How to Understand Money

    In the introduction to one of his satiric songs written for the late, great show That Was the Week That Was (“TW3”) performed and recorded at the late, great “Hungry I” nightclub in San Francisco (the one that closed in 1970, not the strip club that replaced it . . . sort of), the late, great Tom Lehrer made the obvious and characteristic (“Seldom has any point to make except the obvious”) ironic comment that his Christmas Carol celebrated what everyone deeply and sincerely believes in: Money.  Of course, St. Paul made a similar comment in one or other of his letters to somebody or other, that love of money is the root of all evil.

Declaring War on Debt

According to the Bureau of Fiscal Service, America’s public — and completely non-productive — debt and liabilities now stands at $42.9 trillion and rising.  At the same time, America’s net worth in private sector agricultural, industrial, and commercial wealth is estimated at $123.8 trillion, while the federal government owns $5.2 trillion in assets.

Much Ado About Something

The Dow Jones Industrial Average, “the Dow,” plunged yesterday, causing the usual panic among the gamblers and speculators who think investment consists of rolling the dice and hoping to get in on the ground floor of something that will increase in value, so they sell at a huge profit.  Of course, this ignores the true investor who buys something that will generate an adequate return or income regardless of the value of the asset generating the return or income.

Standard Value and Price Level

In the previous posting on this subject, we looked at what can happen if you impose a uniform monetary standard when the price of the standard is not uniform.  Of course, before any standard at all is considered, it is essential that the reserve currency be 100% or at least predominantly asset-backed . . . and “asset” does not include debt issued by the issuer of the reserve currency.

Financing the Future with Government Debt

In the previous posting on this subject, we saw that with the way the British financed the war against Napoléon, combined with the Financial and Industrial Revolutions, set up a surreal situation.  People who owned capital were able to produce far more than they could consume, while the government, which produces nothing, could consume by manipulating money.

Three Principles of Banking, II: The Solution

Yesterday we described the current financial situation in the world in very broad terms, along with what governments have been doing to try and fix things.  In general, the solution is to print more money backed solely by increases in government debt.  In effect, this is trying to get out of a hole by digging it deeper.

Three Principles of Banking, I: The Situation

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A serious problem in the world today is that the people in charge of the world’s central banks have no idea what a central bank is supposed to do.  Their guiding assumption is that central banks were invented to finance government.  They also believe (erroneously) that “money is peculiarly a creation of the State” (Keynes, Treatise on Money).

The Situation in Greece

Since the last solution, people's attention has shifted away from Greece. This does not, however, mean that things are any better. It just means that the powers-that-be aren't thinking about Greece as the rest of the world implodes economically and the nations of the world try to get out of debt by spending more money. As soon as the next riot breaks out or Greece can't pay the refinanced debt, the media will be full of baffled confusion and amazed consternation that the latest fix didn't work.

Thoughtful ordinary people, however, are still wondering how it is possible to spend your way out of debt. As one Faithful Reader asked last week, "Where does the money that is initially loaned come from? Is it truly the result of capital accumulation? Or is it somehow an accounting trick, an entry in a ledger?

"In other words, are the Greeks being asked to pay back funds which were truly loaned to it from the accumulated capital of other nations and workers, or, is it being asked to pay back funds that were created out of nothing by banking institutions that will be able to create similar amounts again even if Greece defaults? Or is my question a silly one?"

The question is not a silly one. Understanding the Greek (and the U.S.) situation, however, requires a better definition of money than the powers-that-be are using, and a better understanding of banking, both deposit banking and issue banking. Currently, following the "currency school" of finance, "money" is construed almost exclusively as coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts), and defined by its function, i.e., medium of exchange, store of value, etc., that is, by whatever is accepted as money does or can be made to do. The legal and accounting definition of money — "anything that can be accepted in settlement of a debt" — is disregarded or ignored.

Viewing money, as Keynes put it, as "a peculiar creation of the State," allows governments to create money at will by emitting bills of credit, and force its acceptance on the economy by fiat (hence "fiat money"). Keynes, however, failed to realize that money is not limited to State-emitted bills of credit, whether in the form of token coinage, banknotes or demand deposits, nor does the mere issuance of a currency or creation of a demand deposit "create money." Money is not created by issuing an instrument, but by accepting it.

This is consistent with the "banking school" understanding money as a promise. All money is a contract, just as (in a sense) all contracts are money. A contract consists, in relevant part, of an offer, an acceptance, and consideration. A government can make offers — issue currency or create demand deposits — and force the public to accept it as money, but the State cannot thereby give consideration (something of value that induces someone to enter into or "accept" a contract), for the State as a State produces nothing in the way of marketable goods and services. The State can only redeem its bills if the citizens grant it taxes and actually pay the taxes.

Further, people cannot pay taxes unless they have something to pay them with, and they will only have the wherewithal if they can produce marketable goods and services with their labor or capital, preferably both. The State's ability to make good on its fiat money is therefore backed only by the present value of future tax collections. If nothing is produced, or if the State isn't granted taxes or lacks the power to collect the taxes, the currency becomes worthless, and no one will accept it.

This is what has been happening in Greece. The government has been spending the present value of future tax collections like a drunken sailor on leave, and, at the same time, discouraging investment in productive activity with a vengeance. It has been bailed out by having other countries pledge the present value of their future tax collections to pay for Greece's past expenditures in the ephemeral hope that Greece will, contrary to its recent history, actually start producing marketable goods and services, the income from which can be taxed and used to redeem the promises that have been made so lavishly.

There is no accounting trick involved, only a serious conceptual problem about where money comes from and how it is created. Greece got into trouble by funding social programs with bills of credit, also known as "anticipation notes" from the fact that they are floated in anticipation of being able to collect taxes in the future to redeem the promises. If an economy is strong and the government secure, a country can get away with this for quite some time, but there must be a growing economy in which the bulk of citizens participate, or the tax base will erode to the point where the State simply cannot collect enough in taxes to pay for its past expenditures. At that point, it either has to devalue its currency (steal from current holders of its obligations) get bailed out (effectively surrender its sovereignty), or declare bankruptcy and refuse to honor all obligations.

Greece has not been loaned existing financial capital, that is, instruments representing the present value of existing marketable goods and services. Instead, it has been loaned the present value of future tax collections of other countries. This gives the illusion that money can be created out of thin air, but that is deceptive. What it's really being created out of is people's faith in the ability of the issuer of the loans to obtain repayment from the borrower, or pick up the tab by expending their own future taxes. Where the borrower — Greece — is going to obtain the funds for repayment is anybody's guess at this point, since the economy is in a shambles. Until, however, people realize that there will probably be no repayment under the current system, and that the countries who backed up the loans with their own faith and credit probably will be very reluctant to guarantee more loans, everything will be fine. When they do realize that Greece probably won't be able to repay as things now stand, the collapse will come.

There is, however, hope. After the Franco-Prussian War, an indemnity was imposed on France that was specifically intended to destroy France economically. By taking advantage of Pasteur's discoveries and the surge in demand for French products, and producing their heads off, however, France repaid the indemnity in less than three years. In some respects, France entered a "golden age" in the latter quarter of the 19th century, thanks in large measure to the rapid expansion of productive capacity and new markets (and the flood of silver on the world market that depressed the price, Bismarck having unwisely agreed to accept silver French Five Franc pieces in payment as well as gold).

