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, August 11, 2011

Panic in the Streets, Part IV: Production and Employment

Since Monday of this week we've been telling you that, bad as the current situation seems to be, it is not as bad as it could be — nor as bad as it has been. We've also made the claim that, hopeless as the politicians and Powers-That-Be might think things are, there is actually a relatively straightforward solution.

Long-time readers of this blog have, no doubt, already figured out where we're going with this. On the off-chance that we've garnered a few new readers (and as a refresher for the oldsters), however, we'll continue with the dénouement. And, with the use of a French word to provide a clever segue (Italian word) into our subject, we'll begin with a story.

The French Financial Crisis of 1871

The Franco-Prussian War officially ended on May 10, 1871 with the signing of the Treaty of Frankfurt. War had raged for five months. It had cost an estimated quarter of a million lives, Prussian and French. The question was now the indemnity France was to pay for having lost the war so artfully arranged by German Chancellor, Prince Otto von Bismarck.

Bismarck's first demand was for 6 billion Francs. When the French threatened to walk away from the table, he immediately lowered it to 5 billion, or just short of $1 billion in terms of United States dollars at the then-current rate of exchange. Biographers and historians ever since have stated that this clearly indicated that Bismarck was fully aware that he was making an outrageous demand, and did not expect to get immediate agreement. Perhaps, but it is highly unlikely that the German Chancellor would have turned down the additional billion had the French agreed to pay.

In any event, from Bismarck's perspective there was little chance that France would be able to pay an indemnity of any amount. This appears to be, in fact, what he was counting on to cripple the French economy permanently, thereby ensuring that the new German Empire-in-formation would be the most powerful nation in Europe. Bismarck, however, failed to take two things into account.

The first was that people have a natural tendency to side with the underdog. At the beginning of the war, France had been extremely unpopular. By the war's end, with what many people saw as unjust actions by Prussia, public opinion in the world had turned in favor of France.

The second was Louis Pasteur, at this time renowned as one of the leading scientific minds in the world. Thomas Huxley was later to declare that the monetary value of Pasteur's discoveries was sufficient to cover the entire cost of the indemnity paid to Prussia.

The fact was that Bismarck seemed to have a rather naïve understanding of money and credit. This was remarkable in light of the fact that the financial systems of the German states were, by and large, well in advance of the rest of the world. The Reichsbank, the Imperial central bank that evolved from the Prussian central bank when the independent systems were integrated under the Second Reich, was a virtual prototype for modern central banking, and provided the model for the Federal Reserve System. The Reichsbank managed to avoid too much financing of government, concentrating on rediscounting the private sector bills of exchange that constituted the vast bulk of the money supply, supplemented with limited open market operations in private sector securities.

Bismarck, however, appeared to think of "money" solely in terms of coin. He may even have viewed with suspicion the paper issues that had allowed the smaller German states in the north and the whole of the south — and the "First Reich," Austria-Hungary, the remnant of the Holy Roman Empire, heir of the classical Roman Empire — to resist Prussian hegemony as they had earlier resisted Napoleon I.

In any event, faced with a gigantic indemnity, the new French government that followed the fall of Napoleon III was desperate for revenue. The flocks of sheep and herds of cattle essential to the production of high-value exports of wool and cheese — now, along with wine (especially champagne) and silk in great demand by the nouveaux riches birthed by the tremendous expansion of commerce and industry that characterized the latter half of the 19th century — had been stricken everywhere with an anthrax epidemic.

Everywhere, that is, except the district of Arbois in eastern France, where the farmers had called in Louis Pasteur, who had earlier saved the wine, silkworm, and poultry industries from utter devastation. After it was proved beyond a shadow of a doubt that the vaccine Pasteur had developed worked, it was distributed throughout France and, later, the world — reducing the death rate from anthrax to under 1%. The upshot of Pasteur's discoveries was that France was able to produce the vast quantities of goods and services needed in order to generate the cash required to meet the indemnity payments.

