In the backwash of the New Deal and the recovery from the Great Depression of the 1930s fostered by the Second World War, Keynesian economic theories were considered validated. One of the chief tenets of Keynesian theory promoted by Adolph Berle and Alvin Hansen was the conviction that government control of the economy through public indebtedness could be extended without limit with no danger to the economy, financial stability, or political security. Ironically, this was in the face of Keynes's own stated conviction that, given the full employment brought about by the need to supply the Allies with war material, the war should not be financed with increased debt, but with increased taxation.
In The New Philosophy of Public Debt (1943), Harold Moulton, too, disagreed with the belief that public debt could be expanded forever for any reason without any danger either to financial stability or political security. He didn't have to look into the future to see today's news reports about the latest episode in the PIIGS crisis to know what was wrong. Promises must be kept, regardless who makes them, or society falls apart. As Charles Morrison noted in 1854 in his Essay on the Relations Between Labour and Capital, nowhere is this more true than with respect to financial matters in an advanced economy.
Does this mean that the State should never, never, ever get into debt? No, that's not what Moulton was saying. The modern idea that if you don't agree completely with someone in precisely the right words you are necessarily completely opposed should be deposited in the same waste receptacle as the stunningly unscientific "modern science" that people cite to justify their own opinions. Because we say that private property in capital in an advanced economy is more critical in securing a just income than wages, are we claiming that wages should be abolished? No, of course not. Only a complete ass — or the very model of a modern major positivist who, like Humpty Dumpty in Through the Looking Glass, changes words to suit himself — would make that claim.
Before demolishing the idea that the State can increase its debt forever without any adverse consequences, Moulton made what the modern scientific Keynesian would claim are some damaging admissions, invalidating his entire hypothesis. First, must the budget always be in balance?
The first principle of taxation is that taxation must be "efficient." That is, the State should collect enough in taxes to run the country without borrowing. The corollary in finance is that the budget should be in balance. Does this mean that current tax revenues must always cover current expenditures? No. Emergencies happen. Prohibiting the State from borrowing to meet tax shortfalls or to deal with a national emergency is obviously suicidal. As long as the budget is usually in balance, and the State borrows out of existing savings no more than it reasonably expects to be able to cover out of future increased tax revenues, there should be no problem.
There is a very big problem, however, if, instead of limiting itself to current tax revenues and short term borrowing out of existing pools of savings, the State emits bills of credit — creates money — backed only by its own "faith and credit." Since the "amount" of faith and credit is limited only by an intangible — what people can be persuaded to accept — the sky is the limit for how much the politicians can create and spend. It only comes crashing down when (as is increasingly the case throughout the world today) a government makes far more promises than it can keep, and people start to catch on.
This is why, for example, the federal government in the United States under the enumerated powers of the Constitution is empowered to borrow money, but not emit bills of credit. The federal government has only been able to emit massive amounts of bills of credit by using financial sleight-of-hand.
For example, under Keynesian economics bills of credit are not considered money, and thus the debt they create is not real debt. The power that the Federal Reserve has to buy and sell bills of credit on the open market was intended to retire the government debt backing the National Bank Notes of 1863-1913. Private sector hard assets would replace government debt as the backing of the currency. Open market operations were intended to eliminate, not expand the debt, but the power has been used to expand government debt beyond all reasonable bounds.
So, no, the budget doesn't always have to be in balance — but that is not the same as saying it must, therefore, be permanently out of balance.
The second "damaging" admission Moulton made was to agree that it was not absolutely essential that the public debt be paid off, that it is possible to have a sound economy without the government being completely out of debt. He noted that a number of times in the 19th century the debt could have been repaid, but it was thought necessary to have some debt outstanding to back the National Bank Notes (and the Treasury Notes of 1890) so that there would be an adequate currency, guaranteed by the government.
This is not, however, the same as saying we should have debt outstanding when it is possible to pay it off. Moulton made it clear in other writings that he considered an inelastic currency backed by government debt after the model of the British Bank Charter Act of 1844 to be unwise and fundamentally unsound. An inelastic, debt-backed currency is also grossly inadequate for a modern industrial, commercial and agricultural economy, as the events of 1873, 1893 and 1907 demonstrated. The problems of 1929, the 1970s, the 1980s and 2008 were caused in large measure by an elastic debt-backed currency. Obviously, although both are important, the critical problem is government debt backing, not currency elasticity.
If managed properly, Moulton said, it is possible to have a certain amount of government debt outstanding. Moulton also noted, however, that with modern methods of finance and commercial and central banking, what is the point? Our position is that by allowing a permanent outstanding debt, you are handing power over the economy to the politicians, who can be trusted to do what will get them reelected, not what is necessarily best for the country — and that means increasing spending to benefit their constituents.
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THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.
Wednesday, May 16, 2012
Tuesday, May 15, 2012
The Global Debt Crisis, VII: Permanent Deficit Financing
If Keynesian economic analysis is correct, the size of the outstanding debt is nothing to worry about. Government debt is an asset. By emitting bills of credit backed by its own "faith and credit," the government increases wealth. For example, when people pay cash money into the Social Security Trust Fund, the Trustees prudently turn right around and purchase government bonds instead of holding on to sterile cash or throwing it away by buying worthless private sector securities with nothing behind them but the present value of existing and future marketable goods and services.
By this reckoning Social Security is fully funded for a decade or so. Even if the Trust Fund runs out of money, the government can bail it out, which it can do by creating more wealth, i.e., issuing more bonds to deposit into the Trust Fund, which can then be redeemed for cash by selling them on the open market to the Federal Reserve.
Obviously, there is something wrong with the Keynesian analysis. If government securities backed only by the faith and credit of the issuer are real wealth, every nation on earth would be richer than Croesus. Pick up the newspaper or watch the news, however, and most of the space and time is taken up with the fact that many governments have issued so many securities that there's no way they can conceivably make good on the promises they've made, at least within the current framework.
A large part of the problem is due to bad ideas about money and credit — and debt. Under Keynesian assumptions, all that's happening when a government emits bills of credit instead of borrowing money out of existing savings is that existing wealth (on which the State has a general claim through its ability to tax) is divided into smaller and smaller pieces.
With more money around, however, the price level starts to rise — inflation, or more units of currency "chasing" the same amount of goods and services. Since wages in general are reactive and rise more slowly than the price level, people who subsist on wage income alone are forced to reduce consumption. Only the fact that new jobs are created in aggregate in response to the transfers of purchasing power caused by unilateral government redistribution through inflation keeps up consumption — and then only so long as private companies use their profits to hire more workers, the government subsidizes hiring or hires people directly, or consumers can go into debt to purchase consumption goods and services.
This is because — according to Keynes — the only way to save is to reduce consumption and accumulate cash. This is, in fact, how Keynes defines savings: reductions in consumption. By inflating the currency and raising the price level, consumption is reduced below what it would otherwise be, but those reducing consumption do not receive the benefit of the "savings." Instead, there is a transfer of purchasing power to producers, who benefit at the expense of the wage workers. These "forced savings" are invested in new capital formation, creating jobs. Keynesian monetary theory is designed to benefit the wealthy at the expense of the poor.
The concept of "forced savings" is also the source of the Keynesian belief that there is a necessary tradeoff between inflation and unemployment. The idea is that without inflation you cannot create jobs (at least according to Keynes), but wage workers continually lose purchasing power the more money there is, and thus (presumably) the more jobs there are. If the system works the way Keynes said it does, there are more jobs, but wages become worth progressively less.
To make up for the loss in purchasing power that consumer borrowing doesn't cover, the government prints more money. This in turn allegedly creates more jobs as demand increases. The cycle can go on forever and debt increase without any danger. As Harold Moulton summarized the Keynesian theory in the passage we quoted previously in this series (and again here to save your having to hunt for it),
"The proponents of the philosophy that the only hope for full employment and continuing prosperity lies in permanent deficit financing recognize, of course, that this means a continuous expansion of the public debt. The economic implications of an ever-expanding public debt are, moreover, given consideration. We are advised that an internal public debt is not a menace and that we should not be 'intimidated' by it. 'On the contrary, instead of looking upon [it] with the sort of awe that was inspired by our savage ancestors by some incomprehensible phenomenon such as lightning, we must take a leaf out of the book of modern science. . . . It is, in fact, so different from what we commonly think of as debt . . . that it should scarcely be called debt at all.' An internal public debt 'has none of the essential earmarks of a private debt'." (The New Philosophy of Public Debt, op. cit., 49-50.)
Ancient science, philosophy and the common sense of primitive people all tell us that a debt is a debt — a promise is a promise — and must be kept. Contracts (another word for promise, as is "covenant") are so sacred that you call upon the gods to witness that you mean what you say, and to ensure that you will keep your word . . . with a cosmic "or else" hanging over you. Oath breakers don't fare well in the mythology of any people.
Some traditions view trickery in getting out of a promise with admiration. The key to getting along is to phrase your promise exactly right so that you leave no loopholes. Even this, however, is a manifestation of the sacredness of the promise itself. Once it is crystal clear what the promise is to all parties, it had better be kept — or else.
This can get irritating to people who put the spirit of the law above the letter, or to those who base the natural law on God's Nature, self-realized in his intellect. "Modern science," however, is equal to the task. As Arthur C. Clarke once claimed, any sufficiently advanced science is indistinguishable from magic. Nowhere is this more true than in the "Modern Monetary Theory" embraced by Keynesian economics. Since "MMT" is "modern science" (or at least claims to be), assertion is sufficient to justify the basic premises. If the basic premises, per ancient science, philosophy or primitive common sense, are shown to be untenable, that's only because you don't understand such controversial or complex matters. You only think it doesn't make sense because you're a primitive savage.
Or not. It might be that the Keynesians and others who claim that others just don't understand might be a little shaky themselves on the basics — especially money and credit, banking, finance, and law.
#30#
By this reckoning Social Security is fully funded for a decade or so. Even if the Trust Fund runs out of money, the government can bail it out, which it can do by creating more wealth, i.e., issuing more bonds to deposit into the Trust Fund, which can then be redeemed for cash by selling them on the open market to the Federal Reserve.
* * * *
Obviously, there is something wrong with the Keynesian analysis. If government securities backed only by the faith and credit of the issuer are real wealth, every nation on earth would be richer than Croesus. Pick up the newspaper or watch the news, however, and most of the space and time is taken up with the fact that many governments have issued so many securities that there's no way they can conceivably make good on the promises they've made, at least within the current framework.
A large part of the problem is due to bad ideas about money and credit — and debt. Under Keynesian assumptions, all that's happening when a government emits bills of credit instead of borrowing money out of existing savings is that existing wealth (on which the State has a general claim through its ability to tax) is divided into smaller and smaller pieces.
With more money around, however, the price level starts to rise — inflation, or more units of currency "chasing" the same amount of goods and services. Since wages in general are reactive and rise more slowly than the price level, people who subsist on wage income alone are forced to reduce consumption. Only the fact that new jobs are created in aggregate in response to the transfers of purchasing power caused by unilateral government redistribution through inflation keeps up consumption — and then only so long as private companies use their profits to hire more workers, the government subsidizes hiring or hires people directly, or consumers can go into debt to purchase consumption goods and services.
This is because — according to Keynes — the only way to save is to reduce consumption and accumulate cash. This is, in fact, how Keynes defines savings: reductions in consumption. By inflating the currency and raising the price level, consumption is reduced below what it would otherwise be, but those reducing consumption do not receive the benefit of the "savings." Instead, there is a transfer of purchasing power to producers, who benefit at the expense of the wage workers. These "forced savings" are invested in new capital formation, creating jobs. Keynesian monetary theory is designed to benefit the wealthy at the expense of the poor.
The concept of "forced savings" is also the source of the Keynesian belief that there is a necessary tradeoff between inflation and unemployment. The idea is that without inflation you cannot create jobs (at least according to Keynes), but wage workers continually lose purchasing power the more money there is, and thus (presumably) the more jobs there are. If the system works the way Keynes said it does, there are more jobs, but wages become worth progressively less.
To make up for the loss in purchasing power that consumer borrowing doesn't cover, the government prints more money. This in turn allegedly creates more jobs as demand increases. The cycle can go on forever and debt increase without any danger. As Harold Moulton summarized the Keynesian theory in the passage we quoted previously in this series (and again here to save your having to hunt for it),
"The proponents of the philosophy that the only hope for full employment and continuing prosperity lies in permanent deficit financing recognize, of course, that this means a continuous expansion of the public debt. The economic implications of an ever-expanding public debt are, moreover, given consideration. We are advised that an internal public debt is not a menace and that we should not be 'intimidated' by it. 'On the contrary, instead of looking upon [it] with the sort of awe that was inspired by our savage ancestors by some incomprehensible phenomenon such as lightning, we must take a leaf out of the book of modern science. . . . It is, in fact, so different from what we commonly think of as debt . . . that it should scarcely be called debt at all.' An internal public debt 'has none of the essential earmarks of a private debt'." (The New Philosophy of Public Debt, op. cit., 49-50.)
Ancient science, philosophy and the common sense of primitive people all tell us that a debt is a debt — a promise is a promise — and must be kept. Contracts (another word for promise, as is "covenant") are so sacred that you call upon the gods to witness that you mean what you say, and to ensure that you will keep your word . . . with a cosmic "or else" hanging over you. Oath breakers don't fare well in the mythology of any people.
Some traditions view trickery in getting out of a promise with admiration. The key to getting along is to phrase your promise exactly right so that you leave no loopholes. Even this, however, is a manifestation of the sacredness of the promise itself. Once it is crystal clear what the promise is to all parties, it had better be kept — or else.
This can get irritating to people who put the spirit of the law above the letter, or to those who base the natural law on God's Nature, self-realized in his intellect. "Modern science," however, is equal to the task. As Arthur C. Clarke once claimed, any sufficiently advanced science is indistinguishable from magic. Nowhere is this more true than in the "Modern Monetary Theory" embraced by Keynesian economics. Since "MMT" is "modern science" (or at least claims to be), assertion is sufficient to justify the basic premises. If the basic premises, per ancient science, philosophy or primitive common sense, are shown to be untenable, that's only because you don't understand such controversial or complex matters. You only think it doesn't make sense because you're a primitive savage.
Or not. It might be that the Keynesians and others who claim that others just don't understand might be a little shaky themselves on the basics — especially money and credit, banking, finance, and law.
#30#
Monday, May 14, 2012
The Global Debt Crisis, VI: What is "Money"?
Last week, in the previous posting of this series, we said we'd look at money in the next posting. Since this is the next posting, and we want our promises (our money) to be good, here it is. This involves the first two false assumptions that have gotten the world into the debt crisis. As they are closely related, we'll look at the first two assumptions under a single heading. "Money" is not restricted to coin, banknotes and demand deposits, with some time deposits thrown in for good measure. That is currency — "current money" — and currency substitutes. On the contrary, money is anything that can be accepted in settlement of a debt.
