The "New" Slavery, Part III: The Wage-Welfare System as Slavery

Some years ago we got into a discussion with someone who was convinced that our talk of "wage slavery" was "silly Marxist rhetoric." We will grant the "rhetoric" part, but the "silly" is only applicable if you regard Marxism as such. Now, we may reject Marx's prescriptions for a more just social and economic order. We may believe that, however well-intentioned Marx may have considered himself, he did a great deal of damage. We may disparage his giving in to what seems to be the German national habit of mockery and ridicule in place of actual argument on occasion. We may even believe Marx to be profoundly mistaken on many things.

One thing Marx was not, however, was "silly." Any man whose thought has influenced so many people, caused so much misery, even despair and tragedy, may have been many things — but he was not "silly." To label him as such not only diverts attention away from the real issue, it is just plain wrong. And what is the real issue? Whether the dependency enforced by the wage and welfare system is tantamount to the dependency enforced by the institution of human chattel slavery.

Aristotle certainly thought so. As he commented in The Politics, "for a slave is connected with you for life, but the artificer not so nearly: as near therefore as the artificer approaches to the situation of a slave, just so much ought he to have of the virtues of one; for a mean artificer is to a certain point a slave." (I.xiii.)

Pope Leo XIII evidently agreed. In Rerum Novarum he explained that,

By degrees it has come to pass that working men have been surrendered, isolated and helpless, to the hardheartedness of employers and the greed of unchecked competition. The mischief has been increased by rapacious usury, which, although more than once condemned by the Church, is nevertheless, under a different guise, but with like injustice, still practiced by covetous and grasping men. To this must be added that the hiring of labor and the conduct of trade are concentrated in the hands of comparatively few; so that a small number of very rich men have been able to lay upon the teeming masses of the laboring poor a yoke little better than that of slavery itself. (§ 3.)

But (as some have claimed), doesn't this refer to the refusal of the rich and greedy to pay wages at an adequate level, and the State to make welfare benefits available at a level sufficient to ensure a lifestyle befitting the demands of human dignity?

Well . . . no. Leo XIII went on to explain at some length that it is the dependency enforced by the condition of propertylessness that is the root problem and the cause of the "yoke little better than that of slavery itself," not the low level of wages or lack of social welfare programs. Wage and welfare systems at any level impose a condition of dependency on the recipient. As Pope Pius XII explained in his Christmas Message of 1942 and reiterated in his 1951 encyclical Evangelii Praecones,

To that right [of use] corresponds the fundamental obligation to grant private property, as far as possible, to all. The positive laws regulating private property may change and may grant a more or less restricted use of it; but if such legal provisions are to contribute to the peaceful state of the community, they must save the worker, who is or will be the father of a family, from being condemned to an economic dependence or slavery irreconcilable with his rights as a person. (Evangelii Praecones ("On Promotion of Catholic Missions"), 1951, § 52.)

The critical issue, then, is not the level or amount of income and benefits, but the source thereof . . . and who or what controls that source, that is, who really owns. As Louis Kelso noted, "Property in every day life is the right of control." (Louis O. Kelso, "Karl Marx, the Almost Capitalist," The Journal of the American Bar Association, March, 1957). This is why Pope Pius XI could declare, whether a socialist State permits people to own or control their own lives or anything else, that is not the issue. It is, rather, that the State thereby claims as its own what belongs only to God: the power to create rights and decide whether or not they can be exercised — "there is no place in [socialism] for true social authority, which rests not on temporal and material advantages but descends from God alone, the Creator and last end of all things." (Quadragesimo Anno, § 119)

Pius XI was responding to people who asked, "But what if Socialism has really been so tempered and modified as to the class struggle and private ownership that there is in it no longer anything to be censured on these points? Has it thereby renounced its contradictory nature to the Christian religion?" (Ibid., § 117) No, it has not. Rather, "Whether considered as a doctrine, or an historical fact, or a movement, Socialism, if it remains truly Socialism, even after it has yielded to truth and justice on the points which we have mentioned, cannot be reconciled with the teachings of the Catholic Church because its concept of society itself is utterly foreign to Christian truth." (Ibid.)

That is, by making the State the supreme authority — the "sole intercessor available to the poor," as one enthusiast put it — the Christian (as well as Jewish and Islamic) concept of society as being based on human nature ("Man is by nature a political animal." — Aristotle, The Politics, I.ii) is completely overthrown, and the essence of the natural moral law denied at the most fundamental level. Consequently, "If Socialism, like all errors, contains some truth (which, moreover, the Supreme Pontiffs have never denied), it is based nevertheless on a theory of human society peculiar to itself and irreconcilable with true Christianity. Religious socialism, Christian socialism, are contradictory terms; no one can be at the same time a good Catholic and a true socialist." (Ibid., 120.) The same goes for believers in any faith or philosophy that bases the natural moral law on God's Nature reflected in humanity instead of a private interpretation of God's presumed Will that is actually their own self will projected on to God.

The bottom line? The slavery imposed by dependency on wages and welfare — and thus on the rich and the State — is just as real, and possibly even more debilitating than legal chattel slavery, for the wage and welfare slaves are, in many cases, convinced that they are free.

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The "New" Slavery, Part II: The Wage System as Slavery

Sometime in the early 1820s, William Cobbett, the "Apostle of Distributism," ran for parliament. Perhaps it would be more accurate to say that he ran from parliament. The account of his campaign (published as a series of pamphlets during the campaign and collected later and republished under the title, The Poor Man's Friend) makes for interesting reading, especially as it has the air of complete accuracy. He names names, specifies times and dates, and— even aside from the picture he paints of voting without the secret ballot — shows how the propertied interests (those later lauded by William Bagehot as the real rulers of the British Empire and then deified by John Maynard Keynes) maintained their positions by threats, intimidation, physical violence, manipulation of the "rotten" or pocket borough system, and so on.

Most commentators stop there, asserting that greater State control and oversight of elections would have corrected the problems, as they allegedly have in our day when government control has managed to insert its way into virtually every part of public, even personal life. Consequently (or so the theory goes) people today are more free, happier, hunger and poverty have been abolished, peace has broken out everywhere, etc., so on, so forth, and all because we have surrendered everything to the State, just as Thomas Hobbes advocated in Leviathan. Private property has been effectively abolished for the great mass of people in socialism, capitalism, and the welfare State, and the wage system with its ever-increasing level of pay and benefits has established universal prosperity, just as Keynes predicted. Economic ills, outbreaks of fighting, unemployment, etc.,— all of these are just temporary glitches on the Road to Utopia until the government can take total control of everyone's lives.

Fortunately for us, Cobbett thought differently. He observed that, the more private property disappeared as an institution in which most people could participate, the more the State took over and intruded into people's lives. As the State was increasingly controlled by those with property, this meant that ordinary people, ostensibly dependents (slaves) of the State were, in reality, the slaves of the rich.

Ironically, the socialists— understanding that the proletariat (the word is Latin for "propertyless worker")— is effectively enslaved to those who own or control the means of production (that which Pope Pius XI called a "despotic economic dictatorship") tried to make the State the protector of the poor. One modern enthusiast has gone so far as to claim (evidently with perfect sincerity) that, "the State is the sole intercessor available to the poor." The fact that when most people own little or nothing in the way of capital and are forced to subsist on wages alone for their incomes puts power over the State directly in the hands of those who own or control the means of production seems to have escaped their notice. By demanding increasing levels of State control over every aspect of life, so-called reformers merely pour gasoline on the fire.

We see this today in the demands for increased regulation of the financial services industry and control by the State. Rather than install obvious "internal controls" in the form of separation of function, prohibiting horizontal and vertical integration (monopolization), ensuring that no institution becomes "too big to fail," and (most effectively) opening up democratic access to the means of acquiring and possessing private property in the means of production, there is an increasing reliance on ineffectual and pointless regulations that only burden honest people, and are easily circumvented by dishonest people.

It escapes those calling for more State control that the very interest groups, industries, and individuals being "regulated" by the State control the State. Essentially, as in subjective tests in which students are asked to give themselves a grade, people are being asked to pass judgment on their own actions— and yet many people seem baffled as to why the current "recovery" is benefiting only the rich and the gamblers on Wall Street!

