News from the Network, Vol. 5, No. 47

As of this writing, the stock market is soaring on reports of shoppers flocking to "Black Friday" sales. It remains to be seen whether people are actually buying anything. Reports are that things are significantly more orderly than in prior years, suggesting either that people are becoming more socially evolved, or they're not in the same rush to trample people to death to be the first one to check out something that you can get cheaper on the internet.

In other news, despite the momentary gains in the stock market (subject to change as the short sellers hurry to borrow and sell shares to force lower prices on Monday to cash in on the inevitable backlash from the "Black Friday" hype) and increases in government spending, the global "recession" manages to persist — causing individual depressions, as an article, "Suicide Attempts Increasing in Crisis-Stricken Greece," suggests. One wonders to what extent the obvious denial in high places, indicated by the insistence that it's a recession and we're in recovery, rather than a depression and it's getting worse, may be part of the problem and causing despair.

As we've seen in the recent postings on the problems with Keynesian economics, however, fluctuations in the stock market, reductions in the number of people getting killed to buy something, increases in the numbers of people who kill themselves because they can't buy something, or anything else, are going to improve things until and unless a Capital Homestead Act is adopted in the near future. To advance that goal, here's what's been happening this week:

• The planning for the April 2013 Rally at the Federal Reserve in Washington, DC, is under way (or weigh, depending whose history you believe). A special effort is being made to reach out to groups and individuals concerned about the growth of State power and thus the loss of control over individual and family life.

• The CESJ "bestseller," The Restoration of Property is available for purchase in bulk (i.e., ten copies or more) at a 20% discount off the cover price, plus shipping. Individual copies can be purchased by following the above link to Amazon, or this link to Barnes and Noble, or by special ordering the book from many "brick and mortar" bookstores. Inquiries about bulk purchase orders should be sent to "publications [at] cesj [dot] org."

• We have been making a special effort this past week to reach out to financial, media, religious and political figures who might be interested in an alternative to "Obamacare" and other programs that put too much power over individuals, families and organizations in the hands of the State. If you have someone in mind you think should be contacted, we have developed a template letter or two that you might be able to use to make contact. Please do not expect us to try to make the initial or follow-up contacts. It is too easy for a suggestion to talk to CESJ coming from CESJ to be dismissed as mere self-promotion, and its importance to be ignored.

• Richard Aleman, editor of The Distributist Review, has a lengthy article in the current issue of The Houston Catholic Worker on the work of Monsignor Aloysius Ligutti and the program Msgr. Ligutti detailed in Rural Roads to Security (1940). Consistent with much of today's distributist thought, there is no acknowledgement of the potential for a solution to be found in the ideas of Louis Kelso embodied in CESJ's Just Third Way. This is particularly so with respect to using future increases in production instead of past reductions in consumption to finance capital acquisition and development — keeping in mind, of course, that in binary economics, land is simply another form of capital. The unnatural barriers that reliance on the slavery of past savings raise to expanded capital ownership are addressed in CESJ's recent publication, The Restoration of Property (above), while the special and limited nature of land and other natural resources are addressed in CESJ's Citizens Land Bank and the Homeowners Equity Corporation. These use advanced financing techniques and the corporate form of organization for ordinary people instead of against them, as Msgr. Ligutti deplored. Unfortunately, locked into the past savings paradigm and focusing on abuses of the corporation (a form of organization especially recommended by Pope Pius XI in § 54 of Divini Redemptoris) instead of its possibilities, the modern distributist movement merely commits itself to repeating the mistakes of the past without the possibility of developing a financially and politically viable program to broaden ownership of farmland — or anything else.

• As of this morning, we have had visitors from 66 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, the United Kingdom, Canada, Australia, and the Philippines. People in Spain, the United States, Estonia, Vietnam and Ireland 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," "News from the Network, Vol. 5, No. 4," "Romney's Speech," and "Why Not Capitalism?"

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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Something to be Thankful For (Keynesian Contradictions, IV)

As we saw in yesterday's posting, the paradox established by Keynesian monetary and fiscal policy cannot truly be resolved within the past savings paradigm. Nowhere is this better illustrated than in the otherwise sound proposal called "distributism."

In 1936 in An Essay on the Restoration of Property, Hilaire Belloc observed that the problem with something like "social credit" (that he called "The Douglas Scheme") — and, of course, the Keynesian assumptions on which "social credit" and, in large measure, distributism itself rests — is that it focuses on income, not property. The only thing that matters is to get income into the hands of people, whether by raising wages, increasing welfare entitlements, inflating the currency, or abolishing private property by redefining what it means to "own" something, i.e., to take away control and enjoyment of the fruits of ownership — the income — from nominal owners for redistribution among non-owners.

Belloc then astutely pointed out that focusing on widespread distribution of the income from capital is not the same as promoting the widespread ownership of capital. This is a distinction that today's distributists and others have ignored or forgotten . . . if they ever knew. Not understanding the potential inherent in financing new capital formation with the present value of future increases in production instead of past reductions in consumption ("future savings" v. "past savings") Belloc not unnaturally concluded that a restoration of property as a characteristic of a society was virtually impossible . . . unless, paradoxically, you effectively destroy private property by giving the State control over property to ensure that both the rich and the poor have an equally difficult time in obtaining credit out of past savings to finance new capital.

Belloc then undermined even that contradictory and self-defeating solution by pointing out that, since the rich control the State, there is little likelihood that they will use their power to divest themselves of wealth, and thus power. The only thing to do is to sit back, be personally virtuous, and wait for the current system to collapse so that a new, better order can be established on the ruins of the old.

Unfortunately, what usually happens in such an event is that the new system is worse than the old because it takes as a given the flawed assumptions of the old system and exaggerates them to achieve a presumably better order. This was why, for example, Pope Pius XI advocated reforming, not destroying the current system, starting with taking a hard look at the fundamental assumptions of the current order — which the Just Third Way does by calling into question the inerrancy of the past savings assumption.

All of this highlights the problems associated with trapping the economy and growth into what Louis Kelso and Mortimer Adler called the slavery of past savings — and there is no better way to put it, either. Enslaved by the bad assumption of the past that it is impossible to finance new capital formation without cutting consumption and accumulating money savings has led to the weirdness of Keynesian economics that ultimately robs the poor to give to the rich so that the rich can invest in new capital that eliminates human labor from the production process.

In CESJ's most recent book we show how Belloc's insightful analysis can be the basis for a viable solution once freed from his dependency on past savings: The Restoration of Property, but it's hard to convince people enslaved by the past savings assumption that things truly can be different — and you don't have to take revenge on others whose only crime is to be rich when you are poor.

That, however, does not address the desperation with which Keynesians and those who accept Keynesian assumptions without question resist coming to terms with necessary reforms, both in the monetary and fiscal systems and their own thinking. Keynesians and their followers become extraordinarily creative (and even more contradictory) when they defend their indefensible system.

Take, for instance, the contradiction inherent in the presumed tradeoff between inflation and employment. Some Keynesians try to argue both ways. If you focus on the inflationary effect of Keynesian monetary and fiscal policy, they claim, for example, that the money is being created to finance new capital formation and thus job creation, and that there is no real inflationary effect. Since job creation is the goal, what you think is inflation isn't true inflation.

This is because according to Keynes true inflation can only exist under conditions of full employment (General Theory, V.21.iv-v.) . . . just as consumption demand can only come from wages and welfare, and financing for new capital can only come from prior reductions in consumption. If you focus on the artificiality of temporary job creation, however, they then claim that the money is being created to obtain the increased consumption benefits of inflation.

The fact is that inflating the currency is presumably doing both at the same time. The fact is, however, that inflating the currency isn't doing either one.  The only way Keynesian policies can "work" is when the private sector is strong and is going about its business by carrying out transactions and financing new capital without recourse to existing savings except as collateral for pure credit transactions, and disintermediating from the commercial banking system — a tendency that has been accelerating as government control of M2 has increased.

As this writer recalls, a finance professor he had in the early 1970s claimed that disintermediation had really started in earnest in the mid-1960s, but the professor did not connect it with the adoption of Keynesian monetary and fiscal policies to finance the "Great Society." It's actually been going on from the dawn of civilization, but only became something "unusual" when the money supply began shifting to government debt backing instead of private sector asset backing during and after World War I.