Money is not a claim issued by the State against the general wealth of society. That would make the State the ultimate owner of everything — socialism. Taxation is not an exercise of property, nor is eminent domain, any more than a conscripted soldier is a slave of the State.
Money and credit — two forms of the same thing — can best be understood in terms of Say's Law of Markets as applied in the real bills doctrine. In light of the current global debt crisis, it is hardly surprising that all the mainstream schools of economics and most of the minor ones reject Say's Law or redefine it into meaninglessness, and all of them reject the real bills doctrine.
Say's Law states that we can only purchase what others produce to the limit of what we produce. If we have produced nothing that we can exchange for what somebody else has produced, then no exchange will take place. Thus, if some people produce marketable goods and services that they can neither consume themselves nor trade to others, the correct action to take is not to reduce consumption, but to increase production.
As Say put it, "As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce." (Letters to Malthus, 1821, 2.)
"Money" is simply the medium of exchange by means of which we trade what we produce for what others produce. It is a symbol of the present value of what we own. As Louis Kelso explained,
"Money is not a part of the visible sector of the economy. People do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector." (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54-55.)
The real bills doctrine is an application of this understanding of money. Currency — banknotes and demand deposits, as well as token coinage and anything else that circulates as "current money" in an economy and is accepted in settlement of a debt ("money") — is backed by the present value of whatever is represented by the negotiable instrument for which the "money" is exchanged.
All money, however, is a contract — a promise — and, in a sense, all contracts are money. Obviously, a contract can be made that delivers the present value of existing wealth. We would not otherwise have gold and silver coin — money that delivers something of value on the spot instead of the bearer having to take the money to the issuer and demand whatever the issuer of the money promised to deliver.
You can also enter into a contract to deliver something at a future date that you do not currently possess. If, however, you have a reasonable expectation that you will possess whatever is promised when the contract falls due, and the other party to the contract believes you (that is, accepts your offer), you have created money between the two of you based on the present value of something to be delivered in the future — and that might not even exist at the time you entered into the contract.
The money is cancelled when the contract is fulfilled, that is, the maker of the contract delivers goods or services as stipulated in the contract. It is thus possible to expand and contract the money supply as needed in an economy by tying the creation and cancellation of money through private property directly to the marketable goods and services being exchanged.
Negotiable instruments fall into three broad categories. These are bills of exchange, mortgages, and bills of credit. Bills of exchange are backed by the present value of future marketable goods and services. Mortgages are backed by the present value of existing marketable goods and services.
Bills of credit, however, are backed by the ability of the government to collect taxes out of wealth that exists now, in the future, or (depending on the optimism of the politicians and their effectiveness at selling pigs in pokes to the voters) might never exist. Greece's immediate problem, for example, is due largely to emitting bills of credit to be redeemed by taxing wealth that, increasingly, people are becoming convinced will never be produced.
Like Say's Law, the real bills doctrine can be stated fairly simply. If all new money is backed by a private property stake in the present value of existing and future marketable goods and services — that is, by contracts representing a private property stake in something with real value — there will always be enough money in the economy, and there will be neither inflation nor deflation.
There are a large number of refinements that can go into a discussion of Say's Law and the real bills doctrine, but that's not our concern at this time. All we're interested in is the basic theory. Our next posting in this series will address the issue as to whether by creating money government is simply shifting existing debt around, and whether public debt is "real" debt, or something that can safely be ignored as a debt we owe to ourselves and that doesn't have to be repaid.
#30#
Money is not a claim issued by the State against the general wealth of society. That would make the State the ultimate owner of everything — socialism. Taxation is not an exercise of property, nor is eminent domain, any more than a conscripted soldier is a slave of the State.
Money and credit — two forms of the same thing — can best be understood in terms of Say's Law of Markets as applied in the real bills doctrine. In light of the current global debt crisis, it is hardly surprising that all the mainstream schools of economics and most of the minor ones reject Say's Law or redefine it into meaninglessness, and all of them reject the real bills doctrine.
Say's Law states that we can only purchase what others produce to the limit of what we produce. If we have produced nothing that we can exchange for what somebody else has produced, then no exchange will take place. Thus, if some people produce marketable goods and services that they can neither consume themselves nor trade to others, the correct action to take is not to reduce consumption, but to increase production.
As Say put it, "As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce." (Letters to Malthus, 1821, 2.)
"Money" is simply the medium of exchange by means of which we trade what we produce for what others produce. It is a symbol of the present value of what we own. As Louis Kelso explained,
"Money is not a part of the visible sector of the economy. People do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector." (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54-55.)
The real bills doctrine is an application of this understanding of money. Currency — banknotes and demand deposits, as well as token coinage and anything else that circulates as "current money" in an economy and is accepted in settlement of a debt ("money") — is backed by the present value of whatever is represented by the negotiable instrument for which the "money" is exchanged.
All money, however, is a contract — a promise — and, in a sense, all contracts are money. Obviously, a contract can be made that delivers the present value of existing wealth. We would not otherwise have gold and silver coin — money that delivers something of value on the spot instead of the bearer having to take the money to the issuer and demand whatever the issuer of the money promised to deliver.
You can also enter into a contract to deliver something at a future date that you do not currently possess. If, however, you have a reasonable expectation that you will possess whatever is promised when the contract falls due, and the other party to the contract believes you (that is, accepts your offer), you have created money between the two of you based on the present value of something to be delivered in the future — and that might not even exist at the time you entered into the contract.
The money is cancelled when the contract is fulfilled, that is, the maker of the contract delivers goods or services as stipulated in the contract. It is thus possible to expand and contract the money supply as needed in an economy by tying the creation and cancellation of money through private property directly to the marketable goods and services being exchanged.
Negotiable instruments fall into three broad categories. These are bills of exchange, mortgages, and bills of credit. Bills of exchange are backed by the present value of future marketable goods and services. Mortgages are backed by the present value of existing marketable goods and services.
Bills of credit, however, are backed by the ability of the government to collect taxes out of wealth that exists now, in the future, or (depending on the optimism of the politicians and their effectiveness at selling pigs in pokes to the voters) might never exist. Greece's immediate problem, for example, is due largely to emitting bills of credit to be redeemed by taxing wealth that, increasingly, people are becoming convinced will never be produced.
Like Say's Law, the real bills doctrine can be stated fairly simply. If all new money is backed by a private property stake in the present value of existing and future marketable goods and services — that is, by contracts representing a private property stake in something with real value — there will always be enough money in the economy, and there will be neither inflation nor deflation.
There are a large number of refinements that can go into a discussion of Say's Law and the real bills doctrine, but that's not our concern at this time. All we're interested in is the basic theory. Our next posting in this series will address the issue as to whether by creating money government is simply shifting existing debt around, and whether public debt is "real" debt, or something that can safely be ignored as a debt we owe to ourselves and that doesn't have to be repaid.
#30#
Friday, May 11, 2012
News from the Network, Vol. 5, No. 19
Back in 1907 the financial services industry was under the control of one man: financier J. P. Morgan. When the president of the Knickerbocker Bank and Trust got into trouble by using bank assets to speculate in copper shares, Morgan engineered a run on the Knickerbocker and was able to take it over — and cause a worldwide financial panic in the process.
The scandal forced Congress to refocus on the need for fundamental financial reform, something that had been shelved following the Panic of 1893 when William Jennings Bryan's presidential campaign of 1896 and the Boy Orator's "Cross of Gold" speech diverted attention away from financial reform by emphasizing the "Silver Question." The end of the Great Depression of 1893-1898 seemed to quell the need for reform.
The result was the Federal Reserve Act of 1913, and the planned replacement of the "inelastic" National Bank Note currency of 1863 to 1913 backed by government debt, with an "elastic" Federal Reserve Note currency backed by the present value of private sector hard assets.
Unfortunately, the federal government figured out a way around the checks and balances built into the system designed to prevent the government from using the central bank to monetize its deficits, with the result that today the financial system is even more badly in need of reform than it was in 1907 — as demonstrated by the news this week that JPMorgan lost billions of dollars in "bad trades," to say nothing of the gigantic debt and Great Depression III. Fortunately, there is some good news on the horizon:
• The big news this week is the CESJ presence at the 35th Annual ESOP Association Conference in Washington, DC. We reconnected with some old friends, and were updated on some developments in one of the major institutions within the expanded ownership movement.
• The "buzz" at the ESOP Association Conference that seemed to be of most concern to attendees is the widespread misunderstanding of the benefits of worker ownership among both political parties. While the ESOP enjoys some strong support among a number of Representatives and Senators, the inability of either party to come up with an effective program (such as Capital Homesteading) that will deal with the deficit and the need to stimulate growth at the same time has led to targeting the ESOP as "corporate welfare." Since most Americans lack any significant direct ownership of corporate stock, targeting the ESOP seems like an easy way to score some points with voters while undermining what may be the most productive sector of the American economy.
• We spoke with some of the presenters about the need to rebuild an ownership culture in America. Our comments were well received. The financial professionals especially expressed interest in the effort to orient the financing of economic growth away from past savings funded by reducing consumption, and toward future savings funded by increasing production — what Louis Kelso called "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."
• In the session on "ESOP Sustainability," our point about viewing the ESOP as an ownership vehicle similar to a partnership instead of a retirement plan expense to help in dealing with the repurchase obligation was positively received. The change in orientation is from treating it as an expense to be minimized, to regarding it as the value of a worker's partnership stake that reflects ownership to be secured and protected.
• As of this morning, we have had visitors from 62 different countries and 54 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, India, and Australia. People in Mexico, the Philippines, France, the United States and South Africa spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Keynesian Cargo Cult: Rot Bilong Keynes," News from the Network from April 20, 2012, and "The Keynesian Cargo Cult: Overview."
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.
#30#
The scandal forced Congress to refocus on the need for fundamental financial reform, something that had been shelved following the Panic of 1893 when William Jennings Bryan's presidential campaign of 1896 and the Boy Orator's "Cross of Gold" speech diverted attention away from financial reform by emphasizing the "Silver Question." The end of the Great Depression of 1893-1898 seemed to quell the need for reform.
The result was the Federal Reserve Act of 1913, and the planned replacement of the "inelastic" National Bank Note currency of 1863 to 1913 backed by government debt, with an "elastic" Federal Reserve Note currency backed by the present value of private sector hard assets.
Unfortunately, the federal government figured out a way around the checks and balances built into the system designed to prevent the government from using the central bank to monetize its deficits, with the result that today the financial system is even more badly in need of reform than it was in 1907 — as demonstrated by the news this week that JPMorgan lost billions of dollars in "bad trades," to say nothing of the gigantic debt and Great Depression III. Fortunately, there is some good news on the horizon:
• The big news this week is the CESJ presence at the 35th Annual ESOP Association Conference in Washington, DC. We reconnected with some old friends, and were updated on some developments in one of the major institutions within the expanded ownership movement.
• The "buzz" at the ESOP Association Conference that seemed to be of most concern to attendees is the widespread misunderstanding of the benefits of worker ownership among both political parties. While the ESOP enjoys some strong support among a number of Representatives and Senators, the inability of either party to come up with an effective program (such as Capital Homesteading) that will deal with the deficit and the need to stimulate growth at the same time has led to targeting the ESOP as "corporate welfare." Since most Americans lack any significant direct ownership of corporate stock, targeting the ESOP seems like an easy way to score some points with voters while undermining what may be the most productive sector of the American economy.
• We spoke with some of the presenters about the need to rebuild an ownership culture in America. Our comments were well received. The financial professionals especially expressed interest in the effort to orient the financing of economic growth away from past savings funded by reducing consumption, and toward future savings funded by increasing production — what Louis Kelso called "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."
• In the session on "ESOP Sustainability," our point about viewing the ESOP as an ownership vehicle similar to a partnership instead of a retirement plan expense to help in dealing with the repurchase obligation was positively received. The change in orientation is from treating it as an expense to be minimized, to regarding it as the value of a worker's partnership stake that reflects ownership to be secured and protected.
• As of this morning, we have had visitors from 62 different countries and 54 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, India, and Australia. People in Mexico, the Philippines, France, the United States and South Africa spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Keynesian Cargo Cult: Rot Bilong Keynes," News from the Network from April 20, 2012, and "The Keynesian Cargo Cult: Overview."
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.
#30#
Thursday, May 10, 2012
The Global Debt Crisis, V: What's REALLY Going On?
In the May 4, 2012 "Money and Investing" section of the Wall Street Journal, there was a small article, almost a filler, on the last page, C10. The headline was "Watch Athens, Not Paris, This Weekend." There was a pie chart breaking down the Greek debt situation. Per the chart, private creditors hold 27% of Greece's "sovereign debt," leaving 73% held by "Official Creditors" — raising the side issue as to why private individuals, for whom, presumably, governments exist at all, rate as "unofficial."
Be that as it may, the article missed the true significance of the statistics. The big concern was whether the candidates from the thirty-two political parties contending for seats in the Greek legislature will upset the agreements reached with the IMF to cut spending in return for bailouts, triggering another round of the ongoing debt crisis in the euro-zone. There was not a word in the article about what stands behind the debt.
Debt sold to private creditors is the most immediately dangerous, yet — in theory, anyway — the soundest type of debt for a government to have if it is foolish enough to believe the Keynesian Great Lie. In Keynesian theory, the debt a government owes to private individuals or entities is "real" debt. It must be paid. Private debt cannot be repudiated, written down or rescheduled without bankruptcy. A government that floats debt to the private sector had better have a solid plan for retiring the debt, or it faces financial ruin when the bill comes due. This is because private debt is funded out of existing savings. Borrowing this money and not repaying it is clearly theft on a massive scale.
What about the "official debt"? In Keynesian theory, public debt that is absorbed by a nation's commercial or central banks is not a problem. No, sir. It's a debt we owe to ourselves, and are simply shifting money from one pocket to another — mere booking entries. There's some redistribution that goes on because of the inflation (necessary to shift wealth via forced savings from non-owners to owners to finance new capital investment), but, in the aggregate, it's all on paper, and it zeros out. Quoting Alvin Hansen of Harvard University, "The American Keynes," in Hansen's article in a Fortune magazine article in the November 1942 issue (page 166), Harold Moulton related,
"We are advised that an internal public debt is not a menace and that we should not be 'intimidated' by it. 'On the contrary, instead of looking upon [it] with the sort of awe that was inspired in our savage ancestors by some incomprehensible phenomenon such as lightning, we must take a leaf out of the book of modern science. . . . It is, in fact, so different from what we commonly think of as debt . . . that it should scarcely be called debt at all.' An internal public debt 'has none of the essential earmarks of a private debt'." (The New Philosophy of Public Debt, 1943, 49-50.)