This irony did not escape William Cobbett's notice. He was fully aware that when you depend on someone else for your income you effectively belong to that someone, that is, you are a slave. As he pointed out in The Poor Man's Friend and reiterated in A History of the Protestant Reformation in England and Ireland,

Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means,— and it means nothing else,— the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (A History of the Protestant Reformation in England and Ireland, 1827, §456.)

As Evelyn Waugh's characters in Love Among the Ruins had the habit of exclaiming, "State save us!"

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The "New" Slavery, Part I: Slavery and Its Diagnosis

Depending on who you ask, "slavery" can be construed anything from the normal condition that "they" impose on "us" until such time as "we" can turn the tables and impose it on "them," to a ridiculous (or, depending on your point of view, insulting) dredging up of a discredited institution in a never-ending search for victimhood in an effort to control others through guilt.

The reality of slavery is probably properly located outside the parameters established by such creative victimology and its rejection by thoughtful people. The essence of slavery is not the control imposed on some by others (although that is slavery's most obvious characteristic), but the "condition of dependency" and the consequent deprivation of rights, whether tacit or explicit — a condition of being "wholly subject to the will of another; one who has no freedom of action, but whose person and services are wholly under the control of another." ("Slavery," Black's Law Dictionary.)

This is not to say that all conditions of dependency constitute slavery, or that all slavery is illegitimate. Children are "wholly subject" to the will of their parents until emancipation — although a wise or practical parent will allow greater freedom of action as a child matures as part of the training to become a functioning member of society. (The analogy between slaves and children in this context is so close that the Law of the Twelve Tables considered slaves and children legally equivalent, virtually the only difference being that children could expect emancipation on reaching majority, while slaves might be manumitted as a gift or as the result of self-purchase — but, fortunately, we don't need to get into that discussion, other than to note that, despite the "legal equivalence," even the Romans considered slaves and children as distinct.)

The case of "legitimate slavery" is even more controversial than the analogy between children and slaves. Nevertheless, legitimate slavery exists in the United States, as clearly stated in the Constitution. The Thirteenth Amendment abolished chattel slavery, that is, the power to own human beings as private property. It did not take away the right or responsibility of the State to control absolutely the actions of convicted criminals: "Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction." [Emphasis added.]

Under Roman law — which was the basis for the institution of chattel slavery as it existed in the United States and the justification for depriving convicted criminals of the exercise of their rights — the slave was considered as fully human as the free man. (Note that this discussion is within a legal context. It does not necessarily reflect individual or even group attitudes towards or beliefs about slavery, slaves, former slaves, or the descendents of slaves.) The only legal difference between a slave and a free man under Roman law was the fact of slavery that (again, under the theory in Roman law, not necessarily people's beliefs or actions) was imposed as punishment for a crime — not by nature, as Aristotle and the Greeks believed.

We see this in the different terminology used in Roman law. Today, "emancipation" and "manumission" have the same legal definition: "The act by which one who was unfree, or under the power and control of another, is rendered free, or set at liberty and made his own master" (or words to that effect). In Roman law, however, a child was emancipated, while a slave was manumitted. The sense in the former was that someone has a right to be free, and emancipation recognizes this right, while in the latter someone who does not have the right to be free receives it as a gift, and is recognized as free by manumission. This may be why Abraham Lincoln called his document the "Emancipation Proclamation" instead of the "Manumission Proclamation." The latter term would tacitly have acknowledged that the people being freed had been legitimately held as slaves. On the contrary — they had been enslaved illegitimately, and the language in the Emancipation Proclamation and the Thirteenth Amendment was phrased to reflect that fact.

Do the Emancipation Proclamation and the Thirteenth Amendment, however, mean that — except for convicted criminals — slavery no longer legally exists in the United States or anywhere else in the world?

By no means. Setting aside instances of chattel slavery being tolerated even though technically outlawed (vide Dr. Kevin Bales, Disposable People: New Slavery in the Global Economy. Berkeley, California: University of California Press, 2004), slavery in other forms is pervasive throughout the world, even among people who are convinced that they are free ("Slavery holds many men fast, but many more hold fast to slavery" — Seneca). There is, of course, slavery to sin and to unrestrained human urges, such as for food, drugs, and alcohol, but we're not concerned with that, either (at least, not in this discussion).

No, that with which we are concerned is economic slavery. This is a much more insidious, "hidden" slavery than the forms chronicled so well by Dr. Bales, although he covers even that in great depth when it takes the form of debt slavery or people being sold into prostitution.

In today's global economy, the most widespread form of slavery is the condition of utter dependency imposed on people by their reliance on the wage and welfare system as their sole or primary source of income.

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News from the Network, Vol. 4, No. 2

Heavy sigh. A few days ago, in response to the grim news about the economy, all the politicians and policymakers hastened to assure us that All Is Well, The Recession [sic] Is Over, Jobs Are On The Rise, etc., etc., etc. Keynesian print, borrow, and spend has again Saved The Economy. We have Nothing To Worry About.

Uh, huh. That's why this morning, in the wake of "weak jobs data" the powers-that-be are (again) hedging their bets. The "Eurozone," for example, is talking about increasing the bailout fund for countries that get (too far) into debt. China is raising interest rates to "curb inflation" (i.e., rising the price of the most critical input to production in order to forestall a price rise). And so on.

On the "good" side, consumer prices are up as jobs are down, the financial services industry is making mega profits, and the people responsible for shoveling money into companies "too big to fail" are congratulating themselves on how well they saved the economy.

Oh, yes, and did we mention that the experts are already predicting the "next recession" [sic] before we're out of the current one . . . to be caused by the massive debt incurred to bring us out of the current "recession." [sic] Not enough? In response to a "tepid" inflation report, stocks are moving up . . . in other words, inflation.

Is this making sense to anyone?

If it does . . . you're lying. If not, start working to get Capital Homesteading enacted by 2012. Consider penciling in the annual Fed Rally into your busy social schedule. Take a look at the Harris Neck project, and send a message of support (and we may have some more proactive suggestions later). Go to the "Just Third Way Bookstore" and buy a bunch of books. (Okay, that last doesn't really do anything to get Capital Homesteading enacted. It just generates a little money for CESJ through the fees that Amazon Affiliates pays for purchases made through the blog. Every little bit helps. And you might want to send the "Bookstore" link around to your network, or ask us for a copy of the press release you can send around. We'll be working one up for The Formation of Capital soon — i.e., as soon as we make $1 million on the other publications . . . )

In the meantime,



  • We had a meeting on Wednesday with Mr. John Dondanville of Detroit and Mr. Robert Colangelo, executive director of the National Brownfield Association. The main topic was explaining how pure credit could be used to finance new capital formation for the rebuilding and right sizing of cities, but (more importantly) the critical need to get behind the Harris Neck initiative as a "fast track" to develop a pure credit/citizen ownership "proof of concept."

  • Mr. Pollant "PJ" Mpofu of London has been making great strides in connecting with key figures in Éire and the UK. We understand that he has been invited to a meeting with the Hon. Grant Shapps, UK Minister of State for Housing and Community Planning, and recently received a telephone call from the Office of the Taoiseach (the Irish Prime Minister), asking if we have any dietary restrictions or have any difficulty going upstairs. Naturally, we informed them that we are on a strict caviar and tenderloin diet, along with whatever vegetables are expensive and out of season, and that we require sedan chairs carried by dozens of beautiful women to get up any staircase for fear we might slip on the perfumed rose petals strewn in our path.

  • After many trials, traumas, and tribulations, we think we have straightened out the broken links and other minor problems connected with our temporary "Just Third Way Bookstore." You should now be able to order CESJ's publications in relative peace and security. If you are a CESJ member and want the member discount, however, you must order directly from CESJ; Amazon simply isn't set up to accommodate selective discounts of that nature. Also, please note that the books published by Universal Values Media, Inc., while occupying most of the "shelf space" in the "bookstore," do not qualify for the CESJ member discount. The wholesale/bulk discount, applicable to quantities of 10 or more of the same title, applies to both CESJ and UVM . . . but not to the books of other publishers. (If this is getting too complicated, send an e-mail to publications [at] cesj [dot] org, and we'll try to answer your question.)