Greece could do something similar by reforming its monetary and tax systems, and aggressively promoting a program of expanded capital ownership, financed not with the present value of other countries' tax collections, but by monetizing the present value of future marketable goods and services to be produced in Greece by discounting and rediscounting private sector bills of exchange, not public sector bills of credit. This would increase both production and effective demand, and at the same time rebuild the tax base and lessen the pressure on social welfare expenditures by helping people help themselves, not remaining what Heinrich Rommen called "passive State serfs" and "insolent bureaucrats," trapped by their dependency on the State for their subsistence.

Further, there is no need in the short- to mid-term to rely on increased exports. As Harold Moulton pointed out decades ago, there is enough unrealized demand present in all economies to absorb virtually all new production in the foreseeable future — if, as Kelso and Adler added, ownership of the new capital instruments financed with future increases in production instead of past reductions in consumption is spread out among people who will use the income first to pay for the capital that generated the income, then for consumption instead of reinvestment.

The injustice of the current system is in the maintenance of barriers that inhibit or prevent full participation of everyone in the economy through ownership of both labor and capital. Justice can be restored by acts of social justice directed at reform of our institutions — in this case tax and monetary policies that have concentrated ownership or control in the hands of a private elite or State bureaucracy (Pius XI's "dictators of money") — and in establishing and maintaining the "four pillars of an economically just society":

1. A limited economic role for the State. As Leo XIII observed, "There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.) The State must be confined to regulation, not ownership or control.

2. Free and open markets within an understandable and fair system of laws as the best means of determining just wages, just prices, and just profits.

3. Restoration of the rights of private property, especially in corporate equity and other forms of business enterprise.

4. Widespread direct ownership of capital, individually or in free association with others.

Adding the three principles of economic justice (Participation, Distribution and Harmony), would mean a quantum leap in how we address the situation in Greece — and in other countries.

#30#

Why Government Debt is "Bad"

From the perspective of the Just Third Way, the good thing about accumulating massive amounts of material from the past ("Long past?" "No, your past.") is that it becomes glaringly obvious that the local, national, and global economies are sliding swiftly down the skids — and why. This contradicts the modern delusion that the sum total of human knowledge became self-evident only this morning, and anything antedating your 6:30 am wake-up call is either completely wrong, totally outdated, or, like, so totally yesterday, Dude, that it isn't worth considering.

So . . . like, how is this relevant to the title of this posting? Well, Dude, like a lot of policymakers and academics are ridiculing the "Tea Party Types" for being concerned about too much taxation and the huge deficits that result from the misuse of the Federal Reserve by monetizing government debt. After all, His Defunct Majesty Lord Keynes proved beyond the shadow of a doubt that we don't need to worry about deficit financing of government. Debt is good. This is because, in Keynesian theory, you're not actually creating money when you monetize government deficits. Rather, you're just chopping up existing wealth into smaller and smaller bits for easy (re)distribution.

Unfortunately for today's monetary and fiscal policy, Keynes was wrong. Monetizing government deficits isn't simply a case of chopping existing wealth into smaller and smaller pieces until the guppies eat the treasury. It's pledging future taxes collected out of wealth that hasn't yet been produced. The present value of what exists in the economy is not based on what currently exists. That would limit the value of the "general wealth of the economy" to the book value of existing inventories of marketable goods, and the salvage or disposal value of capital goods.

Every accountant knows, however, that the real value of productive capital is not its salvage value, but the present value of what that capital will produce in the future — but that does not yet exist in the form of inventory. This means that the "general wealth of the economy" — what the policymakers and academics appear to believe backs the money supply — consists not only of the present value of existing inventories of marketable goods and services and capital, but of the present value of existing and future marketable goods and services.

Thus, when the government monetizes its deficits, it's not simply cutting up claims on existing wealth into smaller and smaller pieces the better and easier to undermine private property and redistribute wealth. Rather, by issuing currency and creating demand deposits backed by future tax collections, the government is promising to redeem the claims it is issuing in increasing numbers out of wealth that hasn't yet been produced — and becomes less likely to be produced the more the government erodes private property by manipulating money and credit. Hence we have the analysis of Henry C. Adams in the late 19th century, in which he concluded that government deficit spending was a fast track to loss of personal sovereignty on the part of the citizens:

As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account. (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)

But, you say, so what? We don't have any real sovereignty left, anyway. With the growing concentration of ownership of the means of production, and the growing State control of what remains, that isn't far from the whole truth. Still, loss of personal sovereignty is only half the problem. Deficit financing leads directly into loss of national sovereignty as well:

The facts disclosed permit one to understand how deficit financiering, carried so far as to result in an interchange of capital and credit between peoples of varying grades of political advancement, must endanger the autonomy of weaker states unable to meet their debt-payments. Provided only that the interests involved are of sufficient importance to make diplomatic interference worth the while, the claims allowed by international law will certainly be urged against the delinquent states, and the citizens of such states may regard themselves fortunate if they succeed in maintaining their political integrity. (Ibid., 28-29.)

As the American economy becomes increasingly weaker, and as that of China, the single largest holder of American debt paper, continues to experience explosive growth, we are seeing the beginning of the end — unless steps are taken immediately, such as enacting the Capital Homestead Act by 2012. And it can be done. In the early 1870s, France managed to repay an indemnity deliberately designed to destroy its economy forever in less than three years by producing massive amounts of quality goods, facilitated by sound money and extension of credit to business — not government.

It can be done. The time to do it is now.  The alternative is to sit idly by while China increasingly throws its weight around, and North Korea and Russia take advantage of the situation.

#30#

Keynes, Bernanke . . . and Private Property?

Yesterday's Wall Street Journal carried a lengthy defense of Federal Reserve Chairman Benjamin Bernanke's efforts to breathe some life into an economy that's been put to death through reliance on the World's Leading Defunct Economist, i.e., John Maynard Keynes. It was everything you'd expect from a panic-stricken Keynesian, especially in light of the evident failure of the $600 billion stimulus.

(According to today's Wall Street Journal, the "experts" are baffled by the fact that, try as the Federal Reserve might by buying up sagillion dollars worth of government securities, bond prices keep rising . . . and so does the interest rate. How is this possible? Hint: as Dr. Harold G. Moulton pointed out, money and credit are not a commodity, and thus the interest rate is not really the "price" of a commodity in limited supply, and there is tremendous speculation going on, anyway.)

(Do I really have to explain it? Okay: "sagillion" = billions and billions; from the late Carl Sagan's habit of trying to give an idea of the colossal size of galaxies, the universe, . . . the national debt . . .)

Anyway, we fired off yet another letter to the Journal, which was promptly ignored, so we publish it here for a much smaller, but evidently more intelligent audience.

Dear Sir(s):

While I assume that Alan Blinder is both well-intentioned and well-versed in the complexities of Keynesian economics ("In Defense of Ben Bernanke," WSJ, 11/15/10, A17), he seems unaware that Keynesian economics is based on an understanding of money and credit, and the role of the State antithetical to personal sovereignty, individual liberty and private property. As Keynes asserted in Volume I of his 1930 Treatise on Money, the State allegedly has the right to abolish freedom of association and contract at will, and to "re-edit the dictionary" to change truth for political ends.

