Preventable Disasters

It was one of the biggest disasters in history, wiping out half the population of a country, either through death or emigration — and it was entirely preventable. An Gorta Mór, "The Great Hunger," that hit Ireland in the 1840s was an artificial situation caused by shipping massive quantities of food out of a country in which the subsistence crop had failed. The situation was made worse by paying lip service to "free market" principles yet preventing the importation of relief supplies until too late to do much good. The argument was that freely choosing to give away food to the starving interfered with the free market. Relief from America was prohibited until a foodstuff — "flint corn" ground into cornmeal — could be found that would not bring down retail prices of other, more familiar food.

While there is otherwise no comparison with the Hunger, the current "financial crisis" afflicting Ireland was, like the "Great Recession" that has been declared "officially" over but still continues in reality, completely preventable. Further, as was the case over 150 years ago, relief is readily at hand. Relief is again prevented, however, by the refusal of the powers-that-be to consider the obvious remedy: abandon disproved Keynesian planned and centrally controlled market principles, and reform the financial system to serve the growth needs of the private sector instead of the State.

Rather than take the obvious course, what we see in today's Wall Street Journal is the continued lament that Ireland's fate is irrevocably linked to the financial health of what Pope Pius XI called, a "despotic economic dictatorship . . . who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure." (Charles Forelle and David Enrich, "Ireland's Fate Tied To Doomed Banks," Wall Street Journal, 11/10/10, A1, A16.) As "the social justice pope" explained,

This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will. (Quadragesimo Anno, §§ 105-106.)

This should come as no surprise. If you saw the Wall Street Journal yesterday morning, "Ireland's Next Blow Could Be Home Loans," C1, you're already aware of the next tsunami facing the Irish economy — 25% of home mortgages are facing foreclosure by the end of the year. Disaster is only being delayed, not diverted, by extending the time it takes for foreclosures to take effect. This will only be effective if a genuine solution can be found and implemented, instead of hoping the horse will learn to sing.

This makes it all the more critical that somebody start paying attention to what Louis Kelso called, "the economics of common sense," binary economics, of which CESJ's proposed application, "Capital Homesteading," holds significant promise not only to halt the continuing decay, but reverse it rather spectacularly.

It's not as if any of this is particularly new — or that the usual solutions are doing anything other than to increase despair. As the late Frank Hall, a columnist in Ireland's most popular family magazine, Ireland's Own, pointed out in response to a letter I sent him on the same problem . . . in 1993 . . . ("Frankly Speaking: We've Tried Everything Else!" Ireland's Own, July 23, 1993, p. 7.), "We have tried everything else — and it hasn't worked. We're out of ideas and running short of time."

And — frankly speaking — what is there to be afraid of? As Mr. Hall said to the Nervous Nellies, "Now, steady on, folks, don't back away from this. It concerns you, unless you have been lucky enough to win top prize in the Lotto."

The fact is, few of us are going to win the lottery. Nor is "the government" going to be able to "create jobs" out of thin air when they can't even save the financial services industry in Ireland that caused the problem in the first place. As Harold Moulton pointed out a few decades ago, the two key factors in any recovery — or in a sound economy, for that matter — are production and employment.

Louis Kelso and Mortimer Adler refined Dr. Moulton's ideas in their two co-authored books, The Capitalist Manifesto (1958) and The New Capitalists (1961). Kelso and Adler added that "employment" should not only include employment of human labor, but of all resources, including capital . . . which must be broadly and directly owned by individual men, women, and children, not conglomerates or colossal corporations owned by a tiny elite and controlled by the State. (Caveat: we've no objections to colossal corporations or conglomerates . . . as long as the free market and the needs of the economy dictated the size and they are broadly and directly owned by people who have the full rights of property.)

And how are ordinary people supposed to become owners, not just of "the corporations," but of all agricultural, industrial, and commercial capital, to say nothing of their own homes and the land itself? That's the simplest part, though probably not very easy, considering the ossified financial and economic thinking that got Ireland (and the United States) into this mess in the first place.

To start, let's talk about the money. As Cyrano said in Rostand's play, "You speak the first word of intelligence!" The usual assumption is that the only way to finance new capital formation — and thus acquisition of capital by those who presently do not own capital — is to cut consumption, accumulate money savings, and then invest.

Not so, as Moulton explained in The Formation of Capital (1935) that, while certainly not as witty and entertaining — or as dangerous — as everybody's favorite big-nosed Gascon, certainly speaks words of intelligence. Financing for both new and replacement capital can be obtained through the expansion of commercial bank credit — for which, significantly, existing accumulations of savings are not required for anything other than as collateral.

By companies and individuals discounting and rediscounting bills of exchange at commercial banks, which can in turn rediscount such qualified paper at the central bank, there will always be sufficient credit available for all financially feasible investment without first having to cut consumption and save. This is why Kelso and Adler called their refinement of Moulton's work "A Proposal to Free Economic Growth from the Slavery of [Past] Savings" — the subtitle of their second collaboration, The New Capitalists.

The Center for Economic and Social Justice has applied Kelso and Adler's principles in developing "Capital Homesteading," a proposal that would make it possible for every man, woman, and child in a country to accumulate capital purchased on credit sufficient to meet common domestic needs adequately. Other vehicles have also been developed, such as the Homeowners Equity Corporation, or "HEC," and the Citizens Land Bank, or "CLB."

By means of these financing and ownership vehicles (particularly adaptable to the Irish situation), plain old "ordinary" people could become direct owners of their own homes and of the land and infrastructure in their communities. Actual flesh-and-blood people would thereby derive the benefits of ownership instead of it going to some absentee landlord, a faceless financial institution, or a spendthrift bureaucrat at Dublin Castle.

So — what's keeping Ireland or the U.S. from adopting Capital Homesteading if it's so good?

You are. Have you bothered to get in touch with any of your contacts, regardless how meek and lowly, or rich and lofty, and let them know there's a solution possible? Have you opened the door to these ideas anywhere? And have you kept at it, not taking, "Oh, yes, I know all about that" (oh, really?) for an answer?

As Father William Ferree pointed out in the conclusion to Introduction to Social Justice,

The theory of Social Justice which has been outlined in this pamphlet is tremendously important and far-reaching. No mere pamphlet could hope to outline the whole theory or to explore all its consequences. That is why this pamphlet is called only an 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 new and tremendously important in this work of Pope Pius XI. 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.

 So — what are you waiting for?

#30#

Open the Door, Richard!

Or whatever your name happens to be. Over the past several weeks we've been urging people to step up their door-opening efforts and get a hearing for the ideas of the Just Third Way, especially at this point the critical difference between credit for bad purposes . . . such as consumption, gambling (you know, what most people call "investing" on Wall Street), government deficits, and all the other unproductive activities that end up in the category of "It Seemed Like A Good Idea At The Time" . . . sort of like jumping off the Empire State Building and having second thoughts about the time the 20th floor zips by.

In any event, at the top of today's concerns is the $600 billion stimulus package being pushed by Obananke, or Berbama, or whatever they call themselves. It doesn't really matter. Whichever way it goes lacks the cleverness of George Bernard Shaw's neologism "the Chesterbelloc" to describe what he termed the terrible two-headed combination of G. K. Chesterton and Hilaire Belloc.

Unfortunately, what the Obamankeama proposes also lacks the basic soundness of the original, non-genuine-without-this-seal distributism. As we've explained once or twice before, distributism as originally conceived by Chesterton and Belloc differs substantially from the Just Third Way only in its acceptance of the alleged necessity of existing accumulations to finance new capital formation. Get over that pons asinorum, and distributism becomes easily attainable instead of a navel-gazing pastime of a nit-picking pseudo elite. (Commercial break: Dr. Harold G. Moulton's The Formation of Capital, 1935, and Louis Kelso & Mortimer Adler's The New Capitalists, 1961, close the toll booth on the pons, and open up the opportunity for capital ownership to everyone.)

So. What's wrong with the Bamaramanke's latest two-thirds of a trillion dollar spending spree? (I mean, besides the fact that I could put 0.000000001% of that to very good use . . . wine, women, and song are getting expensive. I'm going to have to stop singing.) We came up with a few thoughts on the subject.