  •The bottom line to the above item is that you should immediately (if not sooner) go to the "bookstore" and purchase a copy of The Formation of Capital. We've been getting increasing questions that are clearly based on the past savings assumptions, and you probably won't understand our answer if you remain wedded to past saving as the only source of financing for new capital formation.

  • As of this morning, we have had visitors from 46 different countries and 44 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, Brazil, and India. People in Croatia, Poland, South Africa, Venezuela and Canada spent the most average time on the blog. Yet again, and still possibly due to the growing perception that something is wrong with the basic assumptions of Keynesian economics (as well as other schools of economics based on the Currency School of finance), the most popular posting by far is one from a while back, "Thomas Hobbes on Private Property," that briefly explains the similarities in the way Keynes and Hobbes abolish private property. This is followed by a new entry, our "Just Third Way Bookstore" (which we probably shouldn't count, as it's not really a blog, but a way of having a storefront without having a storefront . . . ) We then have "Games People Play," "The Problem With Distributism," "Why Government Debt is Really Bad," and the discussion on "Pure Credit for Student Loans."




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.

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Some Capital Homesteading Questions, Part IV: Back to the Land

A number of social and economic movements today advocate a return to a simpler, more human lifestyle. Usually this takes the form of promoting a return to small, family owned farms and artisan-type workshops using technology that a single individual can build, own, and operate. In this way, life can come down to human scale and the world will not only be more livable, but be more friendly and agreeable, there will be less war and conflict, and so on, so forth.

Consistent with that, our correspondent's final question was, "Were you aware there's an actual present-day movement to have a real-estate Homestead Act (I believe involving government held land for self-sustainable agriculture)?"

Yes. The effort is based on a limited asset, land, and thus embodies all the weaknesses of the original Homestead Act. It relies on existing accumulations of savings to finance development of the land. The proposal could be fitted into Capital Homesteading, but it could never be a permanent solution in and of itself, or anything more than a bandage unless part of a larger Capital Homesteading program.

The fact is, if we get rid of modern technology and force people to return to subsistence agriculture, most of the people on earth will starve to death in a matter of weeks. There is simply not enough arable land available on earth — including all forests and grasslands — to keep 98% of the people fed when farmed using subsistence methods. (This of course begs the question as to how many people would have to be killed to force the survivors into subsistence agriculture.)

Thus, we again hit the brick wall of past savings. The whole "small is beautiful" approach assumes without question that new capital can only be financed out of existing accumulations of savings — by definition a monopoly of the rich.

Given the past savings assumption, the rich will own all new capital, "ownership" will have to be redefined in order to permit "everyone" to "own" in some fashion, or there will be some mixture of the two in an effort to keep things going.

Unfortunately, as the past savings assumption is contrary to reality, it doesn't matter which arrangement of society you make to try and accommodate to it. If the rich own all new capital (capitalism), the poor will become increasingly worse off as the rich keep the fruits of ownership to themselves and advancing technology replaces human labor as the predominant factor of production. If you redefine ownership — private property — in such a way as to change the character (essence/substantial nature) of ownership to include everybody in the benefits of ownership regardless who holds actual title (socialism), you effectively abolish private property, as Dr. Heinrich Rommen (a student of the great Father Heinrich Pesch, S.J., the founder of solidarism) explained:

Property is an original right of the individual but burdened with a changing social mortgage, depending upon the intensity of social symbiosis and the rules of social justice. In its definition, property is exclusive, supreme, and full ownership of a thing, although not all things can become property: not men, not spiritual things. But property and its use are always under the law restricting its use, and the owner himself may invest rights of others in his property, though he himself retains the property and remains the owner. Yet, though property and its use may thus be restricted, even very much restricted, it still continues to exist. If it should cease to exist as an institution, the natural right to property would be abolished. (Heinrich Rommen, The State in Catholic Thought. St. Louis, Missouri: B. Herder Book Company, 1947, 401.)

(This agrees with the analysis of Pope Pius XII in his 1942 "Christmas Message," quoted in § 52 of his encyclical Evangelii Praecones ("On Promotion of Catholic Missions"), 1951: "The dignity of the human person then, speaking generally, requires as a natural foundation of life the right to the use of the goods of the earth. To this right corresponds the fundamental obligation to grant private ownership of property, if possible, to all. Positive legislation, regulating private ownership may change and more or less restrict its use. But if legislation is to play its part in the pacification of the community, it must see to it that the worker, who is or will be the father of a family, is not condemned to an economic dependence and servitude which is irreconcilable with his rights as a person.")

Finally, if you attempt to combine private accumulations of savings with State control, especially State control of money and credit, you end up with socialism under a different name: the "Welfare State." Ultimately, with humanity enslaved to past savings as the only recognized source of financing for new capital formation, there is no way to avoid disaster, as current global leaders and policymakers are starting to discover.

The "small is beautiful" movement, along with distributism, social credit, georgism, as well as the three mainstream schools of economics (Keynesian, Monetarist/Chicago, and Austrian) are all trapped by the slavery of past savings. They are forced by their assumption about how capital formation is financed to turn into heartless capitalists, brainless socialists, or social-capitalists/market-socialists in order to try and make an unworkable system work.

Whichever way it goes, either people or human rights suffer. Under socialism, individual human rights of the few are sacrificed in the ephemeral hope that by this means most people will satisfy their material wants and needs. Under capitalism, the legitimate wants and needs of most people are sacrificed to maintain the individual rights of a few. Under the Welfare State, the effort to protect individual rights — up to a point — at the same time that the wants and needs of the great mass of people are satisfied — up to a point — ensures that neither individual rights will be respected, nor the wants and needs of the great mass of people satisfied.

Thus, regardless in what direction we go within the area circumscribed by the slavery of past savings, we end up at the same place: misery, want, and despair on the part of most people within a system seemingly custom-made to fail.

The flaws of capitalism are obvious to most people, so we should look at socialism and the small is beautiful movement to demonstrate the problems inherent in the approach. These can be summarized as the redefinition of the natural right of private property, the reliance on existing accumulations of savings to finance growth, and an understanding of money and credit that obviates the legal and accounting definitions of those uniquely social goods.

The most obvious problem with the "small is beautiful" approach, however, is that it assumes as a given that small scale enterprises are automatically the optimal size, both socially and economically — which even G. K. Chesterton stated was not the case. By denying people the power to choose to own advanced technology as part owners — thereby bringing even the largest enterprises down to human scale through vesting owners with the full rights of private property — the small is beautiful movement unconsciously relies on increasingly intrusive State control of the economy by mandating what, how, and, especially, if people can own. This is a fundamental redefinition of the natural right of private property. Many supporters of the small is beautiful approach claim to want less State involvement, but, by insisting on mandates, necessarily use the coercive power of the State or something that is the State in all but name to impose desired results. Imposition of results is one of the hallmarks of socialism, as well as assigning a type of power to the State that both Mortimer Adler and Heinrich Rommen had no qualms identifying as totalitarian.

Even the idea of "human scale" is distorted in the small is beautiful movement. Kirkpatrick Sale, for example, rants about human scale continually, yet at the same time rejects the idea of humanity as a standard: "Anthropocentrism, and its expression in both humanism and monotheism, is the ruling principle of that civilization, to which must be opposed the principle of biocentrism and the spiritual identification of the human with all living species and systems." (Kirkpatrick Sale, "Lessons from the Luddites" The Nation, June 5, 1995.)

We are also afflicted with "distributists" — keeping in mind that "distributism" is a system based on widespread ownership of ("private property in") the means of production, with a preference for small, family-owned farms and artisan workshops — who appear to have no idea of what private property consists! We once attended a lecture by a Leading Figure in the Distributist Movement in which the "LFDM" stated that Chesterton's thesis was that "man is building machines he cannot control."

This was an astounding claim for a distributist to make. "Ownership" and "control" are (as Louis Kelso pointed out and as every lawyer should be able to tell you) the same in all codes of law: "Property in every day life is the right of control." (Louis O. Kelso, "Karl Marx, the Almost Capitalist," The Journal of the American Bar Association, March, 1957.) The reasonable interpretation of the claim that man is building machines he cannot control, is that man is building machines he cannot own — a claim directly contrary to the stated principles of distributism.