The bottom line here is that when the private sector isn't strong enough to make up for the inherent contradictions and self-destructive policies of Keynesian economics, the economy takes a nose-dive, jobs disappear, the role of the State expands enormously, and everybody's life, liberty and property is endangered at the most fundamental level. The only proposal to reverse this trend of which we are aware that has any viability at all is Capital Homesteading. Maybe today, when so many people are giving thanks for what little remains to them, it's time to consider what they could have, and give thanks for the opportunity still left to us.

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Keynesian Contradictions, III: Production Becomes Irrelevant

Given the expedient nature of pump priming, Keynes claimed that it would be better if such government expenditures were productive, but this is not essential. Any expenditure will do the job. This is because the job creation that results from the initial pump priming operation is incidental to the increase in effective demand — increase in consumption.

The goal of pump priming is not the temporary job creation that results from the initial stimulus. Rather, the goal is the permanent job creation that presumably results from new capital formation:

"Unless the psychological propensities of the public are different from what we are supposing, we have here established the law that increased employment for investment must necessarily stimulate the industries producing for consumption and thus lead to a total increase of employment which is a multiple of the primary employment required by the investment itself." (General Theory, III.10.ii.)

In other words, new capital investment will always increase employment. Always. There is no recognition of the fact that one of the primary incentives ("psychological propensities") for new capital investment is to decrease employment! As Jean-Baptiste Say explained, "Whenever a new machine, or a new and more expeditious process is substituted in the place of human labor previously in activity, part of the industrious human agents, whose service is thus ingeniously dispensed with, must needs be thrown out of employ." (Jean-Baptiste Say, A Treatise on Political Economy, I.vii.)

Keynes's assertion that employment increases as new capital is formed is another can of worms known as the "Labor Theory of Value." It presumes the only source of consumption income is private sector wages and public sector welfare. Be that as it may, however, in the Keynesian view, new capital formation (and thus the presumably automatic job creation that is the real goal) can only come about if there is a simultaneous increase in both demand by consumers and saving by producers.

A simultaneous increase in both demand and saving, however, can only take place in the past savings paradigm if you inflate the currency by printing money intended to redistribute wealth and raise prices. Keynes resolves the paradox of the economic dilemma by ignoring all the effective demand (consumption) and financing (saving) that results from private sector bills of exchange — future savings — and by assuming that the whole of the money supply consists solely of M2.

It is thus perfectly proper to say that Keynesian monetary and fiscal policy in situations of less than full employment is to print money directly for consumption. As long as whoever gets the new money spends it on consumption (or gets it into the hands of someone who will spend it on consumption), whether the money is spent productively on new investment before it is warranted, or somehow distributed for meaningless work is irrelevant. As Keynes asserted,

"When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how 'wasteful' loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better. . . .

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." (General Theory, III.10.vi.)

Setting aside for the sake of the argument Keynes's astounding claim that something can "become a good deal greater than it actually is" (in other words, both "be" and "not be"), it is clear from this passage (or as clear as Keynes could make anything so contradictory) that as long as money is created and spent, it is irrelevant what it is spent on — as long as it increases consumption.

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Keynesian Contradictions, II: Inflation v. Employment

In Keynesian economics there is a presumed trade-off between unemployment and inflation. This assumption is at the heart of all Keynesian monetary and fiscal policy. As Keynes explained,

"For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive of the growth of capital." (General Theory, VI.24.i.)

Keep in mind that Keynes defined "saving" in all cases as reductions in consumption, i.e., "a low propensity to consume": "So far as I know, everyone is agreed that saving means the excess of income over expenditure on consumption." (General Theory, II.6.ii.) It is a principal tenet of all Currency School economics that it is impossible to finance new capital without first reducing consumption in order to accumulate money savings.

That being the case, and given the Keynesian paradox (what Moulton called "The Economic Dilemma" — Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 26-29) that you can't finance new capital formation without cutting consumption, but you won't finance new capital if consumption is cut, the "solution" is to inflate the currency to induce "forced savings." (General Theory, II.7.iv.) "Forced savings" consists of money pumped into the economy to increase employment temporarily ("pump priming") (General Theory, III.10.vi). (N.B., "pump priming" is not the term in the General Theory; it was used to describe the New Deal deficit spending to increase consumption through make-work jobs, vide Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 14-15.)

The increase in jobs is supposed to increase effective demand (disposable income), which raises prices. The rise in prices means that consumers pay more for less, while producers receive more for less — "forced savings" meaning reductions in consumption presumed necessary to provide the savings to finance new capital. When producers use the increased profits resulting from the inflationary rise in prices (resulting in reductions in consumption) to invest in new capital formation, they create jobs and (presumably) pay wages to sustain the level of effective demand stimulated by the pump priming, i.e., printing money for consumption.

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Keynesian Contradictions, I: No Distinction Between Public and Private Sector

Recently someone raised a question about our claim that Keynesian monetary and fiscal policy relies on printing money directly for consumption. As the questioner recalled, Keynes advocated governmental investment in large productive projects, not "printing money directly for consumption."

Keynes did not state explicitly that the government should print money directly for consumption. It is also true that he favored productive over non-productive expenditures by government . . . up to a point. In a past savings system such as Keynesian economics, however, creating money for government expenditures for any purpose, productive or non-productive, assumes as a given that the government has a right that we call "property" (vide Irving Fisher, The Purchasing Power of Money. New York: Macmillan, 1931, 4) to issue claims against existing wealth, i.e., is the ultimate owner of everything that exists in the economy. Keynesian economics ignores the fact that the government has no such right.

In the Keynesian system there is no real distinction between the private sector and the public sector (General Theory, VI.24.iii), any more than there is in the "chartalism" (a.k.a., "Modern Monetary Theory," or "MMT") of Georg Friedrich Knapp (The State Theory of Money. London: Macmillan and Company, 1924; cf. John Maynard Keynes, A Treatise on Money, Volume I, The Pure Theory of Money. New York: Harcourt Brace and Company, 1930, 4). Thus, Keynes could be honestly confused about the difference between asset-backed private sector money consisting of bills of exchange and mortgages, and debt-backed public sector money consisting of bills of credit.

To be specific, asset-backed private sector money consists of bills of exchange backed by the present value of future marketable goods and services, and mortgages backed by the present value of existing marketable goods and services — anything that can be accepted in settlement of a debt. Consistent with the principles of the "Currency School" — and Keynes was Currency School, despite the widespread belief that he was "Banking School" (Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1989, 60-65) — money consists solely of either specie (gold and silver) or government bills of credit backed by the present value of the government's ability to collect taxes in the future, or substitutes for currency in the form of demand deposits ("checking accounts").

Given the Keynesian understanding of money, and the failure to distinguish between the public and private sector, whether new capital is owned and controlled as private property or by the State becomes irrelevant. This is critical to understanding Keynesian monetary and fiscal policy, which can only be understood in light of the Keynesian assumptions about private property and money.

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News from the Network, Vol. 5, No. 46

Now that the dust appears to be settling from the election, it is becoming increasingly evident that neither side, despite all the good will in the world, had or has a viable solution to the increasingly serious problems the United States and the rest of the world is facing. And please, keep in mind that just because you happen to disagree with someone, even at the most profound level, doesn't mean that he or she doesn't have good intentions. Even Hitler thought he was a public benefactor.

Particularly, with all the analysis coming out of Catholic circles trying to figure out how or why so many Catholics voted for Obama, we have to realize that, for many, it was the implied promise (albeit unsustainable) that the government would take care of people, however high the cost, that persuaded many people to choose Obama over Romney.  We can call this "Welfare Blackmail" for want of a better term.

With nothing other than the perfectly true observation that not even the richest country on earth can afford to support everyone forever without economic growth, the Republicans simply could not win. Most people would rather go with the devil they know with the possibility of maybe eating tomorrow, than the devil they don't with the possibility of not eating at all. No promises either way, but hope is better than hopelessness, and politics these days is usually a triumph of optimism over experience in any event.

That's why Cardinal Dolan's comments about the bishops' proposed statement on the economy (below) is so interesting — there appears to be a growing realization that something more is needed than The Same Old Thing. And (in case you don't care about that) we have other items of interest this week:

• Reports from this past week's meeting of the American bishops is mildly encouraging. They held off on issuing a statement on the economy, evidently afraid that a "rush job" would do more harm than good. It is apparent that there were no solutions being proposed, however, only a general concern for the poor and the hope that somebody would do something. This sets the stage for a program that doesn't rely on people doing the right thing when it is virtually impossible to do the right thing, but in restructuring out institutions (especially our tax and monetary systems) to make doing the right thing possible, even optimal. Capital Homesteading would achieve this goal.