The $600 billion stimulus package is based on an unquestioned, dogmatic belief in the necessity of existing accumulations of savings to finance new capital formation and thus create jobs. The basic assumption is that the wherewithal for new investment simply does not exist unless people cut consumption, accumulate money savings, and then invest. Keynesian economics is built on this assumption, which is also embodied in Monetarist/Chicago school economics as well as the Austrian school. Inflating the currency is, in Keynesian economics, a way to shift "forced savings" from consumers to producers via a rise in the price level — consumers "save" (i.e., cut consumption) by getting less for their money, while producers make greater profits, thereby accumulating financial capital.

The assumption that you cannot finance new capital formation without first cutting consumption was disproved by Dr. Harold Moulton, president of the Brookings Institution from 1916 to 1952, in his 1935 "contra-New Deal" book, The Formation of Capital (supra). In sharp contrast to the assertions of Lord Keynes, Dr. Moulton presented historical evidence demonstrating that periods of intense capital formation were not preceded by decreases in consumption, as Keynes declared was absolutely necessary, but by increases in consumption.

That is, money savings were not being accumulated, but depleted. The financing for new capital formation came not from "forced savings" achieved by inflation and shifting purchasing power from consumers to producers, but by the expansion of commercial bank credit, repaid out of the future profits generated by the capital being financed. The new money was backed not by government debt, but by bills drawn on the present value of existing and future marketable goods and services, and thus the capital assets being financed — an asset-backed as opposed to a debt-backed currency.

In 1936 Dr. Moulton published The Recovery Problem in the United States, in which he pointed out that any viable program of economic recovery has to concentrate on two critical factors: production and employment. In conformity with "Say's Law of Markets," you cannot consume unless you first produce, and there can be no productive employment if there is consumption without production. Production is therefore necessary both to produce marketable goods and services, and to generate the "effective demand" essential to clear those same goods and services at market prices.

In the late 1950s and early 1960s Louis Kelso and Mortimer Adler co-authored The Capitalist Manifesto (1958) and The New Capitalists (1961). Particularly in the latter volume Kelso and Adler refined Moulton's work by pointing out that the value of human labor is falling relative to advancing technology and competition from lower-priced labor in other countries. Production remains critical to the proper functioning of any economy, whether in recovery or in full health, but employment — labor income — must be supplemented with capital income in order to ensure that people have adequate incomes and to generate the effective demand essential to clearing marketable goods and services produced.

Because wage earners are seldom able to cut consumption and save, Kelso and Adler advocated applying Moulton's findings regarding corporate finance to individuals, permitting ordinary people to first invest, then save and repay the capital acquisition loans out of future profits. In this regard, the subtitle of their second book is significant: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." Kelso's work was the basis for the "Employee Stock Ownership Plan" or "ESOP," which has enabled more than 10 million workers to become part owners of the companies that employ them without cutting consumption, risking personal savings, or taking cuts in pay.

CESJ has proposed an application of Kelso's theories called "Capital Homesteading" that would enable individuals to accumulate an estimated $500 thousand in capital on credit on a tax deferred basis. This would generate an estimated $1.6 million in dividend income from birth to age 65. America's capital needs would be met without artificial and inflationary stimulus packages, and entitlements, currently two-thirds of the federal budget, would be decreased dramatically.

If, instead, the $600 billion stimulus goes through (as, absent organized action, appears to be inevitable), America's wage earners will see reductions in the purchasing power of their money. Following the pattern established in the last two years, producers will not reinvest their greater profits in new capital, but will use the additional cash to "go private" (i.e., buy back their own shares), or invest in other securities on the stock market.

The effect of the stimulus to date has been to raise prices of both debt and equity on the secondary market, and this trend will continue as investors risk their money in speculative gains instead of putting it into new capital formation — the ROI is higher, chiefly because the increased demand for secondary issues is artificially driving up prices. This is similar to the situation that existed prior to October 1929, the difference being that 80 years ago money was also being created for new capital investment. If the current trend continues, there will be a drastic decline in share values as soon as the speculative prices cannot be supported by non-existent production, and the non-existent production cannot be supported by non-existent consumer demand.

Nor will increased consumer credit or government spending take up the slack. Government spending is non-productive. Consumer credit temporarily increases effective demand but at the cost of reductions in future consumption. If interest is charged on the consumer loans, future effective demand is reduced further, making the consumer worse off than before. Money created for consumption and government spending, as is the case with money created for speculation on Wall Street, does nothing to foster genuine economic growth, inflates the currency at the expense of wage earners, and undermines the country's productive capacity by depriving the productive sector of critically needed financing for new capital.

Since its formation in the 1930s, the Federal Reserve's Open Market Committee has, in effect, subverted the Federal Reserve from its original mission. This was to provide liquidity for qualified private sector investment by rediscounting bills of exchange drawn on financially feasible agricultural, commercial, and industrial capital investment. This was to be supplemented with limited open market operations in private sector bills of exchange drawn by non-member banks. The FOMC has substituted for private sector investment the technically prohibited practice of monetizing government deficits by purchasing "secondary" government securities.

How is this any use in getting doors opened? Well, for one, it gives you the argument to present to someone who is worried about the latest effort to force economic recovery without all that bothersome production and ownership of new capital. For another, it allows you to segue into opening the door for somebody to talk to members of the CESJ core group, with emphasis on Norm.

For example, you might just happen to mention that Norm was instrumental in persuading the late Senator Russell Long of Louisiana to champion the initial enabling legislation for the ESOP. It wouldn't hurt to say that he is an experienced interviewee on radio shows, and recently returned from China, where he participated in the Caux Roundtable on ethics in business, and Buffalo, New York, where he was on a panel at the Canada-U.S. Brownfields Summit presenting new possibilities for financing the "right-sizing" of cities. Some people might even find it significant that Norm met with the pope in 1986, and was Deputy Chairman of President Reagan's Task Force on Project Economic Justice, a privately funded effort to present an alternative program of economic development to combat Marxism in Central America and the Caribbean Basin.

We might mention that the "pitch" above seems to have generated interest at a radio station or two, especially with the worry over how the "end of the recession" officially proclaimed for last year doesn't seem to have done too much for anybody other than Wall Street gamblers and government bureaucrats.

#30#

"We Do It All"

How often have you seen an advertisement assert, "We do it all!" Usually this is from someone trying to start up a home-based service business, or an established service company trying to improve its image or expand its client base. They certainly get (and deserve) points for initiative, but face it: nobody can "do it all," or anarchy would be a viable alternative to conventional government. Man being political by nature, as Aristotle pointed out (that is, by nature associates with others within a political unit), solutions as well as problems come from organized human behavior.

That is why the virtual tsunami of dependency on the State that seems to be growing exponentially, seemingly by the day, is "bad." It's not just that the State is the wrong tool for doing anything other than it was designed specifically to do. That is, the State's job is to provide a level playing field and police abuses. We could insert the Preamble to the U.S. Constitution if you really want more detail, but just about everything can fit under those two broad categories.

It's not even that our growing dependency on the State is a very bad thing for our individual development as full human beings, that it's contrary to nature, that lack of competition leads to monopolization and concentration of power and the resultant corruption, and so on, etc., etc., etc. The biggest immediate gripe that should be on everyone's lips when yet one more proposal is made for expanding State power or demand is made that "they" (the State) should "do something" is that, frankly, the State is incompetent outside of its proper sphere, and — if not properly designed and maintained — frequently within that sphere as well. If you want something done poorly or not at all, then get the government to do it or (worse) pretend to do it.

That is why the increasing demand for more, more, and more government regulation of the financial services industry in place of systemic internal controls is a very, very, very bad idea. We need hardly look at the reports of increasing incompetence in the policing of abuses, the deficiencies that escaped inspectors' notice, the endless arguments over whether some individual, company, or industry was really at fault, (etc., etc., etc.) to see that something is seriously wrong — not with the way government regulations are enforced, or even the sheer quantity of them, increasing by the hour, it seems, but with the idea of government regulation and how we understand it.

The government cannot do it all, and we are living in a fool's paradise if we think that the State can. The best that the government can do is help people in setting up a system that, in the main, polices itself through internal controls (most especially separation of function, such as not allowing commercial banking and investment banking under the same roof), and then policing the abuses that occur when such systemic controls are violated or circumvented.

