THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Tuesday, January 26, 2010

The Political Animal, Part XXVI

In the previous posting in this series, we concluded that Capital Homesteading has the potential to initiate the restructuring of the social order in the economic realm. It appears to address the two primary areas in which the popes since Leo XIII have focused attention: the restoration of the natural law as the basis of a just society, and the natural right to private property as a necessary prop for the other natural rights, especially life, liberty (free association), and the pursuit of happiness (the acquisition and development of virtue).

Often thought in the modern world to be completely unrelated (especially by socialists of whatever name), even antithetical, the restoration of a moral society and the restoration of widespread direct ownership of the means of production go hand-in-hand, as the popes have recognized. The natural moral law can never be restored except through the action of ordinary people organizing for the common good, and ordinary people will never have the power to organize effectively until and unless they have direct ownership of a meaningful stake of income-generating assets. As Daniel Webster observed in 1820, "Power naturally and necessarily follows property."

The problem is how to empower ordinary people with the means of acquiring and possessing private property. Today's popular understanding of money and credit requires — erroneously — that only existing accumulations of savings can be used to finance capital formation. By right of private property, this necessarily restricts ownership of all newly formed capital to those who, by definition, have a monopoly on existing accumulations of savings.

Capital Homesteading is specifically designed to overcome this problem. First, of course, Capital Homesteading uses a different understanding of money and credit than do the prevailing theories, a more organic, natural understanding based on the laws of social justice, especially freedom of association.

The common misconception about money and credit today is (as Keynes declared in his Treatise on Money) that "money" is exclusively a State creation, an inorganic and legalistic concept, essentially a purchase order issued by the State or a State-authorized individual or institution. When the economy needs more "money," the State creates more; when there is too much, the State reduces the amount. This is, essentially, the monetary theory of the British Currency School. It rejects Say's Law of Markets and something called the "real bills doctrine." (The real bills doctrine is that money can be created as necessary to carry out transactions without inflation or deflation, as long as the new money is backed by the present value of existing inventories or a future stream of income to be realized from the production of marketable goods and services.)

Capital Homesteading takes a different, more organic understanding of money, one consistent with the tenets of the British Banking School. That is, "money" is whatever is or can be used by anyone in settlement of a debt. The parties to the transaction make this determination, not the State. The State may make a declaration that something will be exclusively accepted by the State in payment of taxes, or that such and such a thing, if delivered under certain conditions, satisfies a debt if there is some dispute in the matter. The State cannot, however, under any circumstances declare a contract or other transaction void simply because it does not involve State-issued or authorized currency, or is undertaken without the explicit consent of the State.

The State's role is to regulate the value of the currency, create a uniform standard of measure, and to police abuses that may occur in the process of money creation. This, obviously, is not a creative function of the State. Asserting that the State, because it has the responsibility for setting and maintaining a uniform standard and police abuses, legitimately has the power to create money or arbitrarily set the amount is the same as if the State, charged with setting the standards for a uniform system of weights and measures, declared that only a limited number of inches can be used in the coming year. If anything else needs to be measured, application must be made to the State for a new issue of rulers and yardsticks. Louis Kelso perhaps said it best when he pointed out,
Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. (Louis O. Kelso, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54)
Obviously, then, believing that the State has the power actually to create money on its own authority without producing anything ("economic input") is to put the State in the position of having absolute power. This is just as Keynes intimated in his Treatise on Money (1930) with his declaration that the State has the right to "re-edit the dictionary," i.e., alter reality to suit itself. As Pope Pius XI pointed out, such power has only one result: the creation of an elite that, while not themselves owners of the money issued by the State in the name of "the people" (never actual people), puts control over money and credit in their hands, "which they administer according to their own arbitrary will and pleasure."
This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will. (Quadragesimo Anno, 1931, §§ 105-106)
The chief problem, then, is not the inability to produce. As Dr. Harold Moulton pointed out in America's Capacity to Produce (1934), America — the world — has demonstrated time and again that the economy typically operates at much less than full productive capacity. Nor is it a problem of lack of consumer demand, as Moulton explained in America's Capacity to Consume (1934). Every individual living at or below the poverty level argues otherwise.

No, the problem is that the money and credit system, which is designed and intended to link together production and consumption, has been diverted to other purposes. This is usually to further political aims or implement some variety of social engineering to transform society into the vision (or lack thereof) of the latest administration in Washington. Money and credit have been redefined to serve the needs of either a private elite, as in capitalism, or a State elite, as in socialism.

Capitalism establishes a monopoly over money and credit — and thus access to the means of acquiring and possessing private property in the means of production — by insisting that only existing accumulations of savings can be used to finance capital formation. Socialism establishes a monopoly over money and credit by insisting that only the State has the right to create money.