• Despite the shorter than usual November sales period (CESJ's distributor is cutting off the month at November 23, thereby putting all sales for the previous day or so into December), outlook is encouraging. Sales of In Defense of Human Dignity have picked up, while The Restoration of Property is well on the way to becoming the bestseller of the year.

• An article on why retiring in 2013 might not be optimal for many people, "Retirement Perfect Storm," has been causing quite a stir among some groups in the Global Justice Movement. Some think we're channeling "Tail Gunner" Joe McCarthy and seeing Statists behind every tree (we thought it was Commies under the bed), while others have taken the opportunity to agree that a Just Third Way economy has many advantages over a State-run system. The key to understanding the debate — such as it is — is that, rooted in the slavery of past savings, the State is the only hope most people see . . . and it is a frail reed, indeed, on which to lean. It is much better (as one participant in the discussion averred) to add more economic power to every citizen than to hand it over to the politicians.

• Cardinal Dolan's encouraging remarks on CESJ's paper, "Affording Universal Healthcare Without Mandates," has been getting attention in some quarters. While obviously we don't know, it is tempting to think that His Eminence's reading of the paper alerted him to the possibility that something different than the usual statist solution to poverty is possible, and that that could have led to caution about the release of a statement on the economy.

• Consider signing the petition to reform the Federal Reserve. It's pretty easy, and requires no other commitment, although they do ask for a contribution, but it doesn't seem to repeat. If you feel the overwhelming urge to contribute time or money to something, consider CESJ.

• CESJ has initiated a number of specific outreach efforts this past week to surface grants to establish Justice University as well as undertake a number of small projects awaiting adequate funding. If you have contacts at a foundation or two, or know a philanthropist looking to put a little money into a worthy cause before the end of the year (and get a tax deduction — CESJ is a 501(c)(3) organization), consider letting them know about CESJ. Some of our projects can be carried out with as little as $1,500 (although for a publication, $10,000 is better). Let people know that they can help advance the goal of Capital Homesteading through small initiatives as well as big ones.

• As of this morning, we have had visitors from 63 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 United Kingdom, Australia, and the Philippines . People in France, Spain, Estonia, the United States,, and Vietnam 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," "News from the Network, Vol. 5, No. 4," "Romney's Speech," and "Why Not Capitalism?"

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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Let's Make a Deal, VII: The Bankers' Panic

No, that's the right title for the posting. The "Panic of 1907" was known as "the Bankers' Panic" since it hit the financial services industry first and hardest. Ironically, the problems had been signaled well in advance, but did not seem very pressing once the country came out of the Great Depression of 1893-1898.

What nobody took into consideration was the fact that the system was set up to fail. Given the ultra-concentration of financial power in the hands of a single man, financier J. P. Morgan, it only needed a little push to send it over the edge. Consequently, what should have been merely the routine elimination of a competitor in the ordinary course of cutthroat capitalist business mushroomed into a global financial panic.

The problems had been brewing since Andrew Jackson's "war" on the Second Bank of the United States. Some people thought that the problem of concentrated control over money and credit had been solved with the establishment of the National Bank system in 1863. Having covered the problems associated with that system in previous postings, we need only note that having an inelastic, debt-backed currency for consumers, farmers and small businessmen combined with an elastic, asset-backed money supply for rich industrialists, commercial interests and financiers was a deadly combination, as the Panics of 1873 and 1893 demonstrated. It was custom-designed to concentrate wealth in fewer and fewer hands, something that accelerated rapidly after 1893 when easy access to capital ownership for ordinary people virtually disappeared with the effective end of "free" land under the Homestead Act.

So, what happened?

The president of the Knickerbocker Bank and Trust, the third largest bank in New York City, decided he could make a lot of money by using the bank's (i.e., the depositors') funds to "corner" copper. Translation: he wanted to establish a position in the commodities market by purchasing enough futures contracts on credit that would enable him to dictate the market price of copper, a critical industrial material.

To make a very long and complex story short, he failed. When the news got out, depositors rushed to the bank to get their money. Even in ordinary circumstances a bank that is not a member of a central bank cannot meet immediate demands for all its deposits. Remember the scene in It's a Wonderful Life when "George" (Jimmy Stewart) explains to the savings and loan depositors that their money is invested in other people's houses and businesses, not piled up in the institution's vault? A bank has to be able to sell or "rediscount" its paper for immediate cash to pay out its depositors, and it can only do that if it has a buyer that can't refuse to purchase good loans — a central bank.

In the case of the Knickerbocker, the depositors' money was not only invested in the usual types of things, but a massive amount had been pledged as collateral for the futures contracts that the bank president had purchased on credit. Again, given a little time, he could have liquidated his speculative holdings and made good the loss out of his personal fortune . . . maybe . . . but he wasn't given the chance. He needed the money to meet depositors' demands now, or be forced to close the bank. He applied to J. P. Morgan for a short-term emergency loan to keep the bank open, on the grounds that the financial system in New York couldn't take the strain of a significant failure.

Morgan knew the Knickerbocker had good assets that would back up the emergency loan, if he chose to accept them at their fair value. Morgan, however, decided that this was the perfect opportunity to drive a competitor out of business. He refused the loan. To make matters worse (and to ensure that the Knickerbocker couldn't apply to other banks for emergency funds), Morgan cut the Knickerbocker off from clearinghouse privileges. This made it virtually impossible for the Knickerbocker to buy or (especially) sell securities to raise cash fast.

As Morgan expected, the Knickerbocker was forced to shut down. Morgan then sat back and waited for the dust to settle so he could pick up the Knickerbocker's assets for pennies on the dollar.

It didn't work out quite that way. The run on the Knickerbocker caused panic among depositors at other institutions. Keep in mind that without a central bank (and the United States didn't have a central bank, only a quasi-central bank system under the National Banking Act of 1863), a commercial bank can't keep 100% reserves on hand or on deposit at the non-existent central bank sufficient to liquidate all its deposits. Reserves don't back the deposits, anyway. Demand deposits in a commercial bank are backed by the bank's promissory notes, not cash, while savings accounts are invested in other assets, not kept in cash. Ordinarily a bank keeps only enough cash on hand, "in reserve," to meet its daily transactions demand.

Other banks started to shut down for lack of cash, too, and panic spread beyond New York City, across the U.S., and to Europe. Morgan then stepped in and started making emergency loans. When called to testify before Congress a few years later, Morgan denied that he had anything to do with causing the Panic on the grounds that no one man could have that much power, a demonstrably false assertion, as the evidence showed. Morgan's testimony, recorded in the Pujo Report of February 1913 on the concentration of control over money and credit, is a masterpiece of equivocation, misdirection, and "playing dumb" after having been caught with his hands in a rather large cookie jar. Ironically, "standard" history gives Morgan credit for saving the country from the situation he created.

The economy was once again in a shambles, and it was painfully evident that something would have to be done — but what?

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Let’s Make a Deal, VII: Prelude to Panic

After the failure to undertake necessary reforms of the financial system revealed by the Panic of 1893 and the Great Depression of 1893-1898, the country went through a period of relative prosperity. There were a few negative voices raised, such as Judge Peter S. Grosscup’s concerns, expressed in a series of articles before World War I, but, by and large, most people focused on how to tinker with the system already in place — after all, events since the Civil War half a century before suggested that things would always return to normal.

The problem was that far too many people missed the warning signs that something was seriously wrong with the economy in the United States, and had been since 1863 and the institution of the National Bank system.  This became evident in 1893 when Frederick Jackson Turner declared that the end of “free” land under the Homestead Act meant the end of democracy — and the end of the uniquely American character. Americans would now tend to become increasingly European in their outlook, with the United States ultimately becoming a European style aristocratic republic.

True, the rapid expansion of capital ownership following the 1862 Homestead Act brought the U.S. out of the Great Depression of 1873-1878. Crop failures in Europe and bumper crops in the U.S. brought the U.S. out of the Great Depression of 1893-1898. World War II brought the U.S. out of the Great Depression of 1930-1939.

Perhaps not surprisingly, however, there was a declining effectiveness of each of these remedies. The Homestead Act resulted in increasing production and thus consumption income at just the right time to support the rapid expansion of industrial and commercial capital. The effect first had to build up following the Civil War, however (hence the temporary over-capacity in transportation facilities that triggered the Panic of 1873 in the United States — having caught the disease from Europe — and the ensuing depression), and then petered out as available land was taken, thereby providing the basis of the Panic of 1893 and that ensuing depression.