See? There is nothing to worry about. Put off your primitive skins and beads, assume the Emperor's new clothes, and stop worshipping the false gods of fiscal sanity. Keynes — or at least his clone — declared that public debt (tee hee) isn't really debt! Paraphrasing Martin Luther's letter to Philipp Melancthon (August 1, 1521), Keynes does not save governments who are only fictitious spenders. Be a spender and spend boldly, but believe and rejoice in Keynes even more boldly. For Keynes is victorious over unemployment, debt, and the economy. As long as governments are here they have to spend. This life in not the dwelling place of thrift but, as Keynes says, we look for a new heavens and a new earth in which material happiness dwells. . . . Spend boldly — every government is a mighty spender.
Or we can apply a little common sense to the problem. Let's look at the assumptions we raised in the previous posting in this series:
• "Money" consists solely of coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts) — M2.
• Money is a general claim issued by the State against the general wealth of society.
• By emitting bills of credit (creating money by issuing sovereign debt) the government is simply shifting around existing wealth with no change in the aggregate.
• Government debt paper is a debt the nation owes to itself and doesn't have to be repaid.
We'll look at money in the next posting in this series.
#30#
Be that as it may, the article missed the true significance of the statistics. The big concern was whether the candidates from the thirty-two political parties contending for seats in the Greek legislature will upset the agreements reached with the IMF to cut spending in return for bailouts, triggering another round of the ongoing debt crisis in the euro-zone. There was not a word in the article about what stands behind the debt.
Debt sold to private creditors is the most immediately dangerous, yet — in theory, anyway — the soundest type of debt for a government to have if it is foolish enough to believe the Keynesian Great Lie. In Keynesian theory, the debt a government owes to private individuals or entities is "real" debt. It must be paid. Private debt cannot be repudiated, written down or rescheduled without bankruptcy. A government that floats debt to the private sector had better have a solid plan for retiring the debt, or it faces financial ruin when the bill comes due. This is because private debt is funded out of existing savings. Borrowing this money and not repaying it is clearly theft on a massive scale.
What about the "official debt"? In Keynesian theory, public debt that is absorbed by a nation's commercial or central banks is not a problem. No, sir. It's a debt we owe to ourselves, and are simply shifting money from one pocket to another — mere booking entries. There's some redistribution that goes on because of the inflation (necessary to shift wealth via forced savings from non-owners to owners to finance new capital investment), but, in the aggregate, it's all on paper, and it zeros out. Quoting Alvin Hansen of Harvard University, "The American Keynes," in Hansen's article in a Fortune magazine article in the November 1942 issue (page 166), Harold Moulton related,
"We are advised that an internal public debt is not a menace and that we should not be 'intimidated' by it. 'On the contrary, instead of looking upon [it] with the sort of awe that was inspired in our savage ancestors by some incomprehensible phenomenon such as lightning, we must take a leaf out of the book of modern science. . . . It is, in fact, so different from what we commonly think of as debt . . . that it should scarcely be called debt at all.' An internal public debt 'has none of the essential earmarks of a private debt'." (The New Philosophy of Public Debt, 1943, 49-50.)
See? There is nothing to worry about. Put off your primitive skins and beads, assume the Emperor's new clothes, and stop worshipping the false gods of fiscal sanity. Keynes — or at least his clone — declared that public debt (tee hee) isn't really debt! Paraphrasing Martin Luther's letter to Philipp Melancthon (August 1, 1521), Keynes does not save governments who are only fictitious spenders. Be a spender and spend boldly, but believe and rejoice in Keynes even more boldly. For Keynes is victorious over unemployment, debt, and the economy. As long as governments are here they have to spend. This life in not the dwelling place of thrift but, as Keynes says, we look for a new heavens and a new earth in which material happiness dwells. . . . Spend boldly — every government is a mighty spender.
Or we can apply a little common sense to the problem. Let's look at the assumptions we raised in the previous posting in this series:
• "Money" consists solely of coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts) — M2.
• Money is a general claim issued by the State against the general wealth of society.
• By emitting bills of credit (creating money by issuing sovereign debt) the government is simply shifting around existing wealth with no change in the aggregate.
• Government debt paper is a debt the nation owes to itself and doesn't have to be repaid.
We'll look at money in the next posting in this series.
#30#
Wednesday, May 9, 2012
The Global Debt Crisis, IV: Understanding the Problem
A while back (September 16, 2010) we read an op-ed in the Wall Street Journal, "The Case for a Repeal Amendment," by Randy E. Barnett of Georgetown University and William J. Howell, Speaker of the Virginia House of Representatives. The authors claimed that the income tax has allowed government to overspend and get 'way over its head in debt. Get rid of the Sixteenth Amendment, they declared, and We, the People would once again be able to exercise control over government and rein in the wild spending that's been going on. As the authors stated,
"The 16th Amendment gave Congress the power to impose an income tax, allowing it to tax and spend to a degree previously unimaginable. This amendment enabled Congress to evade the constitutional limits placed on its own power by effectively bribing states. Once states are 'hooked' on receiving federal funds, they can be coerced to obey federal dictates or lose the revenue."
The argument was relatively well stated and argued — and completely wrong. What has allowed politicians to spend beyond our means to repay without substantial changes being introduced into the system is not the income tax, but the monetization of federal debt by the Federal Reserve. Ironically, the income tax was set up in part to ensure that the federal government had adequate financial resources to carry out its legitimate functions.
On the other hand, the Federal Reserve was established not to finance government, but to provide the private sector with an "elastic" and stable uniform currency backed with private sector assets. The idea was to replace the inelastic National Bank Note currency of 1863-1913 backed by government debt, with Federal Reserve Notes backed by the present value of existing and future marketable goods and services.
Unfortunately, the Federal Reserve was allowed to operate for only two years according to plan. The United States then entered World War I and, as politicians in every age have been tempted to do, decided to finance the war effort by floating debt to be repaid tomorrow, rather than by raising taxes to be paid today.
Even this would not have been too much of a problem had the government simply borrowed from the existing pool of savings. That is all the federal or state governments are empowered to do under the Constitution in any event. Creating money backed only by the faith and credit of the government is called "emitting bills of credit." This is explicitly prohibited to the states under Article I, Section 10 of the Constitution, and was specifically removed from the enumerated powers of the federal government under Article I, Section 8 during the debates in 1787 in light of the debacle of the Continental Currency under the First and Second Continental Congresses and the Articles of Confederation.
What happened, however, was that the first Liberty Loan drive drained virtually all existing savings out of the system. The Second Liberty Loan drive and the Victory Loan drive had nothing on which to draw. Faced with a bond issue that wasn't selling due to lack of liquidity in the system (thereby endangering the war effort), the commercial banks stepped forward and purchased the bonds.
Since the commercial banks didn't have either the capitalization or the savings on deposit to purchase the bonds, they turned around and sold the bonds on the open market to the Federal Reserve, as they were empowered to do to retire the government debt they held to back their issues of National Bank Notes. The banks then passed the newly created money on to the U.S. Treasury, pocketing a fee in the process. This kept within the letter of the Federal Reserve Act, but violated the Constitution, just as Salmon P. Chase had done more than half a century before to finance the Union war effort.
A generation later, in response to growing demands that "the government" "do something," what the government did was listen to John Maynard Keynes. Unfortunately, Keynes had a profound misunderstanding of money and credit, as well as the natural rights of freedom of association/contract (liberty) and private property. He even had a unique understanding of the natural law (one that, ironically, has become pervasive in our society), claiming that the State has the power to "re-edit the dictionary" when it came to liberty and property! (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
The effects of this new orientation were profound and far-reaching. The "new philosophy of public debt" contained at least four false assumptions:
One, there was the belief that "money" consists solely of coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts).
Two, "money" is a general claim issued by the State against the general wealth of society.
Three, by emitting bills of credit (issuing debt eventually purchased by the Federal Reserve on the so-called "open market") the government was simply cutting up the present value of existing wealth into smaller and smaller pieces to redistribute it.
Four, government debt paper is a debt the nation owes to itself and doesn't have to be repaid.
The falsity of these assumptions can easily be demonstrated, as we will see in the next postings in this series.
#30#
"The 16th Amendment gave Congress the power to impose an income tax, allowing it to tax and spend to a degree previously unimaginable. This amendment enabled Congress to evade the constitutional limits placed on its own power by effectively bribing states. Once states are 'hooked' on receiving federal funds, they can be coerced to obey federal dictates or lose the revenue."
The argument was relatively well stated and argued — and completely wrong. What has allowed politicians to spend beyond our means to repay without substantial changes being introduced into the system is not the income tax, but the monetization of federal debt by the Federal Reserve. Ironically, the income tax was set up in part to ensure that the federal government had adequate financial resources to carry out its legitimate functions.
On the other hand, the Federal Reserve was established not to finance government, but to provide the private sector with an "elastic" and stable uniform currency backed with private sector assets. The idea was to replace the inelastic National Bank Note currency of 1863-1913 backed by government debt, with Federal Reserve Notes backed by the present value of existing and future marketable goods and services.
Unfortunately, the Federal Reserve was allowed to operate for only two years according to plan. The United States then entered World War I and, as politicians in every age have been tempted to do, decided to finance the war effort by floating debt to be repaid tomorrow, rather than by raising taxes to be paid today.
Even this would not have been too much of a problem had the government simply borrowed from the existing pool of savings. That is all the federal or state governments are empowered to do under the Constitution in any event. Creating money backed only by the faith and credit of the government is called "emitting bills of credit." This is explicitly prohibited to the states under Article I, Section 10 of the Constitution, and was specifically removed from the enumerated powers of the federal government under Article I, Section 8 during the debates in 1787 in light of the debacle of the Continental Currency under the First and Second Continental Congresses and the Articles of Confederation.
What happened, however, was that the first Liberty Loan drive drained virtually all existing savings out of the system. The Second Liberty Loan drive and the Victory Loan drive had nothing on which to draw. Faced with a bond issue that wasn't selling due to lack of liquidity in the system (thereby endangering the war effort), the commercial banks stepped forward and purchased the bonds.
Since the commercial banks didn't have either the capitalization or the savings on deposit to purchase the bonds, they turned around and sold the bonds on the open market to the Federal Reserve, as they were empowered to do to retire the government debt they held to back their issues of National Bank Notes. The banks then passed the newly created money on to the U.S. Treasury, pocketing a fee in the process. This kept within the letter of the Federal Reserve Act, but violated the Constitution, just as Salmon P. Chase had done more than half a century before to finance the Union war effort.
A generation later, in response to growing demands that "the government" "do something," what the government did was listen to John Maynard Keynes. Unfortunately, Keynes had a profound misunderstanding of money and credit, as well as the natural rights of freedom of association/contract (liberty) and private property. He even had a unique understanding of the natural law (one that, ironically, has become pervasive in our society), claiming that the State has the power to "re-edit the dictionary" when it came to liberty and property! (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
The effects of this new orientation were profound and far-reaching. The "new philosophy of public debt" contained at least four false assumptions:
One, there was the belief that "money" consists solely of coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts).
Two, "money" is a general claim issued by the State against the general wealth of society.
Three, by emitting bills of credit (issuing debt eventually purchased by the Federal Reserve on the so-called "open market") the government was simply cutting up the present value of existing wealth into smaller and smaller pieces to redistribute it.
Four, government debt paper is a debt the nation owes to itself and doesn't have to be repaid.
The falsity of these assumptions can easily be demonstrated, as we will see in the next postings in this series.
#30#
Tuesday, May 8, 2012
The Global Debt Crisis, III: The Roots of the Problem
After one of the biggest and most controversial battles ever to take place in both houses of Congress, the Federal Reserve Act of 1913 was passed. Stories about how the Act was passed in secret as the result of a hidden conspiracy are just that — stories. Not only were the issues debated for months in the public press, the testimony before both houses takes up several thousand pages in the Congressional Record.
The fixed belief popular among conspiracy theorists that a secret meeting of conservative Republican financiers led by Nelson Aldrich on Jekyll Island was the basis of the Federal Reserve can be totally discounted. Not only were a House and Senate controlled by the Democrats unlikely to pay any heed to a man they regarded as one of the prime movers behind the financial troubles of the country, Woodrow Wilson never would have signed such a bill. In any event, the Aldrich proposal that came out of the meeting on Jekyll Island was never adopted. As Harold G. Moulton explained,
"The Federal Reserve Act is a substantial improvement over the Aldrich plan. It should be chronicled here that the Federal Reserve Act is not a mere plagiarism of the Aldrich plan. In certain fundamental respects the new law is markedly different from and markedly superior to the Aldrich plan. . . . Subject to a great deal of hostile comment by the financial and business press during the period of its discussion before Congress, after passage the law very quickly became recognized at its true worth as the most constructive piece of legislation that had ever been placed upon the American statute-books. For once, at least, a vitally important, though technical, question had been resolved into its fundamental issues through public discussion, and in this instance a measure emerging into law did represent the best constructive thinking of the nation." (The Financial Organization of Society. Chicago, Illinois: The University of Chicago Press, Third Edition, 1930, 531-532.)
The Federal Reserve was to operate in a manner consistent with classic banking principles. The mechanism was to rediscount — "accept" (purchase) — eligible commercial, industrial and agricultural paper (bills of exchange) originally accepted by member commercial banks through the "discount window" whenever there was a need to increase liquidity. Rediscounting was to be supplemented by purchasing the eligible paper of non-member banks, businesses and individuals on the open, that is, secondary market. When there was too much liquidity in the system, the Federal Reserve would sell enough of its holdings of private sector paper to siphon off the excess.
Unfortunately there was a loophole in the Act. The National Bank Notes and the Treasury Notes of 1890 were backed by government debt. Any National Bank that wanted to issue banknotes to supplement its creation of demand deposits (checking accounts) and meet its daily transactions demand for cash had to purchase government bonds in an amount greater than the face value of the banknotes issued to ensure more than 100% coverage for the banknotes.
Incidentally, the requirement that National Bank Notes be backed by government debt gave rise to the myth that "the banks" were getting "double interest" on their note issues. This was presumably because the banks got interest on their holdings of government bonds that backed the National Bank Notes, and then interest again when they loaned out the notes to borrowers.
The facts fail to support this belief. The National Banknotes — along with the United States Notes ("Greenbacks"), Treasury Notes, Silver and Gold Certificates, and the gold, silver and base metal coinage — constituted by far the smaller portion of the money supply. The task of the currency was to meet the demands of everyday commerce.
The greater part of the money supply — approximately 80% in 1900 — consisted of various negotiable instruments: bills of exchange, mortgages of all types, promissory notes, demand deposits, and so on. When a commercial or mercantile bank (and the National Banks were commercial banks) made a loan on the strength of a collateralized contract (bill of exchange or mortgage), the bank discounted (accepted) the paper, thereby creating money. In return, the bank issued a promissory note that the borrower signed, which the bank used to back a new demand deposit.