Moulton demonstrated the falsity of the capitalist claim in 1935 in The Formation of Capital. More than a century earlier Jean-Baptiste Say refuted the socialist position when he proved that "money," just as Kelso pointed out in Two-Factor Theory (op. cit.), is not a State monopoly, but a symbol for what we and others produce, invented to facilitate the exchange of those productions among people, just as Aristotle claimed in The Politics.

In view of the wasted productive capacity evident in all economies and the manifest under-consumption revealed by the existence of poverty, to which we add our understanding of money and credit as an organized and regulated means of linking production and consumption, the solution becomes obvious. The money and credit system must be reformed to open up democratic access to the means of acquiring and possessing private property in the means of production. That is what Capital Homesteading proposes to do.

Today even the poor have little or no trouble buying consumer goods and services on credit. These purchases, however, are not income-earning property. As a general rule, while capital credit can make someone wealthy, consumer credit makes the borrower even more economically vulnerable than before.

Consider the fact that even in a "slow growth" economy, America adds annually approximately $2 trillion worth of new productive assets in both the public sector and private sector. This works out to more than $7,000 for every man, woman, and child. Under both capitalist and socialist assumptions these assets are typically financed in ways that create few if any new owners. The gap between "haves" and "have-nots" continues to widen.

There is an alternative to capitalism and socialism. This "Just Third Way" is a natural law-based, free enterprise economy, generating private sector profits. The Just Third Way "difference" is that the ownership of the new growth would flow directly to every individual citizen.

With access to capital credit repayable with the full pre-tax earnings of the capital itself, everyone could gain ownership in America's expanding technological frontier. We wouldn't have to take away wealth from those who already own capital to provide ownership, nor have the State redistribute income to make up for the lack of widespread direct capital ownership. The principal vehicle for achieving these goals is the proposed "Capital Homestead Act."

The Capital Homestead Act is a modern version of Lincoln's 1862 Homestead Act that offered a piece of the land frontier to anyone 21 years of age or older, and who was an American citizen or stated the intention to become a citizen. The Homestead Act was the most successful economic initiative in America's history. It laid the foundation for America's rise as the world's greatest industrial power. Unfortunately, the land frontier ran out. Most Americans were never given a chance to share in the ownership and profits of our high-tech industrial frontier, which unlike land, has no known limits.

Capital Homesteading would take nothing away from present owners, but would link every American (including the poorest of the poor) to the profits from sustainable economic growth. Every worker and citizen could gain a share in power over technological progress and the tools and enterprises of modern society. Through widespread ownership all citizens would participate in a more democratic economic process, just as they now participate in the democratic political process through access to the ballot.

The Capital Homestead Act proposes a number of programs so that every man, woman, and child could get interest-free capital credit from a local bank. Future earnings of the capital purchased would pay off the loans, including bank service fees and premiums to cover capital credit default insurance. Through the Capital Homestead Act, access to capital credit — which today helps make the rich richer — would be enshrined in law as a fundamental right of citizenship, like the right to vote.

Using its powers under § 13 of the Federal Reserve Act, the Federal Reserve System would supply local banks with the money needed by businesses to grow — but only in response to financially feasible investments brought to the banks for financing. This is a critical reform of the money and credit system that is often overlooked: money could not be created until and unless it could be backed 100% by the present value of existing assets or the future stream of income to be generated by an investment.

Trapped by the dogmatic belief that capital formation can only be financed using existing accumulations of savings, today's economists and banking experts assume as a matter of course that money must first be created before investment can take place. Inflation then shifts the purchasing power of existing savings to the investor, who uses it to finance the new capital.

The monetary reforms of Capital Homesteading counter such institutionalized and systemic theft by requiring that any new money must be backed by the present value of existing or future assets. No money can be created until and unless there is a reasonable assurance that the assets financed will, in fact, generate a stream of profits sufficient to repay and cancel the money created to finance the capital formation in the first place, and thereafter provide consumption income for the owner of the asset. This is nothing more than the real bills doctrine embodied in the tenets of the British Banking School.

The difference between Capital Homesteading and classic banking theory is that the new money and credit for private sector growth would be "irrigated" through Capital Homestead Accounts and other credit democratization vehicles.

Through a well-regulated central banking system and other safeguards (including capital credit insurance to cover the risk of bad loans), all citizens could purchase with interest-free capital credit, newly issued shares representing newly added machines and structures. These purchases would be paid off with tax-deductible dividends of these companies. Neither existing accumulations of savings nor current consumption income would be reduced.

Thus, Capital Homesteading is an application of the principles of the natural moral law as they pertain to money, credit, and finance, and a blueprint for restructuring the social order. Capital Homesteading provides a means to get away from false and dehumanizing definitions of money and credit, putting these uniquely social goods at the service of the whole of humanity instead of a small elite.