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.

Thursday, December 30, 2010

News from the Network, Vol. 3, No. 52

This is the final News from the Network for the year, so it would probably be considered appropriate to go over the major events of the past year in brief. This is all the more important in that the great advances the movement has made in the past year are not readily evident to people who think of the act of social justice in terms of acts of charity or justice directed to someone's individual good, and don't take into account the fact that the act of social justice consists of organizing to act directly on our institutions — the social manifestations of the common good.

That being the case, here are the major events over the past year on our journey to implement Capital Homesteading by 2012.

• At the top of the list, of course, is the loss of Kemp Harshman, esq., CESJ's volunteer legal counsel, friend, advisor, and (incidentally) chief source of funding for the past several years. Thanks to Kemp's special knowledge of the ins and outs of FCC bandwidth auctions, requirements, and things that still make our head spin, CESJ has ownership of bandwidth that not only provides the means to educate about the Just Third Way, but also generates a moderate core income to cover basic organizational expenses.

• Another great loss over the past year was CESJ friend and co-founder Robert P. Woodman, who died recently in Cleveland, Ohio. Active in church and civic affairs, Bob worked to integrate the precepts of the Just Third Way in all his interactions with others.

• The move to have Capital Homesteading enacted by 2012, the 150th anniversary of Abraham Lincoln's original land-based Homestead Act, has become more focused and more targeted, thanks in large measure to the establishment of the office of "National Field Secretary" and the institution of regular planning meetings for the "Fed Rally" that takes place each April, on or about "Tax Slavery Day."

• The cause of monetary justice was advanced by the republication of Dr. Harold Moulton's 1935 monograph, The Formation of Capital. Originally presented as an alternative to the Keynesian New Deal, The Formation of Capital showed the falsity of the Keynesian claim that new capital formation can only be financed by cutting consumption, accumulating money savings, then investing. Moulton's work laid the foundation for Kelso and Adler's advances, detailed in The New Capitalists (1961), that applied Moulton's "pure credit" (i.e., credit extended without first accumulating savings) findings to the problem of financing widespread ownership of capital. Moulton's book is planned as the first in a series of "economic justice classics," consisting of reprints of important works from the past.

• Michael D. Greaney, CESJ's Director of Research, published Supporting Life: The Case for a Pro-Life Economic Agenda, making the case for adopting Capital Homesteading as a viable alternative to increasing State control of people's lives and the economy. Supporting Life is intended to be the first in a series of CESJ "green papers" detailing specific aspects of the Just Third Way in a way not possible in more general presentations.

• Michael D. Greaney also joined an internet association called "Help A Reporter Out" ("HARO") as a Just Third Way source for reporters, talk show hosts, freelance writers, bloggers, and others. To date, Mike has arranged three radio interviews for Norman Kurland, and provided a number of reporters and writers with information regarding aspects of the Just Third Way, particularly Justice-Based Management.

• On LinkedIn, Mike has made a number of connections with various networks who have expressed interest in Capital Homesteading and Justice-Based Management. In particular, Mike was able to connect CESJ with an old friend from college, Lydia Fisher, author of Cinderella of Wall Street. Lydia was of immense assistance in arranging the logistics for a trip of the CESJ core group to Chicago, putting up everyone in her downtown condo, and treating everyone so well that no one wanted to leave.

• In Chicago, the core group met with Robert Colangelo, executive director of the National Brownfield Association and arranged for Norm to speak at the NBA conference in Buffalo, New York, on the subject of financing the right-sizing of cities. The meeting was arranged by John Dondanville of Detroit, a friend of Mike's from college. Robert and John are scheduled to come into Washington in the second week in January to continue the discussions.
• Also in Chicago, the core group met with Father John McCloskey of the Opus Dei Prelature. Father McCloskey has been active in the effort to restore the natural moral law, the foundation of both Catholic social teaching (as well as Jewish and Islamic) and the Just Third Way.
• "Out of the blue" David Kelly made contact with CESJ. Dave has been involved in the effort to restore the Harris Neck area of Georgia to its original owners, from whom it was taken during the Second World War. Dave has already gathered significant political and financial support, has had the effort mentioned in The New York Times and on 60 Minutes, but sees in the Just Third Way an important addition to the effort. Dave has invited Norm to make a presentation before the Harris Neck people early in the coming year.

• Mr. Pollant Mpofu of London, U.K., also came across CESJ apparently by pure serendipity. He believes that the Just Third Way is exactly what Ireland, the U.K., and Africa — especially his native South Africa — need to restore economic justice and make the world work for 100% of humanity. Pollant has been making continuing efforts to obtain meetings for Mike and Norm with the Taoiseach (Prime Minister of Ireland), the British Prime Minister, the Anglican Archbishop of Canterbury, the Catholic Archbishop of Westminster, and the governor of the Bank of England.

• As of this morning, we have had visitors from 47 different countries and 49 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, Brazil, and Ireland. People in Croatia, Venezuela, Canada, Finland, and Israel spent the most average time on the blog. Yet again, and still possibly due to the growing perception that something is wrong with the basic assumptions of Keynesian economics (as well as other schools of economics based on the Currency School of finance), the most popular posting by far is one from a while back, "Thomas Hobbes on Private Property," that briefly explains the similarities in the way Keynes and Hobbes abolish private property. This is followed by "Aristotle on Private Property," "Games People Play," "Why Government Debt is Really Bad," and Part I of "How to Save the Global Economy."
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.


Wednesday, December 29, 2010

Central Banking for Dumbos, Part IV: What the Heck is a "Central Bank"?

(Welcome to our 700th blog posting. Now that the cheers have subsided, read on.) Concluding our short series of postings on Central Banking for Dumbos, the basic idea behind a commercial bank (the most common type of bank of issue) is that, by substituting its good name and creditworthiness of the bank for that of the drawer of a bill of exchange, risk is spread out and people have more confidence in the currency. The banknotes and demand deposits of a bank that discounts and rediscounts bills of exchange issued by many different drawers are more likely to be "good" than the issues of a single company or individual that acts as its own banker. The bank's name and reputation is also more likely to be known and trusted than that of an individual or company.

If a bank of issue can do that for individuals and companies, then why not an institution that can do the same for the banks themselves? Why not a bank of issue for banks of issue?

That is the basic idea behind a central bank. A commercial bank that discounts bills of individual drawers of bills in an area served by a single bank of issue ensures that all the currency in that area has the same value. Similarly, a single, central bank that serves all the banks of issue in a country or economy ensures that all the currency in that country or economy has the same value.

A commercial bank ensures that all of its currency has the same value by being equally liable for every promissory note it issues and every demand deposit it creates. It doesn't matter how honest or shady the individual who uses the banknote or writes a check, as long as the instrument itself is good and a reputable bank stands behind it. By discounting bills of exchange from individuals, the commercial bank substitutes its own obligations for those of the original drawer of the bill. In effect, the good name of the bank, presumably known everywhere in the district it serves, is substituted for that of the good name of the original drawer, who may or may not be known — and who may or may not be honest. The bank assumes the risk and the obligation instead of the holders in due course of the banknotes that replaced the bill of exchange.

Similarly, there are varying degrees of public confidence in different commercial banks. Bank A's notes might pass at a discount, where Bank B's might pass at a premium. Bank C's notes might pass at par. How do you make certain that all the banknotes in an entire economy or country pass at par?

By doing the same thing for commercial banks that a commercial bank does for individual drawers of bills of exchange. Just as individual drawers of bills discount their bills at a commercial bank with many borrowers, a commercial bank rediscounts the bills it receives in the course of trade at the central bank that has many member banks.

Rediscounting bills of exchange at a central bank that serves an entire economy not only ensures a uniform currency for that economy, it also minimizes risk by increasing the size of the "pool" of assets backing the currency and the number of individuals and institutions participating in the process of money creation. By this means, the percentage of "bad" debts/bills of exchange approaches the statistical average for that economy under existing conditions, spreading out the risk. The failure or dishonesty of a single individual or company — even region — is thus less likely to have as far-reaching or as long-lasting an effect than would otherwise be the case.

This is the risk-spreading principle on which insurance works. By pooling interests through the issuance of a common currency, a central bank ensures that everyone is equally affected by someone's failure — and that the effect is minimized. Of course, unlike insurance, the individual or company that fails still bears the full brunt of its failure. The effect, however, is not passed through to individuals and companies holding the bills of exchange issued by the failed company. Instead, only the commercial bank that discounted the bills suffers — and then only if the bills were not rediscounted at the central bank or adequately collateralized. This minimizes the effects throughout the economy, for just as the failure of a single borrower has a small effect on a commercial bank with many customers, it has even less of an effect on a central bank that serves many commercial banks.