The borrower was given a checkbook. If the borrower wanted currency — gold or silver coin or banknotes — he or she had to draw a check and cash it. The borrower paid the discount (the difference between the face value of the bill of exchange and the amount of money actually created by accepting the bill of exchange and put into the demand deposit), but usually nothing for the privilege of converting a portion of the demand deposit into National Bank Notes and using them in commerce. The bank was no more getting "double interest" on its banknotes than it was getting any interest at all on its holdings of United States Notes, Treasury Notes, Gold and Silver Certificates, or gold, silver, and base metal coins in its vaults.
Still, the National Banks were saddled with a large amount of government debt that the government did not have the capacity to retire all at once. Had the government called in all its debt at one time, it would have been redeemed at a considerable discount, causing enormous losses to the banks.
To get around this problem, the Federal Reserve was empowered to purchase the government debt from the National Banks over time. The Federal Reserve would hold the government paper, and the debt-backed National Bank Notes would be replaced with debt-backed Federal Reserve Bank Notes. As the government paid down its debt, the government debt-backed Federal Reserve Bank Notes would be replaced in turn with visually indistinguishable but private sector asset-backed Federal Reserve Notes.
To make certain that such "open market operations" would not tempt the government to monetize its deficits — the whole idea, after all, was to get rid of the national debt, at least that portion of it backing the currency — Congress adopted the Sixteenth Amendment to the Constitution: the income tax.
#30#
The fixed belief popular among conspiracy theorists that a secret meeting of conservative Republican financiers led by Nelson Aldrich on Jekyll Island was the basis of the Federal Reserve can be totally discounted. Not only were a House and Senate controlled by the Democrats unlikely to pay any heed to a man they regarded as one of the prime movers behind the financial troubles of the country, Woodrow Wilson never would have signed such a bill. In any event, the Aldrich proposal that came out of the meeting on Jekyll Island was never adopted. As Harold G. Moulton explained,
"The Federal Reserve Act is a substantial improvement over the Aldrich plan. It should be chronicled here that the Federal Reserve Act is not a mere plagiarism of the Aldrich plan. In certain fundamental respects the new law is markedly different from and markedly superior to the Aldrich plan. . . . Subject to a great deal of hostile comment by the financial and business press during the period of its discussion before Congress, after passage the law very quickly became recognized at its true worth as the most constructive piece of legislation that had ever been placed upon the American statute-books. For once, at least, a vitally important, though technical, question had been resolved into its fundamental issues through public discussion, and in this instance a measure emerging into law did represent the best constructive thinking of the nation." (The Financial Organization of Society. Chicago, Illinois: The University of Chicago Press, Third Edition, 1930, 531-532.)
The Federal Reserve was to operate in a manner consistent with classic banking principles. The mechanism was to rediscount — "accept" (purchase) — eligible commercial, industrial and agricultural paper (bills of exchange) originally accepted by member commercial banks through the "discount window" whenever there was a need to increase liquidity. Rediscounting was to be supplemented by purchasing the eligible paper of non-member banks, businesses and individuals on the open, that is, secondary market. When there was too much liquidity in the system, the Federal Reserve would sell enough of its holdings of private sector paper to siphon off the excess.
Unfortunately there was a loophole in the Act. The National Bank Notes and the Treasury Notes of 1890 were backed by government debt. Any National Bank that wanted to issue banknotes to supplement its creation of demand deposits (checking accounts) and meet its daily transactions demand for cash had to purchase government bonds in an amount greater than the face value of the banknotes issued to ensure more than 100% coverage for the banknotes.
Incidentally, the requirement that National Bank Notes be backed by government debt gave rise to the myth that "the banks" were getting "double interest" on their note issues. This was presumably because the banks got interest on their holdings of government bonds that backed the National Bank Notes, and then interest again when they loaned out the notes to borrowers.
The facts fail to support this belief. The National Banknotes — along with the United States Notes ("Greenbacks"), Treasury Notes, Silver and Gold Certificates, and the gold, silver and base metal coinage — constituted by far the smaller portion of the money supply. The task of the currency was to meet the demands of everyday commerce.
The greater part of the money supply — approximately 80% in 1900 — consisted of various negotiable instruments: bills of exchange, mortgages of all types, promissory notes, demand deposits, and so on. When a commercial or mercantile bank (and the National Banks were commercial banks) made a loan on the strength of a collateralized contract (bill of exchange or mortgage), the bank discounted (accepted) the paper, thereby creating money. In return, the bank issued a promissory note that the borrower signed, which the bank used to back a new demand deposit.
The borrower was given a checkbook. If the borrower wanted currency — gold or silver coin or banknotes — he or she had to draw a check and cash it. The borrower paid the discount (the difference between the face value of the bill of exchange and the amount of money actually created by accepting the bill of exchange and put into the demand deposit), but usually nothing for the privilege of converting a portion of the demand deposit into National Bank Notes and using them in commerce. The bank was no more getting "double interest" on its banknotes than it was getting any interest at all on its holdings of United States Notes, Treasury Notes, Gold and Silver Certificates, or gold, silver, and base metal coins in its vaults.
Still, the National Banks were saddled with a large amount of government debt that the government did not have the capacity to retire all at once. Had the government called in all its debt at one time, it would have been redeemed at a considerable discount, causing enormous losses to the banks.
To get around this problem, the Federal Reserve was empowered to purchase the government debt from the National Banks over time. The Federal Reserve would hold the government paper, and the debt-backed National Bank Notes would be replaced with debt-backed Federal Reserve Bank Notes. As the government paid down its debt, the government debt-backed Federal Reserve Bank Notes would be replaced in turn with visually indistinguishable but private sector asset-backed Federal Reserve Notes.
To make certain that such "open market operations" would not tempt the government to monetize its deficits — the whole idea, after all, was to get rid of the national debt, at least that portion of it backing the currency — Congress adopted the Sixteenth Amendment to the Constitution: the income tax.
#30#
Monday, May 7, 2012
The Global Debt Crisis, II: The Story Behind the Problem
Paradoxically, before we can understand how the U.S. federal government — and virtually every other government on earth — became burdened with such a gigantic mountain of debt, we have to understand how the United States tried to reform its financial system and get out of debt in the wake of the Panic of 1893, the Great Depression of 1893-1898, and the Panic of 1907.
The Panic of 1893 revealed (among other things) serious weaknesses in the National Bank system that had been in place since 1863. The amount of the currency was fixed — "inelastic" — and backed by government debt. When push came to shove (as it did with the "money famine" of 1894), the system very nearly gave way under the strain. A debt-backed fixed currency was inadequate to the demands put on it by an advanced commercial and industrial economy.
Efforts to make the currency more elastic by increasing the amount of government debt were recognized as being both financially unsound and politically unwise. The country was in the middle of the worst economic crisis it had ever faced, and debauching the currency was seen as a step toward financial suicide. In any event, the country had worked for two generations to restore the faith and credit of the government following the Civil War.
Added to that was the fact that many people realized that if the government could finance itself with debt instead of taxes, politicians would become unaccountable to the citizens. As Henry C. Adams explained,
"As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account." (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)
The presidential campaign of 1896, however, diverted calls for reform of the financial system by bogging down in William Jennings Bryan's "free silver" proposal, viewed by many as "silver socialism" and a serious danger to the recently restored credit of the country. The bumper crops of 1897 and 1898 in the United States at the same time there were crop failures in Europe ended agitation for reform by seeming to solve the problem.
The lull was only temporary, however. The Panic of 1907, caused by bank speculation in the stock market and manipulation of the system by J. P. Morgan, renewed demands for reform. The presidential campaign of 1912 centered on the need for a true central bank to replace the National Bank system, and an income tax to ensure adequate revenue for the federal government raised in a way that would not pass the tax burden of the rich on to those in lower income levels.
Taft did not lose the election because Theodore Roosevelt split the Republican Party. By 1906 the G.O.P. had effectively diverged into an ultra-conservative wing under the control of Nelson Aldrich and J. D. Rockefeller, and a leaderless progressive wing. Woodrow Wilson managed to win most of the moderate Democrats back from Roosevelt by gaining the support of William Jennings Bryan and adopting a progressive stance toward financial reform that copied Roosevelt's. Wilson's campaign made a good thing of characterizing Roosevelt's protégé Taft as Aldrich's stooge, firmly in the pocket of the "Money Trust" headed by J. P. Morgan.
In this, Wilson had more than a little inadvertent assistance from Roosevelt. Roosevelt was outraged at what he saw as Taft's betrayal of the progressive cause, and made no bones about letting everyone know it. The only Democrats who failed to go over to Wilson were a sizable number of progressives who distrusted Wilson's flip-flopping and lack of experience and stuck with Roosevelt, and the more radical socialists and populists who rejected Wilson because of Wilson's earlier support for laissez faire capitalism.
Having won the election largely on the strength of his promise to implement immediate and sweeping changes to the monetary and tax systems, however, Wilson began waffling. The combined efforts of Representative Carter Glass of Virginia and Secretary of State William Jennings Bryan were needed to get Wilson moving to fulfill his campaign promises.
#30#
The Panic of 1893 revealed (among other things) serious weaknesses in the National Bank system that had been in place since 1863. The amount of the currency was fixed — "inelastic" — and backed by government debt. When push came to shove (as it did with the "money famine" of 1894), the system very nearly gave way under the strain. A debt-backed fixed currency was inadequate to the demands put on it by an advanced commercial and industrial economy.
Efforts to make the currency more elastic by increasing the amount of government debt were recognized as being both financially unsound and politically unwise. The country was in the middle of the worst economic crisis it had ever faced, and debauching the currency was seen as a step toward financial suicide. In any event, the country had worked for two generations to restore the faith and credit of the government following the Civil War.
Added to that was the fact that many people realized that if the government could finance itself with debt instead of taxes, politicians would become unaccountable to the citizens. As Henry C. Adams explained,
"As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account." (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)
The presidential campaign of 1896, however, diverted calls for reform of the financial system by bogging down in William Jennings Bryan's "free silver" proposal, viewed by many as "silver socialism" and a serious danger to the recently restored credit of the country. The bumper crops of 1897 and 1898 in the United States at the same time there were crop failures in Europe ended agitation for reform by seeming to solve the problem.
The lull was only temporary, however. The Panic of 1907, caused by bank speculation in the stock market and manipulation of the system by J. P. Morgan, renewed demands for reform. The presidential campaign of 1912 centered on the need for a true central bank to replace the National Bank system, and an income tax to ensure adequate revenue for the federal government raised in a way that would not pass the tax burden of the rich on to those in lower income levels.
Taft did not lose the election because Theodore Roosevelt split the Republican Party. By 1906 the G.O.P. had effectively diverged into an ultra-conservative wing under the control of Nelson Aldrich and J. D. Rockefeller, and a leaderless progressive wing. Woodrow Wilson managed to win most of the moderate Democrats back from Roosevelt by gaining the support of William Jennings Bryan and adopting a progressive stance toward financial reform that copied Roosevelt's. Wilson's campaign made a good thing of characterizing Roosevelt's protégé Taft as Aldrich's stooge, firmly in the pocket of the "Money Trust" headed by J. P. Morgan.
In this, Wilson had more than a little inadvertent assistance from Roosevelt. Roosevelt was outraged at what he saw as Taft's betrayal of the progressive cause, and made no bones about letting everyone know it. The only Democrats who failed to go over to Wilson were a sizable number of progressives who distrusted Wilson's flip-flopping and lack of experience and stuck with Roosevelt, and the more radical socialists and populists who rejected Wilson because of Wilson's earlier support for laissez faire capitalism.
Having won the election largely on the strength of his promise to implement immediate and sweeping changes to the monetary and tax systems, however, Wilson began waffling. The combined efforts of Representative Carter Glass of Virginia and Secretary of State William Jennings Bryan were needed to get Wilson moving to fulfill his campaign promises.
#30#
Friday, May 4, 2012
News from the Network, Vol. 5, No. 18
Whether it's baited or bated, the global financial markets are waiting with it to see how the elections in Greece will either reinforce or counter the poor jobs report that came out this morning. Whichever way it goes, you can bet on one thing: everyone will miss the significance of a leading economic indicator (stock prices) reacting to another leading economic indicator (unemployment) that in Keynesian economics depends on the rate of capital investment, which in turn depends on the interest rate that has an inverse relationship with stock prices and which is determined by the rate of inflation (unless the interest rate is held artificially low or high) . . . stop me if any of this makes sense.
The bottom line here is that, if you follow the train of conventional reasoning from start to finish, it pulls into the same station from which it left. You end up right where you started. Stock prices rise because they rise. People are unemployed because they can't find work. And so on. In logic we call this a "circular argument." It's the sort of thing people say when they have no idea what they're talking about . . . like today's economists and politicians.
We won't even address the issue of categorizing the value of outstanding commercial and industrial loans as a lagging economic indicator.
Okay, you've convinced us. In binary economics, based on the banking principle (Say's Law as applied in the real bills doctrine), the amount of financing for new capital investment with future savings should be a leading, not a lagging economic indicator . . . but that would require abandoning the idea that capital can only be financed out of past reductions in consumption, not future increases in production.
In the past savings paradigm, you can only finance new capital if you or someone else has already produced more than others can consume, and the excess can be invested in new capital formation. That is, you can finance new capital because somebody did well enough to be able to save by cutting consumption and lent you the money, or the savings were transferred to you through the magic of inflation that forced others to pay you a higher price for less value, thereby increasing your profits that you can invest in more capital (Keynesian "forced savings"). Thus, in that Krazy Keynesian Paradigm, the amount of financing for new capital investment is a sign that the economy has done well.
In binary economics, an increase in outstanding commercial and industrial loans is an indication that investors think the economy will do better in the future, not that it has necessarily done well in the past. In the real world, investors finance new capital formation because they see consumer demand rising, not because they see people cutting consumption to save. The demand for new capital is derived from consumer demand for goods and services, not the other way around.
That being the case, increasing investment in new capital, and ensuring that the ownership and the full rights of property are vested in people who will use the income from the capital first to pay for the capital, then for consumption, should be a leading, not a lagging economic indicator. Binary growth is, in a sense, a self-fulfilling prophecy, not an indication of past performance.
Obviously it would be much more rational to examine the principles of the Just Third Way (the Kelso-Adler principles of economic justice, the four pillars of an economically just society, etc.) especially their proposed application in Capital Homesteading. The problem there, of course, is that the practitioners of Hysteria Journalism wouldn't have anything to write about, and would be limited to actually reporting the news — as we will now proceed to do:
• Dawn B., CESJ's poet laureate, had better look to her laurels. CESJ member Mark Reiners has just come out with A Kind of Speaking, The Metaphysic of Listening. Obviously we haven't had a chance to read it, and at 274 pages we're not going to be getting to it any time soon. This is just an announcement that the book is available from Café Press in trade paperback for $19.22. We encourage our readers to buy the book. If you want to review it, we'll consider publishing the review on this blog if you keep it under 500 words. You might, however, first want to explore getting a review into your local newspaper to get more exposure. For some reason, print book reviewers seem to have a greater credibility than bloggers.