Ultimately, we approach the ideal when we achieve a state of affairs similar to that noted by Alexis de Tocqueville in America in the early 19th century:

In some countries a power exists which, though it is in a degree foreign to the social body, directs it, and forces it to pursue a certain track. In others the ruling force is divided, being partly within and partly without the ranks of the people. But nothing of the kind is to be seen in the United States; there society governs itself for itself. All power centers in its bosom; and scarcely an individual is to be meet with who would venture to conceive, or, still less, to express, the idea of seeking it elsewhere. The nation participates in the making of its laws by the choice of its legislators, and in the execution of them by the choice of the agents of the executive government; it may almost be said to govern itself, so feeble and so restricted is the share left to the administration, so little do the authorities forget their popular origin and the power from which they emanate. (Democracy in America, I.iv)

#30#

News from the Network, Vol. 3, No. 44

Evidently, the Big News this week is the (up to) $600 billion "stimulus" package to be funded by Federal Reserve purchase of U.S. Treasury paper, i.e., "nothing."  As we noted in yesterday's posting, this could, of course, trigger a "hyperinflation" scenario.  The question becomes what to do about it.  It seems obvious by now that the powers-that-be aren't reading this blog as they should.  As for Mr. Obama . . . that guy just won't return any of my calls . . .

Despite the pseudo-jocularity with which we might try to present the situation, it's pretty serious.  Even that is an understatement.  The fact is that the situation is more serious than words can really convey, or, at least, any words of mine.  We have to start getting to door openers, and that means communicating the message more effectively.

Per a discussion we had at CESJ yesterday, it may be that the most easily understood summary of the message that we can convey is that there is a difference between productive credit and non-productive credit.  You don't have to understand banking theory, economic history, political philosophy, or even elementary bookkeeping to understand a few simple facts:

• There are two types of credit.

• The two types of credit are 1) Productive, and 2) Non-productive.

• Productive credit is good credit because it pays for itself.

• Non-productive credit is bad credit because it doesn't pay for itself.

• Credit for capital investment is good credit.

• Credit for consumption, government spending, and speculation is bad credit.

• Our is economy is currently running on bad credit.

• Our economy needs to run on good credit.

• Capital Homesteading would make good credit available to everyone.

• We need Capital Homesteading now.

Don't worry too much about the details.  We've got the details.  Just get the message out.  If someone wants more detail, there is the CESJ website, the site of the American Revolutionary Party, this blog, and a number of publications that you might have seen mentioned once or twice on this blog.  If you do your part, we'll have more than this to report:

• In order to supply "the troops" with materials, we are pushing ahead on implementing various social media.  This will, we believe, allow us to reach a broader audience with our publications, news reports, and other media campaigns.  Since we hope to have something ready very soon, please go through your lists of contacts and see which ones might be open to receiving such items via e-mail.  DO NOT SEND US THE E-MAILS.  Rather, be prepared to "forward" what we send you so that we do not get classified as "spam."

• We plan on making the marketing of Moulton's The Formation of Capital the initial effort.  Moulton has "a name" and an affiliation with a known and respected organization, the Brookings Institution, the first "think tank."  Moulton's presentation of the case for what Kelso called "pure credit" applied to financing new capital formation is the heart of the Just Third Way's financial strategy.  It also goes directly contrary to all economic systems that assume that the only source of financing for new capital formation is existing accumulations of savings.

• We have followed up with the Brookings Institution in order to garner some positive comments and endorsements from them.  As of this writing we have not gotten a response . . . but we only sent something yesterday.  If you can open a door to "name" commentators or reviewers who will comment on or endorse The Formation of Capital, or can get a publication (newspaper, magazine, blog, radio, television, etc.) to give favorable mention, do not hesitate to do so.  Your local media outlets might actually be looking for something hopeful to publish in light of the $600 billion price tag we're being saddled with to finance gains for Wall Street gamblers and political porkers.  Many religious newspapers and magazines, for example, should be more open to something positive and hopeful than the secular press that feeds off despair.

• The bottom line is that it depends on YOU.

That's what we have for this week, at least from my remote location in the wilds of Pennsylvania.  For once, we're not asking you to send in news items to us.  Instead, get ready to pitch items to your local media, and report your success to us.

#30#

No Man's Life, Liberty, or Property . . .

As the old joke has it, no man's life, liberty, or property is safe when the legislature is in session. We need to amend that slightly: "No man's life, liberty, or property is safe when Keynesians control the legislature and the central bank." It's a fact — the Wall Street Journal article title welcoming back "Senate Conservatives" was a little inaccurate. They aren't conservatives. They're simply a less free-spending type of liberal. Both "liberals" and "conservatives" have it fixed in their heads that the State has a very big role in the direct running of the economy. The only question is, "How big?"

Case in point. Virtually no one other than those labeled monetary nuts wants to stop the Federal Reserve from monetizing all government debt. Many people, especially legislators, have no idea of the reason the Federal Reserve was established, or the basic theory behind it. This is very strange, for the text of the original Federal Reserve Act of 1913 is readily available, while the theory is based on the legal definition of money — and most legislators are lawyers, or (at least) profess some familiarity with the law. They certainly pass enough of them. Of course, as Cicero said, Summum ius summa injuria — More law, less justice. (De Officiis, I, 33.) Nobody pays any attention to dead, olive-skinned European males, however.

Consequently, the Federal Reserve, designed for one purpose, is used for another. This is an almost certain recipe for disaster, as has, in fact, proved to be the case. In what seems like a paradox, as the Federal Reserve is misused, the apparent need to misuse it even more increases, it might almost be geometrically. Debates at the Federal Reserve over the past couple of days were by how much — not if — the currency should be inflated and the deficit increased. While amounts as high as $1 trillion were tossed about, they finally settled on a beggarly $600 billion.

We're being sarcastic, of course. Just a little. The fact is, going by the assumptions of Keynesian economics, non-productive credit is almost worse than a narcotic. The more you spend, the more you believe you are forced to spend.

This is, incidentally, setting up the economy for the "perfect storm" of hyperinflation. Money, no matter what form it takes, whether coin, banknotes, checks, bills of exchange, or cows, is a derivative of the present value of existing and future marketable goods and services: production. As production declines and the supply of marketable goods and services dries up, the price level starts to rise, even if no new money is added to the economy. If, at the same time, new money is pumped into the economy at a tremendous rate, each unit of currency becomes worth less and less as the present value of marketable goods and services in the economy becomes spread out over a vastly increased number of currency units.

At some point, the price level starts to rise at a rate faster than the rate at which currency is being created, and the surreal phenomenon of hyperinflation takes hold. Part of this is due to the vastly increased velocity of money, but a significant portion results from the fact that the public loses complete confidence in the currency and expects prices to rise faster — so they do. The currency becomes effectively backed with nothing, so that the value of the currency is, to all intents and purposes, determined by dividing by zero, a mathematical impossibility.

The social tsunami of hyperinflation, however, pales into insignificance next to the obtuseness of the powers-that-be that continue to insist, all evidence to the contrary, that the current situation is the only possible situation, and that there is nothing that can be done about it — aside from spending more money.

So — what do they think is going to be the result of this latest stimulus?

According to Keynesian theory, an infusion of money into the economy will raise the price level. This will force wage earners to cut consumption, generating the savings necessary to finance new capital investment and create jobs. There are two things to keep in mind in the Keynesian framework. One, the definition of savings is always cuts in consumption — always. Two, the only source of income for "the masses," and thus production, is human labor, as the Keynesian productivity equation of output per labor hour demonstrates.

Consequently, wage earners are forced to cut consumption by paying more for the same amount of goods and services or the same amount for fewer goods and services. This is Keynesian "forced savings," not to be confused with Kelsonian "future savings." Keynesian forced savings robs the poor for the benefit of the rich, while Kelsonian future savings has the capacity to benefit the poor without taking anything from the rich.

So (in Keynesian theory) inflating the currency provides producers with "savings" that they can then use to finance new capital formation to make money for themselves and create jobs for the rest of us. Job creation increases effective demand, presumably making up for the decreased consumption caused by inflation.

Two more things to keep in mind about this Keynesian scenario. One, even Keynes admitted that individual wage earners are never as well off after inflation as they were before. It's in the aggregate that people are better off because of the job creation that presumably takes place. This is one of the reasons that Friedrich von Hayek criticized Keynes for Keynes's implicit collectivism. (Which causes one to wonder how von Hayek missed explicit totalitarianism in the first couple of pages of Keynes's Treatise on Money.)