By rejecting Say's Law of Markets and its application in the real bills doctrine, in which money is defined as anything that can be used in settlement of a debt, Keynes effectively abolished private property except for an elite private few, which then holds it only at the sufferance of the State. (General Theory, VI.24.ii-iii.) By upholding Knapp's "chartalism," in which the State prints money — narrowly defined as M1 and M2, ignoring private sector bills of exchange and promissory notes — when it is deemed necessary, and taxes it away when there is "too much," Keynes cut the essential links between money and credit, private property and, especially, production of marketable goods and services. Keynesian economics, as von Hayak hinted, established socialism as public policy.

By advocating manipulation of interest rates, Keynes undermined even the appearance of private property in the economy, making the presumably free market a ludicrous farce. By diverting the Federal Reserve to monetize government spending instead of providing an "elastic currency" to supply the needs of agriculture, industry, and commerce by rediscounting bills of exchange supplemented with limited open market operations in privately issued — not government — securities, Keynes gave the unproductive State the power to grow beyond all reasonable bounds, and to spend money unrestrained by the capacity of the productive private sector to support it.

Yours,

Blah, blah, blah.

#30#

"The Strongest Consumer Protections in History"

It may be one of the greatest self-delusions in history. Earlier today, President Obama signed "the most sweeping overhaul of financial regulations since the Great Depression" into law. According to the report from the Associated Press on Yahoo! News, Mr. Obama declared that, "the American people will never again be asked to foot the bill for Wall Street's mistakes." It wasn't clear that we were asked the last time. Nobody asked me, nor did anyone pay any attention to my suggestions on how to avoid the very thing Mr. Obama has now signed into law.

In any event, there are so many things wrong with the so-called "overhaul" that it's difficult to know where to begin. That being the case, we will limit ourselves to what seem to be the three most important items. Starting at the bottom (which is where increasing numbers of Americans will soon find themselves),

Three: The approach to regulation is based on the false idea that the State can command the system to do by fiat what the system should be designed to do by itself. We've made this point before, but the system should incorporate internal, systemic controls to self-regulate, not have the State or some other authority try to impose desired results. The only result of the fixed belief that the State can do everything will be that people and businesses who can hide better or have better lawyers will do exactly as they please, while the more honest or poorer will bear the cost and the blame. The "financial services industry" lauded the repeal of the Banking Act of 1933 ("Glass-Steagall") that contained such internal, systemic controls in the late 1990s, assuring the Congress that external controls in the form of governmental regulations were more than sufficient to prevent disaster. Right. The partial repeal of Glass-Steagall gave us the savings and loan meltdown. The full repeal got us the present "recession." We can hardly wait for what's next.

Two: The overhaul — such as it is — is within the framework of Keynesian economics. Unfortunately, Keynesian economics (as every reader of this blog is aware) does not reflect reality, either the reality of money, credit, banking, and finance, or the reality of human nature. The worst thing that the so-called overhaul can do is exactly what it will do: lull people into a false sense of security by convincing them that something substantive has been done.

And in the Number One spot:

There is no real protection for the consumer or anybody else in the overhaul. The idea that you can "protect" people by maintaining the present system that systematically strips people of ownership of the means of production, then the wage system jobs, and, then, finally, of welfare payments as the State goes bankrupt is hardly "protection," unless you're talking about the sort of protection offered by the local mob boss.

No, the only real protection any consumer can have is to become an owner of a meaningful capital stake sufficient to generate a secure income to be able to meet common domestic needs adequately. As William Cobbett said in one of our most overused quotes, "Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (A History of the Protestant Reformation in England and Ireland, 1827, §456)

#30#

That Ship Has Sailed

We hate to do it, but we have to interrupt our regularly scheduled rant for this important news bulletin. Yesterday's Wall Street Journal carried an editorial in its "Review and Outlook" section expressing serious concerns about the direction in which the Federal Reserve appears to be headed.

There is, for example, a definite possibility that credit could be allocated based not on the financial feasibility and present value of a capital project, but on the sex and ethnic background of the loan applicant. The Journal pointed out that this was how we got into the sub-prime mortgage meltdown in the first place.

Paradoxically, the Journal's concerns were expressed in terms of how such political credit allocation would affect the presumed independence of the Federal Reserve. In light of that, we felt compelled to send the editors a news flash: the Federal Reserve has not been independent since 1916, when it was hijacked by politicians afraid to raise taxes for their constituents, preferring to leave the bill for us to pay.

The following letter was shortened; we sent in only the first two paragraphs in the hope that it might get published. What follows is the full monty:

Dear Sir(s):

Your concern over the politicizing of the Federal Reserve is well founded, but late ("Review and Outlook," Wall Street Journal, 06/14/10). The Federal Reserve has been "independent" in name only since 1916. The Fed was diverted from its primary purpose of providing an elastic currency to meet the needs of the private sector by rediscounting qualified paper, and was used to finance America's entry into World War I. As Dr. Harold G. Moulton, first president of the Brookings Institution (1916-1952) noted, "Responsibility for the large use of bonds as a means of financing the war cannot . . . be placed primarily at the doors of the Federal Reserve system, the Treasury rather than the Federal Reserve officials being responsible for the methods of war finance." (Harold G. Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 392.)

With the New Deal and the effective loss of autonomy of the regional Federal Reserves, the concentration of power in the Board of Governors, the discontinuance of rediscounting for the private sector and the formal institution of the Open Market Committee, the federal government assumed near-total control of the financial system. (Ibid., 407-417.) As Moulton observed, "This shift is a reflection of the philosophy that not only is it a proper function of the Government to assume control over the entire credit system, but that only the Government can be depended upon to exercise such control in the interest of public welfare as a whole." (Ibid., 417.)

There are certain measures that could be implemented almost immediately to restore the independence of the Federal Reserve. One, restrict the Fed to rediscounting qualified private sector paper of member banks supplemented with limited open market operations involving private sector paper issued by businesses and non-member banks. Two, make the prohibition against monetizing government deficits more than a dead letter by forbidding the Fed to deal in either primary or secondary government issues. Three, institute a 100% reserve requirement by rediscounting all qualified loans for industrial, commercial, and agricultural purposes at the regional Feds.

Existing savings can be used to make loans to government and consumers, or for speculative investment. Any "new money" created by the extension of bank credit and discounting of bills of exchange must be restricted to properly vetted and financially feasible loans made for commercial purposes. These measures would go a long way toward restoring some sanity to the financial system, but one thing more is needed: a program to encourage widespread direct ownership of the means of production. One possibility is outlined in the two books co-authored by Louis O. Kelso and Mortimer J. Adler, The Capitalist Manifesto (1958) and The New Capitalists (1961). The subtitle of the latter is revealing, and illustrative of the incoherent mess into which a dogmatic faith in Keynesian economics has trapped the global economy: "A Proposal to Free Economic Growth from the Slavery of Savings."

Yours, etc.