• We're starting to get a little intellectual ferment and action from the annual Rally at the Fed and the CESJ celebration. Everyone tends to look a little like a deer in the headlights after it's over for another year, then wilts for a week before the energizing renewal starts to take root and the action can begin. We hope to have a short guide for advancing the Just Third Way drafted by the next Executive Committee meeting in a couple of weeks.
• After many years of service, Harriet Epstein has announced her retirement from the CESJ Board of Directors. While there is certainly no dearth of board members who work daily to advance the Just Third Way, Harriet will be sorely missed.
• The article by CESJ's Director of Research, Michael D. Greaney, in this month's Inside the Vatican, "Catholic Teaching and the Elections," seems to have generated quite a bit of positive comment and feedback. There has, in fact, only been one negative comment from a disgruntled economist seemingly wedded irrevocably to the discredited Keynesian past savings paradigm, and it was painfully obvious that he either hadn't read or didn't understand the article! The editor of Inside the Vatican has requested four more articles that, if accepted, will appear over the summer.
• As of this morning, we have had visitors from 63 different countries and 51 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, India, and Australia. People in the Netherlands Antilles, Mexico, the Philippines, France, and the United States spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," "The Keynesian Cargo Cult: Rot Bilong Keynes," and the Network News from February 4, 2011.
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.
#30#
The bottom line here is that, if you follow the train of conventional reasoning from start to finish, it pulls into the same station from which it left. You end up right where you started. Stock prices rise because they rise. People are unemployed because they can't find work. And so on. In logic we call this a "circular argument." It's the sort of thing people say when they have no idea what they're talking about . . . like today's economists and politicians.
We won't even address the issue of categorizing the value of outstanding commercial and industrial loans as a lagging economic indicator.
Okay, you've convinced us. In binary economics, based on the banking principle (Say's Law as applied in the real bills doctrine), the amount of financing for new capital investment with future savings should be a leading, not a lagging economic indicator . . . but that would require abandoning the idea that capital can only be financed out of past reductions in consumption, not future increases in production.
In the past savings paradigm, you can only finance new capital if you or someone else has already produced more than others can consume, and the excess can be invested in new capital formation. That is, you can finance new capital because somebody did well enough to be able to save by cutting consumption and lent you the money, or the savings were transferred to you through the magic of inflation that forced others to pay you a higher price for less value, thereby increasing your profits that you can invest in more capital (Keynesian "forced savings"). Thus, in that Krazy Keynesian Paradigm, the amount of financing for new capital investment is a sign that the economy has done well.
In binary economics, an increase in outstanding commercial and industrial loans is an indication that investors think the economy will do better in the future, not that it has necessarily done well in the past. In the real world, investors finance new capital formation because they see consumer demand rising, not because they see people cutting consumption to save. The demand for new capital is derived from consumer demand for goods and services, not the other way around.
That being the case, increasing investment in new capital, and ensuring that the ownership and the full rights of property are vested in people who will use the income from the capital first to pay for the capital, then for consumption, should be a leading, not a lagging economic indicator. Binary growth is, in a sense, a self-fulfilling prophecy, not an indication of past performance.
Obviously it would be much more rational to examine the principles of the Just Third Way (the Kelso-Adler principles of economic justice, the four pillars of an economically just society, etc.) especially their proposed application in Capital Homesteading. The problem there, of course, is that the practitioners of Hysteria Journalism wouldn't have anything to write about, and would be limited to actually reporting the news — as we will now proceed to do:
• Dawn B., CESJ's poet laureate, had better look to her laurels. CESJ member Mark Reiners has just come out with A Kind of Speaking, The Metaphysic of Listening. Obviously we haven't had a chance to read it, and at 274 pages we're not going to be getting to it any time soon. This is just an announcement that the book is available from Café Press in trade paperback for $19.22. We encourage our readers to buy the book. If you want to review it, we'll consider publishing the review on this blog if you keep it under 500 words. You might, however, first want to explore getting a review into your local newspaper to get more exposure. For some reason, print book reviewers seem to have a greater credibility than bloggers.
• We're starting to get a little intellectual ferment and action from the annual Rally at the Fed and the CESJ celebration. Everyone tends to look a little like a deer in the headlights after it's over for another year, then wilts for a week before the energizing renewal starts to take root and the action can begin. We hope to have a short guide for advancing the Just Third Way drafted by the next Executive Committee meeting in a couple of weeks.
• After many years of service, Harriet Epstein has announced her retirement from the CESJ Board of Directors. While there is certainly no dearth of board members who work daily to advance the Just Third Way, Harriet will be sorely missed.
• The article by CESJ's Director of Research, Michael D. Greaney, in this month's Inside the Vatican, "Catholic Teaching and the Elections," seems to have generated quite a bit of positive comment and feedback. There has, in fact, only been one negative comment from a disgruntled economist seemingly wedded irrevocably to the discredited Keynesian past savings paradigm, and it was painfully obvious that he either hadn't read or didn't understand the article! The editor of Inside the Vatican has requested four more articles that, if accepted, will appear over the summer.
• As of this morning, we have had visitors from 63 different countries and 51 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, India, and Australia. People in the Netherlands Antilles, Mexico, the Philippines, France, and the United States spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," "The Keynesian Cargo Cult: Rot Bilong Keynes," and the Network News from February 4, 2011.
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.
#30#
Thursday, May 3, 2012
The Global Debt Crisis, I: What is the Problem?
The world is awash in debt — credit extended for which there is no reasonable hope of repayment. Gross government debt as a share of GDP is uncomfortably (read "terrifyingly") over 100% for Greece and Italy. It is galloping toward that percentage for France, Germany and the United States. Governments are falling all over Europe as outraged government employees and public pensioners riot to protest cuts in spending. Spain's debt crisis is (in the words of one report from a socialist) "pushing [the] global economy to the brink." There are "renewed fears" of a European debt crisis. The global economy seems ready to implode.
According to conventional Keynesian thinking, none of this should be happening. In conformity with the principles of Georg Knapp's "chartalism" (more widely known today under the euphemistic label, "Modern Monetary Theory"), the State should be able to emit all the money (bills of credit) it needs without any problem. More money in circulation means more money for investment, more effective demand to stimulate that investment, more education that will foster creativity and growth, and so on, so forth.
Theoretical support for a large public debt is rooted in the fixed belief that an expanding debt is essential for prosperity. That being the case, the larger the debt is, the better off we are. As Dr. Harold G. Moulton analyzed this Keynesian doctrine in his short book, The New Philosophy of Public Debt (1943), the perceived necessity for a large public debt is due to three factors:
• The Mature Economy Thesis,
• The Phenomenon of "Excess Savings," and
• Corporate Independence of the Capital Markets.
The Mature Economy Thesis
In response to the decline in the rate of population growth during the Great Depression of the 1930s, Keynesian economists believed that there would be insufficient demand to keep the economy going. There would simply be not enough people to consume all that the economy was capable of producing. As Moulton summarized this argument,
"The argument that the United States has recently reached economic maturity and that in consequence further growth (under private capitalism) must be very slow starts with an assumption — namely that economic progress is primarily dependent on rapid growth in population and the opening of new productive areas. Conversely, it is held that a declining rate of population growth and the disappearance of frontiers will check economic growth." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 21-22.)
The Phenomenon of "Excess Savings"
In The Formation of Capital (1935), Moulton analyzed the "economic dilemma." That is, assuming that the only way to finance new capital formation is to cut consumption and accumulate cash, there is no justification for new capital investment.
No rational investor will purchase new capital if there is no existing or reasonably anticipated increase in effective demand to justify additional marketable goods and services. If savings increase, in fact, even existing capital becomes redundant as consumption declines. The "dilemma" an investor faces, then, is that if consumption is reduced to finance new capital formation, there is no reason to finance new capital formation.
Increasing public debt allegedly solves this problem. As Moulton explained,
"The phenomenon of money savings in excess of investment outlets is related in one way to the mature economy conception. If, because of the disappearance of frontiers and an arrested rate of population growth, further private capital expansion were impossible, then obviously we would have no private investment outlets for the current money savings of the people. But independently of a mature economy, it might still be possible that the volume of current money savings had become greater than could be absorbed in productive capital investment. It is contended that the evidence supports the thesis that henceforth money savings are always likely to exceed productive outlets in private enterprise; hence public flotations must fill the breach." (The New Philosophy of Public Debt, op. cit., 30.)
Corporate Independence of Capital Markets
The experts continually remind us how important Wall Street is for the allocation of credit. Wall Street, however, is supposed to be the private sector. The Federal Reserve seems to be in the business of handling government debt, although that was not the original intention. This is endemic throughout the world, as central banks have shifted away from private sector financing and gotten into financing government.
The Keynesian argument during the Great Depression, however, was that, because business corporations presumably had no need of raising funds in the financial markets, there were insufficient new issues to absorb people's savings. At the same time, business corporations simply weren't financing new capital. As Moulton explained,
"The investigations of the Temporary National Economic Committee endeavored to show that in recent times business corporations have largely freed themselves from the necessity of raising funds in the financial markets, the bulk of the investment funds required now being obtained from their own internal resources. Accordingly, even if private business enterprise were reasonably thriving, it would still be necessary for the government to provide outlets for current money savings of the people through continuing flotations of government bonds. This conclusion has been widely accepted in government circles." (Ibid., 35.)
Despite these theories, the crisis continues to mount, yet at the same time demands become more strident to increase the level of government spending to stimulate economic recovery. Even the socialists and laissez faire capitalists are in agreement on this one. As one capitalist source put it, "[T]he IMF says that the United States and Japan have no plan to ever stem their deficits and record borrowing, creating 'latent risks include disruption in global bond and currency markets as a result of high budget deficits and debt in Japan and the United States'." ("Global Government Debt Crisis Emerging" New American)
When the John Birch Society and the Socialist Party can agree on condemning something, somebody ought to be reconsidering just how well the program is working.
#30#
According to conventional Keynesian thinking, none of this should be happening. In conformity with the principles of Georg Knapp's "chartalism" (more widely known today under the euphemistic label, "Modern Monetary Theory"), the State should be able to emit all the money (bills of credit) it needs without any problem. More money in circulation means more money for investment, more effective demand to stimulate that investment, more education that will foster creativity and growth, and so on, so forth.
Theoretical support for a large public debt is rooted in the fixed belief that an expanding debt is essential for prosperity. That being the case, the larger the debt is, the better off we are. As Dr. Harold G. Moulton analyzed this Keynesian doctrine in his short book, The New Philosophy of Public Debt (1943), the perceived necessity for a large public debt is due to three factors:
• The Mature Economy Thesis,
• The Phenomenon of "Excess Savings," and
• Corporate Independence of the Capital Markets.
The Mature Economy Thesis
In response to the decline in the rate of population growth during the Great Depression of the 1930s, Keynesian economists believed that there would be insufficient demand to keep the economy going. There would simply be not enough people to consume all that the economy was capable of producing. As Moulton summarized this argument,
"The argument that the United States has recently reached economic maturity and that in consequence further growth (under private capitalism) must be very slow starts with an assumption — namely that economic progress is primarily dependent on rapid growth in population and the opening of new productive areas. Conversely, it is held that a declining rate of population growth and the disappearance of frontiers will check economic growth." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 21-22.)
The Phenomenon of "Excess Savings"
In The Formation of Capital (1935), Moulton analyzed the "economic dilemma." That is, assuming that the only way to finance new capital formation is to cut consumption and accumulate cash, there is no justification for new capital investment.
No rational investor will purchase new capital if there is no existing or reasonably anticipated increase in effective demand to justify additional marketable goods and services. If savings increase, in fact, even existing capital becomes redundant as consumption declines. The "dilemma" an investor faces, then, is that if consumption is reduced to finance new capital formation, there is no reason to finance new capital formation.
Increasing public debt allegedly solves this problem. As Moulton explained,
"The phenomenon of money savings in excess of investment outlets is related in one way to the mature economy conception. If, because of the disappearance of frontiers and an arrested rate of population growth, further private capital expansion were impossible, then obviously we would have no private investment outlets for the current money savings of the people. But independently of a mature economy, it might still be possible that the volume of current money savings had become greater than could be absorbed in productive capital investment. It is contended that the evidence supports the thesis that henceforth money savings are always likely to exceed productive outlets in private enterprise; hence public flotations must fill the breach." (The New Philosophy of Public Debt, op. cit., 30.)
Corporate Independence of Capital Markets
The experts continually remind us how important Wall Street is for the allocation of credit. Wall Street, however, is supposed to be the private sector. The Federal Reserve seems to be in the business of handling government debt, although that was not the original intention. This is endemic throughout the world, as central banks have shifted away from private sector financing and gotten into financing government.
The Keynesian argument during the Great Depression, however, was that, because business corporations presumably had no need of raising funds in the financial markets, there were insufficient new issues to absorb people's savings. At the same time, business corporations simply weren't financing new capital. As Moulton explained,
"The investigations of the Temporary National Economic Committee endeavored to show that in recent times business corporations have largely freed themselves from the necessity of raising funds in the financial markets, the bulk of the investment funds required now being obtained from their own internal resources. Accordingly, even if private business enterprise were reasonably thriving, it would still be necessary for the government to provide outlets for current money savings of the people through continuing flotations of government bonds. This conclusion has been widely accepted in government circles." (Ibid., 35.)
Despite these theories, the crisis continues to mount, yet at the same time demands become more strident to increase the level of government spending to stimulate economic recovery. Even the socialists and laissez faire capitalists are in agreement on this one. As one capitalist source put it, "[T]he IMF says that the United States and Japan have no plan to ever stem their deficits and record borrowing, creating 'latent risks include disruption in global bond and currency markets as a result of high budget deficits and debt in Japan and the United States'." ("Global Government Debt Crisis Emerging" New American)
When the John Birch Society and the Socialist Party can agree on condemning something, somebody ought to be reconsidering just how well the program is working.
#30#
Wednesday, May 2, 2012
Social Justice, V: Where Do We Go From Here?
Over the past week we've been looking at how the Just Third Way can be effective in spreading the word about these revolutionary ideas. We've come to the conclusion (or at least restated it to our own satisfaction) that the only effective way to implement the principles of economic justice is to follow the principles of social justice — properly understood.
That means that each of us has a personal responsibility to organize with others in a coordinated way on sound principles to work together to restructure the social order. As Father Ferree concluded Introduction to Social Justice,
"The completed doctrine of Social Justice places in our hands instruments of such power as to be inconceivable to former generations.
"But let us be clear about what is new and what is old. None of the elements of this theory are new. Institutions, and institutional action, the idea of the common good, the relationship of individual to common good, — all these things are as old as the human race itself. There is nothing more new in those things than in the school boy's discovery that what he has been speaking is prose; nor must we ever believe that God made man a two-legged creature, and then waited for Aristotle to make him rational. Moreover, much of the actual application of these principles to practical life is to be found in older writers under the heading 'political prudence.'