Thus, just as a central bank ensures that the currency in an economy or country will have a uniform value, it also optimizes the possibility of that same currency having a stable value. That is, by spreading out the effects of any failures to an entire population (the larger, the better — you want to avoid any individual, business, or bank getting "too big to fail"), there is a greater chance that the value of a dollar today will maintain the same value as a dollar tomorrow, or next week, or next year.

We are not, of course, bringing in the time value of money here. The issue at hand is whether a dollar that buys X loaves of bread today will buy X loaves of bread next year. That is, whether the currency retains its value, not whether being able to buy X loaves of bread now is more valuable than buying X loans of bread next year. A properly run central bank optimizes the possibility that, everything else being equal, a dollar that buys ten one-pound loaves of Grade A bread today will buy ten one-pound loaves of Grade A bread next year. (And, yes, Virginia, within living memory good bread once sold for between five and ten cents for a standard 16-ounce loaf.)

Finally, a central bank ensures that there will always be sufficient credit in the system to provide liquidity for financially feasible private sector economic growth and development. A commercial bank, of course, can do this for the area it serves by discounting bills of exchange, but (as we've seen) not in the most secure or stable way. The main reason central banks were invented was, in fact, to ensure that its member commercial banks would always be able to rediscount the bills of exchange that they had discounted, thereby always having sufficient liquidity to supply the needs of commerce.

In this way an entire economy would optimize the possibility that there would always be enough money and credit to meet the needs of commerce, and that the currency would have a uniform and stable value.

What about all those other things that central banks do today? What about funding government debt, ensuring full employment, and providing jobs for Nobel Laureates?

Those are all very well in their way — except that all of them represent more or less egregious misuse of a very specialized and extremely powerful financial and monetary tool. Our concern in this short series has been to show what central banks were intended to do, not what they've been manipulated into doing. That's a story for another day.


Tuesday, December 28, 2010

Central Banking for Dumbos, Part III: The Return of Commercial Banking

In the previous two postings in this series we examined how the idea of money changed from an individual exercise of the natural rights of private property and freedom of association (liberty), to something considered "peculiarly a creation of the State." (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.) That is, money became a means of controlling people and the economy by exercising effective property in the general wealth of the community — socialism . . . the theory of which was summed up by Karl Marx in The Communist Manifesto (1848) as "the abolition of private property."

This is consistent with political thought through the ages. Money is a derivative of property, just as currency is a derivative of money. Power follows property. "Give me control over money and credit," Mayer Anselm Rothschild is alleged to have said, "and I care not who makes the laws." State control over the creation of money (as opposed to regulation, which is legitimate) effectively abolishes private property. Property being a right, it can be abolished by breaking the necessary links between ownership, control, and disposal — as the State does by making promises that it does not have the capacity to keep except by taking what belongs to others.

So much for our "brief" introduction to the Mysteries of Central Banking. We now move forward into the past of the 17th century. As we noted in our first posting in this series, trade was reviving after a long hiatus, and the financial system beginning to (re)develop. Banks of deposit became more widespread, and commercial/mercantile banking — issue banking — was reintroduced, especially in Italy and England. This, however, created a problem.

A commercial bank is in the business of discounting and rediscounting bills of exchange — large denomination money issued ("drawn" or created by) private individuals and companies in conformity with Say's Law of Markets and its application in the real bills doctrine. A commercial bank breaks these large denomination contracts down into more convenient sizes called promissory notes (banknotes), or demand deposits backed by promissory notes. (A promissory note may or may not bear interest.) A commercial bank thus "repackages" money, as it were, much as a retailer buys large quantities of goods and puts them into smaller packages for sale to individual consumers.

In a "pure" system, a commercial bank would redeem its matured promissory notes (banknotes) and checks drawn on its demand deposits with new, un-matured promissory notes or checks. A holder in due course of a bank's note or a check drawn on a demand deposit held by the bank and backed up with the bank's note doesn't want more of the same, however. He or she wants somebody else's note or the value of the banknotes he or she is holding, or he or she would simply have hung on to the note that came to him or her in the course of trade and used it in a transaction.

Naturally, the bank can't deliver the asset(s) that back the banknote to someone who is not a party to the original transaction. That would violate the terms of the contract between the original borrower and the bank. The bank therefore needs to have some assets on hand that it can deliver to a holder in due course of the bank's notes to satisfy his or her legal claim and ensure public confidence in the bank's promises.

These assets are called "reserves." Historically, reserves have been in the form of gold and silver. Each banknote and demand deposit was thus backed 100% by the value of the bill of exchange that it was created to purchase, and by whatever reserve requirement was mandated by the bank's charter or law. A 20% reserve requirement would mean that each £5 banknote (the lowest denomination permitted after reforms in the mid-18th century) was backed by £6 in assets — £5 worth of bills of exchange (actually a portion of a bill of exchange), and £1 of gold or silver.

Banks didn't need to maintain 100% reserves because the vast bulk of banknotes presented to the bank were in payment of loans, or offset against notes of other banks collected in the course of business and presented for payment through a clearinghouse. The banknotes and an equal portion of the debt would thereby both be cancelled, with no payout of gold or silver needed. Barring a "dirty trick" described by some 18th century writers, only a relatively small portion of a bank's outstanding banknotes were ever presented by holders in due course who demanded specie (gold or silver).

(The dirty trick was a manufactured or induced "run" on a rival bank. A larger bank or consortium would collect another bank's notes and hold them back from redemption until the amount exceeded the targeted bank's reserves. The notes would then all be presented for payment on the same day. This usually forced the issuing bank into bankruptcy. The invention of clearinghouses in the mid-18th century largely eliminated this stunt, although J. P. Morgan, who controlled the clearinghouses, employed a similar technique to drive the Knickerbocker Bank and Trust out of business in the early 20th century, causing the Panic of 1907.)

If everything operated perfectly in a perfect world, the banknotes of every commercial bank would always be backed by the present value of solid private sector assets, and all borrowers would repay their loans in full when due. The world, however — if you weren't aware of it already — is far from perfect. A bank's notes might be backed by assets of questionable value — not intentionally (at least on the part of the bank), but not every investment in existing inventory or new capital is as good as it sounds on paper, and things happen. Even when adequately collateralized, in the event of a default, collateral seized and sold at a sacrifice by a bank frequently brings less than the full amount of the debt.

Consequently, banks might be hesitant to create money even for the soundest of projects — as is the case today. Further, even if the bank was willing, and even if the project was sound without a doubt, the bank might already have lent out the maximum allowed, given its reserves, and competitors might not want to lend the bank additional reserves. Finally, the public's confidence in the bank's notes might not be high, and a £5 note of that bank might circulate for, say, £3 or so — a heavy discount. (Of course, public confidence might also be very high, and a £5 note might circulate at a premium, or an amount over the face value.)

The answer to these problems was the central bank — a bank for banks.


Monday, December 27, 2010

Central Banking for Dumbos, Part II: How to Debauch a Currency

In the previous posting in this series, we learned how the State (allegedly) makes a profit by issuing money. The face value of a note or a coin says one thing, and the intrinsic value (the value of the material out of which the note or coin is made) is less, sometimes even negligible compared with the face value. This difference is a profit to the issuer of the money . . . right?

Wrong. The difference, called "seniorage" or "agio," was usually booked as a profit and (when the minting authority was more or less honest) used to defray the cost of issuing the currency. It is not, however, a profit, that is, income. Rather, agio is a liability. Treating agio as if it is income is similar to taxing people for Social Security . . . and then using the Social Security collections for other purposes, replacing the funds with government bonds — bonds that must be redeemed out of other, future tax revenues. All that's been done by collecting FICA is to tax people twice for the same thing. This is because he government still has to come up with the money to redeem those bonds when the Social Security claims come due.

Had Solon the Lawgiver been an accountant instead of a politician when he instituted his plan to reform the Athenian currency and charge an inflation tax to pay for it, he would have seen the problem immediately. Take a look at the "accounting equation": assets = liabilities + owners' equity. In the case of a silver coin with less silver in it than it says on the face, the coin is an asset of whoever owns it. A coin is, in fact, a type of contract. It says on the face, "One Cent" or whatever the denomination happens to be, and bears some statement as to the issuing/certifying authority. The issuer is certifying that the coin-contract conveys a private property right worth one cent.

When the coin contains the full face value of metal, there is no problem. When the coin contains less than the face value of metal, however, the issuer has agreed by the fact of issuing the coin and certifying its value to make good the deficiency when the coin-contract is presented to the issuer for redemption. That deficiency — the agio — is not part of owners' equity, accumulated in "retained earnings" through net income. To construe agio as a profit assumes that the issuer owes the difference between the face value and the intrinsic value of the currency not to the bearer of the currency, but to himself! Given the institution of private property as a natural right, this assumption is clearly ludicrous. The proper classification of agio is a liability on which the issuer has promised to make good to the bearer in due course of the coin or other form of money.