If it's any consolation, we expect to have our new edition of Moulton's classic The Formation of Capital from 1935 ready for the printers sometime in the next couple of weeks.

#30#

Ride the Pig, or, the Small Error that Leads to Huge Debt

Over the past several days world stock markets have been "plunging" (they never "decline" or "adjust" except in hindsight) in response to the discovery that a number of countries in the European Union have been spending more money than they have been earning. ("EU Searches for Way Out of Debt Crisis," AP, 02/09/10) In more normal times, this is called "Keynesian Fiscal and Monetary Policy." When the bill comes due, however (as it inevitably must), it is called a "crisis" — a manufactured and completely avoidable crisis, but a crisis nonetheless.

What no one seems to understand, however, is that such crises are built in to Keynesian economics, as well as an integral part of Monetarist and Austrian economics and every other system built on the shifting foundation of the tenets of the British Currency School. The bottom line is that virtually all systems of economic thought in the world today use the wrong definition of money.

That is bad enough. Rational thought requires that we define our terms before we can know what we're even talking about — and that these definitions reflect reality. It's all very well for policymakers and academics to insist that a "horse" is an animal with cloven hooves that squeals and yields bacon and ham, and even manage to get their definition inserted into law and the dictionaries. (Significantly, in his Treatise on Money, 1930, Keynes claimed that the State has the power to "re-edit the dictionary," that is, to change reality!)

The problem is that people engaged in real life outside of Wall Street and Beyond the Beltway are convinced that the animal so described is called a "pig." Using the "official definition" of horse is only going to get you into trouble when you attempt to hitch your Berkshire to your buckboard. It might do the job for a while, but sooner or later (usually sooner) the bad official definition is going to cause a problem or two . . . and pigs can get as mean and as vicious as their extremely high intelligence would suggest.

What's worse is that using the wrong definition of money — essentially a purchase order issued by the State or some entity to which the State has delegated the authority — can cause enormously more damage than even the angriest pig. It's not that the definition of money that Keynesians, Monetarists, Austrians and others use is wrong so much as incomplete.

Yes, money can be a purchase order issued by the State and backed by the ability of the State to collect taxes in the future. It's even true that an economy can keep going using this definition of money for quite some time without experiencing a financial meltdown — as long as the private sector manages to remain sufficiently productive to stay ahead of government-induced inflation and punitive fiscal policy that seems custom designed to destroy the ability of businesses to be productive.

The problem is twofold. One, claiming that money can only be a purchase order issued by the State unjustly infringes upon private property and subjects the economy to manipulation for political ends that often fail to address the real need of an economy for a stable medium of exchange and a source of financing for capital formation. Two, State purchase orders are, not to try and whitewash the matter, very bad money.

"Money" is anything that can be used in settlement of a debt, and consists of anything that two or more people freely agree to exchange between themselves. "Good money" is a promise on which the issuer can make good on demand, that is, deliver the wealth that backs the money. "Bad money" is a promise on which the issuer cannot make good on demand, either because he or she doesn't own the wealth that allegedly backs the money, or because he or she has to go collect that wealth from somebody else in order to make good on the promise.

In both of the latter cases, the issuer of the money is making promises that someone else has to keep. Ordinarily we would call that person a "thief." In all schools of modern economics, we call that person "the State."

If the countries of the European Union are serious about solving the debt crisis, they need look no further than the Capital Homesteading program proposed by the Center for Economic and Social Justice ("CESJ"). Detailed in the book of the same title, Capital Homesteading for Every Citizen (2004), Capital Homesteading is built on the common sense assumption that you can't spend what you don't have, and you won't have anything if you don't produce. Thus, if you want a country to have a tax base to support all the social programs, wage and price supports, State salaries and pensions that always look so good when you're voting somebody into office and not so good when it comes time to pay for them, you have to have a productive economy.

Even more than a productive economy, however, you need a productive economy in which all citizens can participate productively — and that means not just as sellers of labor, but as direct owners of the means of production, which has displaced human labor in modern technologically advanced economies as the primary source of marketable goods and services.

This, in turn, means that ordinary people have to have some source of financing to acquire productive capital — and that is where the correct definition of money comes in.

If we insist on defining money solely as a purchase order issued or authorized by the State, we cannot finance new capital from any source other than existing accumulations of savings. This restricts ownership of all new capital to those who already own the capital that is generating the income out of which only the rich can afford to save.

If, however, we use the right definition of money, that is, anything that can be used in settlement of a debt, then anybody can become an owner of capital. All anyone needs is a financially feasible capital project that will pay for itself within a reasonable period of time. Such projects have a "present value." Having value, they can be turned into "money."

This is what a commercial bank is designed to do. A prospective borrower brings a sound proposal with a positive present value to the bank. The bank examines the project and, if it agrees that the project has a present value of, say, $1 million, will allow the borrower to borrow up to that amount. (For simplicity's sake we're omitting the demand for collateral, which can be replaced by capital credit insurance and reinsurance in any event.)

The bank doesn't have $1 million in its vaults. Instead, it prints banknotes or creates demand deposits in the amount borrowed, and takes a lien on the capital project in the amount of the loan. The bank then hands over the cash or (more usually) a checkbook to the borrower. The banknotes or the demand deposit are not backed by cash, but by the lien on the capital project. (Again, for simplicity's sake, we will not get into a discussion on cash reserves, something that a central bank is designed to cover . . . if operated properly.)

The borrower takes this newly created money and invests it in the capital project. The project is completed, and begins producing marketable goods and services. The borrower sells these marketable goods and services, presumably adding on a margin to generate a just profit. Out of the revenues generated by the sale of marketable goods and services, the borrower gives the commercial bank back the money the commercial bank created, thereby buying back the lien on the capital asset held by the bank. The borrower also pays a fee to the bank for providing the service of creating money. The bank cancels the money used to repay the loan, and keeps the fee paid by the borrower as its profit.

The theory behind commercial banking is called the "real bills doctrine." The real bills doctrine is the basic tenet of the British Banking School. All economists who base their understanding of money on the tenets of the British Currency School reject the real bills doctrine. This is because the Currency School does not accept the principles of commercial banking and defines money differently. Thus, they conclude that the real bills doctrine, commercial banking, and central banking, all based on the Banking School, are all, essentially, frauds because they are not based on the Currency School. A pig is a fraud because it is not a horse.

If the financial and political powers-that-be, American, Asian, or even European, want a way out of the self-inflicted debt crisis, they should seriously investigate the claims of Capital Homesteading and the underlying theories of binary economics, and start using the world's financial institutions and systems as they were designed to operate in accordance with reality.

The alternative is to continue to try and saddle a pig. Maybe they can do it, but chances are they're not only in for a very short and very rough ride, they will fail in achieving anything other than being attacked by an enraged pig — and in getting a horse laugh from the sidelines.

#30#

The Slavery of Past Savings

We're starting to hear more about how "Obamanomics" has failed. It's tempting, of course, to blame Mr. Obama for the problem, just as he and others blamed Mr. Bush, but let's face facts. Mr. Obama is no more to blame for the current state of affairs than Mr. Bush was. Each one was and is operating within a seriously flawed paradigm. Because the basic premise is flawed, it's not going to make any difference what is done. Whatever is done will only be the right thing by pure chance, and chances (especially for the majority of people) are getting slimmer by the hour.