"When all that is admitted, there is still something tremendously different and tremendously important in this 'new' understanding of social virtue in general, and social justice in particular. The power that we have now to change any institution of life, the grip that we have on the social order as a whole, was always there but we did not know it and we did not know how to use it.
"Now we know.
"That is the difference."
#30#
That means that each of us has a personal responsibility to organize with others in a coordinated way on sound principles to work together to restructure the social order. As Father Ferree concluded Introduction to Social Justice,
"The completed doctrine of Social Justice places in our hands instruments of such power as to be inconceivable to former generations.
"But let us be clear about what is new and what is old. None of the elements of this theory are new. Institutions, and institutional action, the idea of the common good, the relationship of individual to common good, — all these things are as old as the human race itself. There is nothing more new in those things than in the school boy's discovery that what he has been speaking is prose; nor must we ever believe that God made man a two-legged creature, and then waited for Aristotle to make him rational. Moreover, much of the actual application of these principles to practical life is to be found in older writers under the heading 'political prudence.'
"When all that is admitted, there is still something tremendously different and tremendously important in this 'new' understanding of social virtue in general, and social justice in particular. The power that we have now to change any institution of life, the grip that we have on the social order as a whole, was always there but we did not know it and we did not know how to use it.
"Now we know.
"That is the difference."
#30#
Tuesday, May 1, 2012
Social Justice, IV: The Characteristics of Social Justice
Yesterday we looked at the "laws" of social justice as articulated by Father Ferree. These are critical, because as any architect (whether for buildings or a social system) knows, "form follows function." If a chair doesn't look like a chair, then people won't know to sit in it. Or even on it. Is that enough, however? Hardly. Not only must a chair look like a chair, it must be a chair.
This sounds obvious, but in our society many people confuse form and substance. They conclude that if something looks the way it should, then it must be the way it should. As we saw in our analysis of Keynesian economics and the Cargo Cults of the South Pacific, however, appearances can be grossly deceiving. Just because you build an airstrip or a landing dock, raise the flag and march around doesn't mean that planes and ships are going to come in bringing Spam and Coke, any more than mandating education, a high wage economy, welfare, Social Security, or anything else establishes and maintains a sound economy.
Social justice is not ensuring that people have enough to eat or a just wage or government benefits or any other thing like that. Those are all matters of individual justice or charity, not social justice. Social justice is the virtue directed not at any individual good, however great or essential, but at the common good, that network of institutions within which humanity as moral beings acquire and develop virtue by exercising our natural rights of life, liberty (freedom of association/contract) and property.
To oversimplify somewhat, social justice is not about having the State provide desired results, but in equalizing opportunity and means for people to achieve the desired results through their own efforts, with the assistance of the State if necessary to pass laws restructuring the institutions of society, but the primary responsibility rests with us. As Leo XIII pointed out, "There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.)
Understanding that, we can move on to examining the characteristics of social justice.
First Characteristic: Only By Members of Groups
The first mark of social justice is that it cannot be performed by individuals as individuals, but only by individuals as members of groups.
That is extremely important, because virtually everyone misunderstands it. The "efficient cause" (the "actor" or "agent" who carries out the act) of all social virtue is the individual as a member of a group, not an individual on his own ticket. Father Ferree considers this so important that he spends four full pages on getting the idea across.
As a college professor for more than forty years, he found that this was the single largest hurdle to understanding Catholic social teaching. It is not collectivism, nor is it any individual act of virtue carried out with a vague intention to benefit the common good indirectly.
Second Characteristic: It Takes Time
Social justice moves slowly and gradually. It requires organization, consensus building, more organization, solidarity, attention to the principle of subsidiarity — all the troublesome little details of working with actual human beings rather than abstract concepts.
Personally, I have found that this characteristic causes the most frustration to people, particularly those activists who demand immediate results. It is easy to argue that society is unjustly structured, and instant results are not only desired, but absolutely necessary. The temptation in the face of social injustice is to demand that "they" (usually the State or a power elite of any institution) Do Something — and Do It Now!
One problem with this approach is obvious. The activist is absolved from all responsibility! Once he has condemned those in power and everybody else in the immediate vicinity for failing to correct the situation, his job is done. He can go home and comfort himself with a feeling of enormous virtue. He has "raised consciousness," and can leave the dirty, tiresome and frustrating work of actually reforming the system to Somebody Else.
There is another problem. Those in power are comfortable with the operational habits of the status quo, and those not in power are ... powerless. The former have a built in resistance to change, while the latter don't think it can help matters. The problem is that the State (among other forms of government — all "organization" requires governance) is the quasi-efficient cause ("quasi" because the State, as an artificial and not a natural person, cannot be the efficient cause of anything) not of social justice, but of legal justice. Legal justice is not a particular virtue like social justice, and thus is not our direct responsibility. As the State cannot "act" (in a philosophical sense) directly on anything, it's pretty much pure chance whether the desired results will be obtained by passing laws — unless the passage of laws has been preceded by acts of social justice — which is our responsibility, not the State's.
Third Characteristic: Nothing is Impossible
In social justice there is never any such thing as helplessness. As Father Ferree stated, "No problem is ever too big or too complex, no field is ever too vast, for the methods of this social justice. Problems that were agonizing in the past and were simply dodged, even by serious and virtuous people, can now be solved with ease by any school child."
Fourth Characteristic: Eternal Vigilance
The work of social justice is never finished. This is not the same as saying that social justice takes a long time! It refers to what Pius XI called "the radical instability of society." This means that human beings change, conditions change, and our institutions — our human response to the task of being what Aristotle called "political animals" — must be restructured and reformed to meet the new conditions. This change is always happening, therefore the work of social justice is continuous.
Fifth Characteristic: Effectiveness
Work for the common good — the material cause of social justice — must be effective. You can't just do something and hope it works, or go about chanting that it would work if only people weren't human. A mere "good intention" that the common good be benefited is simply not good enough.
Sixth Characteristic: You Can't "Take it or Leave It Alone"
As Father Ferree states, "Another corollary of this characteristic of social justice (that it is never finished) is that it embraces a rigid obligation." That means that each of us is directly and individually responsible for the common good — and we must organize with others for the common good.
Now that we know (or at least have become somewhat acquainted with) the laws and characteristics of social justice — the form and substance of the virtue — our next step is, logically, to ask, "Where do we go from here?" We'll take a look at that tomorrow.
#30#
This sounds obvious, but in our society many people confuse form and substance. They conclude that if something looks the way it should, then it must be the way it should. As we saw in our analysis of Keynesian economics and the Cargo Cults of the South Pacific, however, appearances can be grossly deceiving. Just because you build an airstrip or a landing dock, raise the flag and march around doesn't mean that planes and ships are going to come in bringing Spam and Coke, any more than mandating education, a high wage economy, welfare, Social Security, or anything else establishes and maintains a sound economy.
Social justice is not ensuring that people have enough to eat or a just wage or government benefits or any other thing like that. Those are all matters of individual justice or charity, not social justice. Social justice is the virtue directed not at any individual good, however great or essential, but at the common good, that network of institutions within which humanity as moral beings acquire and develop virtue by exercising our natural rights of life, liberty (freedom of association/contract) and property.
To oversimplify somewhat, social justice is not about having the State provide desired results, but in equalizing opportunity and means for people to achieve the desired results through their own efforts, with the assistance of the State if necessary to pass laws restructuring the institutions of society, but the primary responsibility rests with us. As Leo XIII pointed out, "There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.)
Understanding that, we can move on to examining the characteristics of social justice.
First Characteristic: Only By Members of Groups
The first mark of social justice is that it cannot be performed by individuals as individuals, but only by individuals as members of groups.
That is extremely important, because virtually everyone misunderstands it. The "efficient cause" (the "actor" or "agent" who carries out the act) of all social virtue is the individual as a member of a group, not an individual on his own ticket. Father Ferree considers this so important that he spends four full pages on getting the idea across.
As a college professor for more than forty years, he found that this was the single largest hurdle to understanding Catholic social teaching. It is not collectivism, nor is it any individual act of virtue carried out with a vague intention to benefit the common good indirectly.
Second Characteristic: It Takes Time
Social justice moves slowly and gradually. It requires organization, consensus building, more organization, solidarity, attention to the principle of subsidiarity — all the troublesome little details of working with actual human beings rather than abstract concepts.
Personally, I have found that this characteristic causes the most frustration to people, particularly those activists who demand immediate results. It is easy to argue that society is unjustly structured, and instant results are not only desired, but absolutely necessary. The temptation in the face of social injustice is to demand that "they" (usually the State or a power elite of any institution) Do Something — and Do It Now!
One problem with this approach is obvious. The activist is absolved from all responsibility! Once he has condemned those in power and everybody else in the immediate vicinity for failing to correct the situation, his job is done. He can go home and comfort himself with a feeling of enormous virtue. He has "raised consciousness," and can leave the dirty, tiresome and frustrating work of actually reforming the system to Somebody Else.
There is another problem. Those in power are comfortable with the operational habits of the status quo, and those not in power are ... powerless. The former have a built in resistance to change, while the latter don't think it can help matters. The problem is that the State (among other forms of government — all "organization" requires governance) is the quasi-efficient cause ("quasi" because the State, as an artificial and not a natural person, cannot be the efficient cause of anything) not of social justice, but of legal justice. Legal justice is not a particular virtue like social justice, and thus is not our direct responsibility. As the State cannot "act" (in a philosophical sense) directly on anything, it's pretty much pure chance whether the desired results will be obtained by passing laws — unless the passage of laws has been preceded by acts of social justice — which is our responsibility, not the State's.
Third Characteristic: Nothing is Impossible
In social justice there is never any such thing as helplessness. As Father Ferree stated, "No problem is ever too big or too complex, no field is ever too vast, for the methods of this social justice. Problems that were agonizing in the past and were simply dodged, even by serious and virtuous people, can now be solved with ease by any school child."
Fourth Characteristic: Eternal Vigilance
The work of social justice is never finished. This is not the same as saying that social justice takes a long time! It refers to what Pius XI called "the radical instability of society." This means that human beings change, conditions change, and our institutions — our human response to the task of being what Aristotle called "political animals" — must be restructured and reformed to meet the new conditions. This change is always happening, therefore the work of social justice is continuous.
Fifth Characteristic: Effectiveness
Work for the common good — the material cause of social justice — must be effective. You can't just do something and hope it works, or go about chanting that it would work if only people weren't human. A mere "good intention" that the common good be benefited is simply not good enough.
Sixth Characteristic: You Can't "Take it or Leave It Alone"
As Father Ferree states, "Another corollary of this characteristic of social justice (that it is never finished) is that it embraces a rigid obligation." That means that each of us is directly and individually responsible for the common good — and we must organize with others for the common good.
Now that we know (or at least have become somewhat acquainted with) the laws and characteristics of social justice — the form and substance of the virtue — our next step is, logically, to ask, "Where do we go from here?" We'll take a look at that tomorrow.
#30#
Monday, April 30, 2012
Social Justice, III: The Laws of Social Justice
Last week we posted some comments from a correspondent regarding the effectiveness of the Just Third Way movement in getting things in place and changing the system. We pointed out what we thought was the wrong way to go about these things, so this week we'd like to lay out the right way to bring about revolutionary social change.
Given the adherence of CESJ to the principles of both economic and social justice, our tactical and strategic initiatives must not only be directed to the end of establishing and maintaining an economically just society, but be in conformity with what Father Ferree called the "laws and characteristics of social justice." Absent that, we are no better than anyone else who yields to the temptation to declare that (for us at least, because our goals are right, just, etc.) the end justifies the means.
CESJ cannot, therefore, abandon any of its principles, either of economic or social justice, without, like the hero in a Greek tragedy or today's global economy, bringing about its own destruction by the means chosen to preserve it.
Ideally, every member of CESJ should have read and internalized not only The Capitalist Manifesto and The New Capitalists, but Father Ferree's Introduction to Social Justice. We have summarized the basic principles here — but this is not a substitute for reading Father Ferree's pamphlet:
Like any other human activity, social justice must operate within certain parameters, or it ceases to be social justice. It may be something very good, or it may even be something bad, but if it does not adhere to the "laws" of social justice or conform to its characteristics, it is not social justice.
I. That the Common Good Be Kept Inviolate
In all private dealings, in all exercise of individual justice, the common good must be a primary object of solicitude. To attack or to endanger the common good in order to attain some private end, no matter how good or how necessary this latter may be in its own order, is social injustice and is wrong.
II. Cooperation, Not Conflict
Given the uniqueness of each human person, the particular good of each individual is different. Any particular good that is falsely made into an ultimate principle must necessarily be in conflict with every other particular good. Only cooperation, organization for the common good, can make a real society. This does not mean overriding or ignoring individual goods, but integrating them into the whole effort.
III. One's First Particular Good is One's Own Place in the Common Good
The first particular good of every individual or group is that that individual or group find its proper place in the common good. As Father Ferree put it, "It must be admitted that this is not the way most of us think at the present time, but that is because we have been badly educated. It must be admitted also that to carry out such a principle in practice looks like too big a job for human nature as we know it; but that is because we are individualists and have missed the point. Of course it is too big a job if each one of us and each of our groups is individually and separately responsible for the welfare of the human race as a whole. But the point is that the human race as a whole is social." (We think "political" in the Aristotelian sense is a better word here, but let's not quibble.)
IV. Each Directly Responsible
Every individual, regardless of his age or occupation or state of life, is directly responsible for the common good, because the common good is built up in a hierarchical order. That is, every great human institution consists of subordinate institutions, which themselves consist of subordinate institutions, on down to the individuals who compose the lowest and most fleeting of human institutions.
Since every one of these institutions is directly responsible for the general welfare of the one above it, it follows that every individual is directly responsible for the lower institutions which immediately surround his life, and indirectly responsible for the general welfare of his whole country and the whole world. This is the principle of subsidiarity.
V. Higher Institutions Must Never Displace Lower Ones
No institution in the vast hierarchy that we have seen can take over the particular actions of an institution or person below it. This, too, comes under the principle of subsidiarity, although this is the aspect most often ignored.
VI. Freedom of Association/Contract (Liberty)
If every natural group of individuals has a right to its own common good and a duty towards the next highest common good, it is evident that such a group has the right to organize itself formally in view of the common good. This is yet another aspect of the principle of subsidiarity . . . but this should be obvious by this time.
VII. All Vital Interests Should be Organized
All real and vital interests of life should be deliberately made to conform to the requirements of the common good.
But wait! There's more! Tomorrow we will look at the characteristics of social justice, that is, move from the form to the substance. In other words, in social justice, we must not only look good, we must actually do good.