The bottom line? Before any progress can be made toward a better world, we are going to have to understand the problem — and the problem is not "them." No, it's not the capitalists, the socialists, the Jooz, the neo-cons, the Republicans, the Democrats, the Pro-Lifers, the Pro-Choicers, or even Obama. It's the unquestioned assumption that we are all slaves of past savings.

People of the World Unite!
You Have Nothing to Use But Your Brains!

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Some Capital Homesteading Questions, Part III: Qualified Investment

There is a big problem with advocating widespread capital ownership today. Many people share a virtually unquestioned assumption with "the experts" who really should know better. And that is? That the secondary market for debt and equity — "the stock market" — is actually the primary market and the chief means by which capital is allocated and new capital formation financed. That is simply not the case, as we have shown many times over the years on this blog, and is demonstrated in Dr. Harold G. Moulton's book, The Formation of Capital (1935).

While erroneous, this assumption leads directly in to the second question asked by our correspondent last week: "In what would the self-liquidating credit under a Homestead Act actually be invested in, in a climate such as the current one?"

Good question.

In an economic climate such as the current one, there are few, if any, feasible capital projects suitable for Capital Homesteading. This is because consumer demand has declined in response to the increase in unemployment and distortions of the financial system by the government and the "despotic economic dictatorship." (Quadragesimo Anno, §§ 105-106) The obvious solution to the current situation, then, is — to change the economic climate by organizing and carrying out acts of social justice. This is both easier and harder than it sounds.

First, what is needed is genuine stimulus in the form of an increase in real effective demand, i.e., freeing past savings from the slavery of capital formation, if you will. This is something of a chicken-or-the-egg situation. There are ongoing discussions on this topic in CESJ, and we have not yet decided on a likely scenario, so specifics of this response will probably vary slightly depending on who answers. Some of us think it might go something like this.

Ideally, the whole Capital Homestead package would be enacted at the same time. One of the features is the tax deductibility of dividends at the corporate level. Corporations retain earnings in order to finance future capital growth. (That's not what happens, but that's what most of the experts believe happens.)

In any event, because dividends are considered a distribution of equity and not an expense, they are a charge against retained earnings, not current income. Dividends under Capital Homesteading would, however, be tax deductible at the corporate level, thereby eliminating the "double tax" on corporate profits — and give a double benefit to shareholders: one, by encouraging boards of directors to give to the shareholders what is theirs by natural right of private property, and two, by removing the penalty imposed on property incomes paid out to those who have the right to receive it. There would be no reason for the corporation to retain earnings. The owners equity portion of the balance sheet should, ideally, consist only of a listing of actual equity instruments outstanding, with zero retained earnings.

With retained earnings thereby rendered "sterile," the only rational thing for a corporation to do would be to pay out retained earnings and take the tax deduction. This would provide a stimulus to the economy in the form of dividend income that cannot be reinvested, as all new capital formation would be financed by new issues of shares purchased with non-recourse credit, bundled and rediscounted at the regional Federal Reserves through the commercial banking system. The increase in effective demand resulting from paying out retained earnings would promote real job creation in the short run, just as increased government spending did artificially in World War II, and in the mid- to long-term paying out corporate earnings would ensure that consumption and production reach equilibrium, and there is full employment not just of labor, but of all financially feasible resources.

This is because tax deductibility of dividends would, obviously, encourage full payout of corporate earnings. The owners' equity portion of the Balance Sheet would, however, continue to increase, reflecting the general increase in wealth in the economy. It would not do this by increasing the wealth of existing owners, but by expanding the ownership base of the corporation to the same degree that the corporation would formerly have concentrated ownership. By shifting corporate finance from corporate debt secured by increases in retained earnings, to Capital Homesteading equity shares collateralized with capital credit insurance and reinsurance, the base of capital ownership in the economy would grow, more people would be less dependent on labor incomes alone, and effective (and sustainable) consumer demand would increase proportionately.

So, no, as things are currently structured, there isn't much out there in the way of feasible investment for Capital Homesteading. The current system is based on the erroneous assumption that new capital formation can only be financed out of existing accumulations of savings, which limits the financing for economic growth to what has been reserved out of past consumption — the Malthusian idea of no growth. The "slavery of past savings" also means that people believe that cutting consumption by inflating the currency and raising the price level, redistributing just enough wealth through the tax system to keep things going, and piling up retained earnings instead of paying them out to owners is the only way to finance growth. Ironically, this undermines one of the most important rights of private property: the right to enjoy the fruits of ownership. As William Cobbett, the "Apostle of Distributism" explained,

Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (A History of the Protestant Reformation in England and Ireland, 1827, §456.)

Consistent with Say's Law of Markets and the real bills doctrine, however, once we are freed from the slavery of past savings, there is no artificial limit imposed on growth in the form of reliance on the fallacious "supply of loanable funds." There is as much economic growth as is necessary to supply people with their wants and needs, no more, no less.

#30#

Some Capital Homesteading Questions, Part II: Reserves and Banking

We meandered a bit yesterday in order to set the stage for answering a few questions about Capital Homesteading. Today we need to get down to business. First order of business? Take on one of the monetary conspiracy theorists' favorite whipping boys: fractional reserve banking. Our correspondent asked, "Are you in favor of 100% reserve banking, or fractional [reserve] banking?

That's easy. Short answer: We are in favor of a 100% reserve requirement.

Slightly longer answer: We favor 100% reserve banking, but not quite as Henry Simons or Irving Fisher conceived of it.

Here's why:

Fractional reserve banking ties the amount of money that a commercial bank can exchange in the form of promissory notes and demand deposits for discounted and rediscounted bills of exchange to existing accumulations of savings. This locks the financial system and economic growth into what Louis Kelso and Mortimer Adler called "the slavery of (past) savings." The amount of new capital financed becomes dependent not on the present value of financially feasible projects available in which people have private property, but on the degree to which people have managed to cut consumption in the past. As Dr. Harold Moulton pointed out in The Formation of Capital (1935), this presents an "economic dilemma": capital presumably cannot be financed until and unless consumption is reduced (26-36) . . . but, because the demand for capital goods is derived from consumer demand (47-48), new capital will not be formed if consumption is reduced. (Page references are to CESJ's new edition of Moulton's classic, which includes a new foreword by Norm.)

Dr. Moulton discovered that, from 1830 to 1930, which included periods of rapid capital expansion, in each and every case periods of capital expansion were preceded not by reductions in consumption, but by increases in consumption. That is, people were not saving, but dissaving. The funds to finance the expansion did not come out of existing accumulations of savings, but through the expansion of commercial bank credit by discounting and rediscounting bills of exchange drawn on the present value of existing and future marketable goods and services, with the new money backed by existing inventories and the capital that would be used to produce future marketable goods and services.

The establishment of the Federal Reserve in 1913 was intended to supersede the National Bank System (1863-1913) and correct the inadequacies of the National Bank currency that was backed 100% by government debt. One of the original purposes of the Federal Reserve was to retire the National Bank Notes by purchasing the government debt held by the National Banks on the open market, using Federal Reserve Bank Notes indistinguishable from regular Federal Reserve Notes.

The Federal Reserve Bank Notes would thus be backed by government debt. The Federal Reserve Bank Notes, however, would be retired over time and replaced in turn with Federal Reserve Notes. Federal Reserve Notes would be backed by private sector hard assets on which the regional Federal Reserve Banks had acquired liens by rediscounting qualified bills of exchange drawn on the present value of existing inventories of marketable goods and services and capital in industry, agriculture, and commerce. In this way the national debt that had mushroomed during the Civil War and had been congealed into public policy by Salmon P. Chase as the backing for the National Bank Notes would be retired without draining the country of liquidity (as had caused the Panic of 1873), artificially restraining financially feasible loans (as had caused the Panic of 1893), or permitting concentrated control over money and credit (as had precipitated the Panic of 1907).