Making matters worse is the fact that, even within the seriously flawed Keynesian paradigm Mr. Obama's programs do not make sense. You don't bolster the status quo by pouring money into failed companies or sponsor direct government takeovers of private companies. Instead, the State engages in indirect takeover of private industry by regulating investment returns, the tax rate, inflation, and (above all) artificial job creation that puts money directly into the hands of people who will spend the money not on investment or to bring their asset portfolios back up to previous inflated values, but on consumption, thereby increasing effective demand through full employment.

The flawed basic premise that underlies all of today's monetary and fiscal policy, as well as the bedrock of modern economic thought, is the fixed belief that capital formation can only be financed out of existing accumulations of savings. Held as a virtual religious dogma by academic economists and the politicians and Wall Street speculators and gamblers they advise, what Kelso and Adler called "The Slavery of [Past] Savings" has shackled economic growth, fostered envy and greed, nurtured widespread poverty, and plunged the great mass of people into a condition accurately described as "a yoke little better than that of slavery itself." (Rerum Novarum, § 3)

The following short piece is extracted and condensed from the draft of an upcoming book, tentatively titled "What is Money?" by Norman G. Kurland and Michael D. Greaney. It highlights the seriousness of the problem, and helps us understand Aristotle's observation in De Coelo that a small error in the beginning leads to large errors in the end as it applies to today's confused understanding of the role of existing accumulations of savings in the economy.

The Slavery of Past Savings
By Norman G. Kurland and Michael D. Greaney

Most of modern economics and finance is based on a false assumption: the presumed necessity of existing accumulations of savings to finance capital formation. Prescriptions based on this assumption end up being the wrong thing to do to stimulate a recovery, foster full employment, or achieve sustainable economic development without inflation or deflation.

In their book, The New Capitalists (1961) Louis O. Kelso and Mortimer J. Adler question this basic assumption, thereby earning them the opprobrium of the economics establishment for making (as their subtitle put it), "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." Building on the work of Dr. Harold G. Moulton in his 1935 classic treatise, The Formation of Capital, Kelso and Adler show how capital acquisition for the great mass of currently propertyless people can be financed out of future, rather than past savings by democratizing and monetizing capital credit through commercial bank loans by discounting such loans at a central bank, thereby accelerating private sector growth. Moulton, president of the Brookings Institution, authored The Formation of Capital as part of a series presenting an alternative to the Keynesian New Deal.

The problem as Kelso and Adler saw it was that, given the immense cost of capital in a developing or developed economy, only the people who are already rich, that is, who already own capital, can afford to cut consumption and save. In fact, capital assets are so productive in comparison with mere human labor that the capitalist finds it impossible to consume all the income generated by the capital he or she owns and which accrues to the owner as one of the fundamental rights of private property.

Acting rationally, the capitalist reinvests unconsumed income as a matter of course. This accelerates the generation of increasing amounts of income that cannot be consumed. This in turn causes those who already own far more productive capital than is necessary to provide for all their wants and needs to become increasingly wealthy at an accelerating rate.

In a paradox that has puzzled economists and social scientists for centuries, the very means by which immense quantities of marketable goods and services are provided for the world — the financing of the formation of increasingly efficient and productive capital — is what keeps most people relatively poor and unable to consume everything that is produced. The world is faced with the inexplicable problem that people are in want, even starving and in dire need at a time when there is more than enough unrealized capacity to take care of everyone on earth.

The solution is for those who own little or nothing in the way of capital to become owners of a capital stake sufficient to generate an income that will allow them to meet common domestic needs adequately. Unfortunately, it has become fixed in people's minds that the only legitimate way to become a capital owner is to cut consumption, save, then invest — or to confiscate and redistribute wealth. The former is clearly an impossibility for those whose wages, even opportunities for selling their labor, diminish and in some instances disappear altogether in competition with advancing technology or cheaper labor elsewhere. Some term the latter the equivalent of theft.

Kelso and Adler's answer is to apply basic principles of finance to the science of economics. Thus, if people lack ownership of the means of production other than human labor, and capital is replacing human labor as the predominant factor of production, it seems logical that the solution is to turn people who do not own capital into people who do own capital.

Still, if only existing accumulations of savings can be used to finance capital formation, people who do not own the capital that generates the bulk of income in a developed economy cannot acquire capital. You cannot cut consumption and save unless you own capital, and you cannot own capital unless you cut consumption and save.

As Kelso and Adler discovered, however, a more viable solution is found implicitly in the definition of "money" and in the power of a central bank to monetize and democratize capital credit by discounting non-recourse loans extended by commercial banks for productive projects and collateralized with capital credit insurance, and repay the loans out of future income. Money is anything that can be used in settlement of a debt. "Money" therefore takes the form of a promise to deliver value on demand or at some future date (maturity) to settle the debt. If a promise is "good," that is, we trust the individual or group making the promise to keep his or her (or its) word, then the promise has a current or "present" value.

To acquire ownership of capital, then, a potential owner who lacks an existing accumulation of savings to finance the purchase of capital or to serve as collateral to obtain a loan for the purchase of capital need "merely" make a good promise to pay for the capital in the future. To keep the system in balance, the repayment should preferably come out of the income generated by the capital itself. This promise — asset-backed money — can be made transferable, and used throughout a community as "currency" (current money) until the promise comes due and the holder in due course redeems the promise.

CESJ has developed a proposal, "Capital Homesteading," that is a plan for getting ownership, income, and power to every individual. Adaptable to any economy in the world, Capital Homesteading is an analogue of the 1862 Homestead Act. Capital Homesteading expands the vision of Lincoln to include ownership of land, natural resources, advanced technologies, and infrastructure, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy. The idea is that everyone would have a tax-sheltered trust account, similar to an ESOP, financed by non-recourse loans on credit, in which to accumulate income-generating assets. The income from these assets would first be used to repay the acquisition loans with "future savings," then supplement and, eventually, replace income from selling labor, and provide for a secure retirement.

Assuming that only existing accumulations of savings can be used to finance capital formation locks us into a condition of permanent dependency on the rich. The alternative under the past savings assumption is a State that claims the power to manipulate the money supply for its own advantage, or take what belongs to the rich for redistribution among those whom the State finds acceptably poor or deserving. Neither is acceptable from the standpoint of essential human dignity — or basic economic justice.

#30#

Bring the Jubilee: The Issue

Over the last couple of weeks one of the participants in the Kelso Binary Economics discussion group has been looking into the problem of overwhelming debt. This is a difficult issue, and not one easily solved, especially by the unilateral solutions that are, more and more frequently, being proposed.

It's not, for example, merely a question of forgiving debt. Debts are owed to somebody. Every debt that is forgiven means, effectively, a loss to whoever lent the money, thereby harming or even destroying that person's property rights.

Nevertheless, the concept of Jubilee could be extremely useful in view of the current world situation — as long as we realize and understand that the push of debt forgiveness for some inevitably means a shove against the human rights of property for others. The question then becomes how we manage the former without undue harm to the latter.