Unfortunately (returning to Solon's little error), the silver wasn't there to hand over to the bearer in due course. It had been spent as if it were a profit — just as FICA collections are typically spent after being replaced with government bonds. Consequently, each "money drachm" became worth less than a "weight drachm." Depending on how far the amount of metal in the coin strayed from the face value, somebody might have to pay, say, two drachma in money to purchase a one drachm weight of silver — inflation. Inflation is thus a "hidden tax" that reduces purchasing power to the advantage of whoever has pocketed the value misclassified as a profit rather than a liability.

A private citizen can't get away with making promises — entering into contracts — and delivering less than what is agreed upon in the terms of the contract, unless he or she has a really big club or a lot of guns to back up such offers that others can't refuse. The State, however, having a legitimate monopoly over the instruments of coercion, can — and does — get away with this form of fraud every time it issues or authorizes the issuance of money backed by nothing more than the State's promise to pay out of something that it doesn't own . . . such as the "general wealth of the economy."

This sort of money manipulation might have been okay for the small, localized economies of the Middle Ages, where the petty ruler probably owned everything in sight anyway. After all, if the local king or baron kept debauching the coinage, he was either only cheating himself, or cheating people — such as another baron or a king — who could get him excommunicated, hanged, or something. Coinage wasn't used much in any event, since most economies were extremely localized, with foreign trade being restricted almost exclusively to luxury goods — for which merchants demanded (and got) good gold and silver coin, or there would be no more luxury goods to show off in front of the neighbors.

Depreciation and devaluation of the coinage was therefore, in most cases, gradual. Added to that, any ruler, like Henry II of England, who wanted (or needed) to gain instant popularity could reform the coinage, chop off a few dishonest mintmasters' hands (or heads for a second offense) and be regarded as a virtual financial savior for refusing to engage in monetary chicanery, or making good on that of previous rulers.

Consequently, after the "fall" of the Roman Empire (that's another subject), the first rapid devaluation of coinage in the west didn't occur until the exaggerated claims of the State came in with the Tudors. If anything exceeded Henry VIII's appetite for eating, drinking, wenching, and contracting syphilis, it was his talent for spending enormous sums of money that he didn't have. Numismatists tear their hair out trying to assemble a representative "type set" of Bluff King Hal's coinages. He devalued the coinage so fast that the die cutters couldn't keep up. Some of "Old Coppernose's" coin portraits, especially in Ireland, are barely recognizable as human . . . although maybe the king's debauched life had something to do with that.

England during the Tudor dynasty saw a change in the perception of the role of the State — and thus the general understanding of private property and the derivatives of private property: money and credit. The role of the State was expanded from its legitimate one of regulating the currency, to the illegitimate role of creating money. This matched the shift in the idea of sovereignty that developed at the same time — that the State or the ruler receives its authority not from the people, as the Medieval scholastic philosophers taught, but directly from God: the theory of "divine right," a complete overthrow of the Aristotelian/Thomist concept of the natural moral law.


Thursday, December 23, 2010

News from the Network, Vol. 3, No. 51

It's not Big News, but it's significant. President Obama has decided once again to try and push through the nomination of Dr. Peter A. Diamond of MIT, Nobel Laureate for Economics, to the Federal Reserve. Diamond is one of a number of Nobel Laureates in Economics to come out of MIT, the most notable being Dr. Paul Samuelson, whose textbook, Economics, went through seemingly endless editions and trained generations of college students into the sacred mysteries of Keynesian economics.

Diamond, touted as "an economist's economist" — presumably meaning he exemplifies everything that's wrong with mainstream economics and reinforces the bad ideas that have managed to take over the science — is considered an expert on "search theory," for which he won the prize with two others, Dr. Dale T. Mortensen of Northwestern, and Dr. Christopher A Pissarides of the London School of Economics.

"Search theory" — as far as we can tell — involves studying the lag time between when an employer starts hunting up new employees and locates suitable candidates, and how long it takes someone who is unemployed to find a suitable job. Diamond is also considered an expert on public finance, taxation, Social Security, labor markets, and behavior economics — everything that goes into supporting the Keynesian wage-based approach to economic and social development, and supporting an increasing role for the State. As described in an MIT newsletter,

One paper Diamond wrote in the 1960s, "National Debt in a Neoclassical Growth Model," became a widely used model of public debt. In the early 1970s, Diamond published widely influential work on taxation, including a pair of 1971 papers on "Optimal Taxation and Public Production," co-written with economist James Mirrlees that outlined what kind of tax regime leads to the highest production efficiency available in an economy. The research is part of a body of work that led to Mirrlees being awarded a 1996 Nobel Prize in economics.
Evidently Diamond believes everything is just peachy. What's wrong with ballooning national debt and increasing taxation? (The "public production" throws us, however — what, exactly, does the State produce in the way of marketable goods and services that couldn't be provided better and cheaper by the private sector?) The MIT newsletter goes on to comment, "In Diamond's analysis, Social Security is hardly rushing toward imminent insolvency, but will likely need some increased taxes and some reduced benefits to maintain stability a few decades down the road."

This is the place for some extremely sarcastic comments, but we can probably let the facts (and the quotes) speak for themselves. What we'll do instead is give the news items from this week that report our increasing momentum on the way to release the world from the slavery of past savings, epitomized by Keynesian economics and increasing State control, and establish the Just Third Way by implementing Capital Homesteading by 2012.

• After a number of connections and outreach to the United Kingdom and other countries, the Coalition for Capital Homesteading has been expanded internationally. This decision was reached after consultation with CESJ's National Field Secretaries and the representatives of a number of different groups that have become interested in the effort to enact a Capital Homestead Act by the 150th anniversary of Abraham Lincoln's original 1862 Homestead Act in 2012.

• Early this afternoon we completed our editing suggestions and provided some attachments and links for Mr. Pollant Mpofu of London to send a letter to the Governor of the Bank of England. While not the most important link, "Part V" of this blog's (unfinished) series on Say's Law of Markets and the real bills doctrine is included in the package. Mr. Mpofu has been active in working to get the CESJ core group to meet with the British and Irish Prime Ministers, and the Anglican and Catholic Archbishops of Canterbury and Westminster, respectively. Mr. Mpofu may be up for the (just invented) "Number 17 Award," named after the 17th item on the CESJ Code of Ethics: "There are three keys to gaining acceptance of revolutionary ideas: persistence, persistence, and persistence."

• As usual, there have been a great number of telephone conferences, including the meeting on Saturday, December 18 to discuss progress on the annual "Rally at the Fed" to demonstrate in favor of a people-centered monetary and fiscal reform instead of yet more warmed-over Keynesian economics. Other teleconferences have included extended discussions with Dave Kelly, who is spearheading the Harris Neck effort, and Michiel Bijkerk of the Netherlands Antilles, who has just been asked to lead a new political party that will work to implement the Just Third Way as far as possible within the existing legal framework of that small, locally autonomous region of the Netherlands.

• We have sent a fairly large number of PR-type e-mails in response to general queries from radio stations for potential guests to schedule in the coming year. Keep your eyes peeled for opportunities to suggest that a host interview a CESJ spokesman about the Just Third Way and the effort to implement Capital Homesteading by 2012.

• CESJ representatives and friends are planning to attend the reception given by the Catholic Radio Association at the Catholic University of America the night before the March for Life. Every effort will be made to introduce producers and station owners to the idea of Capital Homesteading as a Pro-Life economic agenda.

• A proposal is being bruited about that a Just Third Way team teach a seminar on Binary Economics at an(other) Ivy League school. Something of a follow-up to the brief introduction to the Just Third Way presented at the Harvard Divinity School a short while back, the idea is to counter the "usual thing" based on past savings and present a viable alternative to the unworkable mix of capitalism and socialism under which the global economy currently labors. Be on the alert for opportunities to have a local college or university sponsor a presentation, seminar, or class by a Just Third Way expert on Binary Economics.

• As of this morning, we have had visitors from 50 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, Brazil, and Ireland. People in Canada, Venezuela, Pakistan, Finland, and Israel spent the most average time on the blog. Yet again, and still possibly due to the growing perception that something is wrong with the basic assumptions of Keynesian economics (as well as other schools of economics based on the Currency School of finance), the most popular posting by far is one from a while back, "Thomas Hobbes on Private Property," that briefly explains the similarities in the way Keynes and Hobbes abolish private property. This is followed by "Aristotle on Private Property," "Why Government Debt is Really Bad," "Games People Play," and Part I of "How to Save the Global Economy."
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.


Wednesday, December 22, 2010

Central Banking for Dumbos, Part I: The Magical Money Machine

First, of course, we'd like you to note the title of this brief series with which we intend to close out the year — more or less. It's "Central Banking for Dumbos," not "for Dummies," or "for Idiots." We don't want to get involved in any multi-million dollar lawsuits with the publishers of the two popular series books that, in general, do an excellent job of helping people get a reasonably good grasp of difficult subjects. Not in-depth, mind you, but good and certainly useful. Given the state of "higher education" today and its devolution into job training, the "Dummies" and "Idiots" books might possibly give a better basic education in many subjects more quickly and certainly more cost-efficiently than most colleges and universities. For example, the material in Business Plans for Dummies duplicated the material I took in a class on business planning almost verbatim.