Two, this Keynesian scenario not only isn't working, it can't work. Frankly, Keynes didn't understand the language of business. Elementary bookkeeping was a sealéd book to him. Trying to put it as simply as possible, the primary use for savings in a corporation is not to finance new capital. Very little if any new capital is financed directly out of savings — "retained earnings." New capital is financed by taking cash — an asset, not savings — and trading it for another asset, or (far more common), taking out a loan and offsetting the increase in assets with an increase in liabilities.

In neither case is retained earnings (savings) touched. The only charge against retained earnings is dividends, not expenditures for new capital. Retained earnings usually serve as collateral for debt financing of new capital, not as financing directly. Even when retained earnings are paid out as dividends and used to finance new capital formation when the recipient reinvests the money, it is not to the advantage of the company that paid the dividends, but to the company in which the recipient reinvests the money.

Nevertheless, corporations tend to make greater and greater profits in times of inflation. Even during the hyperinflation in Germany it was noted that the few producers were able to make enormous fortunes, usually by selling their goods and services at as high a price as possible in the inflated Reichmarks and immediately converting the profits to foreign exchange. This was another factor in fueling the hyperinflation, as producers tried to raise their prices as fast as they could, regardless of the rate at which new money was being created, in order to increase profits — and thus savings — as rapidly as possible.

The difference between the United States in 2010 and Germany in 1923 — or even the United States in 1929 — is that the Germans of 1923 and the Americans of 1929 were, at the same time they were speculating in currency and secondary equity, respectively, also financing new capital formation. While this puzzled commentators at the time, Dr. Harold Moulton's analysis was that the commercial banks were creating money for new capital investment at the same time that they were creating money for speculation. This is an impossibility within the past savings assumption of Keynesian, Monetarist, and Austrian economics.

Unfortunately, American companies are not financing new capital formation with this windfall. Instead, they have accumulated record amounts of cash — approximately $1 trillion according to news reports. This is not being used to distribute dividends and increase effective demand, or to finance new capital and create jobs, also creating effective demand, but to buy back their own shares. This not only concentrates ownership of the means of production even more than now, it also drives up the prices on Wall Street.

The Federal Reserve now proposes to make up for the failure of corporations to use their accumulations to finance new capital by pumping another $600 billion into the economy by purchasing Treasury paper. Whether this is through "open market" operations by means of which the Treasury funnels debt to the central bank through "brokers" whose only function is to turn primary issuances into secondary in a microsecond, or by purchasing bonds from existing holders, the effect will be the same. Corporations will accumulate even more profits, or existing holders will accumulate cash, all of which will be poured into the stock market, which right now appears to be the only place where money can be made.

More problems. One, the stock market is a secondary market. None of the money poured into Wall Street finances one cent of new capital. Two, the rise in the stock market is purely speculative. Current production and projected future production and consumption of marketable goods and services do not support the rapid price rise. Even under the limited and limiting labor-oriented assumption of Keynesian economics, the combination of a rapidly rising price level anywhere (but especially on Wall Street) and high unemployment is a very, very, very dangerous sign. If people aren't earning, they aren't spending. If they aren't spending, there is no incentive to produce. If producers aren't producing, and consumers aren't consuming . . . well, where is the economy? What economy?

The academics and politicians can take great comfort in the fact that the stock market keeps rising. Similarly, some academics were convinced that the hyperinflation in Germany between 1919 and 1923 wasn't really happening because, clearly, some people were making huge fortunes. In 1929, even Irving Fisher, according to Milton Friedman "the greatest economist America has ever produced," was convinced that the stock market would keep on going up forever. (Yale University had to bail him out to the tune of millions.) It's entirely possible that the Dow will go up to 15,000 or more within a very short time — there is, after all, a potential $1.6 trillion being poured into secondary issues. The problem is that, without new capital investment and an increase in effective consumer demand, the prices on Wall Street cannot be sustained. Nor will increases in consumer debt solve anything, as it must either be repaid (cutting future consumption) or forgiven (reducing profits and thus savings presumably necessary to finance new capital).

It seems hopeless, yet the solution is not only obvious, it is simple — though not easy. It's hard to break an addiction, especially when the addict refuses to admit there is a problem. Absent a genuine will to reform, or the belief that reform is possible, rehab only trains the addict to adopt increasingly cunning methods of maintaining him- or herself until the next crash.

As we've pointed out countless times on this blog (okay, maybe not countless . . . the number of postings to date is less than 700, so the number of times we've pointed something out must also be less than 700 . . . although you'd think somebody would start paying attention after more than 600 iterations of the same basic point.

Or not. Maybe it will do some good to say it one more time: Capital Homesteading by 2012.

If nothing else, it beats blaming everybody else on the face of the earth for one's problems.

#30#

Election Reflection

A curious fact came to light during our research on the development of money, credit, and banking theory, and its correlation to the "four pillars" of the Just Third Way. We haven't mentioned the four pillars in a posting for a while, so it might be useful to list them again. Besides, we're continually refining the language — not the basic principles expressed, just the way we say them — so it's good to go over them periodically in any event.

A limited economic role for the State. The State is not a supremely beneficent provider of all that is good. If it carries out the role for which it is designed and intended, the State produces no marketable good or service. It is a tool, nothing more — not a god, the representative of a god, or even the Supreme Owner of All It Surveys. Taxes are not an exercise of property on the part of the State, but a grant from the citizens to defray the legitimate costs of government.

Free and open markets within a strict juridical order as the best way to determine just wages, just prices, and just profits. Liberty — freedom of association — is a natural right. The most common way in which we exercise this right is by entering into contracts with others, thereby conveying private property rights freely among individuals and groups. The State by law, and society as a whole by custom and tradition may regulate the manner in which people associate, and make a prudential determination whether one thing or another should not be considered legal matter for contracts (i.e., a legitimate marketable good or service), but this prudence should not undermine the right of free association itself, e.g., by limiting who may or may not enter into certain types of contracts after attaining majority without just cause or due process. From the Just Third Way perspective, the most common violation of freedom of association is lack of democratic access to means of acquiring and possessing private property in the means of production: the money and credit system.

Restoration of the rights of private property, especially in corporate equity. It's the result of backwards reasoning, but the dogmatic belief that only existing accumulations of savings can be used to finance new capital formation has done more to erode, even abolish the ability to exercise the rights of private property, especially in corporate equity, than any other cause. Majority owners of corporations override the rights of minority owners as a matter of course, even as a matter of public policy. This has become so egregious that, in many people's eyes, if you do not own 51% of something, you cannot be said to own it at all. On the contrary. Private property being a natural right, and (as Louis Kelso pointed out, in common with every lawyer in history worth his or her salt) "property" consisting of control and the right to receive the income generated by what you own, an owner, even the smallest minority owner, has the right to receive all income attributable to his or her pro rata share of ownership.

Widespread direct ownership of the means of production. This is what all three mainstream schools of economics omit — and the minor schools assume it can't be done without in some way redefining what it means to "own." This is because virtually everyone assumes as a given that the only way to finance new capital formation is to cut consumption, accumulate money savings, and invest. On the contrary, as Dr. Harold Moulton proved in his 1935 treatise, The Formation of Capital, financing for new capital formation can be obtained through the expansion of commercial bank credit. Louis Kelso and Mortimer Adler added that all new capital financed in this way should be broadly and directly owned by as many people as possible. Thus, it is entire feasible to finance capital acquisition by those who currently lack savings without confiscation or redistribution of existing wealth.

Oh, that's right. You wanted the curious fact.

Now, we stress the fact that this might be a coincidence, with no actual correlation with reality. It just seems curious, that's all. That is, it seems as if the more concentrated ownership becomes, the more the agitation increases to extend the voting franchise . . . and the less effective the vote becomes. Case in point: it wasn't until the working classes in England were almost completely stripped of small ownership that electoral reform was accomplished and the vote extended to more people. (1832, 1867, and 1884). As concentration of ownership accelerated, so did agitation for female suffrage. Paradoxically, the closer suffrage came to being universal, the less it meant.

Is this because only an elite has the capacity to run things or vote meaningfully? We would contend not. Rather, as control over money and credit became concentrated more and more in the State, the State took over more and more control over people's lives. Benefits tend to accrue not to those who work hard, but to those who vote in people who will distribute more and greater benefits. Gradually the attitude has taken over that the State can do anything, and the more powerless you feel, the more you tend to rely on the State to provide for your needs.