The idea was that the Federal Reserve was to supply the private sector with an "elastic currency" by rediscounting qualified private sector paper representing industrial, commercial, and agricultural assets. This was to be supplemented with limited open market operations to purchase and sell private sector bills of exchange issued by non-member individuals and banks. The Federal Reserve was not given the authority to deal in primary government securities, and was only permitted to deal in secondary government securities in order to retire the debt-backed National Bank Notes.

The Federal Reserve itself was viewed as a supplement to and a safeguard for the existing supply of loanable funds, and was only to operate when the existing supply of loanable funds was deemed inadequate for private sector investment, and was then to provide short term (up to 90 days) liquidity in the form of additional reserves by rediscounting bills of exchange and engaging in open market operations. The commercial banking system was left intact, with the fractional reserve requirement left in place. The only effective change was supposed to be the replacement of debt-backed reserves in the form of government securities, with asset-backed reserves in the form of rediscounted private sector bills of exchange.

During the Great Depression (actually the Second Great Depression; there was an earlier one, 1893-1898) Henry Simons of the University of Chicago, one of the founders of the Monetarist/Chicago School of Economics, advocated abolishing all banks of issue, including the Federal Reserve, and transforming them into banks of deposit. This meant that only gold and government securities would be recognized as reserves, and the money supply would be backed 100% by government debt. Private sector bills of exchange would not be recognized as "money," although bills of exchange were the first form of money and had been so recognized for more than 7,000 years.

The only possible way to expand the money supply under the restrictions of the "Chicago Plan" would be for the government to issue more securities, and tax away any excess when there was too much. These are the basic principles of "chartalism," a socialist system worked out by Georg Friedrich Knapp and explained in his 1924 book, The State Theory of Money. Keynes was a supporter of chartalism, as are the modern "post-Keynesians." (Vide John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt Brace, 1930, 4.)

Irving Fisher and Father Charles Coughlin supported Simons's Chicago Plan. Fisher especially urged its immediate adoption in order to "reflate" the currency and raise prices. The rise in prices would force consumers to pay more for less, thereby shifting purchasing power from consumers to producers in order to generate the presumably necessary past savings for new capital formation, bringing the country out of the Depression. Simons, however, could not in conscience allow the government that much power — he was anti-monopoly and pro competition. He refused to endorse his own plan because he could not come up with any viable means to prevent the State from taking over the money power and exercising a despotic control over the means of acquiring and possessing private property . . . which, as Moulton pointed out in 1938, happened anyway with the effective federal government takeover of the Federal Reserve under the New Deal. (Harold G. Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 417.)

Kelso and Adler combined Moulton's insights into the real nature of money and credit with Simons's ideas about 100% reserve banking, and advocated central bank rediscounting not just as a supplement to the existing supply of loanable funds, but as a replacement, thereby restoring the functioning of Say's Law of Markets. This is analogous to Kelso and Adler's breakthrough in advocating the replacement of traditional collateral in the form of retained earnings, with capital credit insurance and reinsurance. Both the Kelsonian 100% reserve requirement and the proposal for capital credit insurance and reinsurance effect an emancipation from the "slavery of past savings," thereby breaking the power of the "despotic economic dictatorship" (Quadragesimo Anno, §§ 105-106) by basing economic growth not on existing accumulations of savings — by definition a monopoly of the currently wealthy and those who control money and credit — but on the inherent feasibility of the proposed new capital itself, and opening up access to capital credit backed by the present value of the feasible new capital to everyone.

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Some Capital Homesteading Questions, Part I: Following Instructions

Back in 1981 — you know, the Stone Age — Stephen J. Cannell premiered a rather . . . we'll call it "odd" television show, The Greatest American Hero. Briefly (which describes the suit that star William Katt had to run around in), some aliens concerned with saving the Earth give a suit that looks like a pair of red long johns with a Phi Beta Kappa key on the front to high school teacher Ralph Hinkley (unaccountably changed to "Hanley" in Episode 5, although Mr. Cannell continued to refer to him as "Hinkley") and FBI agent Bill Maxwell, played by Robert Culp. Both are eventually assisted by Ralph's girlfriend, Pam Davidson, played by Connie Sellecca.

That kind of star-power sounds like overkill for a show with a silly premise, but the actors did not put themselves above the material (fatal to good comedy), and played it straight. Ms. Sellecca in particular pulled off the almost impossible feat of playing a beautiful and intelligent attorney who was not a) a shark, b) a man-hater, or c) incompetent ditz. Culp's character Maxwell was a slightly off-center FBI agent with a deep and abiding love of the United States and a slight tendency to see commies under every bed — and, unfortunately for Katz's character's sanity, usually turned out to be right. Maxwell also had the unfortunate habit of expecting Pam to get him coffee and a Danish, which Ms. Sellecca's character fielded with just the right amount of tolerant resentment.

The show's gimmick was not the super suit dumped on Ralph Hinckley. As a comedy, that would have turned the show into another Earthworm Jim. (Okay, heck with it. I tried to find the opening sequence to EJ, but all I found was Pinky and the Brain — you were expecting Captain Simian and the Space Monkeys?) Nor was it — precisely — the story of all the problems that an average guy has on suddenly becoming a superhero. That would just have made The Greatest American Hero into a rehash of Captain Nice (and yes — "Carter Nash" was played by William Daniels, a.k.a. the voice of Knightrider and co-star of Boy Meets World, 1776, etc., etc. . . . even actors have to eat) or Mister Terrific . . . and probably as short-lived.

No, the hook (and the reason for mentioning the show on this blog) was that Ralph Hinckley had been given access to almost unlimited power to help solve the world's problems . . . and he had lost the instruction book. Poor Ralph, with all the goodwill in the world, had to learn of the suit's capabilities by trial and error — mostly error. Every episode involved several crash landings (fortunately, due to the suit's protective capability, more embarrassing than injurious for Ralph), the usual double-takes by "normal" people, and a plethora of misunderstandings.

Ralph, however, always managed to make things come out right. This is in sharp contrast to the way the immense power of the world's commercial and central banking systems are used. It's even worse than that. The financial powers-that-be can't claim to have lost the instruction book — nor are there aliens in the background to bail us out (the Stargate program has been shut down). The principles of commercial and central banking have been known for millennia. No, it's not that they don't know the instructions. They simply reject them and refuse to follow them — and then become completely baffled when the system doesn't do what they want it or expect it to do. There's a basic difference in philosophy that seems to prevent them from seeing the truth.

This difference in approach means that there are some questions that pop up every now and then — questions that are based on the unquestioned assumptions that drive the misuse of the system. That's why, when we got an e-mail last week asking some questions, we decided to make our answers a short blog series to cover us for the week. So, for the rest of this week, we'll be answering the following questions:

1. Are you in favor of 100% reserve banking, or fractional banking?

2. In what would the self-liquidating credit under a Homestead Act actually be invested in, in a climate such as the current one?

3. Were you aware there's an actual present-day movement to have a real estate Homestead Act (I believe involving government held land for self-sustainable agriculture)?

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News from the Network, Vol. 4, No. 1

This is the first News from the Network for the New Year, so it is appropriate that recent events have signaled a potential "new beginning" for efforts to introduce the Just Third Way and bring it to the attention of policymakers and politicians. Nowhere is this more evident than in the advances that have been made in Harris Neck, Georgia.

Now, we aren't doing work in Harris Neck. Maybe we'll never do work in Harris Neck. That, however, is not the point. Which is? That people who are the prime movers and shakers in Harris Neck came upon the Just Third Way, as far as we can tell, completely by chance. Welche wonne, they immediately expressed openness to the basic principles of the Just Third Way and the proposals based on those principles.

If you're a reader of The New York Times or a viewer of 60 Minutes, you're already familiar with the Harris Neck situation. Since we've provided links here, we'll only give a brief outline from our perspective. You can follow the links to the Times and 60 Minutes, as well as the Harris Neck Land Trust website if you want more details — and, if you're a typical reader of this blog, you will. If you're then inspired to volunteer for the effort . . . well, hold your horses. We have to see what develops before we start soliciting help, either for them or for CESJ. In the meantime, a statement of support would no doubt be more than welcome — especially if you have any connections to The Rich 'n Powerful and want to be a door opener.