No, we might get into trouble with Disney, but not the Dummies or Idiots people — and our defense with Disney is that we're not using "dumbo" as a proper name, but as a description of our readers, and then only as a way of describing their excusable ignorance and failure to speak up, not any inexcusable stupidity. (St. Thomas Aquinas, after all, one of the most brilliant thinkers who ever lived, was described as "the dumb ox." Maybe the title should be, "Central Banking for Dumbox" . . . "Dumbeaux"?) The fact that our readers tend to have large and inquisitive, if metaphorical, ears is a coincidence. To the best of our knowledge, none of them are elephants, although many of them fly — with the aid of airplanes, gliders, and balloons, not by means of their ears, so there.

We've covered basic commercial and deposit banking in the previous postings this week, so let's cut straight to the chase (even if, like me, you have no idea what that means), and start looking at central banking.

As the financial systems in Europe began to regain lost ground in the 17th century in response to the demands of a rapidly expanding economy, there was a return to the deeper and more sophisticated understanding of money and credit that had prevailed before the introduction of coined money, cir. 700 BC. Frankly, money in the form of certified and regulated lumps of gold and silver is much more convenient for daily transactions than bills of exchange and their derivatives (e.g., promissory notes, drafts, etc. — any form of negotiable contract that circulates as a medium of exchange). Coined money was so convenient, however, that many people became convinced that only coined money and its substitutes are "real" money.

That's bad enough — but it gets much worse. We won't make the argument here, because it is extremely complex. The fact is, however, that many people became confused about sovereignty and human dignity, and thus private property and other natural rights. They began to believe that natural rights are a grant from the State, not inherent in each human being. Yes — the State has the duty to define and enforce the exercise of natural rights, but the State does not grant these rights. Each human being has them by nature.

Cutting to the chase (and what does that mean, exactly?), people began to think that the State has the power actually to create money! Not so. Money, being anything that can be used in settlement of a debt, is an exercise of two natural rights: private property and liberty (freedom of association/contract). Anybody who has ownership of the present value of something for which somebody else is willing to trade, and the freedom to carry out a transaction has the power to create money.

If either of those two rights is absent (ownership/private property or liberty/freedom to associate and enter into a contract), then whoever it is we're talking about cannot legitimately create money. To issue money, you have to 1) own something of value, and 2) have the freedom to enter into contracts. Money, after all, is simply a contract (promise) to deliver an ownership interest in the present value of some marketable good or service on demand or maturity of the promise. Thus, every free man, woman, and child has the inherent power to create money. (There are some restrictions on minors, criminals, and incompetents, imposed for the sake of expedience — e.g., a contract with an unemancipated minor is voidable, not void — but we don't need to get into that.)

States soon discovered, however, that they could abuse their certification and regulatory authority to their own advantage. This started out innocently enough. Even Solon the Lawgiver fell into the trap. In order to cover the cost of minting the coins, the amount of metal in the coin was reduced below the face value. In effect, the State certified that there was exactly one drachm's worth of silver in a coin that actually had less than one drachm's worth of silver. Instant profit, right? The money machine was open for business; free goodies for everybody.

Wrong — as we'll see in the next posting in this series.


Tuesday, December 21, 2010

What Is, What You Think Is, and What Should Be

We love our correspondents. Okay, some of them — those that ask intelligent questions . . . which, frankly, covers a very broad range. As they/we say in Mensa, the only dumb question is the one you don't ask. That, of course, applies to real questions, not disguised lectures, equivocations, attempts to trip people up, so on, so forth — you know, what passes for "honest debate" in much of academia and is neither honest nor debate.

Be that as it may, yesterday's correspondent sent us a follow-up question that came out of yesterday's lecture on distributism:

A key question for me is this: Although banks do this badly (and now almost not at all) do they not lend money on the soundness of a project, re: discounting the future income streams? This seems to be one crux of the issue. So at least for the moment, its not that this part of the system (bank lending on future earnings) doesn't exist, but that its not done very well by the system.
Looking back on my answer, I think I might not have answered it completely, but that's the beauty of using correspondence as the basis for a blog posting — you get a chance to edit, amend, and expand on possibly doubtful areas . . . or (as in this case) actually get around to answering the question, that is, do banks lend based on the present value of the anticipated future income stream?

The quick and easy answer is, absolutely. A loan officer reviews the loan applications and (presumably) checks out the assumptions very carefully, verifies the collateral, the prospective borrower's character ("all loans are 'character loans'" is an old financial aphorism), and so on. He or she then signs off on the loan, and hands over the cash, up to the value of the discounted cash flow or the collateral, usually whichever is less.

This method of estimating the present (and thus loanable) value of a project causes massive confusion among non-finance people. The discounted cash flow method is only an estimate of the actual amount that the borrower anticipates receiving from the project, and (if he or she is being smart) is a big underestimate of what the borrower really expects to receive. He or she is also supremely cautious about the discount rate chosen, as well as all other assumptions.

As a rule of thumb, a borrower should be extremely pessimistic when borrowing, and extremely optimistic when putting the capital into production to pay off the loan as fast as possible. The bottom line is that borrowers usually try to get something at the lowest possible cost, but then work it to its optimal capacity to speed up the payback and get out from under the loan. All these things are estimates, anyway, and the success of a project usually depends on how well the borrower and the loan officer made their estimates, and how closely they manage to adhere to their projections — one of the reasons why some business folk tend to think of the budget as a god instead of as a useful tool.

The problem is that this is how banks are supposed to be making loans, and how they are designed to operate, more or less. Unfortunately, even some bankers don't understand the process, and assume as a given that the true feasibility of a project depends not on whether the assumptions used in arriving at a project's net present value are good, but on whether there are sufficient accumulated savings in the bank to lend for that project.

The key to understanding this rather odd situation is to realize that how the experts tell us a bank operates is not exactly how a bank operates. One of the first things I learned as an auditor is that there is the way the system is supposed to work, the way the people involved think it works, and, finally, the way it actually works. The task is to bring all of these together into material conformity with one another so that the financial statements accurately reflect the position of the accounting entity. This is not the case with the United States and the manipulation of statistics and incomplete reporting that's going on.

Moulton goes into this when examining the Keynesian "multiplier effect" on pages 77-80 (and in detail, 80-84) in The Formation of Capital. The experts invariably define a "bank" as a financial institution that takes deposits and makes loans. This is the definition of a "bank of deposit," e.g., a credit union, savings and loan, or investment bank, which cannot make a loan until and unless the funds already exist as part of the bank's capitalization or have been put on deposit.

There is, however, another — and older — type of bank, the "bank of issue," of which the most common type today is the commercial or mercantile bank. A bank of issue is defined as a financial institution that takes deposits, makes loans . . . and issues promissory notes, usually in exchange for bills of exchange drawn by individuals or companies representing the present value of existing and future marketable goods and services.

Per the real bills doctrine, a commercial bank can create money backed by discounted bills of exchange up to a multiple of its reserves, the multiple being the reciprocal of the reserve requirement. Thus, a 20% reserve requirement would mean that a bank with $1 million in reserves can create money by discounting or rediscounting bills of exchange up to $5 million.

Keynesian economics (and Monetarist/Chicago and Austrian) rejects or changes Say's Law of Markets, and thereby rejects its application in the real bills doctrine. According to Keynesian multiplier theory developed by Richard Kahn in the 1930s when Say's Law was under attack by Keynes, a commercial bank can create money as described above, but it doesn't. In Keynesian theory, backing the money supply with private sector hard assets in the form of new capital is considered much too risky, compared with backing the money supply with government debt based on a deteriorating economic situation and declining tax base.

Instead, the theory is that someone deposits cash in the bank, thereby increasing the supply of loanable funds. Given a 20% reserve requirement, the bank immediately loans out 80% by means of a check, which is deposited in another bank, which then lends out 80% of the 80%, and so on, until the money supply has been increased by a factor determined by the reciprocal of the reserve requirement.

Unfortunately, while the math "works," the theory doesn't hold water. Baron Kahn forgot one gigantic fact that occurred to Moulton immediately. That is, checks do not remain on deposit.  Checks are presented for payment to the banks on which they are drawn.  This results in a transfer of reserves between banks. Further, a check, while a negotiable instrument (actually a form of bill of exchange), does not qualify as reserves.  Thus, even if checks remained on deposit without ever being presented for payment (which is not the case), the money supply would not increase one cent (or one penny), because a bank cannot make loans out of checks on deposit. As Moulton pointed out, there is a constant shifting of the reserves as checks clear, but the amount of money in the system does not and cannot increase in the way Kahn theorized — even though it is the standard explanation in all the textbooks.