This was a graphic demonstration of Say's Law of Markets. It was also an affirmation of Harold Moulton's contention that there are two essential factors to any sustainable economic recovery, production and employment, and Louis Kelso's refinement under binary economics that "employment" includes all resources, both labor and capital, to which as many people as possible are connected through the full rights of private property in a free market.

Most of the productive enterprises on which France depended to generate the cash needed to pay the indemnity were small, family-owned farms, dairies, and vineyards. Expanded capital ownership was a reality in France, at least in the enterprises engaged in the production of luxury export goods that could be heavily taxed. At a time when the need was greatest, a critical sector of the French economy was almost perfectly structured to generate maximum production just as demand increased dramatically.

The indemnity intended to cripple France permanently was not only paid in full, it was paid off ahead of schedule — in less than three years. Further, the productive capacity built up raised standards of living dramatically and ushered in what many still believe to have been a golden age of French culture. Bismarck was evidently unaware that as long as a country can produce marketable goods and services for which there exists effective demand, there is no need to use existing accumulations of savings for anything except consumption and collateral — and collateral can be replaced with capital credit insurance and reinsurance.

A financial and economic reactionary (and a political progressive only when it suited him), Bismarck evidently looked only at France's existing accumulations of savings (which had been depleted to finance the war), not at French productive capacity in setting the amount of the indemnity. This appears to be the same mistake made by world leaders today, and their incomprehensible reliance on Keynesian deficit spending to bring about what only increased production in which every child, woman, and man can participate through capital ownership can accomplish.

Capital Homesteading is the Answer

Today the United States — the world — faces a state of affairs similar to that faced by France in 1871. The differences actually reduce the seriousness of the situation. The crushing burden of debt must be paid off, of course, and paid off as soon as possible. There is, however, no hard and fast due date. Unlike the indemnity imposed on France in 1871, the debt can be rescheduled, even reduced or written off in some instances, and the payment period extended. While debt elimination must be the mid- to long-term goal, debt reduction or, at worst, no increase in debt will stabilize the situation in the short-run.

The only "diseases" afflicting productive sectors throughout the world are not anthrax or bacteriological infection, but lack of demand and capital credit. These afflictions are much easier to cure than anthrax or sour wine. The "vaccines" are tax reform and proper use of the commercial and central banking systems, both keys to a successful program of "Capital Homesteading."

Tax Reform

The tax system can be modified with the stroke of a pen to implement necessary reforms immediately pending a more thorough overhaul later — if necessary. Without trying to be comprehensive (we're just presenting the concept, not a legislative blueprint), some elements are:

1. Tax deductibility of all dividends at the corporate level. This will encourage full payout of corporate earnings by effectively eliminating the notorious "double tax" on corporate profits, and "force" companies to issue new shares in order to obtain financing for new capital formation, thereby providing the opportunity for more people to become owners by purchasing the shares on credit (below). Given the immense amount of cash being retained by U.S. companies — more than $2 trillion the last time we looked . . . many months ago — this would result in an immediate "stimulus" naturally without increasing government debt, encouraging consumers to incur greater burdens of debt, increasing welfare or entitlements, or anything else. The "downside" to this would be that the dividends would be taxed as regular income at the personal level, but this would result in more disposable income since the corporate tax rate plus the personal rate on dividends, even when low, is more than the highest marginal personal tax rate.

2. Merge all tax rates into a single rate levied on income. And we mean all tax rates, including regular income, FICA, dividends, capital gains, sales, liquor, tobacco, gasoline — all of them. This would make tax preparation much easier and less costly than now for most people. It might even be possible to file your taxes on a form the size of a postcard.

3. Eliminate all existing personal tax deductions, credits, exemptions, etc., etc., etc., . . . but raise the personal exemption to a realistic level, say $30,000 for a non-dependent and $20,000 for a dependent. A "typical" family of four would thus pay no taxes until aggregate income exceeded $100,000 in a year.

4. Provide for tax-deferred capital (income-generating) asset accumulation in "Capital Homestead Accounts" up to $1 million. A "CHA" would be something like a "Super IRA," but financed on credit without requiring reductions in consumption income, and with an overall limit imposed on the total accumulation, rather than an annual limit imposed on the "contribution."