The period following the Great Depression of 1873-1878 was characterized by nearly full employment and rapid economic growth, but the opportunities for small ownership were disappearing. As Judge Grosscup noted, the period following the Great Depression of 1893-1898 was characterized by accelerating loss of small ownership itself, not just the loss of opportunity noted by Frederick Jackson Turner. The resulting concentration of financial and economic power brought on the Panic of 1907.

Where the recoveries in the 19th century were "natural," i.e., done without government manipulation of the currency or job creation, and succeeded, that of the 1930s was exclusively based on government manipulation of the currency and job creation — and failed. World War II brought the country out of the Great Depression of the 1930s, not Keynes or Roosevelt. The good credit of the United States financed the war — a credit that is now seriously threatened by the growing deficits that the Keynesians insist are not only good, they are essential to economic growth!

The Keynesian reliance on government deficits and control of the economy, of course, fails to explain why the U.S. went through its most rapid economic expansion at a time when the national debt was negligible, and capital ownership was widespread, giving many people control over their own lives. The outstanding debt was maintained only to back the National Bank Note currency of 1863-1913 and the Treasury Notes of 1890. The Keynesian claim that economic growth in an advanced economy cannot take place without concentrated ownership also fails to explain how concentrated capital ownership appears to inhibit economic growth.

Today we are still trying to force the failed solution of the 1930s (government manipulation of the currency and job creation) to work, when we should be implementing the only solution that really worked: the Homestead Act, only updated to include commercial and industrial capital as well as land.

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Let's Make a Deal, VI: The Great Depression . . . of 1893-1898

As we noted in yesterday's posting, the Panic of 1893 revealed serious structural and theoretical flaws in the financial institutions of the United States. Adherence of the National Bank system to the principles embodied in the British Bank Charter Act of 1844 had saddled the U.S. system with an inelastic, debt-backed currency for farmers, small businesses and wage earners/consumers, but an elastic, asset-backed money supply in the form of merchants, trade and bank acceptances for the rich financiers, industrialists and commercial interests.

Translation: the rich could get all the financing they needed or wanted for new capital formation, but the non-rich did not have enough money to be able to consume what was produced. Neither could the non-rich increase their own production of marketable goods and services — that with which you really purchase what others produce (Say's Law of Markets) — to increase consumption. Having finally restored the faith and credit of the government and brought the paper currency back to parity with gold, the government refused to inflate the currency to stimulate consumption artificially in the short run . . . which, frankly, only robs Peter to pay Paul, anyway.

There was a "money drought." There was more being produced than at any time in history, but because a majority of the people now relied on wage income instead of ownership income and a seriously flawed banking system, there wasn't enough money in small denominations to purchase all that was produced! There was a serious need to shift from an inelastic, government debt-backed currency in an economy in which capital ownership is concentrated, to an elastic, private sector asset-backed currency in an economy in which capital ownership is widespread.

Unfortunately, three immediate issues diverted people's attention from the important. One, there was a dire need to take care of people to prevent starvation. This was epitomized by the march of "Coxey's Army," which demanded government make-work financed with an increase in debt to create jobs.

Two, fiscal reform was thwarted by an 1895 Supreme Court decision that ruled that an income tax levied without apportionment among the states (which would have been unfair) was unconstitutional. This meant that the rich were escaping virtually all taxation, since they were able to pass any taxes on to the non-rich through increased costs for the goods and services they produced. The progressives, populists and socialists all viewed an income tax as the most just and fair tax.  It came out of the "bottom line" (that is, after costs) and thus did not raise prices unfairly for consumers by adding the cost of the tax to the cost of the product . . . for personal income taxes, anyway.  A corporate income tax does raise prices to consumers.

It's important to note that an income tax per se was not unconstitutional before the 16th Amendment. What was unconstitutional was a "direct tax" that was not apportioned among the states. There had been debate for decades on whether an income tax is direct or indirect — the real issue — and thus unconstitutional without apportionment or constitutional, respectively.

Congress was unwilling to cut off a potential source of tax revenue, however, and the income tax in the Civil War was allowed to lapse without a decision being made.  The issue was not raised again until more people were non-owning wage earners, and thus concerned with added costs of production that were not due to wage and benefit increases.

Three, the brilliant and charismatic William Jennings Bryan diverted attention away from needed banking reform by focusing on what he perceived as an immediate need to inflate the currency by allowing "free coinage" of silver, that is, the government would be required to mint all silver into coins that people brought in — at taxpayer expense, of course. Silver at that time was cheap, and had finally been dethroned from its millennia-old position as the monetary metal of choice in favor of gold. The world was awash in cheap silver.   Inflating the money supply by coining massive amounts of silver dollars would provide silver producers with a badly needed market, raise prices for farmers and small businesses, and allow debtors to pay back expensive loans with cheap money — or so the theory went.

Consequently, nothing was done. Fortunately (for the American farmer and small businessman), there were crop failures in Europe in 1897 and 1898 — and bumper crops in the U.S. The tremendous increase in wheat production allowed the people in Europe to have food at a reasonable cost even with crop failure, and provided a ready market for the American farmers, who could now pay their bills to the small businesses. Since the farmers and small businessmen owned the farms and businesses, the benefits all went directly into their pockets.  The Great Depression was over and the American economy was saved . . . for now.

Unfortunately, the powers-that-be thought the problem was solved permanently, and proposals for reform of the financial system were shelved. This set the stage for the "Bankers' Panic" of 1907 — which, being artificially created by financier J. P. Morgan, never should have happened.

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Let's Make a Deal, V: Stop Hitting the Snooze Button

The Panic of 1893 was a wake-up call for financial and economic system reform in America. Unfortunately, the country pressed the "snooze" button and got diverted by the Great Depression of 1893-1898, and the presidential campaign of 1896. Incidentally, we just heard an unverified rumor that, just as the Great Depression of the 1930s overshadowed the severity of the Great Depression of the 1890s in its severity, the Great Depression of the 1890s took the title away from the Great Depression of the 1870s.

Here's a sobering fact that should serve as a wake-up call if the academics and politicians would stop hitting the snooze button: the federal government has assumed a burden of debt in the trillions of dollars (that's a multiple of $1,000,000,000,000) in a failed effort to ameliorate the effects of the current Great Depression, say $15 trillion, just to make the calculation easier.

Yes, it's a depression. Get real. It's not a recession, much less a "recovery."

Add to that the potential hit of around $75 trillion for the Social Security and Medicare promises it's made suggests what could happen when the bill comes due and the government can no longer float more loans backed by empty promises. Another $10 trillion or so, and we've hit the $100 trillion mark.

That assumes that the U.S. currency doesn't succumb to the pressure of debt backing and kick off hyperinflation, i.e., the surreal condition in which the price level actually rises faster than the money supply can be increased. When the hyperinflation in Germany in the early 1920s was finally brought under control, the official exchange rate was 4.2 trillion Reichmarks to the U.S. dollar.

The unofficial exchange rate — what you actually had to pay on the black market since the legal exchanges didn't have dollars — was as high as 24 trillion Reichmarks to the U.S. Dollar. This was for a currency backed by nothing but worthless debt issued by a government that didn't even officially exist and thus couldn't collect taxes to redeem its own promises.

The exchange rate before the First World War was 4.2 Reichmarks to the U.S. dollar. The inflation rate was officially (and we all know what that means — e.g., "lies, damned lies, and official unemployment statistics") 100,000,000,000,000%. The unofficial (i.e., real) inflation rate was around 600,000,000,000,000%. And, giving the lie to the Keynesian dogma that there is an inevitable trade-off between employment and inflation, there was massive unemployment, social unrest, and a variety of other factors that ushered in the totalitarian regime of Adolf Hitler to restore order.

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News from the Network, Vol. 5, No. 45

We're going to try something slightly different this week with the news items. The reason is because (we just got flagged by the Committee for Redundancy Committee) there is an internet petition to Congress to reform the Federal Reserve and pass a Capital Homestead Act asap, and we don't want you to fall asleep and fail to sign the petition just because you got bored with the incredibly erudite and in-depth analysis contained in this week's blogitorial.