Nevertheless, federal government monetary and fiscal policy is set as if the multiplier effect were valid and not a Keynesian fantasy, based on the wrong definition of money, and a partial definition of a bank. This is "a bad thing," because commercial banks have the power to "create money" (more accurately, transform the money created by the drawer of a bill of exchange by changing it into a more convenient or acceptable form) by discounting and rediscounting bills of exchange, and issuing promissory notes that either back new demand deposits on which the "borrower" can draw checks, or (very rare today) banknotes that then circulate in the community as a medium of exchange — hence an archaic term for a bank of issue: a "bank of circulation."

Nor is a bank strictly necessary to issue bills of exchange and use them to settle debts. In fact, a rough calculation for 2008 reveals that approximately 60% of the transactions in U.S. GDP were carried out by means of privately issued bills of exchange that circulated among businesses domestically and abroad, being discounted and rediscounted among businesses and individuals until being presented for payment on maturity. Called "merchants acceptances," these formerly made up the bulk of the money supply before government got so big. Congressman George Tucker in the late 1830s estimated that merchants and bankers acceptances constituted more than 95% of the U.S. money supply.

Money circulated in the form of privately issued bills of exchange for thousands of years before the invention of coined money.  This is evident from the numerous clay tablets from Mesopotamia and papyri from Egypt.  A large proportion of these are in the form of negotiable contracts: bills of exchange, promissory notes, drafts, and so on, the latter being derivatives of bills of exchange.

It is still possible, given an individual's or business's creditworthiness, to carry on transactions by means of privately issued bills of exchange, and quite a large amount of business is still carried on this way, "B2B." Most small businesses, however, don't have the "name" or credit rating to carry it off. Further, the public doesn't generally accept bills of exchange in daily transactions — just promissory notes backed by government "anticipation notes," i.e., debt to be redeemed (maybe) out of future tax collections.

The main problem right now with the banks seems to be lack of sound collateral. It may not be conscious, but banks are very leery right now of traditional forms of collateral, i.e., corporate equity in the form of retained earnings, or some derivative thereof. The rapid gains in the stock market should make people a lot more suspicious and fearful than it evidently does — they forget that the stock market took a quarter of a century to recover after the 1929 Crash; rapid rises in share values are not a recovery, but suggest a speculative bubble getting ready to burst. Since share values are, at least in some measure, a way of determining the value of a company and thus its creditworthiness by the value of its equity/collateral, bankers would be fools to lend on the strength of a rapidly rising stock market in the middle of a depression — and bankers are not fools, or they wouldn't be in business.

Capital Homesteading would replace traditional collateral backed or represented by retained earnings and other corporate equity with capital credit insurance and reinsurance. In and of itself this would probably unclog the lending stream — just as it would have in 1929 after the fall in stock prices eroded existing collateral and forced many companies into bankruptcy when they couldn't get credit. Capital Homesteading then adds the expanded ownership aspect and a "few" other things, but the important thing for financing new capital in the aggregate is being able to get credit where it is needed in a way that does not endanger the borrower, concentrate ownership, or otherwise have a negative impact on the financial feasibility of the new capital and thus creditworthiness of the borrower.

This is why, in short, community banks and small businesses should be the strongest supporters of the push to enact a Capital Homestead Act by 2012 — although we wouldn't complain if it came sooner. So what if it's the 149th anniversary of Lincoln's 1862 Homestead Act instead of the 150th?

There are one or two things a small business can do right now to improve its creditworthiness and improve its chances of obtaining credit. For example, assuming a company that is otherwise doing pretty well, they might want to consider adopting a 100% S-Corp ESOP . . . which pays no federal or state corporate taxes. This effectively improves the bottom line by as much as 50%. We only recommend this if the company also implements Justice-Based Management due to the morale problems associated with calling people owners when they have no rights of owners, but that should not be a problem in a company that tries to adhere to the natural law principles found in Catholic as well as Jewish and Islamic social teaching.

Bottom line: there is a little (though clearly not enough) that can be done within the existing legal system to implement a quasi-Just Third Way approach, though of course not the Just Third Way in a systemic or meaningful way. That's one reason why we're watching a new prospect that has just developed so closely, as it might give us the political leverage to stage a demonstration, using an executive order from the president instead of legislation from Congress, and on the strength of the success of the project, get the enabling Capital Homestead legislation through.


Monday, December 20, 2010

The Problem With Distributism

No horse is so dead that you can't continue to beat it. (Mmmmmm. Dead horse.) Anyway, for years, even before starting this blog, we've gone into great detail and explained at great length exactly where classic distributism and the Just Third Way differ, and where they agree. It doesn't seem to help. The silence remains deafening — or nearly so.

As a whole, Latter Day Distributists (at least those who don't run away chanting the "I'm not an economist" mantra/copout) may agree that both distributism and the Just Third Way share substantially the same goals: an economically and politically just society characterized by widespread ownership of the means of production. On the whole, however, the LDDs and those sympathetic to their position, such as a determinant number of supporters of Major Douglas's "social credit" and Henry George's program, agree that those who support the Just Third Way "just don't get it." Where we aren't already beyond hope, we're just being stubborn by refusing to abandon our position in the face of repeated assertions, contradictory definitions, and lack of argument from the LDDs & Friends.

That being the case, we are clearly being Deliberately Evil by not coming over to the Light Side and agreeing completely with everything someone else says, with or (more usually) without proof or argument. Of course, the human sacrifices we carry out as the high point of every quarterly board meeting may have something to do with that, too, as well as the ritual cannibalism and the high cholesterol Béarnaise Sauce. (Mmmmmmm. Have a friend for lunch.)

That's why when, over the weekend, we received a question about distributism, we made our response the core of today's posting. Of course, there is that little matter about not wanting to work any harder than we have to, plus the fact that (believe it or not) we have other things to do. So, to cut to the chase, our correspondent asked (slightly paraphrased to protect both the innocent and the outstandingly mistaken),

A quick glance over The Distributist Review blog revealed a number of things that caused me concern, e.g., links to some questionable sites, a number of ads and links that don't seem completely consistent with the natural moral law, and a set of "progressive" goals that appear to have the potential to lead people away from the natural moral law based on God's Essence which is self-evident in His Intellect, not His Will, that is the basis for the Christian, Jewish, and Islamic understanding of social justice from an Aristotelian perspective. I found this both disconcerting and mystifying, given the many references to Catholic social teaching, which is based on Thomism, or a "Christianized" Aristotelianism, just as orthodox Jewish and Islamic social teaching are based on the Aristotelian analyses of Maimonides and Ibn Khaldûn, respectively. This demonstrates to me just how easy it is to get good Catholics — or sincere believers in any religion — going off in the wrong direction. My question is, how did Chesterton a) define distributism (without all the add-ons that seem to have come later), b) get economics so wrong, and c) how did he get hijacked to something so far off the range?
(BTW — despite the "cowboy talk" about getting far off the range, our correspondent is not from Texas, nor are we confirming that "he" is really a "he." There's no sense in opening him up to the sort of "arguments" we typically get.)

Okay, here goes (and that's really three questions . . . but we don't charge by the word, so that's all right). "Distributism" is easily defined, all the more because Chesterton and Belloc insisted that there is no specific program involved, only general guidelines: A policy of widely distributed ownership of the means of production, with a preference for small landholdings and enterprises. When enterprises must be large, the ownership should be broadly distributed.

This is simple, and very close to the Just Third Way. The problem comes in when Latter Day Distributists start insisting that the small landholdings and enterprises are a mandate, not a preference . . . and then the fun starts.

The problem is that Chesterton and Belloc made a fundamental error with respect to finance. This is understandable, for neither one was an economist, financial expert, lawyer, or accountant. Had it been explained to either of them, we are convinced that either one would instantly have seen the problem and corrected it. It was one of those small errors that lead to big problems in the end. Regular readers of this blog can probably guess what it is already: the fixed belief that new capital formation cannot be financed except by cutting consumption, accumulating money savings, then investing. (Vide Dr. Harold G. Moulton, The Formation of Capital, 1935).

This can go in one of two ways. If we shift our understanding of the natural moral law from the Intellect to the Will, we simply redefine private property, money and credit, banking, and so on, in order to get what we want. The substantial nature of private property changes from a right inherent in every human being by nature with socially determined exercise of that right, to a grant from the State. This allows redistribution of "ownership," which ceases to mean anything. As John Locke pointed out a number of times in his Second Treatise on Government, you can't really be said to own anything if someone else (the State or a State substitute) can take it away at will.

A distributist who goes this route may end up with widely distributed ownership (although that is doubtful, as the necessary increase in State power will usually prevent this from happening), but the "ownership" won't mean anything. As Keynes quite accurately pointed out, within the past savings paradigm, ownership must be concentrated in order to accumulate money savings, and the small owner eliminated (General Theory, VI.24.ii). This is the antithesis of distributism. Within the past savings paradigm, if ownership is widespread, then people will use their ownership income for consumption, which presumably dries up the pool of loanable funds, bringing economic growth to a halt.