#30#
Given the adherence of CESJ to the principles of both economic and social justice, our tactical and strategic initiatives must not only be directed to the end of establishing and maintaining an economically just society, but be in conformity with what Father Ferree called the "laws and characteristics of social justice." Absent that, we are no better than anyone else who yields to the temptation to declare that (for us at least, because our goals are right, just, etc.) the end justifies the means.
CESJ cannot, therefore, abandon any of its principles, either of economic or social justice, without, like the hero in a Greek tragedy or today's global economy, bringing about its own destruction by the means chosen to preserve it.
Ideally, every member of CESJ should have read and internalized not only The Capitalist Manifesto and The New Capitalists, but Father Ferree's Introduction to Social Justice. We have summarized the basic principles here — but this is not a substitute for reading Father Ferree's pamphlet:
THE LAWS OF SOCIAL JUSTICE
Like any other human activity, social justice must operate within certain parameters, or it ceases to be social justice. It may be something very good, or it may even be something bad, but if it does not adhere to the "laws" of social justice or conform to its characteristics, it is not social justice.
I. That the Common Good Be Kept Inviolate
In all private dealings, in all exercise of individual justice, the common good must be a primary object of solicitude. To attack or to endanger the common good in order to attain some private end, no matter how good or how necessary this latter may be in its own order, is social injustice and is wrong.
II. Cooperation, Not Conflict
Given the uniqueness of each human person, the particular good of each individual is different. Any particular good that is falsely made into an ultimate principle must necessarily be in conflict with every other particular good. Only cooperation, organization for the common good, can make a real society. This does not mean overriding or ignoring individual goods, but integrating them into the whole effort.
III. One's First Particular Good is One's Own Place in the Common Good
The first particular good of every individual or group is that that individual or group find its proper place in the common good. As Father Ferree put it, "It must be admitted that this is not the way most of us think at the present time, but that is because we have been badly educated. It must be admitted also that to carry out such a principle in practice looks like too big a job for human nature as we know it; but that is because we are individualists and have missed the point. Of course it is too big a job if each one of us and each of our groups is individually and separately responsible for the welfare of the human race as a whole. But the point is that the human race as a whole is social." (We think "political" in the Aristotelian sense is a better word here, but let's not quibble.)
IV. Each Directly Responsible
Every individual, regardless of his age or occupation or state of life, is directly responsible for the common good, because the common good is built up in a hierarchical order. That is, every great human institution consists of subordinate institutions, which themselves consist of subordinate institutions, on down to the individuals who compose the lowest and most fleeting of human institutions.
Since every one of these institutions is directly responsible for the general welfare of the one above it, it follows that every individual is directly responsible for the lower institutions which immediately surround his life, and indirectly responsible for the general welfare of his whole country and the whole world. This is the principle of subsidiarity.
V. Higher Institutions Must Never Displace Lower Ones
No institution in the vast hierarchy that we have seen can take over the particular actions of an institution or person below it. This, too, comes under the principle of subsidiarity, although this is the aspect most often ignored.
VI. Freedom of Association/Contract (Liberty)
If every natural group of individuals has a right to its own common good and a duty towards the next highest common good, it is evident that such a group has the right to organize itself formally in view of the common good. This is yet another aspect of the principle of subsidiarity . . . but this should be obvious by this time.
VII. All Vital Interests Should be Organized
All real and vital interests of life should be deliberately made to conform to the requirements of the common good.
But wait! There's more! Tomorrow we will look at the characteristics of social justice, that is, move from the form to the substance. In other words, in social justice, we must not only look good, we must actually do good.
#30#
Friday, April 27, 2012
News from the Network, Vol. 5, No. 17
This cycle's crop of candidates for office seem to be more intent on proving how evil and stupid The Other Guy is than in coming forward with something that will solve the growing problems we face today, both in the United States and abroad. That being the case, it is important that everyone in the Just Third Way movement start looking to see if there's any way to start opening doors to prime movers or potential prime movers — or even to people who can get us to people who can open the door to a prime mover. In our efforts to leave no stone unturned in our quest for economic and social justice, here's what we've been doing this week:
• This has been mostly a winding down week from the intense activity of last week that had the eighth annual rally at the Federal Reserve, the annual meeting and celebration of CESJ (Twenty-eight years and still going) and our usual client work and other mundania.
• We are preparing an informal guide to help people focus on the door-opening initiative so critical to bringing the Just Third Way to the attention of prime movers and potential prime movers. We hope to have something drafted next week.
• We are initiating contact with some of the local colleges and universities to discuss the possibility of having interns, either during the summer or during the school year. Especially in an election year we have a number of projects from which both CESJ and the interns would benefit greatly.
• A number of new contacts have come forward interested in how to advance the Just Third Way within the current system. At present, this means the "JBM S-Corp ESOP," the closest thing in the law to the Just Third Way, somewhat analogous to a Capital Homestead Act within a single company. We hope to prepare a guide showing the advantages a JBM S-Corp ESOP has over regular S-Corp ESOPs and C-Corp ESOPs.
• Reaction to many of the recent postings on this blog has been very favorable, and is reflected in a measurable increase in readership.
• As of this morning, we have had visitors from 63 different countries and 51 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, India, and Pakistan. People in the Netherlands Antilles, Mexico, France, the United States, and Hong Kong spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," Network News, and "The Keynesian Cargo Cult: Rot Bilong Keynes."
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.
#30#
• This has been mostly a winding down week from the intense activity of last week that had the eighth annual rally at the Federal Reserve, the annual meeting and celebration of CESJ (Twenty-eight years and still going) and our usual client work and other mundania.
• We are preparing an informal guide to help people focus on the door-opening initiative so critical to bringing the Just Third Way to the attention of prime movers and potential prime movers. We hope to have something drafted next week.
• We are initiating contact with some of the local colleges and universities to discuss the possibility of having interns, either during the summer or during the school year. Especially in an election year we have a number of projects from which both CESJ and the interns would benefit greatly.
• A number of new contacts have come forward interested in how to advance the Just Third Way within the current system. At present, this means the "JBM S-Corp ESOP," the closest thing in the law to the Just Third Way, somewhat analogous to a Capital Homestead Act within a single company. We hope to prepare a guide showing the advantages a JBM S-Corp ESOP has over regular S-Corp ESOPs and C-Corp ESOPs.
• Reaction to many of the recent postings on this blog has been very favorable, and is reflected in a measurable increase in readership.
• As of this morning, we have had visitors from 63 different countries and 51 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, India, and Pakistan. People in the Netherlands Antilles, Mexico, France, the United States, and Hong Kong spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," Network News, and "The Keynesian Cargo Cult: Rot Bilong Keynes."
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.
#30#
Thursday, April 26, 2012
Social Justice, II: Individualism, the Wrong Path
Yesterday we looked at some commentary on CESJ's effectiveness in getting the "One Percenters" even to discuss the Just Third Way. The problem with the critique, however, was that while it focused more or less on the principles of economic justice, it ignored the principles of social justice. We have to keep in mind at all times that the end does not justify the means.
For example, some people think that the way to achieve a society characterized by widespread ownership of capital is to take from the rich and give to the poor. That's one way . . . except that you don't establish a society in which we restore property for some only by violating it for others. Others redefine capital or private property or liberty or some other natural right — or the natural law itself — thereby achieving the desired goal by establishing it as a fiction.
No, you can only achieve the desired end of the Just Third Way by making sure that your means are fully consistent with your ends. You can't take short cuts, even with the best motives in the world. Thus, the strategy our commentator from yesterday laid out is a virtual archetype of the sort of social activism against which CESJ co-founder Father Ferree warned, and which he saw was ultimately ineffective.
Is it useful? Yes — in its place, but it is not the panacea for social ills that the activists of the 1960s or the Tea Partiers or Occupiers of today believe. It is a short cut that can lead to a permanent detour as people start to focus more on maintaining "the movement" or preserving "the organization" than in reaching the goal the movement or organization was established to reach. As Father Ferree explained,
"The favorite 'social technique' of our own time is the 'peaceful' demonstration, especially when media coverage is likely or can be arranged. Subsidiary aspects of the demonstration are boycotts, sit-ins, organized lobbying pressures, single-issue 'advocacy' and then — crossing an invisible line which is hard to define and harder still to hold — civil disobedience, violent demonstrations, and, ultimately, terrorism!
"Despite the social intent of all such techniques, and their almost universal arrogation to themselves of the terms 'Social Justice' or 'Justice and Peace,' these techniques are all radically individualistic. There are several criteria which can be applied to test this:
"1) They are directed immediately to some specific solution already determined in the mind of the 'activist'; they are never a willingness to dialogue with other and differing opinions on what the problem really is.
"2) They are always intensely concerned with the methodologies of pressure, not with those of competence in the matter in question.
"3) They all require 'time out' from the day-to-day social intercourse of life, and raise the question of how many objects one can juggle at any one time without dropping some or all.
"4) Any 'demonstration' is by definition a demand on someone else to do something. It takes for granted that whatever is wrong is the personal work of someone else, not the common agony of all; and it always knows exactly who and where the someone is.
"All this can be summed up in the observation that the 'social activist' as we have seen them so far, is an earnest amateur by profession.
"This is not to say that such 'professional amateurism' is always wrong. It is wrong as a normal methodology. If it obeys the same principles which would permit a just war, or the insurrection against an entrenched tyrant, more power to it! But it is a hopeless and hence unjust substitute for the patient and full-time organization of every aspect of life which we have seen in the necessary implementation of Social Justice." (Rev. William J. Ferree, Forty Years After. . ., p. 38.)
Was our critic wrong, then? No — but he or she wasn't completely right, either . . . and it's that "completely" that renders the effort ineffective, as we shall see when we pick up this series again next week.
#30#
For example, some people think that the way to achieve a society characterized by widespread ownership of capital is to take from the rich and give to the poor. That's one way . . . except that you don't establish a society in which we restore property for some only by violating it for others. Others redefine capital or private property or liberty or some other natural right — or the natural law itself — thereby achieving the desired goal by establishing it as a fiction.
No, you can only achieve the desired end of the Just Third Way by making sure that your means are fully consistent with your ends. You can't take short cuts, even with the best motives in the world. Thus, the strategy our commentator from yesterday laid out is a virtual archetype of the sort of social activism against which CESJ co-founder Father Ferree warned, and which he saw was ultimately ineffective.
Is it useful? Yes — in its place, but it is not the panacea for social ills that the activists of the 1960s or the Tea Partiers or Occupiers of today believe. It is a short cut that can lead to a permanent detour as people start to focus more on maintaining "the movement" or preserving "the organization" than in reaching the goal the movement or organization was established to reach. As Father Ferree explained,
"The favorite 'social technique' of our own time is the 'peaceful' demonstration, especially when media coverage is likely or can be arranged. Subsidiary aspects of the demonstration are boycotts, sit-ins, organized lobbying pressures, single-issue 'advocacy' and then — crossing an invisible line which is hard to define and harder still to hold — civil disobedience, violent demonstrations, and, ultimately, terrorism!
"Despite the social intent of all such techniques, and their almost universal arrogation to themselves of the terms 'Social Justice' or 'Justice and Peace,' these techniques are all radically individualistic. There are several criteria which can be applied to test this:
"1) They are directed immediately to some specific solution already determined in the mind of the 'activist'; they are never a willingness to dialogue with other and differing opinions on what the problem really is.
"2) They are always intensely concerned with the methodologies of pressure, not with those of competence in the matter in question.
"3) They all require 'time out' from the day-to-day social intercourse of life, and raise the question of how many objects one can juggle at any one time without dropping some or all.
"4) Any 'demonstration' is by definition a demand on someone else to do something. It takes for granted that whatever is wrong is the personal work of someone else, not the common agony of all; and it always knows exactly who and where the someone is.
"All this can be summed up in the observation that the 'social activist' as we have seen them so far, is an earnest amateur by profession.
"This is not to say that such 'professional amateurism' is always wrong. It is wrong as a normal methodology. If it obeys the same principles which would permit a just war, or the insurrection against an entrenched tyrant, more power to it! But it is a hopeless and hence unjust substitute for the patient and full-time organization of every aspect of life which we have seen in the necessary implementation of Social Justice." (Rev. William J. Ferree, Forty Years After. . ., p. 38.)
Was our critic wrong, then? No — but he or she wasn't completely right, either . . . and it's that "completely" that renders the effort ineffective, as we shall see when we pick up this series again next week.
#30#
Wednesday, April 25, 2012
Social Justice, I: Introduction
Most of the postings on this blog have dealt with the binary economics aspect of the Just Third Way. Having just had our eighth annual rally outside the Federal Reserve and the twenty-eighth CESJ annual celebration, the question came up as to the effectiveness of the effort to implement the Just Third Way, especially a Capital Homestead Act. As one correspondent declared rather forcefully (names have been changed to protect the guilty),
"Why, I ask, are we not part of this national debate on economics? After 40 years, we are not even mentioned as a potential or even possible solution. We do not have the attention of the system! Why can we not see that? We are less than ignored. We are ridiculed! Even the impressive Russell Long victory was really not a victory for democratic economics as it was ultimately perverted by the crooked Congress (funded by the 1%). We cannot beat them without calling them out to the American people.
"WE HAVE TO OUT THE 1% AND CALL THEM WHAT THEY ARE . . . ROBBER BARONS! We should publish a list of them . . . brand them for what they are . . . break down our argument for change into individual elements. See them for what they are, a faceless minority hiding behind even more faceless corporations doing their bidding. We should be working hand in glove with the 99% converting them over from socialism to binary economics. That is where our time should be spent . . . not in trying to get their leaders to pass the litmus test, of ideological purity according to CESJ. We should become a virus in the system and not a flea crawling across its back."
This is a fairly accurate statement of the goal of economic justice and the standard means chosen to reach goals in our society. The problem here, however, is that the strategy and the tactics do not take into account the fact that CESJ is the Center for Economic and Social Justice. People can be up to speed on the Kelsonian principles of binary economics and the necessity of implementing and maintaining the four pillars of an economically just society.
To refresh our memories, the three principles of economic justice are,
• Participation (the input principle which demands as a fundamental human right, equal opportunity for every person to contribute to the production of society's marketable wealth both as a worker and as an owner of productive assets),
• Distribution (the outtake principle which holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or "just wage") for each particular type of human contribution to the production of marketable wealth. This principle dictates that the contribution of capital should be compensated by the "just profit" generated by the project or enterprise), and
• Harmony (the feedback principle that balances and restores participation and distribution within the economic system. This principle was referred to by Louis Kelso and Mortimer Adler as the "principle of limitation" and by others as "social justice," as it calls for the restructuring of the economic system to restore participative and distributive justice),
The four pillars of an economically just society are:
• A limited economic role for the State,
• Free and open markets within an understandable and enforceable legal system as the best means for determining just wages, just prices, and just profits,
• Restoration of the rights of private property, especially in corporate equity and other forms of business organization, and
• Widespread direct ownership of capital, individually or in free association with others.
So, you say, what's the problem? That is what we'll look at tomorrow.