Financial Reform

The commercial and central banking systems can be reformed to function as they were designed and intended to function. Again, a non-comprehensive list of reforms is,

1. All financially feasible and properly vetted new capital formation would be financed by discounting bills of exchange. If discounted at a commercial bank, the bills would immediately be rediscounted at the central bank, thereby imposing a de facto 100% reserve requirement and an "elastic," asset-backed currency to replace the current debt-backed currency.

2. The interest rate on existing accumulations of savings would be set by the free market.

3. The interest rate on the outstanding balance of "pure credit" loans made to finance new capital formation would be eliminated and replaced with a one-time discount fee per transaction and an ongoing risk premium.

4. The risk premium would be used to purchase capital credit insurance and reinsurance to protect financial institutions in the event of default, replacing traditional collateral, thereby opening up capital ownership to those who currently have no assets to risk as collateral.

5. Commercial banking, deposit banking, investment banking, insurance, and so on, currently combined into an integrated "financial services industry," would be separated by the enactment of a "Super Glass-Steagall" to build internal controls into the financial system. Specialization by independent financial institutions would be encouraged, e.g., savings and loans, credit unions, cooperative banks, and so on, to minimize conflicts of interest and internal control violations system-wide.

6. Central bank purchases of government securities of any type, primary or secondary, local, state, or federal, whether by discounting, rediscounting, or open market operations, would be prohibited. Central bank transactions involving government securities would be limited to disposing of current holdings as rapidly as possible without causing deflation, ideally as the government debt is paid down, and the existing currency backed by government debt is replaced with currency backed by private sector hard assets.

7. Commercial or deposit bank purchases of government securities would be limited to the amount of cash on deposit (not the reserves) and capitalization. There would be no discounting or rediscounting of government securities by banking institutions.

Political/Economic Reforms

In order to ensure as far as possible that the necessary but dangerous tool of the State is kept within strict limits, some reforms in what was traditionally called "political economy" will be necessary. Again, this list is by no means exhaustive, but is given for illustrative purposes:

1. Each citizen would have an equal right and opportunity to purchase on credit financially feasible and properly vetted corporate shares or other instruments representing a direct ownership stake in capital, or the capital itself — as noted above in the points on tax reform. (N.B.: this does not mean that money would be created and handed out so that people could invest. Rather, the money would be created by borrowing against the present value of the future marketable goods and services to be produced by the capital being purchased, and the loans repaid out of profits generated by the capital itself.)

2. Ownership of the central bank would be vested in every citizen by issuing each natural person a single, no-cost, voting, fully participating share in the central bank.

3. Ownership of all land, natural resources, and infrastructure in a region would be vested in the citizens and permanent residents in the same way.

Generating Demand

The only question that remains is what to do about the fact that the U.S. doesn't have the advantage France enjoyed in 1871, that of a tremendous existing, seemingly insatiable demand for quality products made in France. U.S. products no longer have the cachet they once had overseas, and are frequently seen as low quality and overpriced.

That, frankly (if you'll pardon the word), is the easiest problem of all to solve. In a little book published in 1943 (The New Philosophy of Public Debt), Moulton stated that internal, domestic demand would be more than sufficient to take care of everything America could produce — a point he had made almost a decade earlier in America's Capacity to Produce (1934) and America's Capacity to Consume (1934), as well as in Capital Expansion, Employment, and Economic Stability (Washington, DC: The Brookings Institution, 1940), when presenting an alternative to the Keynesian New Deal. As Moulton explained,

"It is an obvious truth that the needs and desires of an expanding population constitute potential markets for the sale of goods and services. But it is equally true that the unfulfilled wants and desires of the existing population constitute potential markets. If the economic system is operated so as to expand consuming power in proportion to the increase in productive power, there is no reason why a slowly increasing, or stationary, population should check industrial expansion. And so long as a large proportion of our population is 'ill-housed, ill-clothed, and ill-fed,' it is not difficult to determine the kinds of additional production which the population most needs." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 24.)