The solution within the past savings paradigm for anyone who has any concern whatsoever for his fellow man is to redefine the natural law, especially regarding private property. As the reasoning inevitably goes, private property may be a right, but (contradicting explicit papal teachings, e.g., Rerum Novarum, §§ 5-6) it is not an "absolute right." The State (or some State-substitute) has the duty to redistribute wealth by some means (usually manipulation of the currency or outright confiscation and redistribution) when people are in need. "The rich" therefore have no right to the income from what they own, except for what is necessary for reinvestment and what some authority has decided is a just return. (Of course, "enjoyment of the fruits," i.e., income, is the essence of private property . . . except that they've redefined private property!)

This is shoddy reasoning, and leads to the economic situation we see today, an economy that, ostensibly arranged for the benefit of everyone, with entitlements, family allowances, welfare, high fixed wage and benefits packages, etc., etc., etc., in reality functions exclusively for the benefit of the wealthy. It is no coincidence that the U.S. just experienced its most profitable quarter in history . . . with the vast bulk of profits in the financial services industry — those whom Pope Pius XI called the despotic economic dictators, who, while they don't, as a rule, own, control money and credit, so that none may breathe against their will. (Quadragesimo Anno, §§ 105-106)

The stock market is booming. Unemployment is near 10% . . . officially; near 20% "unofficially." To a mind that believes the State can do anything just by re-defining truth (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt Brace, 1930, 4), this is not happening because it cannot be happening. There must be a hidden conspiracy somewhere preventing the economy from working for the benefit of all: the rich, whose greed prevents others from enjoying the income and standard of living that God decreed for them.

The other way this can go is to insist that the rights of private property are sacred and must not be infringed upon — which is absolutely correct. Unfortunately, those who take this position also do a "little" unconscious re-editing of the dictionary, as Keynes called it, and make three fundamental errors. 1) They continue to insist that existing accumulations of savings are essential to finance new capital formation. 2) The right to property — that which comes under the natural law and thus is absolutely part of human nature — is redefined as effectively inhering only in an elite. 3) The rights of property — the socially determined exercise of property (but always without prejudice to the underlying natural right to be an owner) — are redefined as absolute. That is, 2 & 3 reverse the natural order, and effectively negate the natural law as surely as those who redefine it in the other direction.

Those people in the first group, i.e., those who redefine natural rights explicitly (which includes most Latter Day Distributists), necessarily view those in the second group (those who reverse the natural order) as heartless fiends who selfishly insist on their rights of property to the detriment of others' right to life. Those in the second group necessarily view those in the first group as idealistic blockheads who would sacrifice the common sense of the natural law (including private property) to a disastrous social theory that can only lead to economic disaster.

The two sides could easily be reconciled if they could be brought to understand that 1) money is anything that can be used in settlement of a debt, 2) existing accumulations of savings are not essential to the financing of new capital formation, and 3) widespread direct ownership of the means of production is essential to the functioning of Say's Law of Markets and its application in the real bills doctrine to finance widespread acquisition and possession of private property in the means of production.

We have tried on a number of occasions to make this clear to people on both sides of the aisle, but have typically gotten one of several (non)responses:

1) A polite dismissal for questioning the principal tenet of the religion of past savings,

2) No response whatsoever,

3) A pitying shake of the head and a statement to the effect that we could be refuted on every point . . . but that they aren't going to take the time to do so. (Vide Milton Friedman's refusal to debate the Kelso ideas in response to an invitation from Norman Kurland),

4) An outraged attack claiming that we are anti-distributists, anti-social crediters, anti-Catholic, anti-histamine, or whatever else comes to hand.

What we don't get is honest debate, or even argument. A leader in the distributist movement once exacted a promise from this writer not to judge distributists too harshly. That was approximately two and a half years ago, and a number of efforts have been made to reach out to the distributist movement, as well as other movements that consider themselves affiliated with distributism in some fashion.

There has been no response. In consequence, our opinion of distributism is as high as it ever was, i.e., that except for being enslaved to past savings, it is about as close to the Just Third Way as it is possible to get within the current system. Our opinion of distributists, however, is lower than ever before.


Friday, December 17, 2010

News from the Network, Vol. 3, No. 50

Kudos to Guy Stevenson, a CESJ National Field Secretary in Iowa, who gave us a great catch phrase for this week's blogitorial . . . that we're not going to use. It was good, though: "It's a duct tape world." This brought in all the jury-rigging political and, especially, economic fixes that have been slapped on to try and remedy bad situations by covering them up and adding more complexities. We even had some notes, and that great opening sentence, courtesy of Mr. Stevenson. We were bringing in Garrison Keillor and the American Duct Tape Council . . . all kinds of clever stuff.

Yes, we were all set to run with Guy's suggestion . . . until we read this morning's Wall Street Journal, and the op-ed by Alan S. Blinder, an economics professor at Princeton, "Our Dickensian Economy." (Wall Street Journal, 12/17/10, A19.) Pitting alleged Republican greed against Democratic envy, Dr. Blinder-Than-Thou tried to juxtapose the Murdstones of the GOP with the Democratic David Copperfields. He was clearly attempting to take the high road of concern for the working poor by urging more monetary expansion by the Federal Reserve and “hinting” that employers need to pay workers more. After all, Dr. Blinder points out, productivity in nonfarm business is up 86% since 1978, while real compensation per hour is up just 37% . . . "Is that fair?" he complains.

A Binary Economist would respond with an "Absolutely not!" Where is the fairness in compensation to labor going up 37% when the increases in productivity are due almost exclusively to advancing technology, i.e., capital? How is it "fair" that labor gets what capital has earned, and which goes by natural right to the owner of capital?

Abraham Lincoln had something to say on that score. In the debate with Stephen Douglas on October 15, 1858, Lincoln declared that taking for one's self what another earns is nothing less than slavery: "It is the eternal struggle between two principles, right and wrong, throughout the world. It is the same spirit that says 'you toil and work and earn bread, and I'll eat it.' No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation, and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle."

Two wrongs don't make a right. It's no more fair for "capital" to rob "labor" by withholding a just wage, than it is for workers to demand increases in pay for work done by capital owned by others. Would a black slaveholder who kept his former white master in involuntary servitude somehow be less despicable for doing what he, better than anyone, knew to be wrong?

The solution in Binary Economics, of course, would be to open up democratic access to money and credit so that owners of labor could also become owners of capital, thereby sharing in productivity growth by right rather than as the result of coercion. Dr. Blindly-Stumbling doesn't stop with hinting that what belongs to owners of capital should be redistributed to owners of labor, however. After declaring, "Our biggest problem today is the shortage of jobs" (and how, exactly, does raising the price of labor encourage job creation?), Dr. Blinder asserts,

The Federal Reserve is trying to do something about it. But having fired so much ammunition already, it is down to pretty weak weaponry. Yet the Fed's announcement that it would purchase $600 billion worth of Treasury bonds was greeted by thunderous protest from the right, which frets over inflation even as we teeter on the brink of deflation.
Uh, yeah, Kingfish . . .

Dr. Blinder does not explain how or why pumping trillions of dollars worth of fiat money into the economy, backed only by toxic, overvalued "assets" and government debt, constitutes "teetering on the brink of deflation." Huh? A few weeks ago Reuters reported that American companies have cir. $1 trillion with which they plan to buy back shares, driving up prices on the secondary market. The financial services industry has reported record profits at a time when the Obama administration has been moaning that banks are stuffed with cash that they refuse to lend. Prices of items carefully omitted from the Consumer Price Index — food and energy — continue to rise. The claim that "we teeter on the brink of deflation" could only come from the mind of an economist who accepts Keynes's re-editing of the dictionary with regard to "inflation." As the Great Defunct Economist explained,

When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e. we shall have reached a state of true inflation. Up to this point, however, rising prices will be associated with an increasing aggregate real income. (General Theory, III.10.ii)
In plain English, according to Keynes, "inflation" is not a rise in the price level due to more money "chasing" the same or fewer marketable goods and services. Rather, "true inflation" is a rise in the price level after full employment has been attained. By twisted Keynesian logic, then, since we clearly do not have "full employment," even by the distorted figures coming out of the Bureau of Labor Statistics, we cannot possibly be suffering from inflation. Since we're not suffering from inflation, egad! We're teetering on the brink of deflation!(!!)[!!!]{! x 10!!!} The solution is obvious, at least to a Keynesian: CREATE MORE MONEY! SPEND, SPEND, SPEND!