The only solution, as far as we can see, is Capital Homesteading. Voting is pretty much meaningless without the property/power to back it up. Paradoxically, the more "power" people get from State-mandated or supported wage and welfare benefits, the more dependent they become — and the less real power they have. That it, the more people rely on the State, the less they rely on themselves, and the more dependent they become.

Thus we can see the obvious wisdom in the words of William Cobbett a relatively short time ago:

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

Maybe Capital Homesteading by 2012 isn't such a bad or crazy idea after all.

#30#

Outreach Made "Easy"

Yes, I know what you're thinking. Nothing is ever easy. So you can self-edit or perform a little mental reservation and say, "easier." The point is that we need outreach in order to open doors to, er, door openers. We also . . . okay, our points are the one we just said, and that people in education in the principles of Binary Economics — especially the bit about the proposal to free economic growth from the slavery of savings. And Capital Homesteading by 2012. And pie for dessert. (Shades of Monty Python's Inquisition sketch.)

Anyway (whether you expected it or not), we've developed a sort of template for you to use in reaching out to economists who adhere to "Austrian School" economics. First, of course, try to find something good to say about something the individual to whom you are writing wrote or said. For example, "A fortnight ago I came across your terrific-a-mundo article, "How Past Savings Freed Humanity from the Scourge of Capital Credit" in the Journal of Semi-Economics." You then continue,

On reading the article and some others you have posted, as well as looking over your faculty page on the Tenure University website, I thought you might find it useful to be in touch with Dr. Norman G. Kurland, president of the Center for Economic and Social Justice ("CESJ") in Arlington, Virginia. A short time ago Dr. Kurland attended a presentation by a group of Austrian economists. (Of course, we all know that an Austrian economist isn't necessarily really from Austria, any more than past savings really are used to finance most new capital formation, or all Keynesians are from the Peoples Republic of Keynesia.) (Note: it's better if you know that Norm did, in fact, attend such a presentation. Read the weekly News from the Network every Friday on this station.)

One of the subjects discussed at the presentation were the similarities and differences between the Austrian school of economics, and the Binary Economics of Louis Kelso, especially as applied in CESJ's "Capital Homesteading" proposal. From our research, it appears that the chief difference between the Austrian school and Binary Economics is that the thought of von Mises and von Hayek is explicitly based on the "British Currency School" of finance, while that of Kelso uses the principles of the "British Banking School of finance."

Thus, Austrian economics takes for granted that the only way to finance new capital formation is to cut consumption, accumulate money savings, then invest; a "bank" is a financial institution that takes deposits and makes loans. As embodied in the British Bank Charter Act of 1844 and the United States National Bank Act of 1863/64, this construes money and credit more as a commodity than as the medium of exchange, redefining "interest" as the price of money and the cost of capital, rather than in the classical sense as the earnings of capital.

Binary Economics, building on the work of Dr. Harold G. Moulton, especially his 1935 contra-New Deal treatise, The Formation of Capital, accepts the legal definition of money: anything that can be used in settlement of a debt, thereby conforming to Say's Law of Markets as applied in the real bills doctrine, as well as the thought of Adam Smith; a "bank" is a financial institution that takes deposits, makes loans, and issues promissory notes in the discounting and rediscounting of bills of exchange. We believe that Binary Economics thereby conforms more closely to the natural moral law than other schools of economics, especially with respect to liberty (freedom of association/contract) and private property (right of control/disposal), and thus with Catholic social teaching based on the natural moral law.

As presented to His Holiness Pope John Paul II (and which received his encouragement), the Just Third Way, that we believe is, in Capital Homesteading, an application of the principles of economic personalism, is directed at reestablishing the "four pillars" of an economically just society:

• A limited economic role for the State,

• Free and open markets within a strict juridical order as the best means of determining just wages, just prices, and just profits,

• The restoration of the rights of private property, especially in corporate equity, and (the fatal omission from mainstream schools of economics)

• Widespread direct ownership of the means of production, a condition largely precluded by reliance on existing accumulations of savings to finance new capital formation.

As I said, after reading your articles and profile, I believe that a discussion between you and Dr. Kurland might prove fruitful, especially since we are currently in the process of building a network of natural law supporters among people of all faiths and philosophies with the ultimate goal of restructuring the social order, particularly with respect to our economic and financial institutions. Dr. Kurland can be reached via contact information on the CESJ website.

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The Global Natural Resources Bank

We came across this discussion on how to handle private ownership of things, such as land and natural resources, that are in limited supply. Is it possible even to have private ownership of such things? Henry George thought it was not a good idea. Others have maintained that land and natural resources are the only things we can own. Here is how CESJ president Norman G. Kurland responded to this issue from "John."


*****************



John, I'll intersperse my responses below. I love your questions.

Norm

John:

As I get through your book and the other material you sent, some of my curiosity questions may get answered. If that's true, forgive me for taking this direct approach. > >You believe that one value of capital homesteading is that it democratizes capital while leaving undisturbed the present ownership of capital.

Norm:

Not quite "undisturbed." Nature puts a limitation on the rights of private property — the finite life of an owner. Rather than redistributing existing ownership rights, it's easier to change the inheritance and gift tax laws by taxing the estate of the recipient. As proposed, the Capital Homestead Act would enable every citizen to establish from the time of birth a personal Capital Homestead Account that would shelter from asset transfer taxes any gifts or bequests below an accumulation of $1 million and impose a tax on accumulated assets above that exemption level. This hopefully would encourage the wealthy to spread out their gifts and bequests as broadly as possible and thus discourage future monopolies of capital.

John:

A lot of those assets are invested in what I call the common wealth and I particularly wonder how ownership of coal or iron ore or petroleum or diamonds, or buildable land will be affected and what impact the impact it will have on those who do not own it.

Norm:

This is an excellent point where I think Kelso and Henry George can be brought together. As I will point out below, we should separate out (1) treatment of subsurface rights, rights over national parks and nature reserves, scenic coastlines, water, airways and other natural resources, from (2) treatment of surface rights for planning, developing the land and adding infrastructure for building viable, life-enhancing, ecologically sound, energy self-sufficient communities upon the land, from (3) the economic activities that bring people, technology and structures together for the market-based production and market-based distribution of capital goods and consumer goods, including mining rights.

John:

It seems to me there will be an economic balance permitting some more (far more) than their fair share if the concern is CESJ's. Were it not for this thought, I would probably give up my fondness for the citizen's dividend (CD)in favor of total support for Capital Homesteading (CH). I still think it would be better to combine financing the CHA with a portion of the CD. That way, there would be no loans to repay.

Norm:

I think there is a way to avoid loans for land acquisition, build equal land ownership rights among all citizens in a "community" as designated by the State or higher governmental authority, and avoid concentrating direct economic power over land, land planning and land rentals in government, mankind's only legitimate monopoly over the means of coercion. As a plausible expedient in today's USA in dealing with surface rights only, the State could designate all "communities" within its border that would be eligible to form Citizens Land Banks (CLBs) (on a one citizen, one-share basis) for planning, developing, redeveloping and renting surface rights on land within each local or regional community's borders. Assuming the Federal and State governments gave the CLB tax treatment comparable to that enjoyed by ESOPs and supported this bottom-up empowerment model over top-down tax, credit and government land rental redistribution (as in the Citizen Dividend advocated by Georgists) models, then government at every level could transfer free to CLBs government-owned land for distributing property rights free to each local citizen. (The operating Jeffersonian principle is that anything that can be owned by the State can and should be owned by the citizens.)

As for privately-owned surface rights in the community, the law could terminate the private ownership of surface and subsurface rights upon the death of the owner and his or her spouse. Thus, title to surface rights would automatically be transferred under that law to the CLB, while leaving the structures upon the land to continue to be owned by whoever inherits those assets and is willing to pay land rents to the CLB.

Because it would use the land for the benefit of the "public" (in a truer sense of the word than if it were the government), the CLB could be granted by the State its power of condemnation under eminent domain. Then the CLB could buy the structures and improvements at a fairly appraised price and either lease back the structures and improvements to the new owner, sell them to others, or tear them down for redevelopment for purposes more beneficial to the citizens.

There is another option to canceling out land surface ownership rights upon death. The CLB might be required to pay the new owner for title to the surface rights. In that scenario, the CLB would have to borrow under the no-interest productive credit policies under the Capital Homestead Act. The loan would be repaid by future CLB rental incomes from all surface rights in the community, including that from users on the free land granted to the CLB from government.