The concept of the "principle of double effect" is useful in this context. Most simply put, the principle of double effect allows us to do something that is not bad in and of itself, but which has bad consequences. In the case of debt forgiveness, writing off debt is hardly bad — but it does have the bad result of harming others' property rights.

The "requirements" of the principle of double effect are pretty straightforward:

• The act is itself good, or at least morally neutral;

• You intend the good effect, and not the bad either as a means to the good, or as an end itself;

• The good effect outweighs the bad effect in circumstances sufficiently serious to justify causing the bad effect, and you do all you can reasonably do to minimize the harm.

There is one more requirement in social justice. That is to organize with others to restructure the relevant institution(s) so that the situation is less likely to reoccur. How to do this is described in the pamphlet by William J. Ferree, S.M., Ph.D., Introduction to Social Justice.

That being said, how do we apply these principles to the issue of debt forgiveness? First, of course, we have to see if what we propose meets the requirements of the principle of double effect:

Is forgiving debt good or morally neutral? Absolutely.

Do we intend to harm others' property rights, or is direct harm to property rights (as opposed to debt forgiveness) our goal? Absolutely not.

Does the good of forgiving debt outweigh the bad of harm to property rights? That's harder to answer. Not all debt is unserviceable, and even debt that is unserviceable may not be entirely unserviceable. That leaves us with the problem of exactly how we might engage in debt forgiveness that is both fair and has a chance of accomplishing the desired goals.

What You Can Do to Address the Economic Crisis

On Sunday, August 9, 2009, I took a neighbor lady to Mass at a local parish. The celebrant chose the proposed health care plan currently being pushed through Congress (as soon as they come back from vacation, of course) as the subject of his "Homily." (I had to look that up. A "Sermon" is based on the scripture reading for that day, while a "Homily" is on any subject consistent with Christianity that has some relevance to the congregation. Now you know.)

Some people walked out on the sermon, and a couple of people went up to the priest afterwards and told him how outraged they were that he would dare talk about "politics" and "attack" the infinite wisdom of the State. They didn't put it that way, of course, but the implication was that the priest had no right to do anything other than get up and talk in vague platitudes and make people feel good about themselves.

For the record, the priest only commented about the moral implications of the health care proposal as it has been explained in the newspapers. He told no one what to do, restricting himself to pointing out that, as described, the proposal is not completely consistent with the moral teaching that is common to all religions and philosophies with a basis in the natural law.

Seeing the people who walked out and hearing the comments, I got the impression that the bishop would soon be receiving secret reports on the priest's no doubt scandalous behavior and making people feel bad about themselves. (Knowing how the bishop feels about the subject, however, I have a sneaking hunch any such reports will quickly be deposited in File 13.) Nevertheless (although it is not my habit), I wrote a "fan letter" to the priest, if only to give him some documentary evidence to support the contention that not everyone was offended or outraged by the sermon. I mean homily.

With respect to the Just Third Way, however, the point was to seize the opportunity, and try to see if CESJ or any of the other organizations in the Just Third Way could find some way to introduce more people to the possibilities offered by the Doctors' Plan for Universal Health Care in particular, and Capital Homesteading in general. In this way, we will be able to respond more effectively to our critic (and others) who told us we would "rue the day [we] ever heard of health care financing reform." (cf. our July 30 posting on "Who is Responsible for Our Health Care?") Here's the letter, with incriminating names removed to protect the guilty:

Dear Father:

First, let me say once again how much I appreciated your homily at Mass yesterday on the dangers represented by the health care plan currently being pushed through the Congress. It was a necessary wake-up call and reminder of the need for moral guidance in these matters, particularly in light of your obligation to present the teachings of the Church in a practical and comprehensible manner. I hope I adequately conveyed my approval of your action in our brief discussion after Mass.

Second, I confess to being ill-prepared to talk with you, as our volunteer who was with me pointed out, and not having any business cards with me. Let me redress that omission by giving you Dr. Norman Kurland's contact information and our website address again in a possibly more legible fashion:

Dr. Norman Kurland, President
Center for Economic and Social Justice
www.cesj.org

Third and finally, I'd like to suggest some possible initiatives to take advantage of your bringing these issues out into the open.

One, you might want to visit the CESJ website, www.cesj.org, particularly the "executive summary" of the "Doctors' Plan for Universal Health Care," which was prepared, in part, with input from Dr. Steve White, past president of the Catholic Medical Association. You might also find Dr. Kurland's brief bio useful, as well as the short description of some of CESJ's accomplishments. Of special importance is the pamphlet, Introduction to Social Justice, written by one of CESJ's co-founders, the late Rev. William J. Ferree, S.M., Ph.D., "America's greatest social philosopher" (as he was termed by Rev. Andrew F. Morlion, O.P., Ph.D., confidential papal secretary and founder of the International University of Social Studies in Rome).

Two, your mention of Dr. Mercedes Wilson gave me an idea. We have on occasion characterized CESJ's "Just Third Way," particularly the "Capital Homesteading" application, as an economic agenda for the Pro Life movement, especially since the principles of economic justice on which the Just Third Way is based appear to provide a good follow-up to Caritas in Veritate. It would, I think, be very useful for Dr. Kurland and Dr. Wilson to talk. If you could help arrange a meeting, it would be mutually beneficial to both CESJ and Dr. Wilson, especially in her position as a member of the Pontifical Academy for Life. You might try mentioning my name in connection with the U.N. conference in Copenhagen that I attended with Father Matthew Habiger, O.S.B., Ph.D. (former head of Human Life International), but I doubt that she remembers me. (Father Habiger is currently on the CESJ board of counselors.)

Three, I spoke with Dr. Kurland earlier today about the possibility of giving a talk at the parish on the Just Third Way as a Pro Life economic agenda, and its congruence with the natural law (and thus Catholic social teaching). Dr. Kurland is generally willing to give talks if an organization can guarantee a large enough crowd, and a small honorarium and travel costs are covered. It might be possible to draw attendees from other parishes if a notice could be inserted in the local Catholic newspaper or other parish bulletins, possibly even nearby Catholic colleges and universities. Including people from institutions of hire (and higher) learning to a talk by Dr. Kurland might suggest some possible courses for them that convert them from the education-as-job-training paradigm to the realization that education is for life training.

If you like, I could drop off copies of a couple of our recent publications at the Rectory, Capital Homesteading for Every Citizen (2004) and In Defense of Human Dignity (2008), or (if you prefer), Capital Homesteading is also available on the website as a free download.

Again, thank you for your homily on Sunday. I think far more people appreciated it than were able to tell you. I saw one woman make applauding motions with her hands, which was most encouraging, even though I generally consider applause at Mass inappropriate.

What Caused the Economic Crisis?

Taking another break from William Cobbett (he won't mind . . . I hope), one of our loyal readers asked an obvious question the other day: "What caused the economic crisis?" Frankly, I think I'd rather try to understand string theory or turn Finnegan's Wake into a musical comedy than attempt to dig up all the causes of the current economic troubles. The roots of the problem go back several thousand years, and would take too long to explain in a blog posting in a way that wouldn't try someone's patience. We can, however, say what we believe to be the immediate cause of the mess — and a very quick possibility for a solution. So, in "elevator speech" form:

Q: What was the immediate cause of the economic crisis?