Really? Dickens understood quite well what happens when you spend without producing. As he had Mr. Micawber instruct Master Copperfield,

"My other piece of advice, Copperfield," said Mr. Micawber, "you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored. As I am!"
Whatever Keynes's and Blinder's delusions, inflation hurts the wage earner. Even Keynes admitted that his "forced savings" theory puts the wage earner into the position of never being able to catch up, and robs the poor for the benefit of the rich. (General Theory, II.7.iv) Labor earns more in aggregate, but Keynes (as von Hayek rather astutely pointed out) neglected to take into account the individuals who make up those aggregates . . . individuals who are worse off by being forced to reduce consumption to put greater profits into the pockets of producers who presumably reinvest the "forced savings," or which are taxed away to fund redistribution.

The poor are effectively taxed to support the poor. Dr. Blinder was right. This is truly a Dickensian economy. The problem is that Dr. Blinder is not a Deus ex Machina author, setting everything right in the end by chance and coincidence. Rather, he bears a startling resemblance to Uriah Heep, who honestly thought he was being a friend to David Copperfield, while engaged in doing the worst possible things to everyone for his own benefit. Frankly, rather than spending our collective heads off and end up being sent to the international equivalent of the Marshalsea debtors' prison — effective loss of national sovereignty — we'd be much better off doing what some conservative fatcats propose: shut down the Federal Reserve, stop spending, balance the budget, allow the rich to accumulate sufficient savings to finance new capital investment and create jobs, and so on.

. . . . or we could do something that actually makes sense: implement Capital Homesteading. So what have we been doing this week to advance the case for a Capital Homestead Act by 2012?

• This past Saturday, December 11, 2010, the "Fed Rally Task Force" had a telephone conference, with another scheduled for tomorrow. This may sound like a rather intensive round of "meetings, bloody meetings," but the effort is starting to build some momentum. In particular, the networking efforts of the CESJ National Field Secretaries are starting to bear fruit. Of special note are Russell Williams and his continuing efforts to reenergize the NAACP to get the venerable organization behind Capital Homesteading as the next logical step in helping all people of all colors to secure their civil — and natural — rights to life, liberty, property, and the pursuit of happiness.

• Adding to the impression that we do nothing but have meetings, on Wednesday we had the monthly Executive Committee meeting. Seeing the movement toward the establishment of the Just Third Way on a daily basis gives you a slightly distorted perspective on progress. It isn't until you see it all in one place (such as these news items) that you realize the momentum that is building up to reach the goal of Capital Homesteading by 2012.

• Russell Williams has been making great strides with the university system in Connecticut, and has opened the door there for Norman Kurland in a number of venues. Russell also has been offered a weekly radio show on the Just Third Way for six months. He still needs to find funding, but he doesn't think that will be a problem. Of course, we're morally certain that if anyone wanted to contribute something to offset production costs, it would be graciously accepted. This has not been discussed, but if the station is not a non-profit, it might be possible to make contributions to CESJ, which has 501(c)(3) status.

• A meeting (meetings, again!) has been scheduled in January with Mr. John Dondanville of Detroit (and a graduate of Notre Dame) and Mr. Robert Colangelo, Executive Director of the National Brownfield Association in Chicago, to discuss the application of the principles of the Just Third Way to the financing of the right-sizing of cities in light of the ongoing economic downturn.

• Norman Kurland has been scheduled for an interview on the "Unlock Your Wealth" radio show, hosted by Heather Wagonhals and produced by the Unlock Your Wealth Foundation, to be broadcast live on Saturday, February 19, 2011. Norm was most recently featured on "Money America" out of Cambridge, Massachusetts, to rave reviews (or as rave as you can get, talking about economics). If you know of a local (or national, or international) show, radio or television, even a local newspaper or magazine that is looking for dynamic, effective, and interesting (yes, it's possible to be interesting about economics) person to interview, put them in touch with us. We're working on a one-sheet handout describing Norm as a guest. It's a great way to spread the word about the Just Third Way, and Norm has the unique ability to turn "the dismal science" of economics into something that has the potential to deliver hope to everyone through Capital Homesteading.

• Dave Kelly (another graduate of Notre Dame), who is spearheading the Harris Neck effort to recover land taken from its owners during the Second World War, has been making many significant contacts. He has also invited Norm to speak before the boards of advisors and directors of the Harris Neck initiative in February.

• Michiel Bijkerk, an attorney in the Netherlands Antilles, is running for a seat in the legislature. He hopes to sponsor an initiative to implement the Citizens Land Bank concept as far as possible within existing legal structures. The interim vehicle would be called a "Community Investment Center."

• Pollant Mpofu, a CESJ friend in London (originally from South Africa) has been making great strides in his efforts to introduce religious and political leaders in England, Ireland, and South Africa to the ideas of the Just Third Way and its potential to revitalize the global economy. He hopes to have Norman Kurland and Michael Greaney invited to meet with David Cameron, as well as the Anglican Archbishop of Canterbury and the Catholic Archbishop of Westminster. He has also reached out to Jimmy Kelly, a Regional Secretary in Ireland of the Unite trade union. Pollant is also working on having Norm invited to meet with the president of South Africa.

• As of this morning, we have had visitors from 53 different countries and 49 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Brazil, and Ireland. People in Japan, Canada, Pakistan, the United States, and Venezuela spent the most average time on the blog. Possibly due to the growing perception that something is wrong with the basic assumptions of Keynesian economics (as well as other schools of economics based on the Currency School of finance), the most popular posting by far is one from a while back, "Thomas Hobbes on Private Property," that briefly explains the similarities in the way Keynes and Hobbes abolish private property. This is followed by "Aristotle on Private Property," Norman Kurland's tribute to Bob Woodman, "Part I" of "How to Save the Global Economy" from last month, and "Keynes, Bernanke, and Private property," also from last month.
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.


Thursday, December 16, 2010

Games People Play

It's become painfully obvious that the world's most popular sport isn't soccer, baseball, or even texting. It's jumping to conclusions after warming up playing word games. On today's swampy intellectual and moral playing field shadowed over with a heavy positivist cloud cover, even understanding the idea of absolutes of the natural moral law and discerned as far as human capacities permit through the use of reason is virtually unthinkable. People waste their time twisting themselves and their thoughts into moral and intellectual pretzels — and you know what happens if you try to untwist a pretzel.

This makes it all the more difficult to explain the Just Third Way, especially as the principles of the Just Third Way are applied in Binary Economics and compared with today's "mainstream" schools of economics. We've spent the last couple of years on this blog explaining in great detail the philosophical framework of the Just Third Way, its principles (especially as they relate to money and credit, banking, and finance), and how these principles might be applied in Capital Homesteading to bring about a more economically (and politically) just and human(e) future for all.

A major part of the groundwork involved in this effort is surfacing or developing accurate definitions of terms and concepts. One of the more difficult terms to define, for example, is "money." Economists and even banking experts muddy the waters on this one by insisting on defining money by its function, that is, what money does or can be made to do, rather than by its nature, that is, what money is, or the basic principle(s) of money.

Almost as difficult as defining "money" is defining the terms "capitalism" and "socialism." Money has a lot of emotional and historical "baggage" that gets in the way of gaining a true understanding, but capitalism and social certainly give it a run for the, well, money. Call something "socialist," for example, and it seems that nobody actually tries to understand what you mean. Instead, people immediately assume that you're using a pejorative just to score off an opponent, rather than giving an objective and accurate description.

Case in point: a couple of days ago we stated that chartalism, a theory originated by Georg Friedrich Knapp and detailed in his book, The State Theory of Money (1924), is socialist. In its purest form, chartalism puts total control over money and credit in the hands of the State. Today's chartalists modify the form of chartalism by permitting some private control (under State guidance, of course), but this does not change the substantial nature of the theory.

Emphasizing form over substance, a chartalist (or, at least, someone claiming to understand chartalism better than we do) responded by claiming that the modifications and changes introduced by modern chartalists into the application of the pure theory have, in effect, rendered it non-socialist. The debate then continued by claiming that the principles underpinning the Banking School of finance — Say's Law of Markets and the real bills doctrine — are, essentially, hogwash, and the relevant framework is that of the Currency School of finance.

On the contrary! As we have attempted to explain over and over (and are now forced to close the debate with this final posting), you can change the form or application of something, you can even redefine something to suit your personal opinion, but the thing remains what it is. If you change the definition of something, you are either abolishing the thing for what it was and making it something different, or claiming that the thing never was what it was. In either case you are only playing games.

