As he explained in Chapter XXIX of Leviathan, “Of Those Things That Weaken, or Tend to the Dissolution of a Common-Wealth”:
Attributing Of Absolute Propriety To The Subjects
A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, "That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign." Every man has indeed a Propriety that excludes the Right of every other Subject: And he has it onely from the Soveraign Power; without the protection whereof, every other man should have equall Right to the same. But if the Right of the Soveraign also be excluded, he cannot performe the office they have put him into; which is, to defend them both from forraign enemies, and from the injuries of one another; and consequently there is no longer a Common-wealth.
Translated into more modern English, what Hobbes said is that your natural, inherent, inalienable none-genuine-without-this-seal right of private property (“absolute Propriety in his Goods”) is only proof against ordinary mortals.  The State, a “Mortall God,” is the real owner.
Why?  Because the State may take what it wants, when it wants, in order to carry out its mission.  The Immortal God may create “human beings,” but the State, a “Mortall God,” creates “persons,” defining a “person” as “that which has rights.”
Is that true?  Can the State by some inherent right simply take what it wants, any time it wants, because it creates persons and calls it a tax?  Or are human beings “natural persons” with inherent, absolute, inalienable rights that cannot be violated simply because they are human beings, and it’s the State that only has such rights as human beings grant to the State, including taxes?
Locke: taxes unjust without consent.
If that last sounds familiar, it’s because that was what John Locke and the Founding Fathers of the United States thought.  As Locke explained in his Second Treatise of Government,
Sect. 140. It is true, governments cannot be supported without great charge, and it is fit every one who enjoys his share of the protection, should pay out of his estate his proportion for the maintenance of it. But still it must be with his own consent, i.e. the consent of the majority, giving it either by themselves, or their representatives chosen by them: for if any one shall claim a power to lay and levy taxes on the people, by his own authority, and without such consent of the people, he thereby invades the fundamental law of property, and subverts the end of government: for what property have I in that, which another may by right take, when he pleases, to himself?
So, last Thursday we learned that the whole central banking concept was hijacked at its very inception by politicians — yes, a king is a politician; he’s head of the executive branch, if you believe Blackstone’s Commentaries — in order to finance government without raising taxes, at least immediately.  Gradually this evolved until (according to Keynes) you can have a permanent outstanding government debt . . . as long as you don’t owe the money outside the country.
This has continued to evolve until today it doesn’t matter who holds the debt.  If a country has too much debt, somebody else will come along and bail it out.  Free money!  Goodies for everybody!!
Moulton: Consumer demand drives economic growth.
Of course, Harold G. Moulton pointed out the problems with government debt owned completely by citizens of the government that issued the debt in The New Philosophy of Public Debt (1943).  Turns out that if a government expects to be able to make promises (incur debts) in the future, it had better be prepared — and able — to keep those it made in the past.  You can’t just keep spending forever, even if the government is the ultimate owner of everything.  Eventually somebody is going to stop and say, “Hey!  Wait a minute!”
Then the currency collapses, the government falls, and Hitler comes in to restore order.  It’s happened before.
Can anything be done about this?  Most assuredly.  A crash doesn't have to be a disaster . . . except for the speculators and the politicians who want to keep on spending without being accountable to anyone.  Three things are needed to stave off an economic meltdown, two of which can be done right now, and another that could be put in place in a matter of weeks or months:
1. An elastic asset-backed reserve currency. This is what the Federal Reserve was instituted to do. Stop monetizing government debt, and use the central bank to finance private sector agricultural, commercial, and industrial projects. This could be done today simply by allowing commercial banks to rediscount their qualified paper. You don't need existing accumulations of savings for that.
2. Capital credit insurance and reinsurance. With a stock market crash, the value of existing collateral falls. We need an instant substitute for traditional collateral. This can take the form of insurance policies to replace or supplement existing collateral the value of which declines as the result of a fall in prices.
Wait a minute!  Isn’t there something missing here?  You bet there is: consumer demand, what drives the economy.  Without that, there’s not much sense in doing the first two.
Smith: the purpose of production is consumption.
Why?  As Adam Smith explained in The Wealth of Nations, the first principle of economics is “Consumption is the sole end and purpose of all production.” (Book IV, Chapter 8, if you care.)  You can have the soundest currency in the world, and everybody can have the means and opportunity to participate in the creation and use of money, but unless there is consumer demand to drive the whole process, why bother?  As Moulton explained,
 [W]hen the managers of modern business corporations contemplate the expansion of capital goods they are forced to consider whether such capital will be profitable. . . . To be sure, there are certain types of speculative enterprise in which capital will be risked for considerable periods of time in the hope of large ultimate profits; but, in the main, returns have to be in prospect relatively soon.
Now the ability to earn interest or profits on new capital depends directly upon the ability to sell the goods which that new capital will produce, and this depends, in the main, upon an expansion in the aggregate demand of the people for consumption goods. A particular corporation may, to be sure, construct new plant and equipment in the face of a declining aggregate demand from consumers, hoping by lower costs and price concessions to take business away from competitors, whose capital will thereby be rendered obsolete; but if the aggregate capital supply of a nation is to be steadily increased it is necessary that the demand for consumption goods expand in rough proportion to the increase in the supply of capital.  (Dr. Harold G. Moulton, The Formation of Capital.  Washington, DC: The Brookings Institution, 1935, 29.)
Moulton then went into several pages of more explanation to demonstrate the truth of what he said.  He concluded, “a growth of capital does not take place unless expansion of consumption is also occurring, . . . The motivating force in all economic activity, under a system of private initiative, is the wants and demands of people.  The base of the economic pyramid is the production of consumption goods.”  (Ibid., 71.)  Or (as Adam Smith put it) “Consumption is the sole end and purpose of all production.”
So the third thing on the list — that is actually the first thing?
3. Expanded capital ownership, with money created and credit extended in ways that create new owners who will use their dividend income first to pay for their newly issued shares, and then on consumption to maintain the demand that sustains economic growth.
The question now becomes, how can this be done — and done justly, without taking anything away from others?  We’ll look at that tomorrow.

1 comment:

Norman Kurland said...

Excellent presentation.