A: The immediate cause of the economic crisis was the creation of money for consumption, speculation, and government spending instead of for investment in capital projects that will pay for themselves out of future earnings.

Q: What is the solution to the economic crisis?

A: The solution to the economic crisis is to create money for financially feasible capital investment, and by that means empower every person with the means of acquiring and possessing a capital ownership stake sufficient to generate an adequate and secure income if thrift and frugality are exercised.

Like all "elevator speeches," the quick answer raises more questions than it answers — such as the issue that people are in trouble now, how will making them capital owners in the future do anything to help that? Here's the short answer to that:

Q: What are people supposed to do now, and until they own enough capital to generate an adequate and secure income?

A: Caritas in Veritate states the principles and suggests specific measures that can be undertaken at the present time to keep people alive and healthy in a manner befitting the demands of human dignity, but without prejudice to the need ultimately to empower people with the means to acquire and possess capital of their own.

That is, we need to take care of people now by making whatever redistribution of wealth is necessary to keep people alive and healthy in a manner that respects their human dignity. Do not, however, labor under the delusion that a redistribution of wealth is anything other than a barely tolerable expedient as an emergency measure. Such measures cannot last, and must be replaced at the earliest opportunity with a system that enables people to gain a living income through their own efforts, whether through their labor, their ownership of capital, or both. Society must apply the principles of economic justice. This, as we might expect, raises more questions:

Q: What are the principles of economic justice?

A: There are three principles of economic justice, 1) The principle of Participation (or Participative Justice), 2) The principle of Distribution (or Distributive Justice), and 3) The principle of Harmony (sometimes referred to as Social Justice).

Q: What are the basic things that a society must have to be economically just?

A: To be economically just, a society must embody the "four pillars of an economically just society" in some form: 1) A limited economic role for the State, 2) Free and open markets as the best means of determining just wages, just profits, and just prices, 3) Restoration of the rights of private property, especially in corporate equity, and 4) Widespread direct ownership of the means of production, individually or in free association with others.

That's about all anyone would have time (and the listener the patience) for in an "elevator speech" situation. For anything more, it's probably better to let the great thinkers speak for themselves. Thus, if people want details and specifics, refer them first to Father Ferree's Introduction to Social Justice, an analysis of the social doctrine of Pope Pius XI. It's relatively short, but challenging, as it forces people to question many of their basic assumptions about social justice.

Referring people to Introduction to Social Justice on the CESJ website also takes them (obviously) to the website. There they can find some very in-depth treatments of the principles of economic and social justice as well as specific proposals applying the principles, most especially Capital Homesteading.

You may have to warn people that the material presented on the CESJ website is not a panacea, nor is it easy for someone who might be stuck within certain modern thought frameworks and assumptions to grasp, but the advantage is that a serious investigator can always make contact with us directly via the contact information on the website.

The Mortgage Crisis in Ireland

It appears that the crisis in property values might have the potential to bring Northern Ireland and Éire together, if yesterday's report published in the Belfast Telegraph is any indication ("Republic's toxic assets 'could cause Northern Ireland property prices to nosedive'," Belfast Telegraph, 07/07/09). Officials at the highest levels on both sides of the border are holding emergency talks on what to do about the situation, reported in language with no small hint of hysteria and panic.

Ironically, a solution — Capital Homesteading for Every Citizen — has been suggested not once, but several times. As reported on this blog, we have managed to get word to a couple of Ministers and members of Dail Eireann, as well as to members of the Economic Social and Research Institute (Ireland's premier think tank), but there has been no real interest expressed, for whatever reason. This is more than a little perplexing, for included in the overall Just Third Way Capital Homesteading proposal is the "Homeowners' Equity Corporation" program, or "HEC." The HEC has the potential not only to solve the current "toxic asset" crisis, but also point the way to a permanent solution to many of the other economic and political ills afflicting not only Éire and Northern Ireland, but the United Kingdom, the United States, and the rest of the world.

Coincidentally, this writer contributed an article yesterday to the Helium Writers' Cooperative on the subject, which has (at least as of this morning) achieved the top rating. Clearly people are seeking a new solution, and, just as clearly, those who have come across the HEC believe that there may be something in the proposal (to say nothing of Capital Homesteading itself) that has the potential to achieve something positive.

The HEC has the potential to answer every concern expressed in the article in the Belfast Telegraph. The problem is that the leaders in Éire and Northern Ireland either don't know anything about it, or, if they know about it, haven't taken it seriously.

What we need, obviously, is for people with contacts — or people with contacts who have contacts — at the appropriate levels of government (at this point that is probably the ministerial level) to open the door to these ideas and get them to the people who can take the ball and run with it. This, of course, means you — whoever you are. If you have read this far, you evidently think there's something in the Just Third Way that has the potential to bring about lasting reform in our economic and political institutions. The question then becomes what you are going to do about it.

Here's what you can do:

1. Get to your contact(s) (or your contacts with contacts) and mention that there is a program that has the potential to solve what many people are starting to regard as one of the worst financial disasters in history.

2. Send your contact(s) to the CESJ website, pointing out that most of the literature on the subject is free and available for download.

3. Suggest to them that if they find the material has possibilities (and, at this point, anything has to be better than what is in place), they open the door for a meeting between a minister (or, better, the Taoiseach, Mr. Brian Cowen) and Norman Kurland to discuss the best way to implement Capital Homesteading.

In light of the increasingly horrifying economic news coming out of Ireland (or anywhere else, for that matter), nobody has anything to lose by giving serious consideration to Capital Homesteading. It might even do some good — and, in social justice, it is your personal responsibility to see that contacts are established and doors opened so that something effective can be done.

Party Like It's 1914, Part III

Early in the 20th century, Judge Peter S. Grosscup of the United States Circuit Court of Appeals, wrote a series of articles highlighting the threat of what he saw as the growing economic disenfranchisement of the average American. As one of Teddy Roosevelt's "Trust Busters," Judge Grosscup was well aware of the dangers that threatened the country, ultimately the world, from monopoly control over the means of production, which means, in the end, control over the means by which people sustain their lives and liberties.

Judge Grosscup advocated "peoplizing" the means of production, possibly by instituting federally-chartered corporations with the Congress providing oversight instead of the different state governments. Widespread ownership would be mandatory in order to stop the flow of investment from ownership of the means of production, to ownership of savings deposited in financial institutions and used by others to finance increasing concentrations of ownership of the means of production.

Unfortunately, beyond the general recommendation, Judge Grosscup had no further recommendations to make. This was prior to the establishment of the Federal Reserve System that (consistent with the "Real Bills" doctrine) would have the power to finance capital formation without first requiring people to put up non-existent savings. There was no practicable means, given the necessity of maintaining the rule of law and respect for the natural rights of mankind, for opening up democratic access to the means of financing acquisition and development of the means of production.