Most of us here at JTW Global HQ had never paid any attention to Harris Neck. For the most part we've focused our efforts on East St. Louis that, as most viewers of The Simpsons know, is a city in need of some substantial work to return it to its former livability. We worked with Wyvetter Younge, the Illinois State Representative for the area, for many years in her efforts to bring R. Buckminster Fuller and Louis Kelso's vision of What-Could-Be to fruition. Due to various factors, however, the project has been on a back burner for some time now.

Not too long before Christmas 2010, however, we got a nice surprise gift in the form of a call from Dave Kelly, one of the prime prime movers working to get Harris Neck back to its rightful owners. Dave filled Norman Kurland in on the Harris Neck situation, and Norm filled Dave in on the potential of the Just Third Way as a possible means to structure the project and secure development financing in a way that not only doesn't put it on the backs of the taxpayers, but vests direct ownership of any development in the people.

We scheduled a meeting during one of Dave's trips to Washington to discuss how Just Third Way principles, especially financing and direct citizen ownership, might be applied to the Harris Neck situation, and to strategize on how to get to "door openers" and others within less than six degrees of Kevin Bacon. When the meeting was almost over, we found out that Dave, like this writer, is a "Domer," the Not-So-Secret-Code-Word for graduates of Notre Dame. By merest coincidence, the tie I had selected to wear (i.e., that was on top of the heap of clothes that I hadn't put away for a week) was what "We Domers" call a "Bookstore Special," meaning the sort of kitsch that gets sold by the truckload on "Football Saturdays" at the Notre Dame Hammes Bookstore to alumni & friends who show up to see some real football, as opposed to pro ball in which you watch twenty-two millionaires beat each others' brains out after preempting your favorite show.

We exchanged Secret Handshakes, etc., and dropped a few names ("Holy Cross!" "St. Ed's!"), leaving Norm and Dawn Brohawn completely in the dark. We then politely included these Children of Lesser Universities (U of Conn/Chicago & Georgetown, respectively) in the rest of the conversation — which concerned tactics on (what else?) how to bring the the Harris Neck initiative to the attention of the media and prime movers.

This, obviously, is an Auspicious Beginning to the New Year, which (thanks to "Great Depression III: This Time It's Personal") bodes well to be open to the effort to pass a Capital Homestead Act by 2012, the Sesquicentennial of Abraham Lincoln's 1862 land-based program. It is not, however, the only thing, as this week's news items make clear:

• Naturally, right after we wrote the above effusion on Harris Neck, we got a telephone call from Pollant Mpofu in London. (Pollant did not attend Notre Dame.) As we've reported previously, Pollant, who is an official in the Labor (or "Labour") Party in London, has been working very hard at making connections with the goal of introducing VIPs in the UK and Éire to the principles of the Just Third Way. He has reached out to the Prime Minister, the Taoiseach, Members of Parliament, Members of the Daíl, the Anglican Archbishop of Canterbury, the Catholic Archbishop of Westminster, and, seemingly, all the clippers and ships at sea. Pollant's news was that a series of letters to the Hon. Grant Shapps, MP and Minister of State for Housing and Planning, and one of David Cameron's most valued and strong supporters of the Prime Minister's "Big Society" initiative, have resulted in an invitation to meet with Mr. Shapps. (It doesn't hurt any that Mr. Shapps is also noted for being "squeaky clean," having come out of the investigation of the recent parliamentary expense scandal with flying colors . . . I mean, colours.)

• Dave Kelly, Domer Extraordinaire and prime mover for the Harris Neck initiative, is working to get Norm a meeting with some highly placed other prime movers who might be able to open up the door to Mr. Obama. We haven't heard yet, but, frankly, people are busy, and it takes time to arrange things. For example, we knew that Pollant's persistence (above) would pay off, but we didn't expect anything this soon.

• As readers of this blog are aware, it's not just the financial system and academia that are messed up. The surrounding culture has been taking a beating ever since widespread ownership disappeared, the wage system became "the" way to run the world, and, in consequence, "bodily labor, which Divine Providence decreed to be performed, even after original sin, for the good at once of man's body and soul, is being everywhere changed into an instrument of perversion; for dead matter comes forth from the factory ennobled, while men there are corrupted and degraded." (Quadragesimo Anno, § 135) Nowhere is this more evident than in the popular media. In light of that, a bunch of us got together some years ago and started an effort to bring "long lost" fiction that embodies universal moral values back into print. Our first effort was famed Notre Dame (them again!) football coach Knute Rockne's only novel, a "Young Adult" epic entitled The Four Winners from 1925, and featured in one of the late Dr. Ralph McInerny's mysteries set at Notre Dame. (We even got the endorsement of Dr. Charles Rice, Dr. Sam Nigro, and some guy named Knute Rockne III.) We followed up with the fiction of Monsignor Robert Hugh Benson . . . who lectured at Notre Dame. (What is going on here? Is this Notre Dame place supposed to be important for some reason?) We started with Father Benson's better known works, such as his science fiction satire Lord of the World (1907), but this past week (finally) got all of his lesser-known-but-in-many-ways-much-better "mainstream" novels, written between 1910 and 1914, to the printer. One or two of these have not been widely available for nearly a century, which is a real pity, for they probably qualify as classics of satiric literature — Evelyn Waugh loved them. Anyway, we expect them to be listed on Amazon, possibly even Barnes and Noble by next week, at which point we'll tell you how to get them, as well as CESJ's own publications. Don't bother to get those put out by other publishers, as we've added forewords and footnotes to fit the novels into the general ethical framework of the Just Third Way so, while other editions are perfectly okay, they don't do anything for us.

• Final arrangements have been made to meet next week with Mr. Robert Colangelo, Executive Director of the National Brownfield Association in Chicago, and one of his associates from Detroit, Mr. John Dondanville . . . who went to Notre Dame . . . . Among other things, we'll be discussing ways to finance the "right sizing" of cities in the U.S. and Canada, the topic on which Norm spoke at the Canada-U.S. Brownfield Summit held in Buffalo, New York, this past October.

• As of this morning, we have had visitors from 46 different countries and 45 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, Brazil, the UK, and India. People in Croatia, Venezuela, Poland, Canada, and the United States spent the most average time on the blog. Yet again, and still possibly due to the growing perception that something is wrong with the basic assumptions of Keynesian economics (as well as other schools of economics based on the Currency School of finance), the most popular posting by far is one from a while back, "Thomas Hobbes on Private Property," that briefly explains the similarities in the way Keynes and Hobbes abolish private property. This is followed by "Aristotle on Private Property," "Games People Play," "The Problem With Distributism," and "Why Government Debt is Really Bad."

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.

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Pure Credit Redux, Redux: Reply to Dr. Bob

Or should that be "Pure Credit Redux Squared"? We announced this response yesterday as a lynch mob for Dr. Crane, but nobody remembered to bring a rope. We'll just have to be satisfied with words, not deeds — verbi non facti, to throw a little of our own knowledge of other languages around a bit. (Of course, that pretty much exhausts our knowledge of ye language of ye Caesars, but we won't tell if you don't.)

Anyway, in response to Dr. Bob's extremely thorough response to our posting on pure credit for student loans, I think we'll stand pat. Basically, from the perspective of accounting theory on which Binary Economics is, in part, based (specifically the "matching principle"), if you cannot tie a stream of income directly to the activity being financed or the expenditure of resources, then activity financed or the expenditure of resources is not an investment, and any charge made by the lender in excess of the amount borrowed or expended is not a profit. Usury — riba — consists of taking a profit where no profit is due, and is therefore contrary to justice — vide Vix Pervenit ("On Usury and Other Dishonest Profit"), 1745. To use pure credit to finance projects or anything that does not pay for itself within a reasonable period of time is therefore contrary to the principles of Binary Economics, whatever Louis Kelso or anyone else may have said.

We would, therefore, support interest-free pure credit loans to be used to finance infrastructural projects (including school buildings and government facilities rented to educational providers and public sector agencies), through commercial bank loans to for-profit Citizens Land Banks. In other words, such projects would be profit-making enterprises leased out, with the citizen-owners sharing in any profits over and above legitimate expenses. The stream of income would be "matched" directly to the project itself.