The pent-up demand represented by the more than $2 trillion in cash held by U.S. companies will, when paid out in dividends, provide an immediate, private sector version of Keynesian "pump priming." This will, in and of itself, start putting people back to work, creating (in a good way) something of a domino effect as the positive consequences of increased demand spreads throughout the economy.

Even without raising living standards (and they will rise as people gain capital incomes to supplement or replace labor incomes), there are enough unmet wants and needs in the U.S. by itself from deferring purchases, both at the personal level and the corporate level, to provide all the demand necessary in the short run without artificial stimulus packages or other government intervention. In the mid- to long-run, all that is necessary is to remove the tax, financial and other institutional barriers that prevent people from receiving the capital income that is due them by right of private property, and that inhibit or prevent people without capital from becoming owners of capital — and thus gaining the power to employ both labor and capital to reach true "full employment" — without cutting consumption or reducing pay or other benefits.

This is what "Capital Homesteading," an application of the principles of the "Just Third Way," is designed to do. Capital Homesteading is an analogue of the nineteenth century American programs enacted to bring about a broad distribution of the ownership of land. Capital Homesteading expands the concept to include ownership of advanced technologies, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy.

Obviously we've only touched on some of the more important points in this blog series. For more detail, we suggest you go to the CESJ website and delve deeper into the subject if you want to get a handle on how to get out of the current mess in a way that, as R. Buckminster Fuller put it, will "make the world work for 100% of humanity in the shortest possible time through spontaneous cooperation and without ecological offense of the disadvantage of anyone."

What Are YOU Going to Do About It?

The only question remaining on the table is what YOU are going to do about it. Individually, of course, you are helpless to effect necessary social change. Organized in social justice with others, however, you gain the power necessary to change the institutions of the social order — including money, credit, banking, and finance — for the better. As the late CESJ co-founder Father William J. Ferree, S.M., Ph.D., eulogized on his death in 1985 as "America's greatest social philosopher," put it,

"Every individual, regardless of his age or occupation or state of life, is directly responsible for the Common Good, because the Common Good is built up in a hierarchical order. That is, every great human institution consists of subordinate institutions, which themselves consist of subordinate institutions, on down to the individuals who compose the lowest and most fleeting of human institutions. Since every one of these institutions is directly responsible for the general welfare of the one above it, it follows that every individual is directly responsible for the lower institutions which immediately surround his life, and indirectly (that is, through these and other intermediate institutions) responsible for the general welfare of his whole country and the whole world. . . . The completed doctrine of Social Justice places in our hands instruments of such power as to be inconceivable to former generations. . . . The power that we have now to change any institution of life, the grip that we have on the social order as a whole, was always there but we did not know it and we did not know how to use it. Now we know. That is the difference." (William J. Ferree, Introduction to Social Justice. New York: Paulist Press, 1948.)

You want specifics?

1. Go to the CESJ website and read up on Capital Homesteading and the Just Third Way.

2. Join the Coalition for Capital Homesteading. You don't get a membership card or a secret decoder ring, but then you don't have to send in any box-tops or money, either. You just have to —

3. Go through your Rolodex ("Did he really say 'Rolodex'? What's a 'Rolodex'?") and see if you have any contacts who can open doors to people who should be hearing about Capital Homesteading, and bring them together with CESJ.

4. If nothing else, send the links of this blog series around to your network — and follow up to see what kind of reaction you get. If someone rejects the ideas, ask why. If you can't give a satisfactory answer, refer him or her to CESJ, putting the responsibility on the other to stop carping and criticizing and come up with something better and more effective.

It's nice to be able to complain how bad everything is, even if it isn't as bad as it could be. Yet. It's quite another to take personal responsibility for, as Chesterton put it, "What's Wrong With the World," organize, and do something effective — such as bringing Capital Homesteading to the attention of people who can do something, and following up.

You know what? If you don't do it, it's not going to get done.