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, December 14, 2010

Why Government Debt is REALLY "Bad"

Yesterday's posting on why government debt is a bad idea was supposed to be a "one-shot" deal. We had intended today to post something on how wages tend toward subsistence in a system in which most people are denied access to the means of acquiring and possessing private property. Among other things, there's no "competition" among sources of income, so the wage payer has a virtual monopoly and thus control over wage earners' income.

We'll get to that — eventually — but we received a comment on yesterday's posting that demands a response. Why? Because the comment revealed that people can be reading the postings on this blog, especially on the nature of money and credit, and still remain trapped within the existing paradigm. (We're not talking about Dr. Norman Kurland's posted comment.  We liked that one.  This is one that was sent to us rather than submitted as a posted comment.)

This is a serious problem. The whole point of the Just Third Way is that it takes as a given that the existing paradigm is based on seriously flawed principles. When applied to the design and maintenance of a political or economic system, these flawed principles can have only one result: disaster. This is because the Just Third Way derives from application of the essential precepts of the natural moral law, that is, from human nature itself, reflected from the Creator and discernible by the use of reason. The refusal or inability to base the institutions of society on these precepts within acceptable parameters virtually guarantees failure.

What are the essential precepts of the natural moral law? We find them listed in, e.g., the Universal Declaration of Human Rights and the Declaration of Independence, but perhaps most succinctly in George Mason's draft of the Virginia Declaration of Rights of June 12, 1776: life, liberty (freedom of association/contract), access to the means of acquiring and possessing private property, and the acquisition and development of virtue ("pursuit of happiness and safety"). The last of these, best understood as "becoming more fully human," while most important, is supported by the essential triad of life, liberty, and property.

This is the basic framework of the Just Third Way, a fundamental respect for the dignity of each person. That being the case (and recalling the number of times we've covered this topic in postings on this blog), the comment we received was, well, discouraging:

Since the treasuries of sovereign governments that issue their own currencies are not depository institutions, to speak of such sovereign governments as being in debt is largely meaningless. If government debt is bad, you ought to see just how bad budget surpluses are.

The only way to respond to this dogmatic assertion is to explain again, as briefly as possible, the nature of money — not its function. Because we've explained this so many times before and gone into a great deal of depth on the subject, this is going to come across as a string of dogmatic assertions. If a new reader wants more explanation, there is much more information over to your right under "money and credit," in which there are more than eighty individual postings.

"Money" IS anything that can be used in settlement of a debt. What "money" DOES is serve as the medium of exchange, a standard of value, a unit of measure, and a store of value.

By definition, all money constitutes a contract, and all contracts are money.

"Currency" is a specific form of money, "current money," that may or may not have legal tender status, and may or may not be sanctioned or regulated by the State.

The State's proper role with respect to money is to set the standard of value and enforce contracts when necessary. Anything else interferes with freedom of association (liberty/contract) and undermines the institution of private property where it does not abolish it outright.

A treasury of a sovereign government that issues its own currency is not a "depository institution," but is functioning as a "bank of issue."

A bank of issue only properly emits banknotes and creates demand deposits when the banknotes and demand deposits are backed by the present value of existing and future marketable goods and services or the capital instruments used to produce the future marketable goods and services, in which the issuer (emitter of the banknotes or creator of the demand deposits) has a private property right secured by a bill of exchange or a derivative of a bill of exchange in the form of a draft, a promissory note, or other financial instrument — a "real bill."

An emitter of banknotes or a creator of demand deposits that does not have such a private property right is engaged in theft, that is, is drawing "fictitious (fraudulent) bills." When the emitter/creator is the State, the issuance of banknotes or creation of demand deposits that are not construed as debts secured by future tax collections ("anticipation notes") constitutes effective socialism.

The form of socialism in which the State issues all money backed solely by its "faith and credit" and is not required to make good on the promise(s) conveyed by the currency to holders in due course of the currency is called "chartalism." Lauded by John Maynard Keynes in his Treatise on Money (1930) as the perfect monetary system within and for an absolutist State, chartalism was pioneered by Georg Friedrich Knapp in The State Theory of Money (1924).

Like all socialism, chartalism is based on the belief that private property is illegitimate, and that the State, whether or not it holds actual title, is the real and ultimate owner of everything in the economy. This belief was posited in modern political theory as the "divine right of kings," and articulated in Thomas Hobbes's manual for totalitarian government, Leviathan (1651).

Hobbes was a primary source for Walter Bagehot, whose The English Constitution (1867) and Lombard Street (1873), the latter based on the British Bank Charter Act of 1844, are virtual "bibles" for the structuring of the modern financial system and government monetary and fiscal policy. Bagehot, contradicting A. V. Dicey's emphasis on the "rule of law," presumed rule of the State by a financial elite, a "despotic economic dictatorship" who "often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure." (Quadragesimo Anno, § 105)

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. (Ibid., § 106.)
The bottom line is that basing the financial system on the tenets of the British Currency School of finance (that money is arbitrarily defined and re-defined by the State at will, and that freedom of contract is abolished along with private property), is directly contrary to the natural law foundation of the British Banking School of finance, expressed in Say's Law of Markets and applied in the real bills doctrine. The Just Third Way uses the Banking School definition of money, while the commentator is evidently using the Currency School definition. This makes it difficult-to-impossible to respond to such comments without lengthy posts such as this one, for we are clearly not speaking the same language, or analyzing the situation using the same principles.