John:

Completely different question: Has anyone extrapolated the projections you do for U.S. citizens to the global population?

Norm:

No, but I would love to get some academics volunteering their time to do those projections.

While I like to develop models that can be realistically launched as prototypes in order to move toward more universal replication, your question provoked me to think more about global applications of the CLB concept. First, I hope we can find a community with some committed binary economics activists to experiment with the CLB concept; e.g., East St. Louis and Carbondale, IL; Washington, D.C. and the Virginia and Maryland suburbs; Orlando, FL; an Indian reservation; the Ozarks in Missouri; the Mississippi Delta; and maybe, John, in your area in New Hampshire. We'll need people with political clout at the State level first.

When we think globally about how to treat subsurface rights, rights over national parks and nature reserves, scenic coastlines, water, airways and other natural resources, one is tempted to conclude that all natural or God-given resources should be owned equally by every human being in the world, no matter where he or she is located. Looking into the future, I can envision a for-profit Global Natural Resources Bank (operating like a global central bank does with its monopoly and "rental rules" over money and credit policy) that would own all natural resources, set the rules for conserving and recycling non-replenishible resources, arrange for market-based rental fees by auctioning to competing broadly-owned corporations and cooperatives the right to explore and extract minerals and market natural resources, and then paying out rental incomes as dividends to each shareholder of the GNRB. But most observers recognize that global politics is not yet mature enough to implement a GNRB that could overcome the incredible barriers today in trying to reach every human being and enroll them as shareholders, getting a free, non-transferable private property share to each one, and then distributing dividends from GNRB rentals of natural resources. The current nation-state system and the very nature of the UN stands in the way. Hence, I would move in stages toward the more ambitious goal.

I would encourage CLBs wherever the politics permit to set working models for the new approach to citizen dividends. I would also propose, for example, that the US (or Canada) establish a for-profit Federal Natural Resource Bank (analogous to the Federal Reserve System in renting money for productive activity) to serve the functions described for the GNRB but dealing only with all natural resources within the boundaries of the US (or Canada). Every man, woman and child from birth to death would receive free as a right of citizenship a single non-transferable share of stock in the FNRB with full private property rights, including voting and dividend rights but without the right to sell or transfer ownership rights. Thus, rental incomes from the natural resources of America would raise the purchasing power of every family and individual, with no government redistribution required. All citizens would also have the money to pay for government services at all levels, but the power over money would flow upwards from a nation of independent capital owners. The government necessarily become more dependent on the economic strength of citizen owners, rather than forcing more and more citizens into lives of economic dependency.

Under a Capital Homestead Act, citizens would also receive rental incomes from the rental by a local CLB of surface rights in the land of their community. And each citizen would be able to accumulate FNRB and CLB shares in a tax-sheltered Capital Homestead Account at their local bank, where he or she would also receive a periodic allotment of interest-free capital credit to invest in newly issued full-voting, full dividend payout shares of a company in which a member of the family works, a company in which they have a monthly billing account, the local CLB, or qualified companies with a solid history of earnings.

As more democratically oriented nations around the world follow the lead of the US or Canada in enacting Capital Homesteading legislation and establishing FNRBs, they can form a commonwealth of combined natural resources by merging each of their FNRBs into a Commonwealth Natural Resources Bank (CNRB) and distributing free CNRB shares to each of their citizens to replace their FNRB shares. And eventually this process will lead to a Global Natural Resources Bank, building ownership power into every citizen on the globe from the community level up. The process will create a world of capital owners and a truly democratic global economy based on principles of economic justice, the ideal needed to sustain development and peace for truly empowered citizens of the global community.

In the final analysis, John, the issue is in whose hands should power (i.e., sovereignty) be placed. Through Capital Homesteading and binary economics and under the only higher sovereignty, that of the Creator, all power should reside in the individual human being, under a system where it can be delegated upwards. The structured diffusion of economic power through universal access to property rights is the ultimate check against the inevitable corruption and abuses of power that result from concentrated power. As the forces of globalization mount, we need people of goodwill like you and others in your human empowerment network to work with us in transforming structures of greed and envy into structures of justice.

Best regards, Norm

#30#

News from the Network, Vol. 3, No. 43

This morning Richard Foley sent us an article from the Christian Science Monitor, "Is the U.S. System Rigged for the Rich?" by David R. Francis. We have to pay attention to Richard on several counts. One, he's a railroader, and so were my grandfather and great-grandfather — almost a full century of service with the AT&SF, the Needles to Kingman run (and back again, of course). My grandfather and great-ditto, not Richard.  Two, he's a long-time CESJ supporter. Three, he's a railroader. Anyway, to answer the question raised by the article, "Yes. The U.S. system is rigged for the rich. For our own good, of course."

This injustice is based on a fundamental dogma of all three mainstream schools of economics, but especially the Keynesian. It is an assumption disproved by Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, in his book, The Formation of Capital (1935). (Don't stop me if you've heard this. The more often we repeat it, the more chance that you will internalize it and pass it on to others — especially when opening doors.)

The assumption that causes so much injustice is that new capital cannot be financed without first cutting consumption, accumulating money savings, and then investing. This requires a class of people who can afford to cut consumption: the rich — and the richer, the better, due to the high cost of advancing technology. Wage earners cannot afford to cut consumption, therefore (according to Keynes) should not own. Check it out. It's right there in the closing passages of Keynes's General Theory of Employment, Interest, and Money (1936).

Under the "past savings" assumption, if the State wishes to foster new capital formation and thus job creation, it must make it as advantageous as possible for the rich to save, or (so the reasoning goes) there will be no new capital formed, and thus no jobs. In the eyes of today's academics and policymakers, social programs for the poor, while wrongly implemented as a permanent solution to poverty, are construed as if they were short term helps on the way to getting jobs that won't exist unless the rich get enough money to invest — the presumed long term solution.

Unfortunately, to fund job creation, the State has to give back or not take in the first place money from the rich, and make up any perceived slack with subsidies and other "corporate welfare." The poor necessarily take second place to the perceived need for the State to subsidize job creation . . . ostensibly to help the poor, but with advancing technology, fewer and fewer jobs are created, even in periods of rapid growth.

From the perspective of Binary Economics, this is all nuts, but it gets worse.

According to Keynes, the "forced savings" to finance new capital formation doesn't come from the rich, but from wage earners. The government inflates the currency to bring down unemployment . . . but this raises the price level, forcing wage earners to pay more for fewer goods and services. This meets the Keynesian definition of saving, but the benefit does not go to those who are forced to cut consumption, but to producers who realize greater profits for less production. Under Keynesian monetary and fiscal policy, the poor are robbed for the benefit of the rich.

It's even worse than that. Yesterday Reuters pointed out that American companies have accumulated an estimated $1 trillion in cash — half the estimated annual capital growth ring. According to Reuters, this will not be paid out in dividends, as the rights of property demand, nor will it be used to expand plant and equipment, hire new workers, or pay bonuses or additional compensation to existing workers. Instead, the plan is to buy back shares, "going private." This will further concentrate capital ownership by between 3-5%, a very crude estimate. This doesn't sound like much, but add that to the $2 trillion or so of new capital typically created each year and financed in ways that create few, if any new owners, and you have capital ownership concentrating at a rate of 10% or more each year.

If this were an algebraic progression, all wealth would be concentrated in a tiny percentage of owners within a decade, but (small comfort) it's calculus, not algebra — it doesn't go 10% of the original total each year, but 10% of the remaining total, a curve, not a straight line.

Kelso and Adler were absolutely correct in the subtitle of their second book when they called this "the slavery of [past] savings." Not only is the financial system itself set up to concentrate ownership, the State is forced under Keynesian assumptions not only to facilitate this concentration, but accelerate it as fast as possible, just as Keynes asserted in his General Theory and his call for socialization of the economy — to "protect" the poor, the State must allow the rich to accumulate faster and faster, even to the extent of robbing the poor, but the State then steps in and tries to take care of the poor so that they don't suffer too much. The State cannot, however, afford to give the poor as much as it gives the rich, or the whole process is as meaningless as Keynesian economics itself. Keynesian economics permits private "ownership," but only if that ownership is meaningless.