Here's the news:

• Consider signing a petition to initiate reform of the Federal Reserve so that it serves the needs of real people like us, instead of politicians, and get a Capital Homestead Act passed. You can get to the petition by clicking on this link. It takes less than half a minute to sign, although you might want to take a full minute to tweet the link or post it on your FaceBook page. Consistent with the "laws and characteristics" of social justice, keep in mind that this is an initiative to REFORM the Federal Reserve, a necessary institution, so that it serves the needs of actual people, not "End the Fed" even though it has been egregiously abused to fund government growth instead of economic growth in which all people can participate in and benefit from.

• We have had a number of very interesting discussions this week on how to move the Justice University Concept forward. Recently we learned that a CESJ founder was appointed as a director at a grant-giving foundation, which opens up some possibilities for funding a number of initiatives under the Justice University umbrella, and begin the great task of reforming academia.

• This week we signed CESJ's speakers bureau (which we intend to merge into Justice University as soon as it becomes feasible) up on "Radioguestlist.com," a free internet booking service (although there are paid services, too; they do have to make money like the rest of us). Since it costs nothing to join or use the service, and you can withdraw at any time, we're giving it a try. We'll let you know how it turns out. We've already submitted one suggestion to a radio show based in Minnesota and Texas (we're not going to ask) about applying JBM and JBL concepts to small business. Don't send us anything right now, but if you think you'd like to be a member of CESJ's speakers bureau, you might want to start preparing your resume and materials now. Your subject and (of course) the presentation will have to conform to the principles of the Just Third Way, and there will probably be an audition of some kind, but that's just to ensure quality and conformity with the ideas.

• We just learned that Debra Murphy of Idylls Press in Ashland, Oregon, is revamping her whole system, and expects to launch her new website in (we believe) January of 2013. We'll keep you posted, especially since her products — "classic" Catholic fiction — are fairly complementary with CESJ's non-fiction and UVM's fiction.

• We got a very nice compliment this past week on the forewords to UVM editions of the fiction of Robert Hugh Benson and John Henry Newman. A schoolteacher who has been reading books to her 8th graders (such as the sadly out of print The Pushcart War) said they were well written, informative, and gave a needed added dimension to novels that today's readers might otherwise overlook. Since all the forewords are written from the perspective of the Just Third Way, this was particularly gratifying.

• We expect to launch CESJ's new website in the near future as well, so stay tuned for developments.

• As of this morning, we have had visitors from 61 different countries and 50 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 United Kingdom, Australia, and India. People in Slovenia, France, the United States, Canada, and Portugal 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," "Romney's Speech," "Why Not Capitalism?" and "Is Binary Economics Practical?"

And Now for the Blogitorial:
As of this writing (a little after noon, Eastern Standard Time), the stock market is up somewhat after two days of serious drops. "Strong consumer data" is being given the credit, but that, frankly, is nonsense. We're more than a month into the heaviest-hitting retail selling quarter of the year, with people making plans to snag bargains for the holidays, seasonal employment is kicking up in anticipation of "Black Friday" in a couple of weeks — and sales are still seriously off for many businesses — even Universal Values Media's novels and CESJ's new releases are down a bit from the prior period, a rather startling development for November when these sell, if not like hotcakes, at least like warm pies.

What's the real story? Given the drastic drop of the previous two days and the speed with which trades can be carried out with computers, it's pretty obvious why the market is up: the short sellers are taking profits. They can't risk the market starting to turn up too much, or they stand to lose money rather than make it.

It works like this. In a normal "long sale" in stock market gambling you buy something with your own money or on credit ("on the margin"), hold it until the price goes up, sell it, and take a profit. You then pocket the money, after using some to pay off the loan you took out to purchase the shares. This is not true investing, but speculation. Fortunately, losing in this kind of deal hurts only you and anyone who lent you money, and then only to the extent that you or your creditor put money in. Nobody can lose more money than they put into a long sale, and the potential for profit is, in theory, unlimited, as there is no upper limit to a price (in theory).

In a "short sale" the story is a bit different. It's still gambling, of course, but it's "looking glass gambling." Where in ordinary stock market gambling the potential for profit is unlimited and the loss is limited, in short selling the potential for profit is limited, but the loss potential is unlimited.

It works like this. In a "short sale" in stock market gambling you either use shares that you own or, more commonly, borrow shares from somebody else. You then sell the shares and wait for the stock to go down in price. When the stock goes down to where you think it will go down no further, you buy back the same amount of shares that you borrowed (or more, if you think it's going up again and want to make a double profit), and return them to your portfolio or to the person who lent them to you. Your profit consists of the difference between the price at which you sold the shares, and the price you paid to replace the shares.

You can see the limited profit potential. The most money you can make on a short sale is the difference between what you sold the shares for and what you had to pay to replace them. Even if the stock price drops to zero, you can't make any more than what you sold the shares for in the first place.

The potential loss, however, is unlimited. You expect the shares to go down after you sell them . . . but what if the price goes up? You automatically lose your "investment" — the amount for which you sold the shares — plus whatever it costs to buy replacement shares to return to the lender.

For example, you borrow a block (100 shares) of a "penny stock" for 25¢ a share. You sell the block, realizing $25.00 on the sale (we're ignoring broker's fees and the sneers you would get for a lousy $25 investment). The next day the share price goes down to zero. You buy back 100 shares of the stock for nothing, return them to whoever lent them to you, and pocket your $25.00 profit.

That's if things work out. Suppose, however, the next day the stock shoots up to $100.00 a share. You have to buy 100 shares at $100.00 a share to replace what you borrowed and sold — $10,000.00. You managed to incur a loss of $9,975.00 for your $25.00 bet. What if the share price goes up to $1,000.00? Make that a loss of $99,975.00 suffered for a potential maximum gain of $25.00.

This is called "smart investing."

Anyway, that's why we think the stock market is up — the short sellers can't wait any longer to start buying back the shares they sold, or they could lose money instead of making it.

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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The Road to Fascism

The day before yesterday, Archbishop Charles A. Chaput published a post on "Public Discourse," the blog of the Witherspoon Institute, on "Life in the Kingdom of Whatever." The point of the posting (if you don't have time to read it here) is that the spread of moral relativism, seen most graphically in the presumed split between faith and reason, has had a disastrous effect not just on individual lives, but on the whole of civilization.

Perhaps not surprisingly, Archbishop Chaput's analysis is similar to that of CESJ — and (as you might expect) to ours, as detailed in In Defense of Human Dignity (2008), Supporting Life: The Case for a Pro-Life Economic Agenda (2010) and The Restoration of Property: A Reexamination of a Natural Right (2012).

The restoration of virtue — justice in particular — was, broadly speaking, the topic on which we wanted to meet with the Archbishop a few years ago. The presentation our gatekeeper/door-opener made, however, may have lost a little in the translation. She apparently was not up to explaining how CESJ's "Just Third Way" differs from the usual redistribution schemes that either confiscate wealth outright, or redefine the natural rights of life, liberty and property — or even human nature itself — in a way that allows people to fool themselves that they are still being consistent with universal moral values and the natural law. The shift in the basis of the natural law from what can be observed about human nature and empirical evidence, to one's personal opinion has been disastrous in too many ways to list.

To take one example, in the world of finance and economics, many people hold as a virtual religious doctrine the opinion that the only way to finance new capital formation is to restrict consumption and accumulate money savings. This opinion is the basis for the mainstream Keynesian, Monetarist/Chicago, and Austrian schools of economics, as well as minor schools such as distributism, georgism, and social credit. This is related to the opinion that only labor is truly productive, that capital only enhances labor.

Now, as Mortimer Adler pointed out in Ten Philosophical Mistakes, an opinion can be true or false — but knowledge is always true. In his 1935 book, The Formation of Capital, Dr. Harold G. Moulton of the Brookings Institution proved beyond the shadow of a doubt — proved; he did not simply assert as opinion — that the present value of future increases in production could be turned into money by the expansion of commercial bank credit and used to finance new capital formation without first having to cut consumption and accumulate money savings. This is, in fact, what commercial and mercantile banks (known generically as "banks of issue" or "banks of circulation") were invented to do, thousands of years before the invention of banks of deposit, such as credit unions and savings and loans, ironically the only type of bank with which most people are familiar.

Further, as Moulton pointed out (consistent with Adam Smith's dictum that the purpose of production is consumption, a lead-in to Say's Law of Markets), to require that consumption be reduced before new capital formation can be financed is, everything else being equal, the worst way to finance new capital and stimulate economic growth. No sane person produces goods or services for market unless there is some demand for what will be produced. Decreasing consumption necessarily implies reduced demand, thereby reducing the incentive to produce. Therefore, it is far more efficient and logical to finance new capital with the present value of future increases in production, than accumulated savings representing what has been withheld from consumption in the past.