Further, it is a bad argument to try and claim that the financial principles of the Just Third Way, notably Say's Law of Markets and the real bills doctrine, are bad because they are not the principles of the Currency School. Heavy sigh. As G. K. Chesterton explained,

It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought always to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours. We may do other things instead of arguing, according to our views of what actions are morally permissible; but if we argue we must argue "on the reasons and statements of the philosophers themselves." (G. K. Chesterton, St. Thomas Aquinas: The "Dumb Ox." New York: Image Books, 1956, 95-96.)
To settle the matter once and for all, then, let's examine what "the authorities" are actually saying. In the Wikipedia, "chartalism" is described as, "a monetary standard in which government-issued tokens are used as the unit of money. In such a system, fiat money is created by government spending. Taxation is employed to reclaim the money and control the total amount of fiat money in existence. Reclaiming most of this issued money via taxation is essential to maintaining its value in exchange." The entry goes on to explain,
Modern Chartalism theory states that under a fiat money system, net currency is created by government through deficit spending. Because the issued currency is not tied to or backed by a commodity, currency can only be created when the government spends. Government may, or may not, ask for that currency back in taxes. The demand to hold and acquire this government issued currency is driven by taxes levied by the state — which typically can only be paid in the state-issued fiat currency.

The theory was developed by economist G.F. Knapp into the 1920s, with important contributions by Alfred Mitchell-Innes also. It was influential on the 1930 Treatise on Money by John Maynard Keynes — Knapp and Chartalism are cited approvingly on its opening pages. Chartalism experienced a revival under Abba P. Lerner, and has a number of modern proponents, who largely identify as post-Keynesian economists.
And what did Keynes say in his Treatise on Money?
It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
If we understand private property (to say nothing of money and credit, banking, and finance), we are forced to the conclusion that, remonstrate as you will, call us whatever names you like, chartalism is, as we stated, a form of socialism. A State that issues money without backing and eliminates the necessary private property stake is socialist — no ifs, ands, or buts.  Thus chartalism — "the doctrine that money is peculiarly a creation of the State" — is, without question, a form of socialism.


Wednesday, December 15, 2010

What is "Socialism"?

As regular readers of this blog are aware, the Just Third Way uses definitions of terms consistent with an Aristotelian "natural law" approach, rather than the definitions that popular culture or even academia may currently assign to the terms. Thus, we have had extended (and re-extended) and involved discussions concerning such basic concepts as money and credit, banking, finance, even the natural law and its application within the confines of the common good . . . to which we assign a special meaning that may elude the casual reader.

All of this is no doubt great fun. Nevertheless, despite our inordinate appetite for proving us right and everyone else in the world wrong, it does little to advance the Just Third Way. As you know (or, at least, as we hope you know), we present the Just Third Way as the only viable alternative to both capitalism and socialism, a free market, private property-based approach to economic and social development.

Overall, the Just Third Way is based on the inherent dignity of the human person. In its economic aspect (which also brings in politics in the Aristotelian sense), the Just Third Way integrates the "four pillars of an economically just society." We've listed them countless times before on this blog, but it might be useful to do so again:

1. A limited economic role for the State,

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

3. Restoration of the rights of private property, particularly in corporate equity, and

4. Widespread direct ownership of the means of production, individually or in free association with others, especially as it relates to access to money and credit as the chief means by which property is acquired and possessed.
This last, the "fatal omission" from the three mainstream schools of economics (Keynesian, Monetarist/Chicago, and Austrian), as well as pretty much all the others, is what causes the most trouble with acceptance of the principles of the Just Third Way. Not the least of the problems is found in the definitions of socialism and capitalism that we juxtapose with the Just Third Way. Both socialism and capitalism, as defined in the Just Third Way paradigm, concentrate ownership of the means of productions — both of them for reasons that seem good to the adherents of each system, but that render each of the systems fatally flawed. The problem is that the failure to realize the strict definitions used in the Just Third Way inserts a degree of confusion into the discussion.

Let's take capitalism first, for it is the easiest to define. "Capitalism," as that term is used in the Just Third Way, means a system in which ownership of the means of production is concentrated in the hands of a private elite, and the great mass of people subsist solely or predominantly on wages.

Superficially, "socialism" is just as easily defined: a system in which ownership of the means of production is concentrated in the hands of a public elite, i.e., the State, and the great mass of people subsist solely or predominantly on wages.

Problems immediately crop up. Many people, for example, claim that unless the State holds title, the system is not socialist. They fail to take into account that "ownership" and "control" mean the same thing in law. You may hold title, but if you can only exercise your presumed right of control of what you own or enjoy of the fruits thereof at my behest, then I, not you, am the real owner, regardless who has nominal title.

What about where the State permits private owners to both own and control what they possess without undue interference from the State? Is that socialism?

Many people are surprised to learn that the answer is "yes" — such a system is socialist. Why? Because in such a system the State does not recognize the natural right of private property as inhering in the human person. The right of ownership is construed as a grant from the State, not the Creator. The State permits owners to own and exercise their ownership, it does not protect as inalienable a right that is recognized as belonging by nature to each human being. Rights are viewed as coming from the State, not from God. This puts the State in the place of God.

Is it any wonder, then, that while capitalism comes in for some well-deserved castigation from religious authority, such as the heads of the Catholic Church, it is not condemned within an Aristotelian framework. This is because in capitalism natural rights are not alienated, but badly distorted. The result is to deny the effective exercise of inalienable rights, but without denying them outright.

Socialism, however, effectively denies the inalienability of the natural right itself. This overthrows the basis of the natural moral law. As the natural moral law is the foundation of the social teachings of Christianity, Judaism, Islam, and every other ethical system, it comes as no surprise that religious authorities condemn socialism as inherently contrary to a religious worldview. Nowhere is this better seen than in the careful analysis accompanying the condemnation of socialism issued by Pope Pius XI in the 1931 encyclical, Quadragesimo Anno. As the pope explained,

116. Yet let no one think that all the socialist groups or factions that are not communist have, without exception, recovered their senses to this extent either in fact or in name. For the most part they do not reject the class struggle or the abolition of ownership, but only in some degree modify them. Now if these false principles are modified and to some extent erased from the program, the question arises, or rather is raised without warrant by some, whether the principles of Christian truth cannot perhaps be also modified to some degree and be tempered so as to meet Socialism half-way and, as it were, by a middle course, come to agreement with it. There are some allured by the foolish hope that socialists in this way will be drawn to us. A vain hope! Those who want to be apostles among socialists ought to profess Christian truth whole and entire, openly and sincerely, and not connive at error in any way. If they truly wish to be heralds of the Gospel, let them above all strive to show to socialists that socialist claims, so far as they are just, are far more strongly supported by the principles of Christian faith and much more effectively promoted through the power of Christian charity.

117. But what if Socialism has really been so tempered and modified as to the class struggle and private ownership that there is in it no longer anything to be censured on these points? Has it thereby renounced its contradictory nature to the Christian religion? This is the question that holds many minds in suspense. And numerous are the Catholics who, although they clearly understand that Christian principles can never be abandoned or diminished seem to turn their eyes to the Holy See and earnestly beseech Us to decide whether this form of Socialism has so far recovered from false doctrines that it can be accepted without the sacrifice of any Christian principle and in a certain sense be baptized. That We, in keeping with Our fatherly solicitude, may answer their petitions, We make this pronouncement: Whether considered as a doctrine, or an historical fact, or a movement, Socialism, if it remains truly Socialism, even after it has yielded to truth and justice on the points which we have mentioned, cannot be reconciled with the teachings of the Catholic Church because its concept of society itself is utterly foreign to Christian truth.

118. For, according to Christian teaching, man, endowed with a social nature, is placed on this earth so that by leading a life in society and under an authority ordained of God he may fully cultivate and develop all his faculties unto the praise and glory of his Creator; and that by faithfully fulfilling the duties of his craft or other calling he may obtain for himself temporal and at the same time eternal happiness. Socialism, on the other hand, wholly ignoring and indifferent to this sublime end of both man and society, affirms that human association has been instituted for the sake of material advantage alone.
In other words? Socialism is not condemned because it abolishes private ownership — it may or may not do that — but because it abolishes the basis of private ownership.  This makes "private" property a grant from the State, not inherent in human nature as a reflection of God's Nature, self-evident in His Intellect.

Consequently, if the State giveth, the State can also taketh away; only God's gifts are irrevocable. Socialism abolishes private property, even in those instances where it "permits" private ownership of the means of production. As John Locke pointed out in his Second Treatise on Government, you cannot truly be said to own anything if someone else can take it away from you when he wills.

Thus a system like chartalism, in which the State issues money backed by the general wealth of the economy, is a socialist system — even if it "permits" private sector money. Why? Because the right to issue money — that is, to draw a bill on the present value of existing or future wealth — presumes ownership of the wealth on which the bill is drawn. In chartalism, as in Keynesian economics, the State issues money backed by wealth to which the State does not have title, but is presumably in private hands.  It doesn't matter whether the State allows private individuals to issue money; the key is that the State does not recognize this as a natural right.

By issuing money in any amount or to any degree, the State exercises property in what somebody else nominally owns, thereby abolishing private property through control of money and credit, and establishing, as Keynes admitted, an absolutist State. As Meyer Anselm Rothschild is reputed to have said, "Give me control over money and credit, and I care not who makes the laws."