The answer, of course, is Capital Homesteading — but we first have to convince people that, even in today's economy, existing accumulations of savings are rarely used to finance new capital formation in any event — I can prove it to an accountant in minutes, but most people aren't accountants, and most accountants don't care. (In a corporation, "savings" are called "retained earnings." You do not, however, decrease retained earnings when purchasing new capital. Instead, you increase liabilities, or decrease one asset account and increase another; it always has to balance. The only legitimate charge against retained earnings is dividends, not new capital assets. Savings, therefore, are never used directly to purchase new capital. It can't be done.)

Obviously, the sooner we can get the powers-that-be to understand this, the better off all of us are going to be. That means that YOU (not the guy behind the tree) are personally and individually responsible to organize with others and open doors for us to get the word to prime movers. Consequently, here's what we've been doing this week:

• Our "Halloween Horror Special" series of postings has come to an end. Oddly enough, for pieces that were a little bit to the side of serious, they proved to be, for this blog, immensely popular. Readership has tripled while the series has been running. The problem, of course, is that this stuff is so serious and complex that it's difficult to sustain even the rather moderate humor we tried to insert into the postings.

• The big news, of course, is Norman Kurland's trip to China to participate in the Caux Roundtable on ethics in business in Beijing. We'll try to get Norm to submit a full report to expand on what little we have space for here in these news briefs, but the bottom line is that the Chinese scholars seemed extremely interested in what Norm had to say. He was able to distribute copies of all of CESJ's major publications, Curing World Poverty (1994), Capital Homesteading for Every Citizen (2004), Supporting Life (2010) and our most important reprint to date, Dr. Harold G. Moulton's The Formation of Capital, the classic from 1935, but with our 2010 foreword tying Moulton's work into Kelso and Adler. Moulton's work undermines the basic premise of both socialism and capitalism — the alleged necessity of concentrated ownership (whether public or private) of the means of production in order to generate the savings to finance new capital formation — while that of Kelso and Adler shows how each person can benefit directly from ownership financed out of future savings. Capital Homesteading, of course, details a comprehensive program for achieving this end, and Supporting Life ties it into an issue that many people put at the top of their priority list.

• Reverend Virgil Wood, a veteran of the civil rights struggle and one of Martin Luther King, Jr.'s key men, has been making great strides in opening doors for Norm with some of the legends of the civil rights movement. It now appears highly likely that Virgil will succeed in getting Norm a series of meetings with some very well placed individuals who may be able to get Norm to Obama.

• Earlier today a meeting was held to plan for the upcoming annual rally at the Federal Reserve. Participants renewed their commitment to open doors to prime movers who could bring people to the rally and even provide logistical support for the effort.

• Given the lack of resources, the publications program is proceeding very well. We have at least eight additional books that we could get out sooner if we had the resources. We are investigating some of the internet marketing and social media techniques to publicize the new books, especially The Formation of Capital, and may be in a position for a great leap forward by the end of this calendar year.

• As of this morning, we have had visitors from 48 different countries and 49 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, Brazil and Australia. People in Trinidad and Tobago, Venezuela, Lithuania, the United States, and Belgium spent the most average time on the blog. The most popular posting is "I Do Believe in Spooks" in the current Halloween Horror series, followed by "The New Manifest Destiny," an old posting from 2009 "We are Seeing the Future and It Doesn't Work," "The Keynesian Bloodletting," and "The Severed Hand of Adam Smith."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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To the People of Ireland and the World

In Dublin on Monday, April 24, 1916, forces of the Irish Republican Brotherhood and the Irish Citizen Army, supported by 200 members of Cumann na nBan (League of Women) occupied the General Post Office on Sackville Street, later renamed O'Connell Street in honor of the Great Emancipator, proclaiming an Irish Republic. After fighting that lasted a week, the rebels surrendered. They were imprisoned, and all of the leaders with the exception of Eamon de Valera, technically still an American citizen, were tried and executed in secret.

A critical provision of the proclamation, read before entering the General Post Office, was to assert the importance of ownership as the basis of the indefeasible sovereignty and independence of every Irish man and woman:

We declare the right of the people of Ireland to the ownership of Ireland, and to the unfettered control of Irish destinies, to be sovereign and indefeasible. The long usurpation of that right by a foreign people and government has not extinguished the right, nor can it ever be extinguished except by the destruction of the Irish people.

Today, the effective exercise of the natural right of the people of Ireland to the ownership of Ireland, while no less sacred now than then, is even more remote and less attainable than it was immediately preceding the sacrifice of Éirí Amach na Cásca, the Easter Rebellion. The size of the current deficit — 22% of GDP — dwarfs in relative size even the deficits incurred by the other "PIIGS." It is an incredible tsunami of debt that, under existing financial and economic assumptions, can only result in the economic destruction of the Irish people.

There is, however, hope — and a way of getting out of what threatens to be a disaster unequaled in scope for a century and a half, not since An Gorta Mór, "The Great Hunger," before which even the worst possibilities presented by today's impending financial catastrophe pales into insignificance.

There are, nevertheless, lessons to be learned from the Hunger, even if there is otherwise no possible comparison. The most obvious is that the Famine was completely avoidable, and would have been, had the great mass of Irish men and women been direct owners of the land. More than enough food was produced in Ireland to keep everyone alive and comfortable during even Black 47, the worst year of the Famine, but it was exported in payment of debt (usually incurred at the gaming tables of London and Paris) and to provide income for absentee landlords.

Today's financial disaster was also completely avoidable:

• Had the Bank of Ireland discounted and rediscounted loans to fund financially feasible and properly vetted capital projects instead of engaging in open market operations to purchase government debt securities and finance gambling on the stock market, the deficit would necessarily have been limited to existing accumulations of savings, whether domestic or lured in from abroad.

• Had such credit been extended in ways that made every Irish man, woman, and child, instead of the government and foreign investors, a direct owner of the agricultural, infrastructural, industrial and commercial assets of Ireland, the income generated by that ownership would first have paid for its democratic acquisition, then provided a "second income" to supplement and, in some cases, replace wage income.

• Had financing for new capital formation come from the expansion of commercial bank credit, the income from capital would have generated sufficient effective demand to keep the economy on an even keel while the banking system provided adequate financing for any feasible capital project, whether agricultural, commercial, or industrial.

Instead, the financial resources of the nation were expended on increasing the size of government, taking away the personal sovereignty of each Irish citizen to the extent that the government took over, and driving the country to the brink of ruin.

A way out?

Yes!

• Pass enabling legislation to create a "Irish National Citizens Land Bank" to take immediate title at no cost to all government-owned land, natural resources, and infrastructure. Every Irish citizen and legal resident of the country would immediately receive one no-cost, non-transferable, voting and fully participating equity share in the INCLB, making the declaration in the Easter Proclamation a reality.

• The use of all land and natural resources held by the INCLB would be determined by an elected central authority, located outside of Dublin (possibly Meath) with mandatory input from local, county, and provincial authorities. Existing shares in the INCLB would be surrendered without compensation at death or on immigration, and new shares issued at birth or on declaration of permanent resident status.

• The INCLB would acquire additional land, natural resources, and infrastructure at fair market value when it came on the market, exercising a right of first refusal for all such offerings.

• Financing for acquisitions would come from discounting loans for the purchase at the Bank of Ireland.

• All income from leasing and usage fees above the costs of administering the INCLB would be distributed to shareholders as a dividend, to be taxed as regular income.

• Pass legislation to establish "Homeowners Equity Corporations" as a way to solve the housing crisis.

• Reform the commercial and central banking system to prohibit government borrowing and discourage non-productive private sector borrowing, especially for stock market speculation, except out of existing accumulations of savings.

• Reform the tax system to encourage wealth accumulation and a more just distribution of the costs of government.

• Implement a program of "Capital Homesteading."

These and other steps can be taken almost immediately. With the rise in economic growth in which everyone, not just a few participate, the deficit can be reduced dramatically as people take back the economy from the government, and start to take care of their own needs out of their own incomes.

More than fifteen centuries ago the Irish saved civilization. It's time to do it again.

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Halloween Horror Special XV: Nightmare on Wall Street, The Final Chapter

Yesterday we promised a final blowout for the final posting in the "Halloween Horror Special" series. Well . . . the subject matter certainly fits, but the treatment may not be up to our usual incredibly high standards. The fact is that we have to get to work on another posting we hope to make today and try to get some people and organizations moving on the Just Third Way. So, here goes for our final episode of our version of the Tree House of Horrors.