To Moulton's findings Louis Kelso added that all new capital financed with such "future savings" should be broadly owned . . . and thereby solved a problem that has plagued social reformers for millennia: how can people without capital and who consume all of their labor income supposed to become owners of capital? They aren't paid enough to be able to save more than a pittance for retirement (if that), and the rich aren't going to lend them money or give it to them outright, except in exceptional cases. What can be done?

Typically, the response has increasingly been that, since the rich must have stolen what they have, it's only just that we should steal from them and redistribute their presumably ill-gotten gains; two wrongs make a right. This, of course, requires that the ones judging the rich have the true knowledge that God has. Unfortunately, all they really have is the false opinion that, since the only way new capital formation can be financed is by cutting consumption and saving, and since labor is the only real input to production, and since nobody's labor is worth that much, the rich must have stolen what they have! That's logic, as Tweedledee and Tweedledum would say. Wealth must be redistributed if we want justice. They used to call this "theft."

This requires that such things as life, liberty and property be redefined so that redistribution is no longer theft, but justice. This, as we might expect, makes the natural law conditional, that is, no longer the natural law. No one's rights to life, liberty and property are truly inalienable, for redefinition inevitably establishes criteria to justify being alive, being free, or owning something.

Thus, you must prove that your life is worth living or isn't inconvenient or endangering someone else's life, liberty or property. Paradoxically, you also have to prove that you are worthy of being free and not a slave, i.e., a full member of society . . . which involves proving that you haven't committed a crime — such as attempting to be born inconveniently or under circumstances that make you an embarrassment or financial or social burden. As for ownership, that must be justified on some grounds other than being merely human. If you didn't work for it, you don't really own it. It must also be convenient for the State or other people that you own, or you can be divested of your property until you can justify possession.

In other words, pure moral relativism. Redefining fundamental rights in this fashion, as both Mortimer Adler and Heinrich Rommen pointed out, leads straight to totalitarian government. Sadly, the rot has spread so far that the moral relativism Archbishop Chaput targets is now not only respectable, it's considered essential, as Keynes asserted on the second page of Volume I of his magnum opus, A Treatise on Money (1930). The absolutist State has (according to Keynes) the power to "re-edit the dictionary," thereby abolishing the natural law.

As Kelso pointed out, however, empirical evidence has shown that 1) past savings is not the only source of financing for new capital, and 2) labor is not the only producer of wealth.

Suddenly we see that it is completely unnecessary to re-define the natural law in order to take what others have. Nor do we need to help God out by enforcing His law when we think other people are breaking it, however much we may think He is sleeping on the job.

The problem, of course, is that (being wedded to their opinions) people reject the potential of Kelso's advances in economics and finance, especially as embodied in, say, Capital Homesteading. We have actually seen people shake with rage when it was suggested that we don't have to take revenge on the rich in order to establish justice, and proclaim that CESJ is opposing God's Will — when, frankly, all that's really being opposed is their own false opinions.

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Let's Make a Deal, IV: Society Becomes Non-Social

If the financial and economic problems facing the United States in 1910 we've been looking at in the last few postings weren't enough, there was also the degeneration of society itself. Society had, in fact, become less "social." Part of the problem was that the economic problems were obvious: concentrated ownership of capital, lack of access to capital credit, an inadequate money and credit system, an inelastic currency, and a shift from land to industrial and commercial capital as the predominant source of economic growth — a source to which most people lacked access.

The full effect of some of the problems with the social order had been staved off for a while by the relative success of the Homestead Act, but that was limited to land, not the rapidly expanding commercial and industrial capital. The increased production due to the Act and the consequent increase in demand, especially for rail service, brought the country out of the depression that followed the Panic of 1873. Similarly, the combination of crop failures in Europe and bumper crops in the U.S. brought the country out of the depression that followed the Panic of 1893.

There are two significant differences between the recovery from the depressions of the 19th century, however, and that of the 1930s and today. In the latter half of the 19th century, capital ownership was still relatively widespread in the United States. Increases in production had the double benefit of providing increased goods and services to purchase, as well as an increase in income with which to purchase.

In the 1930s and today, however, the remedy to an economic downturn is not to increase production and the capital ownership by means of which ordinary people can benefit from the increase, but to stimulate demand alone by artificially creating jobs. Ironically, it was the increased real demand for war material in the Second World War that brought the United States out of the depression of the 1930s, not the artificial demand created by increased government spending and debt.

Within the ruling Keynesian economic framework that became embedded as public policy with the New Deal, production is not a problem, while widespread capital ownership is characterized as irrelevant, a diversion, or even a positive evil. The rationale is that if ordinary people own capital, they will use the income for consumption, thereby drying up the supply of savings presumably essential to finance new capital that will provide the wage system jobs that provide people with income.

Both the increasingly individualistic (capitalism) and collectivistic (socialism) attitudes that had begun to characterize American society in the latter half of the 19th century can be traced to the concentration of capital ownership. Despite that (or because of that), the solution to this particular problem (as Pope Pius XI was to point out a generation later) is to become more social . . . not more social-ist.

The fact is that the United States, as described by Alexis de Tocqueville in Democracy in America (1835, 1840) had once been a fundamentally different type of society. As de Tocqueville compared social action in France, Great Britain and America, he claimed that in France, people expected the State to solve problems, in Great Britain they expected a "great man" to solve problems, but in America people tended to take matters into their own hands — the people were in charge. As he observed,

"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." (Alexis de Tocqueville, "The Principle of Sovereignty of the People in America," Democracy in America, I.iv.)

This different orientation had its effect on every day life:

"The citizen of the United States is taught from his earliest infancy to rely upon his own exertions in order to resist the evils and the difficulties of life; he looks upon social authority with an eye of mistrust and anxiety, and he only claims its assistance when he is quite unable to shift without it. This habit may even be traced in the schools of the rising generation, where the children in their games are wont to submit to rules which they have themselves established, and to punish misdemeanors which they have themselves defined. The same spirit pervades every act of social life. If a stoppage occurs in a thoroughfare, and the circulation of the public is hindered, the neighbors immediately constitute a deliberative body; and this extemporaneous assembly gives rise to an executive power which remedies the inconvenience before anybody has thought of recurring to an authority superior to that of the persons immediately concerned. If the public pleasures are concerned, an association is formed to provide for the splendor and the regularity of the entertainment. Societies are formed to resist enemies which are exclusively of a moral nature, and to diminish the vice of intemperance: in the United States associations are established to promote public order, commerce, industry, morality, and religion; for there is no end which the human will, seconded by the collective exertions of individuals, despairs of attaining." ("Political Associations in the United States," ibid., I.xii)

In light of this, it is revealing that during the Great Depression of 1893-1898 there were, for the first time in American history, widespread calls for the government to take direct action. People felt that they had lost control over their own lives, and were looking to the most stable and most powerful entity around — the State — to make things right. The State had changed from being the people's servant, to being its master.

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Let's Make a Deal, III: The Trap of Non-Capital Credit

As we saw yesterday, a system in which most people do not have access to capital credit to finance new capital formation or enhance the productivity of existing capital is a system designed to fail. It increases variable costs of production, raises prices, and puts producers unable to obtain adequate credit for new or improved capital instruments in a perpetual "catch-up" situation, like the Red Queen in Lewis Carroll's Through the Looking-Glass.

An economy in which wage workers own little or no capital is thus analogous to a farmer who routinely sells his seed corn to meet debts incurred previously. The farmer then has to borrow again for more seed for the next crop, and hope that prices are high enough to generate the additional revenue needed to cover the cost of past seed, future seed, other operations, and provide sufficient income for consumption.

The farmers and the small businessmen of the latter half of the 19th century were in a bind caused by the design of the financial institutions of society and the manipulation of the currency under the principles of the British Currency School. Many of them had taken out loans during and immediately following the Civil War when, as a result of the inflationary policies followed by Salmon P. Chase, Lincoln's Secretary of the Treasury, money was "cheap." After the war there was a need to reestablish the faith and credit of the government and restore parity of the paper currency with gold — that is, make money "dear" again.