We would not, however, support the use of interest-free pure credit for education. Rather, we would fund human consumption of citizens' educational needs first by making it possible for people to provide for their own needs by their own efforts, whether by sale of their labor, or income from directly owned capital. Should that prove inadequate, educational needs could be met through vouchers funded by private charity, interest-free non-usurious loans from the rich out of their existing accumulations of savings, or by taxpayer grants financed out of current tax revenues.

Such an arrangement would maximize the opportunity of the young and their families to accumulate Capital Homestead stakes as rapidly as possible, and eventually enable the students to pay for their own educational costs from Capital Homesteading dividend incomes.

To use pure credit to pay for the consumption of educational services would only increase the cost of providing for the salary and retirement incomes of educators. If we stick to confining pure credit for financing highly feasible non-human productive assets, society will reverse the exponential trends of higher educational costs.

In contrast, in an ideal universally prosperous world would, as in Socrates' day (we'll ignore the 99% of the people who were chattel slaves for the sake of the argument), educators as well as students would have all or most of their subsistence needs produced by non-human energy slaves or robots. This would enable educators — now wage slaves — to teach for the love of teaching, with their services provided as cost-free, beyond-economic-toil, leisure work.

That was the vision of Louis Kelso and Mortimer Adler. Expedients should be — actually must be — funded in ways that preserve the integrity of the logic of Kelso's theory of Binary Economics, as we suggested above. To compromise on the consumption of education would open the door to demands for access to pure credit for food, health services, and rents, all of which are critically important, much more so than formal education, for a person's physical wellbeing and development. Using pure credit as the first recourse in such matters adds a confusion factor into the money creation system that will lead inevitably to runaway inflation, chaos, and increasing intervention and power of the State at the expense of human freedom. In sum, we can support (1) and (3) of Dr. Bob's analysis, but offer a more practical and principled way to address concerns the issues raised in (2).

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Pure Credit Redux

One of the best things about belonging to an internet group that puts together journalists and (other) writers with (more or less) expert sources is that when you respond to a query from a reporter, you can frequently adapt it as a blog posting as well. That is what we were able to do yesterday with our posting on "Pure Credit for Student Loans."

It's even better when somebody responds at great length to the posting. This has two benefits. One, it demonstrates that somebody is actually reading the posting instead of merely sneaking a quick look to be able to claim familiarity with the most erudite and scholarly blog on the internet. Two, it saves us the trouble of actually having to write anything.

Thus, when early this morning we opened our e-mail and found the following response from Dr. Robert Crane, we rejoiced exceedingly. Dr. Crane raises some points to which, if we handle this right, our response can serve as tomorrow's posting. That will bring us up to Friday and our initial News from the Network for the year . . . and, voilá — our blog is written for the week!

So — here is Dr. Crane's e-mail, edited a couple of places to correct spelling 'n stuff (evidently, some servers still don't have spell check, and some people are too busy with real work to upgrade).

Dr. Bob's E-Mail
(We're Not Indenting as a Quote Because That Messes Up the Home Page)

In reference to yesterday's posting on "Pure Credit for Student Loans," the conflict between "bad" pure credit and "good" pure credit, which has erupted into a worldwide war, could, I believe, be solved by adding a third category of credit in between. I don't know what good English words would be for the three categories, but there are a number of choices in Arabic, which is a much richer language for nuances.

"Pure credit" is money loaned (or invested) based on expansion of credit without reference to existing accumulations of savings (retained earnings). As the lawyer-economist Henry Dunning Macleod pointed out, "money" and "credit" are simply two different aspects of the same thing.

Here are the three kinds with Arabic names:

1) Riba or usury. This kind of credit "is a charge of any amount on a loan of money for something that does not, in and itself, generate a profit", regardless whether or not interest as a fixed charge is involved. This kind of credit, whether for consumption or for investment in money (as in derivatives) rather than in real goods is bad (for all kinds of reasons), because money is merely a medium of exchange and a store of value — a contract — and really has no value in itself. Investing in debt by my definition is inherently a ponzi scheme. Some Islamic banks do it all the time by the back door of legal fictions, about which I wrote a 120-page book in 1982.

2) Minha al Kabira, the Great Minha. This is a loan or investment in either tangibles or intangibles that generate a profit but only over the long term and which cannot easily be calculated. Since this is new thinking, I have invented my own Arabic terms for the second and third kinds of credit. Manaha means both to grant as a favor and to invest for long-range return. This is not zakah or charity without any expected return at all.

An example of minha al kabira or minha al kamila (perfect minha) is money created for infrastructure projects or for education. It might even be eligible for housing, but only under special arrangements, because otherwise it would fit under consumption, for which in principle credit should never be given. It is interesting that the Japanese had no consumer credit cards until a couple of years before their economy crashed. Until then all Japanese insisted on debit cards, because they thought that consumer credit cards were inherently a fraud.

3) Tamar al Kabir. This is investment according to the real bills doctrine, which provides that the return on investment in real goods, i.e., productive capital, can be reasonably calculated in a profit and loss statement. Tamar is profit. The fourth form of the verb, tamara, means to bear fruit, and the tenth form, istamara, is the active form meaning to invest profitably.

The two latter categories could be called, respectively, minha al saghira, the lesser minha, and minha al akbar, the greatest minha. I would prefer, however, to restrict the term "greatest" to zakah, which stands for compulsory charity (not secular taxation) and for sadaqah, which means voluntary charity for the neediest in society (the miskin). The term zakah comes from the verb zakah, which as a religious term has many nuanced meanings, especially to increase or grow, to be suitable, and to be pure and just. By expanded meaning both minha al kabira and tamar al kabir are zakah. The growth in the pure zakah refers primarily to spiritual return, based on the concept that whatever one gives away in charity will return many fold in spiritual benefits, as well as perhaps materially.

Is it necessary to argue as purists about whether pure credit must be restricted to the third category or can also include the second category of long-range return on investment? There are good arguments both pro and con about both categories, but it would be better to address the pros and cons as policy issues rather than as dogmas. The application of all ideas must be contextual to fit time and place. In ideal times Category 3 would be the best choice, but in other times the better policy might include both.

Combining both flexibly is part of the term I invented decades ago for the binary output/input model of binary economics, namely, harmony, based on mizan or balance, which is central to the dialectics of the entire universe and to everything Islamic.

And for this unorthodox thinking, known in the Wahhabbi religion as bida', I may be strung up by all sides.

Justice through faith and rational thought,

Bob

* * * * *

We will assemble our lynch mob and prepare a response that will be posted tomorrow.

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Pure Credit for Student Loans

If you go to the "Binary Economics" entry in the Wikipedia, you'll find some statements regarding the use of "pure credit" — that is, credit extended without first cutting consumption and accumulating money savings — for student loans, State-owned infrastructure, e.g., roads, bridges, sewers, and so on. This is presented as fully consistent with the theory of Binary Economics. The justification is that Louis Kelso and other authorities sanctioned the use of pure credit for such purposes, and it is therefore sound theory. We disagree for two reasons. One is a matter of form, the other of substance.

Form

First, as a matter of form, using the "appeal to authority" is a bad way to argue. The issue is whether the use of pure credit is consistent with the principles of Binary Economics, not whether Louis Kelso or anyone else claimed it is consistent or advocated it as an expedient. That is, do you present your case based on faith in the infallibility of the dicta of Louis Kelso or anyone else, or do you present your case based on a clear set of principles and a sound argument? As G. K. Chesterton quoted St. Thomas Aquinas when faced with a similar situation,

Behold our refutation of the error. It is not based on documents of faith, but on the reasons and statements of the philosophers themselves. If then anyone there be who, boastfully taking pride in his supposed wisdom, wishes to challenge what we have written, let him not do it in some corner nor before children who are powerless to decide on such difficult matters. Let him reply openly if he dare. He shall find me there confronting him, and not only my negligible self, but many another whose study is truth. We shall do battle with his errors or bring a cure to his ignorance. (St. Thomas Aquinas, quoted by G. K. Chesterton in The Dumb Ox (1933).)

As Chesterton went on to explain,

It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought always to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours. (Ibid., 95.)