It's not a coincidence that the typical American idea of the haunted house is a late Victorian mansion. As a result of the home mortgage crisis caused by the Panic of 1893 and the ensuing Great Depression (Part I), many people abandoned the over-priced homes they had purchased or built. Their mortgages exceeded the market value of the home, and it was much easier in those days simply to walk away from an unpayable debt, disappearing into another state without leaving any clues to your whereabouts. Consequently, banks and mortgage companies foreclosed on properties that they couldn't sell, and which were left to fall into ruin. This provided generations of children and village idiots with dares to spend the night in the house from which the owners had mysteriously disappeared without leaving a trace, and the stories made up to explain it . . .

It took, however, the Panic of 1907, to which the Panic of 1893 inevitably led, to wake people up to the need for genuine reform in the financial system. The president of the Knickerbocker Bank and Trust, the third largest bank in New York, used the bank's resources (reserves) to try and "corner" copper. It almost worked, but "almost" doesn't count when you're up against J. P. Morgan. The Knickerbocker went bust, and runs ensued on the banks in New York, a panic that quickly spread across the U.S. and Europe.

The demand for reform was immediate and overwhelming. One of the most critical reforms, finally embodied in Glass-Steagall a generation later, was to separate commercial and investment banking. Separating commercial from investment banking effectively prohibited commercial banks from using their assets to invest (or speculate) in corporate shares or securities of other companies. All that, of course, changed with the repeal of Glass-Stegall.

Who said that those who fail to learn from history are doomed to repeat it? It doesn't matter, because the truth of the aphorism is evident. The home mortgage crisis that accompanied the Panic of 1893 was repeated with the sub-prime mortgage crisis of 2007 — ironically an even 100 years following the Panic of 1907 that finally provided the incentive for genuine reform of the financial system . . . carefully dismantled beginning in the 1980s.

And what followed the home mortgage crisis? Genuine reform to institute proper internal controls of the financial system? Hardly. The financial and political powers-that-be immediately went to work replacing even more internal controls with questionable external regulation with no bite — bulldogs with rubber teeth, and blind in both eyes.

They also, welche wonne!, insisted on subsidizing not the poor homeowner losing his or her house, or the worker thrown out of a job as Keynesian economics demands, but the gamblers and speculators in commercial and investment banking who caused the problem in the first place by taking advantage of the lack of proper internal control, as well as massive money creation for non-productive spending. (Well . . . that last is in accordance with the Keynesian prescriptions.)

The nail in the coffin (appropriately enough for our Horror Special) is that the financial services industry is getting a double benefit from the government bailout and subsidization of the gamblers on Wall Street. Not only are they making tremendous fees from transactions involving speculation without financing any appreciable amount of new capital, they are now, according to yesterday's Wall Street Journal, making huge profits by "investing" "excess reserves" in the stock market. ("Banks Turn Their Reserves to Profit," Wall Street Journal, 10/27/10, C1.) "J. P. Morgan Chase & Co. earned $4.4 billion in the third quarter, in part because it released $1.7 billion from the bank's loan-loss reserves." Once again, it evidently doesn't pay to go up against J. P. Morgan.

In plain English, the commercial banks are not lending to businesses to finance new or replacement capital, which is the purpose of a commercial bank. Instead, they are putting the money into the stock market . . . something not even an investment bank is supposed to be doing. This has dried up the ephemeral "supply of loanable funds," so that businesses are starved for credit.

The "supply of loanable funds" may be a meaningless concept within the Just Third Way understanding of banking and finance, which uses classic banking theory, but it is a virtual god within a financial and economic system locked into the assumptions of Keynesian economics. The bottom line is that by using bank assets to invest in something other than new or replacement capital in the agricultural, commercial, or industrial sectors, the financial services industry has completely abandoned its proper role in the economy, even by Keynesian standards. There could not be a better argument for the reforms embodied in Capital Homesteading.

Correction: the best argument is yet to come, although we hope it doesn't — the coming collapse when the house of cards being built by the weird union of politics, economics, and finance on a foundation of disproved Keynesian assumptions improperly implemented not only comes crashing down, but erupts in a financial inferno that few people in the United States can even imagine.

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Halloween Horror Special XIV: Nightmare on Wall Street, Part I

When we started this series, we thought there might be a problem coming up with enough horrible things happening to write about to last through the month of October. No, the problem is finding enough October to be able to use all the horrifying ideas we've been having as well as try and keep up with the new horrors "they" insist on inflicting on the world.

Take, for example, a column on the internet to which Our Man in Iowa, Guy Stevenson, sent us a link: "Brokers Flee Brokerages as Declining Assets Show Broken Model." 10/26/10, Financial Advisor Magazine. Setting aside for the moment (or for all time) the over-use of the word "broke" (too many people are broke for that to be even mildly amusing), we noted a disturbing development: lack of appreciation on the part of the powers-that-be for proper internal control of a company, a system, and an industry. The Big Buddy Brokerage Houses seem to accept conflict of interest as a given, a conflict that necessarily accompanies the vertical and horizontal integration of the financial services industry.

(English translation: because a single company sells the product, advises you to buy the product, finances the product, and even insures against loss if the product goes belly-up, there is a certain, shall we say, lack of independence and objectivity on the part of many brokers. It becomes in their best interest to do what is best for The Company rather than the investor.) Hence, brokers who are "troubled" with "scruples" and other unessential "feelings" tend to get out of the business, or go with a smaller company that is not a part of the overall integration of financial services. As the article relates,

While lacking the clout of big brokerages, independent firms boast of one advantage with clients: no conflicts of interest. Brokers at Merrill Lynch, for instance, are pressured to sell funds managed or approved by the firm because they pay a higher commission than those run by other companies, says Paul De Rosa, who worked at the brokerage for 26 years before co-founding his own firm, Gateway Advisory LLC, in Westfield, N.J., in January.

Many people interested in the health of the financial industry are reacting, although (in our opinion), not quite as strongly as they could — we're not hearing anyone serious about restoring Glass-Steagall, for instance. Still, half a loaf, etc.:

Registered investment advisors are urging the SEC to adopt the tough fiduciary standard under the Investment Advisers Act of 1940 that governs their profession. If advisors receive additional payments for recommending a particular fund over another, they must fully disclose the arrangement and obtain informed consent from investors every time they sell such a product, says Falls Church, Virginia-based Knut Rostad, chairman of the Committee for the Fiduciary Standard, a group of financial professionals. Advisers must also manage conflicts by, for instance, crediting that additional payment to their client's account rather than accepting it themselves, Rostad says.

Naturally, those who make the most money out of (alleged) conflicts of interest are the most vociferous about not being burdened with such trivia. Using an argument that sounds suspiciously like that used to dump Glass-Steagall, they are making an "SSDD"-type argument that boils down to the fox demanding the keys to the henhouse:

The Securities Industry and Financial Markets Association, a lobbying and trade group based in New York, says the stringent fiduciary rules of the 1940 act are unnecessary to safeguard investors and would restrict their options. SIFMA does support the idea of more disclosure.

This quote is absolutely priceless . . . I mean, valueless, which describes what the client ends up with once he or she gets the (wink-wink-nudge-nudge) "advice" from his or her financial analyst: "'We believe in a robust disclosure regime where the client can make the decision to consent to conflicts,' says Andrew DeSouza, a SIFMA spokesman."

Really? A client who is compos mentis is not going to be "consenting" to conflicts, period. Doctors, lawyers, accountants, clergymen, and others are called "professionals" because they practice a "profession." Part of being a professional is putting the client's interests first — it's what you're hired to do. You're not hired to put your own interests above that of the client or you are, frankly, a thief, taking money for a service you are not delivering. A "conflict of interest" is exactly that — a conflict between the client's interests that you are being paid to protect, versus your own interests. You're asking — demanding, really — that the client foot the bill for something that benefits you, not him or her.

In short, what the SIFMA proposes is that brokers only be required to tell their clients that they are robbing them, not that they stop it unless asked. Uh, huh. This is what they call a "Hobson's choice." It's like the thief holding a gun to your head and asking you if it's all right to empty your wallet into his or her own pocket. "No objections? You're sure, now. Okay?)

If you think that's bad, however, wait until you see what we've got planned for tomorrow's final episode in this series.

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