Consequently there was at first an official and then an unofficial policy of deflation to offset the 600% inflation during the war and bring gold and silver back into circulation. Prices fell. Thus, where farmers previously had to grow, for instance, a thousand bushels of wheat to repay a debt, they might have to grow two thousand to repay the same debt.

For another, the accumulated savings on which farmers and small businessmen relied for credit disappeared to repay debts or was used for consumption. There was little left over for investment. Farmers and small businessmen had to rely on mortgages based on the present value of existing assets to finance new capital formation, not the bills of exchange based on the present value of future assets available to the wealthy.

To explain, a bill of exchange is based on the creditworthiness of the borrower. It represents the present value of a future project — "future savings." The amount that can be borrowed is limited only by the financial feasibility of the project: the ability of the capital to pay for itself.

In contrast, a mortgage is based on something the borrower already owns, not on what he or she proposes to own. Mortgage financing thereby limits the amount that can be borrowed to what has been withheld from consumption in the past — "past savings." When operations are financed with a mortgage (as was usually the case with farmers and small businessmen), there is generally no increase in productive capacity that enables the borrower to repay the loan and continue to meet current consumption needs — nor, except in extraordinary circumstances (such as free or self-liquidating capital made available under a Homestead Act) can there be any expansion of productive capacity.

Instead, in such a situation, mortgage financing of operations (as opposed to new capital formation) creates a vicious circle. Existing capital is doubly burdened, having to produce at least at the prior level, plus enough to make the debt service payments. It comes as no surprise that, even in the best of times, few farmers and small businessmen were able to repay the principal, but were only able to make interest payments.

When the balloon payment came due, the loan was refinanced. If refinancing was unavailable due to scarcity of savings or decreased production (both of which occurred in the 1930s), the bank was forced to foreclose. Farmers lost their land, and small businesses went under.

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Let's Make a Deal, II: Bad Systems Design Principles

As we saw last week, a central bank is an economic and financial necessity if society is to advance economically. Consequently, prior to the Civil War the United States made three attempts to establish a central bank, all of which were terminated as a result of political pressure and a misunderstanding of what banks do.

Finally, in 1863, in response to an increasingly desperate need for a central bank, the National Bank system was established. Unfortunately, the architects of the system chose the wrong model: the British Bank Charter Act of 1844 that undermined the money and credit system of Great Britain, and accelerated the concentration of capital ownership in that country in fewer and fewer hands.

The fundamental problem with the National Bank system was that it was virtually custom-made to favor the already wealthy and concentrate ownership of the new industrial and commercial capital that began to be formed after the war at a tremendous rate. This capital was financed in large measure by the expansion of bank credit — by the currently wealthy issuing bills of exchange that were discounted and rediscounted by other capitalists and commercial banks. This left income from operations available for working capital and distribution in the form of dividends for consumption income — and reinvestment in additional new capital.

In other words, the already wealthy were able to create money at will for new capital investment and use current income to finance operations, consumption, and accelerated capital formation simply because they were wealthy. They had a lock on the formation of new capital because they had a virtual monopoly on the means of financing new capital: access to capital credit, limited only by the present value of the capital being financed, and possession of collateral to back up their creditworthiness. At the same time, farmers and small businessmen were limited to existing accumulations of savings for credit to finance operations and in many cases consumption as well — and there were some serious problems with that.

It is a basic fact of business life that if you can generate enough revenue to cover costs you will make a profit; "profit" is what is left after meeting capital depreciation (fixed) and operating (variable) costs. Capital, whether land or technology, is usually the single largest cost in an economy in which capital ownership is widespread and owners work for profits instead of being wage slaves driving up the cost of production. This is because owners take their consumption income out of profits; consumption income is not a cost of production.

In a wage system, of course, labor is usually the single highest cost in a business. This is because consumption income has been shifted to a cost of production, not a residual after production costs have been met.

Shifting from an ownership economy to a wage economy is a "double whammy." This is because a business (including a farm) can survive for a time if it meets all its variable costs (especially if the capital is fully paid for and the cost is the non-cash item of depreciation), but goes bankrupt when it cannot meet its variable costs.

Capital in the form of depreciation or immediate expensing of equipment is generally a fixed cost, i.e., it doesn't change in the short run. Labor is generally a variable cost, e.g., if you don't produce anything you generally don't have to pay workers who aren't there. A wage system economy thereby has a tendency to insolvency built-in by being oriented toward increasing costs, where an ownership system economy is oriented toward growth by being oriented toward increasing production.

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News from the Network, Vol. 5, No. 44

The "Jobs Report" is out, and (depending on what side you're taking in the current political contest, i.e., "wrong" or "wronger") it goes both ways. Yes, "lots" of jobs have been "created." (The image of a bearded deity wearing a bed sheet waving a magic wand and booming, "Let there be JOBS" keeps popping into the brainpan for some reason.) The question is whether they are "good jobs" or "bad jobs." (Another image: Glinda the Good Witch of the North, with another magic wand, asking Dorothy if going after the ruby slippers is a "good job" or a "bad job.")

The assumption is that "jobs" are "good." How else is someone supposed to make a living? Well, there's welfare. That's where the government takes money from people with "jobs" and gives it to people without "jobs."

Then there's gambling. That's where people with "jobs" take some of their money and play games in a casino or stock market to see who ends up with it . . . usually people without "jobs" who have figured out a way to move money from the pockets of people with "jobs" to their pockets.

That's about it.

Oh, sorry. There's also "ownership" of "capital." The problem with "owning capital," however, especially capital with which you produce a marketable good or service, is that it disrupts the whole economic equation. As every good Keynesian knows, the purpose of production is not consumption (feh), but reinvestment in new capital to create jobs. If ordinary people owned capital, most of them wouldn't do the sensible thing with their profits (i.e., give it to the government to spend creating jobs or invest in new capital to create jobs), but waste the money on food, clothing and shelter, and maybe a steak dinner, a vacation, or a college education.

Small investors are such a pain. As Keynes said, he looked forward to the "euthanasia" of everybody who spends capital income on consumption rather than reinvestment or taxes.

Perhaps that explains why there's been so little going on this week in the Just Third Way — nobody is anxious to become a small capital owner and have the Keynesians liquidate them. Or it could be the Wonder Storm Sandy and the Biggest Election in the History of the World.

Nah. It's the Keynesians.

• Speaking of Keynesians, this news report makes perfect sense . . . once we realize that (as Harold Moulton pointed out more than three-quarters of a century ago in The Formation of Capital) economic growth is best financed not out of existing accumulations of savings, but by monetizing the present value of future increases in production. The incredible complexities of the tax system are (if you read the report properly) utterly useless.  Unfortunately, none of this occurs to anyone on either side of the debate.

• Outreach efforts continue in an effort to connect with potential door openers and gatekeepers who might get us to prime movers. "Buzz words" and key concepts to look for: private property, liberty, natural law, ownership, justice, and so on.

• This past week we obtained two more rare books for the CESJ research library, both by "Banking Principle" writer James Wilson Gilbart: An Inquiry into the Causes of the Pressure On the Money Market During the Year 1839, and The Logic of Banking. We hope soon to be surfacing (good) copies of the works of Thomas Tooke and Henry Dunning Macleod. Note: these books are much better than their titles make out, although still not exactly "lite" reading.

• As of this morning, we have had visitors from 61 different countries and 50 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 United Kingdom, Australia, and the Philippines. People in Slovenia, France, Estonia, the United States and the United Kingdom 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 Theory of Quantitative Easing," "What Really Happens in Quantitative Easing," and "The Strange Case of the Ignored Encyclical."

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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Let's Make a Deal, I: A Recipe for Disaster

In 1910, the United States was in serious trouble. The financial system was in a shambles following the Panic of 1907 that occurred relatively soon after the Panic of 1893 and the Great Depression of 1893-1898. The growing power of the Trusts and giant corporations, the accelerating loss of property by farmers and small owners, and the concentration of financial and economic power was countered by increasing demands for State control of the economy.

From 1901 to 1908 Theodore Roosevelt had made great advances in reining in the power of the great corporations, but without succumbing to the temptation to replace the unbridled power of the vested interests of the private sector with the iron fist of the State. From the Just Third Way perspective, however, there were two problems Roosevelt faced that he failed to solve.

Roosevelt's failure was not due to any lack of initiative or vision on his part. It was simply that the necessary institutions were not in place. The first of these was an adequate financial system. The second of these was the act of social justice.