Thus, it is not what Louis Kelso said about anything that makes it true or consistent with Binary Economics, but whether what Kelso said is consistent with the principles he himself laid out. Anyone can change his or her mind, or be provoked into an unthinking utterance ("What sluggish knaves are these of my kingdom! Is there not one that will rid me of this troublesome priest?"). While someone is, of course, responsible for what he or she says, that does not make it true or consistent with his or her previous position or stated principles. If the previous position is consistent with accepted principles, and the change of mind or heart is inconsistent with those same principles, reason dictates that we should go with whatever is consistent with the accepted principles, not accept an inconsistent development or give in to intellectual bullying.

Substance

The matter of substance relates to the basic principles of Binary Economics, e.g., whether it is consistent with the principles of Binary Economics to use pure credit financing for education. What follows, obviously, is "pure theory" and does not match current practices of the global financial system, which, frankly, is based on some very distorted notions of money, credit, banking, and finance.

There are two basic types of banks, "banks of deposit" and "banks of issue" (also once known as "banks of circulation"). A bank of deposit is legally defined as a financial institution that takes deposits and makes loans. A bank of issue is legally defined as a financial institution that takes deposits, makes loans, and issues promissory notes.

The most common types of banks of deposit today are credit unions, savings and loans, and investment banks. The most common type of bank of issue is the commercial or mercantile bank. A central bank is a special type of commercial bank, ideally restricted to serving (other) commercial banks as its customer base.

The chief business of the bank of deposit is to aggregate savings (either in the form of capitalization or deposits), and make loans. The chief business of a bank of issue is to discount and rediscount bills of exchange, that is, "purchase" bills of exchange by creating a promissory note, either directly in the form of small denomination banknotes, or in a large denomination to back a newly created demand deposit (checking accounts — "mini" bills of exchange).

To oversimplify, a bank of issue "buys" money in the form of privately issued bills of exchange. The bank then "retails" the money in the form of banknotes and demand deposits. It thereby breaks the "wholesale" bills of exchange, typically denominated in units of $100,000 or more, into smaller packages that can be used in daily transactions.

Massive confusion results from the fact that most commercial banks today also deal in deposit banking. Even more confusion results from the fact that the understanding of "bank" in the three mainstream schools of economics (Keynesian, Monetarist/Chicago, and Austrian) is limited to the bank of deposit. Binary Economics, however, recognizes the bank of issue.  In consequence, public policy does not, as a rule, recognize the bank of issue, nor use the commercial banking system or the central bank properly.

Application

A student, or anyone else (such as a consumer as a consumer, or the State) who is not investing money in a productive and financially feasible project (i.e., an investment that generates income sufficient to repay the cost of the project and thereafter provides the owner with income) should use a bank of deposit. The capitalization and deposits of a bank of deposit, such as a credit union, all come out of existing accumulations of savings, that is, from having cut consumption in the past. Since, as Adam Smith pointed out in the opening passages of The Wealth of Nations (1776), the purpose of production is consumption, any loan for consumption should come out of existing accumulations of savings. Credit unions usually do this on favorable terms for their members, since they are "cooperative banks," presumably functioning in the best interests of their depositors, not outside shareholders.

Only borrowers who are obtaining financing for capital projects that will pay for themselves within a reasonable period of time should borrow from commercial banks. They are not really borrowing in any event, but availing themselves of the special function of a bank of issue to convert one form of money (a privately issued bill of exchange) into a more widely acceptable form of money (currency or demand deposit), a service for which the commercial bank properly charges a fee, the "discount," as well as a risk premium.

In essence, the commercial bank is permitting the borrower to use the bank's good name and assuming the risk that the bill of exchange will not be paid at maturity, thereby protecting holders in due course of the bank's promissory notes. This process is described in The Formation of Capital by Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, as an alternative to the Keynesian New Deal.

As for credit cards connected with credit unions — it tends to go against the "philosophy" of deposit banking, which is to lend out only what has been deposited or used to capitalize the institution. A debit card would be consistent, but a credit card allows money creation through credit expansion without the necessity of first accumulating money savings. When this is done for consumption, it throws the system out of whack. Under the name of "usury" it has been forbidden by the three great monotheistic religions (Judaism, Christianity, and Islam), and most pagan religions and philosophies. (The fact that the prohibition against usury has been consistently violated for millennia no more invalidates it than the fact that murders occur invalidates "Thou shalt not kill.")

This is because a bill of exchange — the means whereby a private person or business enterprise creates money — is valued at the present value of existing or future marketable goods and services that the drawer of the bill of exchange either owns at the time of issue, or expects to produce within a reasonable period of time (traditionally 90 days, the most common term for commercial paper in the old days). Creating money in this way ties the new money to actual hard assets, whether the existing inventories, or the capital to be used to produce the future marketable goods or services.

Creating money for consumption goes contrary to this approach, and is backed by the borrower's presumed ability to pay out of other assets not directly related to what the money was created to finance. Borrowing for food, clothing, shelter, education, or charitable contributions creates a liability without balancing it with and matching it to the present value of an existing or future asset. This violates basic accounting principles and sound financial practice.

As for checking accounts and credit unions — as long as the demand deposit (checking account) is backed by 100% reserves of cash deposited in the credit union, and not a promissory note that it would be illegal for the credit union to issue in any event, there should be no problem.

For Binary Economics the bottom line is, whether we're talking about student loans, consumer credit, government expenditures, or stock market speculation, using pure credit for anything other than properly vetted, financially feasible capital investment, we either should not be using credit at all, or borrowing out of existing accumulations of savings. There may be circumstances that warrant the use of pure credit for non-productive expenditures, but these must be recognized only as expedients in an emergency, and not the application of a principle of Binary Economics.

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It Ain't Rocket Surgery, Part I: The Economic Dilemma

We suppose it's starting the year off right. Daniel Kurland over at "Poetic License" waxed, uh, poetic over the mounting problem of mountainous debt that is afflicting consumers and, increasingly, our perpetually purblind politicians. The fact is, the problem is not going away by ignoring it, although the economists predicting a "great 2011" don't seem to realize that simple fact. (If we understood the headline, employment will surge while unemployment stays the same. If you can figure that out, you, too, can be a highly paid economist in a growing and competitive field.)

Evidently, it's time for a reality check — and what better time than the New Year? Academic economists might want to take a second look at their assumptions, most particularly the idea that new capital formation can only be financed out of existing accumulations of savings. (Not so, as any reader of this blog should be able to tell you.)

With respect to consumer debt, the reliance on past savings has one very powerful, and extremely damaging effect. As Harold Moulton pointed out in The Formation of Capital (1935), the presumed Keynesian "economic dilemma" (which he proved does not, in fact, exist) consists of the paradox that new capital will not be financed until and unless consumer demand justifies it. (Well . . . consumer demand or delusional government and academic predictions of huge increases in consumer demand coming from who-knows-where.) Unfortunately, consumer demand will not exist at a level sufficient to justify new capital formation due to the fact that income was diverted from consumption to finance the new capital . . . thereby making it less likely that the new capital will pay for itself!

The Keynesian solution is 1) have the government print money and spend it to stimulate effective demand, thereby redistributing wealth through inflation and creating "forced savings" to finance new capital at the same time, 2) tax "excess" wealth (i.e., wealth not essential to finance new capital) and redistribute it through the tax system, and 3) encourage consumer borrowing to stimulate demand, thereby creating jobs that will generate the wage income to repay the consumer debt.

Unfortunately, while Moulton agreed that employment was a critical factor in a recovery, it was equally critical that the new jobs not be created in response to anything other than a real increase in demand for new production — the other critical factor in a recovery. Creating jobs by inflating the currency, redistributing existing wealth, or direct subsidy ignores the necessity of producing marketable goods and services.

It also doesn't work. Consumers are currently borrowed up to the hilt. Companies are producing — at least some of them are — but the average consumer still isn't buying. The much-touted "recovery" is an illusion, one that will come home to roost as soon as the credit card bills from Christmas start arriving in the mail.

We should probably explore this at greater length, but the weeping and gnashing of teeth from all the debtors is too distracting.

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