In 1958, however, Louis O. Kelso and Mortimer J. Adler co-authored a book with the misleading title, The Capitalist Manifesto. They followed this up in 1961 with The New Capitalists, another somewhat misleading title. The importance of the second book is not described in its main title, however, but in its subtitle: "A Proposal to Free Economic Growth from the Slavery of Savings." As described in the two books, it is not necessary to confiscate and redistribute wealth belonging to others in order for ordinary people to gain an adequate ownership stake in the means of production. By using the money creation powers of the Federal Reserve, it is possible to extend loans for financially feasible projects so that "the rest of us" could begin gaining income from ownership that would supplement and, eventually, replace income realized from selling labor.

Kelso and Adler's work is most familiar in the form of the Employee Stock Ownership Plan, or "ESOP." Their thought, however, extends far beyond this innovative, yet somewhat limited vehicle. The Center for Economic and Social Justice, "CESJ," has developed a proposal called "Capital Homesteading" that would open up the means to acquire and possess private property in the means of production to everyone.

The Capital Homestead Act is a comprehensive national economic strategy for empowering every American citizen, including the poorest of the poor, with the means to acquire, control and enjoy the fruits of productive corporate assets.

This long-range agenda involves major restructuring of our tax system and our Federal Reserve policies to lift unjust artificial barriers to more equitable distribution of future corporate capital and faster growth rates of private sector investment. It would shift primary national income maintenance policies from inflationary wage and unproductive income redistribution expedients to market-based ownership sharing and dividend incomes.

The Capital Homestead Act's central focus is the democratization of capital (productive) credit. By universalizing citizen access to direct capital ownership through access to interest-free productive credit, it would close the power and opportunity gap between today's haves and have-nots, without taking away property from today's owners.

The Capital Homestead Act is designed to:

1) Generate millions of new private sector jobs by lifting ownership-concentrating Federal Reserve credit barriers in order to accelerate private sector growth linked to expanded ownership opportunities, at a zero rate of inflation.

2) Radically overhaul and simplify the Federal tax system to eliminate budget deficits and ownership-concentrating tax barriers through a single rate tax on all individual incomes from all sources above basic subsistence levels. Its tax reforms would:

a) eliminate payroll taxes on working Americans and their employers;

b) integrate corporate and personal income taxes; and

c) exempt from taxation the basic incomes of all citizens up to a level that allows them to meet their own subsistence needs and living expenses, while providing "safety net" vouchers for the poor.

With the financial crises that seem to erupt every time the administration announces yet another glimpse of recovery, it might be time to take a look at something that might actually work, rather than continue to print money and sell equity that is spent for obligations incurred in the past instead of invested in the future.

Party Like It's 1914, Part II

As Vladimir Ilyich Lenin is reputed to have said, "The Capitalists will sell us the rope with which we will hang them." By proposing to sell 300 million new shares to raise capital to meet non-productive existing obligations instead of to form capital to generate profits to meet those obligations, the Ford Motor Company is selling the rope with which the company can be hanged. Not only that, this Jewel in the Crown of the capitalist system is working as hard as possible to build the scaffolding and perfect the mechanism of the trap door through which it will drop.

Lest the analogy appear too obscure, the scaffolding is the capitalist system as transformed by Keynesian economics. "The drop" (the trap door through which the condemned falls, hopefully to break his or her neck and not suffer slow strangulation) is the replacement of systemic, "internal" controls of the financial markets and banking institutions with increasing levels of government regulation down to the micro-management level. By raising capital for non-productive expenses instead of capital investment, the Ford Motor Company is simply making a bad situation worse, or (as folk wisdom puts it), trying to get out of a hole by digging it deeper.

The irony, of course, is that none of this is necessary. Henry Ford had the opportunity in 1914 to spread ownership out among his workers. This would have shifted the practice of raising pay by relying on increasing fixed wages and benefits, to variable profit sharing from the bottom line. Every accountant (and hopefully every CEO) knows that it is easier to remain in the black if you shift as many costs as possible to variable, and reduced fixed costs to the minimum.

This is because a company only incurs a "variable cost" when it produces something. A fixed cost, on the other hand, must be paid whether or not you produce anything at all. A variable cost thus has a "built in" way to pay it, assuming that what is produced can be sold. In contrast, a fixed cost is, essentially, money down a rat hole if nothing salable is produced. Using capital raised by a new issue of equity to pay expenses that didn't result in production even when they were incurred (as the Ford Motor Company proposes) is economic suicide.

To make matters worse, Henry Ford, one of the "high priests of capitalism," put the final nail in the coffin of the capitalist system in 1919 when he undermined the rights of private property of minority owners in the Ford Motor Company. Capitalism is only marginally palatable because, however distorted, it is based on the natural right of private property. By effectively taking away one of the principal rights of private property — the right to enjoy the income generated by what is owned — Henry Ford undermined the very system he helped establish and maintain . . . another example of the Ford Motor Company's orientation toward self-destruction.

Possibly because he mistrusted banks (which he believed were controlled by an international Jewish cabal), Ford decided to finance a plant expansion using retained earnings instead of selling new equity or borrowing the money. Some of the minority owners (i.e., owners with less than a controlling interest), the Dodge brothers, protested. They weren't interested in why Henry Ford refused to borrow from banks or issue new shares to finance plant expansion. They wanted the dividends to which they were entitled under the traditional rights of private property. Henry Ford refused to pay dividends, and the Dodge brothers sued.

The case, Dodge v. Ford Motor Company (204 Mich. 459, 170 N.W. 668. (Mich. 1919)), became a landmark. Among other issues, the court redefined the traditional right to receive the "fruits of ownership" (i.e., income from what is owned — dividends) for minority shareholders as limited to the power to sell their shares if they weren't happy with the dividend policy of the majority owner(s).

While unacknowledged, Dodge v. Ford Motor Company helped set the stage for the Crash of 1929 and the current financial crisis. It did this by shifting the incentive for share ownership from anticipation of a future stream of dividends, to speculation in the value per share itself. "Investment" became redefined in the popular mind (and in that of many financial professionals) as buying and selling in anticipation of a rise or fall in the value per share, not putting resources to work in a productive endeavor. The result was a near-total divorce of "investment" and share ownership from the revenue stream generated by profits of production.

The problem of financial and economic divorce is now pervasive throughout the world. Money is divorced from the production and productive capacity that necessarily backs it. Workers are divorced from ownership of the means of production other than their own labor — which is rapidly decreasing in value in competition with advancing technology and cheaper foreign labor. Academic economists, financial advisers, Wall Street magnates, and political leaders are divorced from common sense, and unable to comprehend the possibilities for reform and recovery represented by binary economics, the "economics of reality," as the subtitle of one of Louis Kelso's books puts it. (Two-Factor Theory: The Economics of Reality. New York: Random House, 1967)

What happened to the Dodge brothers? They sold their shares in the Ford Motor Company, and used the cash to start their own automobile manufacturing concern. They eventually designed what many automobile enthusiasts consider one of the greatest cars of all time, the 1926 Dodge. This not only dethroned the ubiquitous "Tin Lizzy" (Ford's Model T), it took a large market share from Ford, and cost the Ford Motor Company millions in lost sales — and then cost Henry Ford more millions to design the Model A and retool all his factories and retrain all his workers.

Unfortunately, we still haven't learned the lessons that cost the Ford Motor Company so much. Neither, evidently, has the Ford Motor Company. The problem becomes what to do about it.