Both an adequate financial system and the act of social justice had, to some extent, existed at one time in the United States. Prior to the Civil War there had been three attempts to establish a central banking system to provide a uniform and stable currency and adequate liquidity for private sector economic development. These were the Bank of North America from 1782-1787, the Bank of the United States from 1792-1811, and the Second Bank of the United States from 1817-1836.

All three of these institutions had been shut down out of fear of concentrated control over money and credit. Few people understood that a properly run commercial or central bank cannot simply create money by fiat, the way a government can by forcing people to accept its debt paper — "bills of credit."

A "bank of issue" (and commercial and central banks are banks of issue) can only create money by issuing promissory notes when accepting ("discounts" or "rediscounts") bills of exchange offered by a maker or holder of the bill. A "sound" banker will always carefully examine the creditworthiness of the maker of the bill.

This is because the bank is liable to any holder or holder in due course on a promissory note it issues who presents the note for payment. A bank that issues promissory notes in excess of the present value of the bills it discounts or rediscounts (a practice called "overbanking" or "overtrading") is making promises that it is not reasonably certain can or will be kept — and for which the bank is responsible.

Assuming that commercial banks properly examine all bills brought to it for discounting, and assuming there is a central bank to ensure that rediscounting is available to make certain that the currency is uniform and in adequate supply, there will always be sufficient money in circulation to provide for the needs of commerce without inflation or deflation.

Without a central bank, the State tends to take over control over money and credit instead of being confined to a regulatory and enforcement role. This effectively puts the economy under direct government control, whether the economy calls itself capitalist or socialist. Only a central bank that is not under political control and that does not accept government bills of credit can carry out its proper function of ensuring a uniform and stable asset-backed currency and providing the private sector with sufficient liquidity to meet the demands of trade and commerce.

A central bank is therefore a vital necessity for any economy that advances beyond the agrarian stage and subsistence agriculture. During the Civil War, then, there was a fourth attempt to establish and maintain a central banking function, the National Bank system. Although it was seriously flawed, it lasted from 1863 to 1913 until replaced by the Federal Reserve system.

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Romney's Speech

It might be a little late in the day to bring this up, but the morning after Mitt Romney's talk at the Al Smith Dinner on October 18, someone sent us a link to a video of the speech.  Unlike most political speeches or humorous monologues, we watched it through to the end. We're not sure the Romney campaign would be pleased to hear this, but it may have been the most carefully written and highly nuanced speech of the entire campaign.

The only thing lacking was a recognition that neither of the candidates has a viable program either of economic recovery or (not to sound too melodramatic) of restoring the Republic. It took an Octavius Caesar to halt the decline of Rome, and neither candidate is of the caliber of the "Divine Augustus."

Even Caesar Augustus, however, only halted the deterioration and delayed the inevitable end of a system that embodied grave flaws. The founders of the United States and the framers of the Constitution intended the American Republic to correct the errors of the past and create a "more perfect" union, establish justice, and so on, but insisted on leaving in place the "original sin" of slavery.

This, according to constitutional scholar William Crosskey of the University of Chicago, was fatal. Almost from the beginning the ideals on which the United States was founded were corrupted to preserve an inherently unjust institution: people innocent of any crime held in servitude for the economic benefit of others. This was justified by what became known as the "living Constitution" theory that euthanized the document.

The violation of the natural right of liberty (freedom of association/contract) involved in chattel slavery undermined understanding of the natural law itself. It led, inevitably, to distortions and violations of the natural rights of life and property. Ironically, this has largely been accomplished by effectively nullifying the 14th Amendment to the Constitution, an amendment adopted in part to establish for all time the inalienable personhood of every human being.

Not surprisingly, the only real hope we have of sustainable economic recovery and of restoring the Republic lies in emancipating people from the wage slavery of capitalism and the welfare slavery of socialism, and in reversing the growth of the Servile State that combines the evils of both systems. Only a program of expanded capital ownership that does not violate either political expediency or the precepts of the natural law can accomplish these goals.

As I argue in my latest book, The Restoration of Property: A Reexamination of a Natural Right (as well as in my previous book, Supporting Life: The Case for a Pro-Life Economic Agenda, 2010), simply redistributing existing wealth through the State or redefining the natural right of private property — and, inevitably, life and liberty as well — causes more problems than it solves. It can, in fact, be shown that the Keynesian emphasis on using the State to redistribute existing wealth through taxation and inflation and (as Keynes put it) "re-editing the dictionary" for political ends is, in large measure, responsible for the current economic and even moral decay of our society.

That being the case, and in light of Romney's speech, I can think of no greater service any American can perform for his or her country than to set aside egos and opinions, and introduce the candidates and our fellow citizens to the potential of Capital Homesteading to reestablish the United States as "the last, best hope of earth."

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The Old Shell Game

Recently we responded to a reporter who clearly didn't know the difference in U.S. retirement law between a defined contribution plan and a defined benefit plan — and who assumed that a defined contribution plan could somehow be unfunded. This makes defined contribution plans like ESOPs and 401(k)s come across as another ploy to cheat workers out of guaranteed benefits.  It helps convince people that everything should be guaranteed so that everyone can be a dependent in some degree on the State or on a private employer.

The reporter had no comeback, but a defined contribution plan cannot be unfunded for the simple reason that a participant in such a plan is due 100% of the vested balance in his or her accounts. There is no question of being unfunded: the money is either there, or it isn't. If it's not there, you don't get it. If it is there, you do.

In a defined benefit plan, a participant is due whatever the sponsoring company promised. Whether the plan actually has the ability to make good on that promise is another matter altogether. A defined benefit plan — like the U.S. government plan and Social Security, has made promises, but may not have any assets behind those promises.

A defined contribution plan cannot go bust by definition, but defined benefit plans go bust all the time because they don't have the assets to pay the promised benefits. Social Security, for instance, has no assets (and you don't own what's in your account, either — Flemming v. Nestor, 1960).

All those "assets" are government bonds that represent the money you paid in that the government lent to itself. In other words, you gave the government money, and the government gave itself an IOU and spent the money. Now the government has to collect more money to pay you out, or issue more bonds to go deeper into debt.

This used to be called "thimblerig" or "the old shell game." Today it's called "Modern Monetary Theory." It's an application of Keynesian economics derived from Georg Friedrich Knapp's "chartalism." Chartalism is a socialist theory developed in the 1880s (hence the need to convince people that it's "modern") that assumes the State owns everything, and can issue money at will against the wealth of society . . . none of which it owns.

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Why NOT Capitalism?

By Norman Kurland

Picking up where we left off last week, what was and still remains missing in the Kelso movement?

In my mind, what's missing is a deeper understanding of and commitment of all those subscribing to the Kelso-Adler principles of economic justice to the "laws of Social Justice." These were best articulated in a 1948 pamphlet Introduction to Social Justice by the late Rev. William J. Ferree, a superb scholar and leader in the Marianist Catholic Order. Ferree explained that the principles that must be followed to change any institution which has become unjust or flawed, including the social order from the lowest to the highest levels of any society.

I first learned of Kelso's ideas in 1965 while on the frontlines of President Johnson's "War on Poverty." I left the War on Poverty to serve as Director of Planning to introduce Kelso's ideas to the leaders and projects of the Citizens Crusade Against Poverty. The Citizens Crusade was a coalition of so-called "progressive" labor, civil rights, religious, business, academic, and grassroots leaders headed by the legendary United Auto Workers president Walter Reuther.

I left the CCAP in 1968 to join with Kelso to help form and serve as the first executive director of Kelso's Institute for the Study of Economic Systems from 1968 to 1976 and to serve as Kelso's "one-man lobbying campaign" as Washington Counsel for his ESOP investment bank. I did not learn of Father Ferree's ideas on how to organize for peaceful change until 1984. This was in the last years of his life when he served as chairman of Dayton University and made what he called his 500-mile "monthly pilgrimage" to Washington to form and participate in CESJ.

I highly recommend that you read and comment on our 1997 republication of Father Ferree's pamphlet on how to organize for revolutionary social change. I knew and debated Saul Alinsky and read his Rules for Radicals. Alinsky and Obama should have read Ferree's rules for true revolutionaries. So should every supporter of the Just Third Way. Supporters of Kelso's ideas should study this pamphlet, including our Foreword, and begin to take initiatives consistent with Ferree's wisdom. We will hasten the day of victory for the Just Third Way and the passage of the Capital Homestead Act.

The sooner we win the war of words and the sooner we will win the war of ideas.

"Own or Be Owned."

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