#30#
"Why, I ask, are we not part of this national debate on economics? After 40 years, we are not even mentioned as a potential or even possible solution. We do not have the attention of the system! Why can we not see that? We are less than ignored. We are ridiculed! Even the impressive Russell Long victory was really not a victory for democratic economics as it was ultimately perverted by the crooked Congress (funded by the 1%). We cannot beat them without calling them out to the American people.
"WE HAVE TO OUT THE 1% AND CALL THEM WHAT THEY ARE . . . ROBBER BARONS! We should publish a list of them . . . brand them for what they are . . . break down our argument for change into individual elements. See them for what they are, a faceless minority hiding behind even more faceless corporations doing their bidding. We should be working hand in glove with the 99% converting them over from socialism to binary economics. That is where our time should be spent . . . not in trying to get their leaders to pass the litmus test, of ideological purity according to CESJ. We should become a virus in the system and not a flea crawling across its back."
This is a fairly accurate statement of the goal of economic justice and the standard means chosen to reach goals in our society. The problem here, however, is that the strategy and the tactics do not take into account the fact that CESJ is the Center for Economic and Social Justice. People can be up to speed on the Kelsonian principles of binary economics and the necessity of implementing and maintaining the four pillars of an economically just society.
To refresh our memories, the three principles of economic justice are,
• Participation (the input principle which demands as a fundamental human right, equal opportunity for every person to contribute to the production of society's marketable wealth both as a worker and as an owner of productive assets),
• Distribution (the outtake principle which holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or "just wage") for each particular type of human contribution to the production of marketable wealth. This principle dictates that the contribution of capital should be compensated by the "just profit" generated by the project or enterprise), and
• Harmony (the feedback principle that balances and restores participation and distribution within the economic system. This principle was referred to by Louis Kelso and Mortimer Adler as the "principle of limitation" and by others as "social justice," as it calls for the restructuring of the economic system to restore participative and distributive justice),
The four pillars of an economically just society are:
• A limited economic role for the State,
• Free and open markets within an understandable and enforceable legal system as the best means for determining just wages, just prices, and just profits,
• Restoration of the rights of private property, especially in corporate equity and other forms of business organization, and
• Widespread direct ownership of capital, individually or in free association with others.
So, you say, what's the problem? That is what we'll look at tomorrow.
#30#
Tuesday, April 24, 2012
A Better Way to Save, V: Capital Homesteading for Every Citizen
We've addressed this particular issue from so many directions and in so many ways that it starts to get a little difficult to try and pique people's interest and get them excited about the Just Third Way. That being the case, we hope we'll be forgiven if we simply outline an alternative to what Louis Kelso and Mortimer Adler called the slavery of past savings. If the previous postings on this blog or in this series haven't done the trick, we'll need a little more time to see what can hook you.
The basic problem with using past savings to finance new capital formation is that, by definition, existing accumulations are a virtual monopoly of the wealthy. That being the case, traditional rights of private property dictate that whoever finances new capital owns the new capital. Obviously, then, under the current system the rich are going to get richer, and the poor are going to get poorer.
That is, unless you take the dishonest expedient that underpins Keynesian economics and "re-edit the dictionary," changing what it means for a right to be a right. This makes everything simple. If someone else has something you want, you just re-define his or her rights, stick a gun or the equivalent in his or her face, and claim it for your own. As Keynes explained the simplicity of his philosophy,
"It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized." (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
Any Aristotelian or Thomist will instantly grasp the incredible, even breathtaking scope of Keynes's claim. If true, Keynes's declaration not only abolishes private property, but free association — liberty — by claiming that the State can alter the terms of any "money contract" at will simply by changing the definition of a thing. Keynes was evidently unaware that all contracts are "money contracts," involving the exchange of the present value of existing or future marketable goods or services — "consideration" — or no contract exists.
The power to change the definition of a thing is the power to change the thing's "substantial nature" — its essence. Keynes was, in effect, claiming that the State, if not a god per se, is at least something with the power of God to change truth through transubstantiation.
This has led to the situation in which the great mass of people has become convinced that all benefits flow from the State. No recourse is to be had from any other source for anybody or any thing. The fact that this declaration directly contradicts Catholic social teaching is deemed irrelevant. As Pope Leo XIII clearly stated, ""There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.)
As we have seen, flawed ideas about money, credit and private property prevent people from implementing a viable solution to today's economic crisis and the increasing State control over their lives: "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Ibid., § 46.)
By supporting a "Capital Homesteading" program that would enable every child, woman and man to acquire capital that pays for itself out of future profits on credit without redistributing existing wealth, we can empower people to resist the unjust inroads of the State. That, of course, leads us into a brief description of Capital Homesteading.
Capital Homesteading is an analogue of the nineteenth century American programs enacted to bring about a broad distribution of the ownership of land. It expands the concept to include ownership of advanced technologies, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy.
A "Capital Homestead Act" would be a national economic policy based on the binary growth model, designed to lift barriers in the present financial and economic system and universalize access to the means of acquiring and possessing capital assets. A Capital Homestead Act would allow every child, woman and man to accumulate, a target level of assets sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.
The chief means for doing this would be a tax-deferred "Capital Homestead Account." Under "Capital Homesteading," a citizen's tax-sheltered capital asset accumulation account, similar to an Individual Retirement Account (IRA). Each capital homesteader's account would be able to receive annual allocations of interest-free, productive credit and new asset-backed money issued by the central bank and administered by local commercial banks. This new money and credit would then be invested in feasible private sector capital formation and expansion projects of businesses that would issue new shares to be purchased and sheltered in the citizen's Capital Homestead Account. After the "future savings" (future profits) generated by the productive assets paid off each year's Capital Homestead investment (loan), the citizen would continue to receive in the form of dividends the incomes generated by those capital assets.
#30#
The basic problem with using past savings to finance new capital formation is that, by definition, existing accumulations are a virtual monopoly of the wealthy. That being the case, traditional rights of private property dictate that whoever finances new capital owns the new capital. Obviously, then, under the current system the rich are going to get richer, and the poor are going to get poorer.
That is, unless you take the dishonest expedient that underpins Keynesian economics and "re-edit the dictionary," changing what it means for a right to be a right. This makes everything simple. If someone else has something you want, you just re-define his or her rights, stick a gun or the equivalent in his or her face, and claim it for your own. As Keynes explained the simplicity of his philosophy,
"It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized." (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
Any Aristotelian or Thomist will instantly grasp the incredible, even breathtaking scope of Keynes's claim. If true, Keynes's declaration not only abolishes private property, but free association — liberty — by claiming that the State can alter the terms of any "money contract" at will simply by changing the definition of a thing. Keynes was evidently unaware that all contracts are "money contracts," involving the exchange of the present value of existing or future marketable goods or services — "consideration" — or no contract exists.
The power to change the definition of a thing is the power to change the thing's "substantial nature" — its essence. Keynes was, in effect, claiming that the State, if not a god per se, is at least something with the power of God to change truth through transubstantiation.
This has led to the situation in which the great mass of people has become convinced that all benefits flow from the State. No recourse is to be had from any other source for anybody or any thing. The fact that this declaration directly contradicts Catholic social teaching is deemed irrelevant. As Pope Leo XIII clearly stated, ""There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.)
As we have seen, flawed ideas about money, credit and private property prevent people from implementing a viable solution to today's economic crisis and the increasing State control over their lives: "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Ibid., § 46.)
By supporting a "Capital Homesteading" program that would enable every child, woman and man to acquire capital that pays for itself out of future profits on credit without redistributing existing wealth, we can empower people to resist the unjust inroads of the State. That, of course, leads us into a brief description of Capital Homesteading.
Capital Homesteading is an analogue of the nineteenth century American programs enacted to bring about a broad distribution of the ownership of land. It expands the concept to include ownership of advanced technologies, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy.
A "Capital Homestead Act" would be a national economic policy based on the binary growth model, designed to lift barriers in the present financial and economic system and universalize access to the means of acquiring and possessing capital assets. A Capital Homestead Act would allow every child, woman and man to accumulate, a target level of assets sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.
The chief means for doing this would be a tax-deferred "Capital Homestead Account." Under "Capital Homesteading," a citizen's tax-sheltered capital asset accumulation account, similar to an Individual Retirement Account (IRA). Each capital homesteader's account would be able to receive annual allocations of interest-free, productive credit and new asset-backed money issued by the central bank and administered by local commercial banks. This new money and credit would then be invested in feasible private sector capital formation and expansion projects of businesses that would issue new shares to be purchased and sheltered in the citizen's Capital Homestead Account. After the "future savings" (future profits) generated by the productive assets paid off each year's Capital Homestead investment (loan), the citizen would continue to receive in the form of dividends the incomes generated by those capital assets.
#30#
Monday, April 23, 2012
A Better Way to Save, IV: The Purpose of Production
Last week we saw that Keynes was faced with something of a conundrum. How, at one and the same time, do you decrease consumption to accumulate savings to finance new capital, and increase consumption to justify new capital investment? Harold Moulton gave the answer to this "economic dilemma" in his counter-Keynesian monograph, The Formation of Capital (1935), but we suspect that Keynes — while he probably read it — completely ignored it because it pointed out the fallacies of the past savings approach.
Keynes had his own solution: produce goods and services that are not marketable! Classical economics assumed as a matter of course that if someone engaged in productive activity, it was with the intent of bettering him- or herself. As Pope Leo XIII agreed,
"It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. If one man hires out to another his strength or skill, he does so for the purpose of receiving in return what is necessary for the satisfaction of his needs; he therefore expressly intends to acquire a right full and real, not only to the remuneration, but also to the disposal of such remuneration, just as he pleases. Thus, if he lives sparingly, saves money, and, for greater security, invests his savings in land, the land, in such case, is only his wages under another form; and, consequently, a working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels. Socialists, therefore, by endeavoring to transfer the possessions of individuals to the community at large, strike at the interests of every wage-earner, since they would deprive him of the liberty of disposing of his wages, and thereby of all hope and possibility of increasing his resources and of bettering his condition in life." (Rerum Novarum, § 5.)
Keynes said (in essence), baloney. Screw the market. Liberty and private property? Feh. The private sector isn't in charge, anyway. The State is in charge of everything, and has been (according to Keynes) for at least 4,000 years. State save us! The purpose of production is not consumption. Neither Adam Smith nor the popes knew what they were talking about. The purpose of production is to pile up wealth to reinvest in capital to provide jobs to realize effective demand to justify the capital that produces the wealth to pile up. As Keynes pontificated,
"The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (John Maynard Keynes, The Economic Consequences of the Peace (1919), 2.iii.)
Of course, there has to be enough production of marketable goods and services to keep people sufficiently contented not to overthrow the government or start burning economists at the stake. The problem is to get sufficient effective demand into the hands of consumers to allow them to buy the marketable goods and services that keep them alive, and yet decrease consumption to provide savings.
Yes, but how?
Simple. By creating money that pays for production of non-marketable goods and services! Paying for the labor to produce non-marketable goods and services increases the effective demand that allows consumers to buy needed goods and services, but does not increase the supply of those same goods and services. Further, you can create all the money you want to do this and it won't cause inflation because the new money is only paying for goods that aren't sold! The fact that the price level rises is, according to Keynes, due to "other factors." It's not "true inflation."
That's the theory, anyway.
Okay, what sort of non-marketable goods and services did Keynes say we should produce in order to get the economy rolling again? Oh, anything, just as long as the goods are not meant for use, or were to be destroyed in some fashion after manufacture without adding to what is available in the market — pyramids, cathedrals, even war if the politicians can't think of anything sufficiently useless on which to spend money.
The massive waste of lives and resources that such a program entails is irrelevant as long as you gain your immediate end. Mounting debt, depleted resources, ruined lives — these are long run problems. We're only interested in the short term. In the long run, as Keynes claimed, we're all dead. Screw tomorrow. We Want It Now.
Of course, we could always address the Great Savings Dearth by doing something that actually helps people save instead of allowing the government to waste. We'll take a look at one possibility starting tomorrow.
#30#
Keynes had his own solution: produce goods and services that are not marketable! Classical economics assumed as a matter of course that if someone engaged in productive activity, it was with the intent of bettering him- or herself. As Pope Leo XIII agreed,
"It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. If one man hires out to another his strength or skill, he does so for the purpose of receiving in return what is necessary for the satisfaction of his needs; he therefore expressly intends to acquire a right full and real, not only to the remuneration, but also to the disposal of such remuneration, just as he pleases. Thus, if he lives sparingly, saves money, and, for greater security, invests his savings in land, the land, in such case, is only his wages under another form; and, consequently, a working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels. Socialists, therefore, by endeavoring to transfer the possessions of individuals to the community at large, strike at the interests of every wage-earner, since they would deprive him of the liberty of disposing of his wages, and thereby of all hope and possibility of increasing his resources and of bettering his condition in life." (Rerum Novarum, § 5.)
Keynes said (in essence), baloney. Screw the market. Liberty and private property? Feh. The private sector isn't in charge, anyway. The State is in charge of everything, and has been (according to Keynes) for at least 4,000 years. State save us! The purpose of production is not consumption. Neither Adam Smith nor the popes knew what they were talking about. The purpose of production is to pile up wealth to reinvest in capital to provide jobs to realize effective demand to justify the capital that produces the wealth to pile up. As Keynes pontificated,
"The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (John Maynard Keynes, The Economic Consequences of the Peace (1919), 2.iii.)
Of course, there has to be enough production of marketable goods and services to keep people sufficiently contented not to overthrow the government or start burning economists at the stake. The problem is to get sufficient effective demand into the hands of consumers to allow them to buy the marketable goods and services that keep them alive, and yet decrease consumption to provide savings.
Yes, but how?
Simple. By creating money that pays for production of non-marketable goods and services! Paying for the labor to produce non-marketable goods and services increases the effective demand that allows consumers to buy needed goods and services, but does not increase the supply of those same goods and services. Further, you can create all the money you want to do this and it won't cause inflation because the new money is only paying for goods that aren't sold! The fact that the price level rises is, according to Keynes, due to "other factors." It's not "true inflation."
That's the theory, anyway.
Okay, what sort of non-marketable goods and services did Keynes say we should produce in order to get the economy rolling again? Oh, anything, just as long as the goods are not meant for use, or were to be destroyed in some fashion after manufacture without adding to what is available in the market — pyramids, cathedrals, even war if the politicians can't think of anything sufficiently useless on which to spend money.
The massive waste of lives and resources that such a program entails is irrelevant as long as you gain your immediate end. Mounting debt, depleted resources, ruined lives — these are long run problems. We're only interested in the short term. In the long run, as Keynes claimed, we're all dead. Screw tomorrow. We Want It Now.
Of course, we could always address the Great Savings Dearth by doing something that actually helps people save instead of allowing the government to waste. We'll take a look at one possibility starting tomorrow.
#30#
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